1. Brock Corp.

reports operating expenses in two categories: (1) selling, and (2)

general and administrative. The adjusted trial balance at December 31, year 1,
included the following expense and loss accounts:

Accounting
and legal $120,000
fees
Advertising 150,000
Freight-out 80,000
Interest 70,000
Loss on sale
of long-term 30,000
investment
Officers'
225,000
salaries
Rent for
220,000
office space
Sales
salaries and 140,000
commissions
One-half of the rented premises is occupied by the sales department.

Brock's total selling expenses for year 1 are

$480,000

$400,000

$370,000

$360,000
2. The premium on a 3-year insurance policy expiring on December 31, year 3, was
paid in total on January 1, year 1. Assuming that the original payment was
initially debited to an expense account, and that appropriate adjusting entries
have been recorded on December 31, year 1 and year 2, the balance in the
prepaid asset account on December 31, year 2, would be

Zero.

Lower than the balance on December 31, year 3.

The same as the original payment.

The same as it would have been if the original payment had been initially debited
to a prepaid asset account.

3. Sun Co. is a wholly owned subsidiary of Star Co. Both companies have separate
general ledgers, and prepare separate financial statements. Sun requires stand-
alone financial statements. Which of the following statements is correct?

A. Consolidated financial statements should be prepared for both Star and Sun.
B. Consolidated financial statements should only be prepared by Star and not by
Sun.
C. After consolidation, the accounts of both Star and Sun should be changed to
reflect the consolidated totals for future ease in reporting.
D. After consolidation, the accounts of both Star and Sun should be combined
together into one general-ledger accounting system for future ease in reporting.
 4. On January 1, year 1, Warren Co. purchased a $600,000 machine, with a five-
year useful life and no salvage value. The machine was depreciated by an
accelerated method for book and tax purposes. The machine's carrying amount
was $240,000 on December 31, year 2. On January 1, year 3, Warren changed
to the straight-line method for financial reporting purposes. Warren can justify
the change. Warren's income tax rate is 30%.

On January 1, year 3, what amount should Warren report as deferred income

tax liability as a result of the change?
$120,000
$ 72,000
$ 36,000
$0
 5. On January 1, year 1, Robert Harrison signed an agreement to operate as a
franchisee of Perfect Pizza, Inc. for an initial franchise fee of $40,000. Of this
amount, $15,000 was paid when the agreement was signed and the balance is
payable in five annual payments of $5,000 each beginning January 1, year 2.
The agreement provides that the down payment is not refundable and no future
services are required of the franchisor. Harrison’s credit rating indicates that he
can borrow money at 12% for a loan of this type. Information on present and
future value factors is as follows:

Present value of $1 at 12% for 5 periods .567

Future amount of $1 at 12% for 5 periods 1.762
Present value of an ordinary annuity of $1 at 12% for 5 periods 3.605

Harrison should record the acquisition cost of the franchise on January 1, year 1, at
$29,175
$33,025
$40,000
$44,050

6. How would the declaration of a 10% stock dividend by a corporation affect

each of the following on its books?

Retained earnings Total stockholders' equity

(RE) (SE)
Decrease No effect
Decrease Decrease
No effect Decrease
No effect No effect

7. Which of the following components should be included in the calculation of net

pension cost recognized for a period by an employer sponsoring a defined
benefit pension plan?
 Amortization of
Actual return
on
unrecognized
prior
plan assets, if
any
service cost, if any
No Yes
No No
Yes No
Yes Yes

8. An increase in the cash surrender value of a life insurance policy owned by a

company would be recorded by

Decreasing annual insurance expense.

Increasing investment income.
Recording a memorandum entry only.
Decreasing a deferred charge.

9. General-purpose external financial reporting of a corporation focuses primarily

on the needs of which of the following users?

Regulatory and taxing authorities

Investors and creditors and their advisors
The board of directors of the corporation
Management of the corporation

10. Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12,
year 2. Cobb received a stock dividend of 2,000 shares on March 31, year 2,
when the carrying amount per share on Roe’s books was $35 and the market
value per share was $40. Roe paid a cash dividend of $1.50 per share on
September 15, year 2. In Cobb’s income statement for the year ended October
31, year 2, what amount should Cobb report as dividend income?
$98,000
$88,000
 $18,000
$15,000

11. Compared to its 20X4 cash-basis net income, Potoma Co.'s 20X4 accrual-basis
net income increased when it:

Declared a cash dividend in 20X3 that it paid in 20X4.

Wrote off more accounts receivable balances than it reported as uncollectible
accounts expense in 2004.
Had lower accrued expenses on December 31, 20X4, than on January 1, 2004.
Sold used equipment for cash at a gain in 20X4.

12. Sanni Co. had $150,000 in cash-basis pretax income for the year. At the
current year-end, accounts receivable decreased by $20,000 and accounts
payable increased by $16,000 from their previous year-end
balances. Compared to the accrual-basis method of accounting, Sanni’s cash-
basis pretax income is

Higher by $4,000
Lower by $4,000
Higher by $36,000
Lower by $36,000

13. The following costs were incurred by Griff Co., a manufacturer, during year 1:
Accounting and legal fees $ 25,000
Freight-in 175,000
Freight-out 160,000
Officers salaries 150,000
Insurance 85,000
Sales representatives salaries 215,000
What amount of these costs should be reported as general and administrative expenses
for year 1?
$260,000
$550,000
$635,000
$810,000
14. The enhancing qualitative characteristics of financial reporting are

Relevance, reliability, and faithful representation.

Cost-benefit and materiality.
Comparability, verifiability, timeliness, and understandability.
Completeness, neutrality, and freedom from error.

15. A short-term marketable debt security was purchased on September 1, year 1,

between interest dates. The next interest payment date was February 1, year 2.

On the balance sheet at December 31, year 1, the debt security should be
carried at

Market value plus the accrued interest paid.

Market value.
Cost plus the accrued interest paid.
Cost.

16. Derivatives are financial instruments that derive their value from changes in a
benchmark based on any of the following except

Stock prices.
Mortgage and currency rates.
Commodity prices.
Discounts on accounts receivable.

17. The Plaza Company was organized late in year 1 and began operations on
January 1, year 2. Plaza is engaged in conducting market research studies on
behalf of manufacturers. Prior to the start of operations, the following costs
were incurred:

Attorney’s fees in connection with organization of Plaza $4,000

Improvements to leased offices prior to occupancy 7,000
Meetings of incorporators, state filing fees and other organization expenses 5,000
16,000
Under generally accepted accounting principles, what is the amount of organization
costs charged to income for year 2?
$9,000
$16,000
$11,000
$5,000

18. Fogg Co., a US company, contracted to purchase foreign goods. Payment in

foreign currency was due 1 month after the goods were received at Fogg’s
warehouse. Between the receipt of goods and the time of payment, the
exchange rates changed in Fogg’s favor. The resulting gain should be included
in Fogg’s financial statements as a(n)

Component of income from continuing operations.

Extraordinary item.
Deferred credit.
Component of "other comprehensive income" and stockholders’ equity.

19. The following information is available for Bart Company for year 1:

Disbursements for purchases $580,000

Increase in trade accounts payable 50,000
Decrease in merchandise inventory 20,000

Cost of goods sold for year 1 was

$650,000
$610,000
$550,000
$510,000
20. Under IFRS, what valuation methods are used for intangible assets?

The cost model or the fair value model.

The cost model or the revaluation model.
The cost model or the fair value through profit or loss model.
The revaluation model or the fair value model.

21. Which of the following is not a derivative financial instrument?

Interest rate and foreign currency swaps.

Outstanding loan commitments written.
Option contract.
Trade accounts receivable.

22. Which of the following financial instruments is not considered a derivative

financial instrument?

Interest-rate swaps
Currency futures
Stock-index options
Bank certificates of deposit