Intermediate Accounting II
Practice Questions
Course Introduction
Intermediate Accounting II builds upon foundational accounting principles to further explore the preparation and analysis of financial statements under generally accepted accounting principles (GAAP). The course covers topics such as liabilities, stockholders equity, dilutive securities, earnings per share, investments, revenue recognition, income taxes, pensions, leases, and accounting changes and error analysis. Emphasis is placed on problem-solving and critical thinking to address complex accounting issues. This course is designed to enhance students abilities to interpret financial information and apply advanced theoretical concepts to real-world corporate reporting scenarios.
Recommended Textbook
Intermediate Accounting 9th Edition by
J. David Spiceland
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Sample Questions
Q1) Comprehensive income
A)Net outflows from peripheral transactions.
B)Probable future economic benefits controlled by an entity.
C)Results if an asset is sold for more than book value.
D)Increases in equity from the sale of goods and/or services.
E)All changes in equity except owner transactions.
Answer: E
Q2) Enhancing qualitative characteristics of accounting information include each of the following except:
A) Timeliness.
B) Materiality.
C) Comparability.
D) Verifiability.
Answer: B
Q3) Elements of financial statements do not include:
A) Monetary unit.
B) Investments by owners.
C) Comprehensive income.
D) Losses.
Answer: A
Page 3
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Chapter 2: Review of the Accounting Process
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Sample Questions
Q1) Permanent accounts would not include:
A) Cost of goods sold.
B) Inventory.
C) Current liabilities.
D) Accumulated depreciation.
Answer: A
Q2) Carolina Mills purchased $270,000 in supplies this year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. What was supplies expense for Carolina Mills during the year?
A) $300,000.
B) $280,000.
C) $260,000.
D) $240,000.
Answer: C
Q3) Balance sheet accounts are referred to as temporary accounts because their balances are always changing.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Balance Sheet and Financial Disclosures
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Sample Questions
Q1) Prepaid expense
A)Asset recorded when an expense is paid for in advance.
B)Goods to be sold in the ordinary course of business.
C)Transactions with owners, managers, and affiliated companies.
D)An intangible asset.
E)Management's views on significant events.
F)Net income less dividends since inception of the corporation.
G)Amounts due from customers.
H)Material events that occur after the end of the fiscal year and before the statements are issued.
I)Obligations to suppliers of merchandise or of services purchased on account.
J)Cash received from a customer in advance of providing a good or service.
Answer: A
Q2) Working capital is equal to:
A) Current assets.
B) Current liabilities.
C) Current assets plus current liabilities.
D) Current assets minus current liabilities.
Answer: D
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5
Chapter 4: The Income Statement, Comprehensive Income, and
the Statement of Cash Flows
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Sample Questions
Q1) Hulkster's 2018 return on shareholders' equity is (rounded):
A) 17.1%.
B) 14.0%.
C) 12.6%.
D) 7.1%.
Q2) Its asset turnover ratio for 2018. Round your answer to two decimal places.
Q3) Using the information provided above, use the DuPont framework to briefly summarize the operating performance of McDonald's relative to its benchmark competitors.
Q4) A company is effectively leveraging when:
A) the return on assets exceeds the return on shareholders' equity.
B) the return on shareholders' equity exceeds the return on assets.
C) the return on shareholders' equity is increasing.
D) the return on assets is increasing.
Q5) Explain, using an example, how a company can use earnings management and justify it by conservatism.
Q6) Its average days in inventory for 2018. Round your final answer to one decimal place.
Page 6
Q7) Its return on stockholders' equity for 2018. Round your answer to one decimal place, e.g., 0.1234 as 12.3%.
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Chapter 5: Revenue Recognition
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Sample Questions
Q1) Which of the following does not apply to a seller who is a principal?
A) Has control over goods or services
B) Primarily responsible for providing goods or services to customer
C) Exposed to risks associated with holding inventory
D) Primary performance obligation is to facilitate the transfer of goods or services
Q2) Contract liability, deferred revenue and unearned revenue are all ways to describe a liability that the seller recognizes with respect to unsatisfied performance obligations for which the seller has already been paid.
A)True
B)False
Q3) Assume that Sanjeev estimates variable consideration as the most likely amount. After Sanjeev has recognized revenue for two months of the contract, he changes his assessment of the chance the contract will pay him $3,000 to 70%. What adjustment to revenue should Sanjeev recognize to account for that change in estimate?
A) Debit of $1,000
B) Debit of $334
C) Credit of $1,000
D) Credit of $334
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Chapter 6: Time Value of Money Concepts
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Sample Questions
Q1) George Jones is planning on a cruise for his 70<sup>th</sup> birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the:
A) Future value of an ordinary annuity of $1.
B) Future value of an annuity due of $1.
C) Future value of $1.
D) Present value of an annuity due of $1.
Q2) Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year. Required: Calculate the total present value of the cash flows.
Q3) Compound interest includes interest earned on interest.
A)True
B)False
Q4) The calculation of future value requires the removal of interest.
A)True
B)False
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Page 8
Chapter 7: Cash and Receivables
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Sample Questions
Q1) The net method of accounting for cash discounts requires adjusting entries for discounts taken.
A)True
B)False
Q2) Assume Frankenstein views the financing component of these sales to be significant. What amount of interest revenue would Frankenstein earn on these notes during 2019?
A) Above $12,000.
B) Between $7,000 and 10,000.
C) Less than $5,000.
D) None of these answer choices are correct.
Q3) Important elements of an internal control system for cash disbursements include each of the following except:
A) Only authorized personnel should sign checks.
B) All expenditures should be authorized before a check is prepared.
C) All disbursements, other than very small disbursements, should be made by check.
D) The same person that prepares the check should also record it in the proper journal.
Q4) Define what it is meant by internal control.
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9
Chapter 8: Inventories: Measurement
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Sample Questions
Q1) During periods when costs are rising and inventory quantities are stable, cost of goods sold will be:
A) Higher under FIFO than LIFO.
B) Higher under FIFO than average cost.
C) Lower under average cost than LIFO.
D) Lower under LIFO than FIFO.
Q2) What inventory balance should Badger report on its 12/31/2018 balance sheet?
A) $126,000
B) $121,000
C) $120,000
D) $100,000
Q3) Work-in-process
A)Most recent purchases will be included in ending inventory.
B)1 - (Cost of goods sold Net sales).
C)Purchase discounts not taken are included in inventory.
D)Products that are not yet complete.
E)Purchase discounts not taken are considered interest expense.
Q4) Briefly explain when there would be a tax benefit from electing LIFO rather than FIFO.
Q5) What additional income tax payments did the 2014 liquidation cost SUPERVALU?
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Chapter 9: Inventories: Additional Issues
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Sample Questions
Q1) The primary motivation behind the lower of cost or market (LCM) rule is conservatism.
A)True
B)False
Q2) Hawkeye Auto Parts uses the average cost retail method to estimate inventories.
Data for the first six months of 2018 include: beginning inventory at cost and retail were $55,000 and $100,000, net purchases at cost and retail were $785,000 and $1,300,000, and sales during the first six months totaled $800,000. The estimated inventory at June 30, 2018, would be:
A) $330,000.
B) $360,000.
C) $362,300.
D) None of these answer choices are correct.
Q3) In applying the lower of cost or net realizable value rule, the inventory of supplies would be valued at:
A) $45,000.
B) $54,000.
C) $41,000.
D) $60,000.
Q4) Determine the inventory book value for Products A, B, and C.
Page 11
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Chapter 10: Property, Plant, and Equipment and Intangible Assets:
Acquisition
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Sample Questions
Q1) Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. The capitalized cost is:
A) $455,000.
B) $446,000.
C) $437,000.
D) $435,000.
Q2) Under International Financial Reporting Standards, research expenditures are:
A) Expensed in the period incurred.
B) Expensed in the period they are determined to be unsuccessful.
C) Capitalized if certain criteria are met.
D) Expensed if unsuccessful, capitalized if successful.
Q3) 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
Q4) Briefly explain how R&D is reported in financial statements.
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Chapter 11: Property, Plant, and Equipment and Intangible
Assets: Utilization and Disposition
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Sample Questions
Q1) Qualcomm Inc. engages in the development, design, manufacture, and marketing of digital wireless telecommunications products and services. In a recent income statement the company reported a $114 million goodwill impairment loss. The loss related to the goodwill of its Firethorn reporting unit.
Required:
1. Why did Qualcomm conduct an impairment test of the goodwill of this reporting unit?
2. Describe the steps Qualcomm performed to conduct its impairment test.
3. Where would the impairment loss be shown in the company's income statement?
Q2) Using the double-declining balance method, depreciation for 2019 would be:
A) $28,800.
B) $18,240.
C) $17,280.
D) None of these answer choices are correct.
Q3) Statutory depletion is the maximum amount of depletion that may be reported in financial statements prepared according to GAAP.
A)True
B)False
Q4) Briefly differentiate between activity-based and time-based allocation methods.
Page 13
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Chapter 12: Investments
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Sample Questions
Q1) On January 1, 2017, Bactin Corporation acquired 10% of Oakton Company for $100,000. On that date, the total book value and fair value of Oakton's net assets was $900,000. Any difference between cost and fair value is attributable to goodwill. In 2017, Oakton reported net income of $60,000 and paid dividends of $30,000. On January 1, 2018, Bactin Corporation bought another 10% of Oakton for $100,000, and on that date, the book value and fair value of Oakton's net assets still was $900,000 (the fair value of Oakton did not change during 2017). Bactin concluded that its 20% ownership now allowed it to significantly influence Oakton's operations. In 2018, Oakton reported net income of $80,000 and paid dividends of $40,000.
Required:
Prepare all journal entries for Bactin for 2017 and 2018, assuming no change in fair value of the Oakton stock during that time period.
Q2) Trading securities, by definition, are properly classified in the balance sheet as:
A) Shareholders' equity.
B) Intangibles.
C) Current assets.
D) Other assets.
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Page 14
Chapter 13: Current Liabilities and Contingencies
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Sample Questions
Q1) A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under U.S. GAAP, RoughEdge should accrue a liability in the amount of:
A) $0.
B) $1,000,000.
C) $2,000,000.
D) $3,000,000.
Q2) Clark's Chemical Company received refundable deposits on returnable containers in the amount of $100,000 during 2018. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?
A) $0.
B) $2,000.
C) $10,000.
D) $14,400.
Q3) How are customer advances and refundable deposits similar and yet different?
Q4) Define and distinguish between current and noncurrent liabilities.
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Chapter 14: Bonds and Long-Term Notes
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Sample Questions
Q1) Mind Explorers issues bonds with a stated interest rate of 7%, face value of $200,000, and due in 10 years. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using present value tables, calculate the issue price of the bonds.
A) $163,200.
B) $186,410.
C) $214,878.
D) $200,000.
Q2) Hillside Excursions issues bonds due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 6%. Using a financial calculator or Excel, calculate the issue price of the bonds.
A) $163,200.
B) $186,410.
C) $214,877.
D) $200,000.
Q3) Distinguish between:
(a) Secured and unsecured bonds.
(b) Coupon and registered bonds.
Q4) Required: How much interest will Morton Sales Co. pay on these bonds in 2018?
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Chapter 15: Leases
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Q1) On January 1, 2018, Osiris Inc. leased manufacturing equipment from Giza Leasing for a four-year period ending December 31, 2018, at which time possession of the leased asset will revert back to Giza. The equipment cost Giza $206,092 and has an expected economic life of five years. Giza expects the residual value at December 31, 2018, to be $25,000. Negotiations led to Osiris guaranteeing a $35,000 residual value. Equal payments under the lease are $50,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Osiris is aware that Giza used a 5% interest rate when calculating lease payments. Required:
Round your answers to the nearest whole dollar amounts.
1. Prepare the appropriate journal entry for Osiris on January 1, 2018, to record the lease. 2. Prepare all appropriate journal entries for Osiris on December 31, 2018, related to the lease.
Q2) Discuss the three major types of leases that may apply to the lessor when there is no third party guarantee. How do they differ?
Q3) What is a purchase option? How does it affect accounting for a lease?
Q4) Discuss the economic advantages of leasing.
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Chapter 16: Accounting for Income Taxes
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Sample Questions
Q1) Franklin's taxable income ($ in millions) is:
A) $40.
B) $165.
C) $110.
D) $160.
Q2) Balance sheet classification
A)No tax consequences.
B)Produces future taxable amounts or future deductible amounts.
C)"More likely than not" test.
D)Noncurrent.
E)A "plug" for the net effect of the current tax liability and changes in deferred tax assets and liabilities.
Q3) Interperiod tax allocation
A)Is usually a revenue or expense item that is excluded or not deductible in determining taxable income.
B)Is reduced by a valuation allowance if realization of future tax benefit is not more likely than not.
C)Arises when future taxable amounts are created by temporary differences.
D)Is the process of allocating income taxes among two or more reporting periods.
E)Will always create a deferred tax asset.
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) The accounting for defined contribution pension plans is easy because each year:
A) The employer records pension expense equal to the amount paid out to retirees.
B) The employer records pension expense based on an amount provided by the actuary.
C) The employer records pension expense equal to the annual contribution.
D) The employer records pension expense based on the earnings of the plan assets.
Q2) What are the five components of postretirement benefit expense?
Q3) Castillo Company has a defined benefit pension plan. At the end of the reporting year, the following data were available: beginning PBO, $75,000; service cost, $18,000; interest cost, $5,000; benefits paid for the year, $9,000; ending PBO, $89,000; the expected return on plan assets, $10,000; and cash deposited with pension trustee, $17,000. There were no other pension-related costs. The journal entry to record the annual pension costs will include a credit to the PBO for:
A) $13,000.
B) $17,000.
C) $18,000.
D) $23,000.
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Chapter 18: Shareholders Equity
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Q1) The retained earnings balance reported in the balance sheet typically is not affected by:
A) Net income.
B) A prior period adjustment.
C) Dividends paid.
D) Restrictions.
Q2) R Co. has outstanding 100 million shares, $1 par common stock, selling for $8 per share. After a 1 for 4 reverse stock split:
A) R would have 25 million shares, $4 par per share.
B) The market price per share would be about $2.
C) Fractional shares would be issued.
D) Retained earnings would be reduced.
Q3) Under IFRS, components of other comprehensive income:
A) Can be reported as part of a single statement of comprehensive income.
B) Are not permitted to be reported.
C) Must be reported in a separate statement of comprehensive income.
D) Can be reported as part of a statement of shareholders' equity.
Q4) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to debt and equity for preferred stock?
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Why are earnings per share figures for prior years adjusted for stock splits and stock dividends when data from prior years is presented in comparative financial statements?
Q2) Hammerstein Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock award plan, the company, on January 1, 2018, granted 2 million of its $1 par common shares to various division managers. The shares are subject to forfeiture if employment is terminated within four years. The common shares have a market price of $20 per share on the award date.
Required:
(1.) Determine the total compensation cost from these restricted shares.
(2.) Prepare the appropriate journal entry to record the award on January 1, 2018.
(3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2018.
(4.) Suppose a 15% forfeiture rate was expected prior to vesting. Determine the total compensation cost, assuming the company follows the fair value approach and chooses to anticipate forfeitures at the grant date.
Q3) What is the advantage of stock appreciation rights over stock options?
Q4) How is a complex capital structure different from a simple capital structure?
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Chapter 20: Accounting Changes and Error Corrections
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Q1) Prospective approach
A)No journal entry needed, but disclosure is required.
B)Handled prospectively.
C)Adjustment to retained earnings of earliest year reported.
D)Not used for changes in accounting principle.
E)Information for change in reporting entity.
Q2) Which of the following statements is not true regarding the correction of an error?
A) The correction is reported prospectively and previous financial statements are not revised.
B) A journal entry is needed to correct any account balances that are incorrect as a result of the error.
C) Prior years' financial statements are restated to reflect the correction of the error (if the error affected those statements).
D) A disclosure note should describe the nature of the error and the impact of its correction on net income, income from continuing operations, and earnings per share.
Q3) What are the changes in accounting principle that require the prospective approach?
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Chapter 21: The Statement of Cash Flows Revisited
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Q1) The accounting records of Eastlake Industries provided the data below.
\[\begin{array} { | l | l | }
\hline \text { Net income } & \$ 300,000 \\
\hline \text { Depreciation expense } & 15,000 \\
\hline \text { Increase in inventory } & 2,000 \\
\hline \text { Increase in accounts receivable } & 1,400 \\
\hline \text { Decrease in interest payable } & 1,600 \\
\hline \text { Amortization of bond premium } & 3,000 \\
\hline \text { Increase in accounts payable } & 7,000 \\
\hline \text { Cash dividends paid } & 20,000 \\
\hline
\end{array}\] Required:
Prepare a reconciliation of net income to net cash flows from operating activities.
Q2) Which of the following is reported as an investing activity in the statement of cash flows?
A) The receipt of dividend revenue.
B) The payment of cash dividends.
C) The payment of interest on bonds.
D) The sale of machinery.
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Page 23