Intermediate Accounting
Test Questions
Course Introduction
Intermediate Accounting builds upon fundamental accounting principles, focusing on more complex concepts and standards essential for accurate financial reporting and analysis. This course covers topics such as revenue recognition, inventory valuation, long-term assets, liabilities, stockholders equity, and the preparation of financial statements in accordance with generally accepted accounting principles (GAAP). Students will develop analytical and problem-solving skills by examining real-world accounting scenarios, applying advanced accounting methods, and interpreting the impact of various transactions on a companys financial position. The course prepares students for future accounting coursework and professional certification exams.
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) Identify or define the following terms: a. historical cost, b. realization.
Answer: Historical cost - Asset and liability measurements should be based on the amount given or received in an exchange transaction.
Realization - Revenue should be recognized only after the earnings process is virtually complete and there is reasonable certainty of collecting the asset to be received from the customer.
Q2) Surefeet Corporation changed its inventory valuation method. Which characteristic is jeopardized by this change?
A)Comparability.
B)Representational faithfulness.
C)Consistency.
D)Feedback value.
Answer: C
Q3) Independent auditors express an opinion on the:
A)Fairness of financial statements.
B)Accuracy of financial statements.
C)Soundness of a company's future.
D)Quality of a company's management.
Answer: A
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Chapter 2: Review of the Accounting Process
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Q1) A sale on account would be recorded by:
A)Debiting revenue.
B)Crediting assets.
C)Crediting liabilities.
D)Debiting assets.
Answer: D
Q2) The adjusting entry required to record accrued expenses includes:
A)A credit to cash.
B)A debit to an asset.
C)A credit to an asset.
D)A credit to liability.
Answer: D
Q3) Which of the following accounts has a debit balance?
A)Accounts payable.
B)Accrued taxes.
C)Accumulated depreciation.
D)Bad debt expense.
Answer: D
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) Altoid Co.'s debt-to-equity ratio
Answer: Debt-to-equity ratio: $(450 + 600) /$(150 + 1,000) = .91
Q2) New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is:
A)Twelve months.
B)Thirty months.
C)Six months.
D)Three months.
Answer: B
Q3)
\(\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad
\text { Current ratio\quad\quad Acid-test ratio\quad\quad Total debt-to-equity ratio }\)
\(\text { Cash sale of land for a gain }\)
Answer: \(\begin{array}{cccc} & \text { Current ratio } & \text { Acid-test ratio } & \text { Total debt-to-equity ratio } \\ \text { Cash sale of land for a gain } & \text { I } & \text { I } & \text { D } \end{array}\)
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Chapter 4: The Income Statement and Statement of Cash
Flows
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Q1) Freda's Florist reported the following before-tax income statement items for the year ended December 31, 2009: All income statement items are subject to a 40% income tax rate. In its 2009 income statement, Freda's separately stated income tax expense and total income tax expense would be:
A)$128,000 and $128,000, respectively.
B)$128,000 and $100,000, respectively.
C)$100,000 and $128,000, respectively.
D)$100,000 and $100,000, respectively.
Q2) An item must meet the subjective criteria of being either unusual or infrequent to be reported as extraordinary.
A)True
B)False
Q3) The distinction between operating and non-operating income relates to:
A)Continuity of income.
B)Principal activities of the reporting entity.
C)Consistency of income stream.
D)Reliability of measurements.
Q4) Briefly explain when and why intraperiod tax allocation is necessary.
Q5) Briefly define extraordinary items and explain how they are reported.
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Chapter 5: Income Measurement
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Q1) Hulkster's 2009 inventory turnover is:
A)3.62.
B)3.96.
C)4.07.
D)6.03.
Q2) Its average days in inventory for 2009.
Q3) Briefly explain how you can determine if a company is effectively using leverage.
Q4) Imagine that the Ace Construction Company (ACC is going to switch from the percentage of completion method to the completed contract method. Assume that none of their construction projects are going to produce a loss. Is it possible that, in a particular year, ACC will show higher gross profit under the completed contract method than they would under the percentage-of-completion method? Explain.
Q5) Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and:
A)Revenue is realized.
B)Any receivable is collected.
C)Collection is reasonably certain.
D)Collection is absolutely assured.
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Chapter 6: Time Value of Money Concepts
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Q1) Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $80,000 per year for 5 years. Interest is 8%. Assume the cash savings occur at the end of each year.
Required: Calculate the present value of the cash savings.
Q2) Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.
\(\begin{array}{cccc}& \text { Invested } & \text { Interest } & \text { Number of } \\
\text { Item } & \text { Amount } & \text { Rate } & \text { Periods }\\
\text { a. } & \$ 40,000 & 7 \% & 20 \\
\text { b. } & \$ 20,000 & 6 \% & 25 \\
\text { c. } & \$ 50.000 & 11 \% & 10 \end{array}\)
Q3) The total cash interest payments in 2009 for these notes.
Q4) Column 4 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.
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Chapter 7: Cash and Receivables
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Q1) Rahal's adjusted allowance for uncollectible accounts at December 31, 2009, is:
A)$4,340.
B)$4,100.
C)$3,800.
D)$4,040.
Q2) Define what it is meant by internal control.
Q3) Cash may not include:
A)Foreign currency.
B)Money orders.
C)Restricted cash.
D)Undeposited customer checks.
Q4) How might a company with loan receivables like Winchester be able to manage earnings in applying generally accepted accounting principles?
Q5) What is the balance in the allowance for sales returns account at the end of 2009?
A)$11,000.
B)$39,000.
C)$43,000.
D)$ 4,000.$32,000 + 39,000 ($650,000 6%) 28,000 = $43,000
Q6) Describe some key elements of an internal control system for cash.
Page 9
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Chapter 8: Inventories: Measurement
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Q1) Thompson's 2009 inventory turnover ratio is:
A)3.91.
B)4.00.
C)4.88.
D)5.00.$336,000 [($82,000 + 86,000) 2] = 4.00
Q2) Dollar-value LIFO eliminates the risk of LIFO liquidations.
A)True
B)False
Q3) In a perpetual average cost system:
A)A new weighted-average unit cost is calculated each time additional units are purchased.
B)The cost allocated to ending inventory is generally the same as it would be in a periodic inventory system.
C)The moving-average unit cost is determined following each sale.
D)The average is determined by dividing the total number of units sold by the cost of units purchased during the period.
Q4) Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses FIFO.
Q5) Briefly explain the advantages of dollar-value LIFO (DVL).
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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 classes of trees.
Q2) In applying the LCM rule, the inventory of apparel would be valued at:
A)$108,000.
B)$ 90,000.
C)$110,000.
D)$115,000.$90,000 designated market value is less than $108,000 cost.
Q3) Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to individual trees.
Q4) To the nearest thousand, estimated ending inventory is:
A)$55,000.
B)$52,000.
C)$57,000.
D)None of these is correct.
Q5) The numerator for the current period's cost-to-retail percentage is:
A)$64,800.
B)$48,100.
C)$47,700.
D)$49,800.$49,800
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Chapter 10: Operational Assets: Acquisition and Disposition
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Q1) How are donated assets recorded?
Q2) Champion Industries exchanged a dust-scrubbing piece of equipment for another version of the same type of equipment and received $12,000 cash. The old dust scrubber cost $76,200 and had a book value of $54,500. The new dust scrubber had a fair value of $58,500.
Required:
Prepare the journal entry to record the exchange. Assume the exchange has commercial substance.
Q3) Average accumulated expenditures:
A)Is an approximation of the average debt a firm would have outstanding if it financed all construction through debt.
B)Is computed as a simple average if all construction expenditures are made at the end of the period.
C)Are irrelevant if the company's total outstanding debt is less than total costs of construction.
D)All of these are true statements.
Q4) Why are software development costs treated differently than other types of R&D?
Q5) Show the journal entry to record Plank's disposal of the fixed assets during 2009.
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Chapter 11: Operational Assets: Utilization and Impairment
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Q1) Jung Inc. owns a patent for which it paid $66 million. At the end of 2009, it had accumulated amortization on the patent of $16 million. Due to adverse economic conditions, Jung's management determined that it should assess whether an impairment should be recognized for the patent. The estimated undiscounted future cash flows to be provided by the patent total $43 million, and the patent's fair value at that point is $35 million. Under these circumstances, Lester:
A)Would record no impairment loss on the patent.
B)Would record a $7 million impairment loss on the patent.
C)Would record a $15 million impairment loss on the patent.
D)Would record a $31 million impairment loss on the patent.The patent fails the recoverability test, and the impairment is measured by the difference between its fair value of $35 million and its book value of $50 million ($66 million 16 million).
Q2) Required:
Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.
Q3) Briefly discuss the factors that determine the service life of a depreciable asset.
Q4) Briefly explain how a change in depreciation method is accounted for.
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Chapter 12: Investments
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Q1) 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.
Q2) Sloan Company has owned an investment during 2009 that has increased in fair value. After all closing entries for 2009 are completed, the effect of the increase in fair value on total shareholders' equity would be:
A)higher under the available-for-sale approach than under the trading-securities approach.
B)lower under the available-for-sale approach than under the trading-securities approach.
C)the same amount under the available-for-sale and trading-securities approaches.
D)not possible to identify whether the available-for-sale or trading-securities approaches yield higher shareholders' equity given this information.unrealized gains end up in retained earnings for trading securities and AOCI for available-for-sale securities, but total shareholders' equity is the same.
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Chapter 13: Current Liabilities and Contingencies
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Q1) Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?
A)The long-term debt is callable by the creditor.
B)The creditor has the right to demand payment due to a contractual violation.
C)The long-term debt matures within the upcoming year.
D)All of these require the current classification.
Q2) 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 million.100 million $.30 70% = $21 million $21 million (45
= $7.5 million
Q3) Classifying liabilities as either current or long-term helps creditors assess:
A)Profitability.
B)The relative risk of a firm's liabilities.
C)The degree of a firm's liabilities.
D)The amount of a firm's liabilities.
Q4) How are customer advances and refundable deposits similar and yet different?
Q5) Define and distinguish between current and noncurrent liabilities.
Q6) Define a loss contingency and give two examples that almost always are accrued.
Page 15
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Chapter 14: Bonds and Long-Term Notes
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Q1) Required: How much interest will Morton Sales Co. pay on these bonds in 2009?
Q2) When bonds are sold at a premium, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of premium is:
A)Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.
B)Less than the effective interest amount in the early years and more than the effective interest amount in the later years.
C)Higher than the effective interest amount every year.
D)Less than the effective interest amount every year.
Q3) Amortization of discount on bonds payable results in interest expense that is less than the actual cash outflow.
A)True
B)False
Q4) Paid-in capital is increased when bonds payable are issued with detachable stock purchase warrants.
A)True
B)False
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Chapter 15: Leases
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Q1) What would be the amount of interest expense recorded with payment #5?
A)$2,000.
B)$ 893.
C)$7,107.
D)$1,107.Interest rate = $2,660 / $26,600 = 10% Interest, #5 = $8,925 10% = $893
Q2) From the perspective of the lessor, leases may be classified as either:
A)Direct financing or sales-type.
B)Operating, capital, or direct financing.
C)Operating, sales-type, indirect financing.
D)Operating, direct financing, or sales-type.
Q3) 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.
Q4) Required:
1. Calculate the amount to be recorded as a leased asset and the associated lease liability.
2. Prepare Rumsfeld's journal entries for this lease for 2009 and 2010.
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Chapter 16: Accounting for Income Taxes
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Q1) Recognizing tax benefits in a loss year due to a net operating loss carryforward requires
A)creating a tax refund receivable.
B)footnote disclosure only.
C)creating a deferred tax asset.
D)creating a deferred tax liability.
Q2) Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was:
A)$390 million.
B)$210 million.
C)$150 million.
D)$180 million.
Q3) How much tax on income from continuing operations would be reported in Hobson's income statement?
A)$56 million.
B)$60 million.
C)$62 million.
D)$50 million.[($150 25 + 10 + 5) 40%] + [($25 10) 40%] = $62
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) Prior to 1993, postretirement benefits other than pensions generally were accounted for on the:
A)Accrual basis.
B)Cash basis.
C)Modified accrual basis.
D)Hybrid basis.
Q2) With respect to Ralph, what is Oregon's accumulated postretirement benefit obligation (APBO) at the end of 2009, rounded to the nearest dollar?
A)$ 130,544
B)$ 205,593
C)$195,050
D)None of these is correct
Q3) Accounting for postretirement health care benefits is similar, in most respects, to accounting for:
A)Payroll taxes.
B)Health insurance costs for current employees.
C)Pension benefits.
D)Sick pay and vacation pay.
Q4) What are the five components of postretirement benefit expense?
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Chapter 18: Shareholders Equity
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Q1) The 2010 sale of half of the treasury stock would:
A)Reduce income before tax by $60,000.
B)Reduce retained earnings by $60,000.
C)Increase total shareholders' equity by $300,000.
D)Decrease retained earnings by $40,000.
Q2) Paid-in capital must consist solely of amounts invested by shareholders.
A)True
B)False
Q3) Identify the three common forms of business organization and the primary difference in the way we account for them.
Q4) What was the average price (rounded to the nearest dollar) of the additional shares issued by Levi in 2009?
A)$5 per share
B)$26 per share
C)$39 per share
D)Cannot be determined from the given information.Proceeds = Increase in common stock + increase in additional paid-in capital = $30 million + $128 million = $158 million Average issue price = Proceeds/Number of shares issued = $158 million/6 million shares = $26.33/share, rounded to $26 per share
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) On December 31, 2008, Merlin Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). On February 28, 2009, Merlin issued an additional 36,000 shares of common stock. On September 1, 2009, 9,000 shares were retired. At year-end, there were fully vested incentive stock options outstanding for 30,000 shares of common stock (adjusted for the stock dividend). The exercise price was $18. The market price of the common stock during the year had averaged $20. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2006 and convertible into 50,000 common shares (adjusted for the stock dividend). Net income was $900,000. The tax rate for the year was 40%. A 10% stock dividend was declared and distributed on July 1, 2009.
Required:
Compute basis and diluted EPS for the year ended December 31, 2009.
Q2) Contingently issuable shares may be included in:
A)Basic EPS.
B)Diluted EPS.
C)Both a and b.
D)None of these is correct.
Q3) Compare the concepts of basic and diluted earnings per share with respect to their calculation.
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Chapter 20: Accounting Changes
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Q1) Which of the following is an example of a change in accounting principle?
A)A change in inventory costing methods.
B)A change in the estimated useful life of a depreciable asset.
C)A change in the actuarial life expectancies of employees under a pension plan.
D)Consolidating a new subsidiary.
Q2) Regardless of the type of accounting change that occurs, the most important responsibility is:
A)To properly determine the tax effect.
B)To communicate that a change has occurred.
C)To compute the correct amount of the change.
D)None of these.
Q3) Which of the following would not be accounted for using the retrospective approach?
A)A change from LIFO to FIFO inventory costing.
B)A change from the completed contract method to the percent-of-completion method for long-term construction contracts.
C)A change in depreciation methods.
D)A change from the full cost method in the oil industry.
Q4) How are accounting errors treated?
Q5) Describe the approaches of reporting changes in accounting principles.
Page 22
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Chapter 21: The Statement of Cash Flows
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Q1) Which of the following financial statements is prepared as of a particular point in time rather than for a period of time?
A)Statement of cash flows.
B)Income statement.
C)Statement of shareholders' equity.
D)Balance sheet.
Q2) A purchase of equipment for cash is:
A)Reported as an operating activity in the statement of cash flows.
B)Reported as an investing activity in the statement of cash flows.
C)Reported as a financing activity in the statement of cash flows.
D)None of these is correct.
Q3) What activities are included in the statement of cash flows under the section entitled "Cash flows from investing activities"?
Q4) Why is the statement of cash flows required as part of the set of external financial statements?
Q5) Explain why Brothers Corporation subtracts equity income from its net income in its measurement of operating cash flows.
Q6) Did accounts receivable increase or decrease during 2009?
Q7) Is depreciation a source of cash? Explain.
Page 23
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Chapter 22: Appendix a Derivatives
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Q1) How is a gain or a loss from a cash flow hedge reported when it initially occurs? When is it reported in the income statement?
Q2) The key criterion for qualifying as a hedge is that the hedging relationship must be highly effective in achieving offsetting changes in fair values or cash flows based on the hedging company's specified risk management objective and strategy. Explain what happens if a swap is used ineffectively to hedge the fair value of a note.
Q3) An agreement by a British company to import manufactured goods from Thailand, denominated in US dollars:
A)Represents a cash flow hedge.
B)Represents a fair value hedge.
C)Represents a foreign currency hedge.
D)Does not qualify as a hedge.
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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