This pack of ACC 423 Exam 1 shows the solutions to the following questions:

1) Proceeds from an issue of debt securities having stock warrants should NOT be allocated between debt and equity features when

2) The conversion of preferred stock may be recorded by the

3) The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be

4) A primary source of stockholders’ equity is

5) Stockholders’ equity is generally classified into two major categories:

6) When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the

7) Treasury shares are

8) “Gains” on sales of treasury stock (using the cost method) should be credited to

9) How should a “gain” from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?

10) In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?

11) When computing diluted earnings per share, convertible bonds are

12) What effect will the acquisition of treasury stock have on stockholders’ equity and earnings per share, respectively?

13) On May 1, 2007, Kent Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Kent had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Kent ‘s common stock was $20 per share on May 1, 2007. As a result of this stock dividend, Kent’s total stockholders’ equity

14) How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the market value of the shares exceeds the par value of the stock?

Additional Common Stock | Paid-in Capital

15) At its date of incorporation, Wilson, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Wilson acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?

Retained Earnings | Additional Paid-in Capital

16) Which of the following is correct about the effective-interest method of amortization?

17) An unrealized holding loss on a company’s available-for-sale securities should be reflected in the current financial statements as

18) An unrealized holding gain on a company’s available-for-sale securities should be reflected in the current financial statements as

19) Investments in debt securities should be recorded on the date of acquisition at

20) Securities which could be classified as held-to-maturity are

21) Which of the following is NOT a debt security?

22) An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as

Fair Value Method | Equity Method

23) When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

24) Bista Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?

Fair Value Method | Equity Method

25) Debt securities that are accounted for at amortized cost, NOT fair value, are

26) Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders’ equity are

27) Use of the effective-interest method in amortizing bond premiums and discounts results in

28) All of the following are characteristics of a derivative financial instrument EXCEPT the instrument

29) The accounting for fair value hedges records the derivative at its

30) All of the following statements regarding accounting for derivatives are correct EXCEPT that

31) Taxable income of a corporation differs from pretax financial income because of

32) The rationale for interperiod income tax allocation is to

33) Interperiod income tax allocation causes

34) At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an accrued receivable for financial reporting purposes but NOT for tax purposes. When this asset is recovered in 2008, a future taxable amount will occur and

35) Which of the following differences would result in future taxable amounts?

36) Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

37) In a defined-contribution plan, a formula is used that

38) In accounting for a defined-benefit pension plan

39) Which of the following is NOT a characteristic of a defined-contribution pension plan?

40) In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

41) The projected benefit obligation is the measure of pension obligation that

42) The relationship between the amount funded and the amount reported for pension expense is as follows:

43) On January 1, 2008, Pratt Corp. adopted a defined-benefit pension plan. The plan’s service cost of $300,000 was fully funded at the end of 2008. Prior service cost was funded by a contribution of $120,000 in 2008. Amortization of prior service cost was $48,000 for 2008. What is the amount of Pratt’s prepaid pension cost at December 31, 2008?

44) Reser Corp., a company whose stock is publicly traded, provides a noncontributory defined-benefit pension plan for its employees. The company’s actuary has provided the following information for the year ended December 31, 2008:

Projected benefit obligation$600,000

Accumulated benefit obligation525,000

Fair value of plan assets825,000

Service cost240,000

Interest on projected benefit obligation24,000

Amortization of unrecognized prior service cost60,000

Expected and actual return on plan assets82,500

The market-related asset value equals the fair value of plan assets. Prior contributions to the defined-benefit pension plan equaled the amount of net periodic pension cost accrued for the previous year end. No contributions have been made for 2008 pension cost. In its December 31, 2008 balance sheet, Reser should report an accrued pension cost of

45) Effective January 1, 2007, Quayle Co. established a defined-benefit plan with no retro-active benefits. The first of the required equal annual contributions was paid on December 31, 2007. A 10% discount rate was used to calculate service cost and a 10% rate of return was assumed for plan assets. All information on covered employees for 2007 and 2008 is the same. How should the service cost for 2008 compare with 2007, and should the 2007 balance sheet report an accrued or a prepaid pension cost?

Service Cost for 2008 Compared to 2007 | Pension Cost Reported on the 2007 Balance Sheet

46) On January 1, 2005, Foley Corporation acquired machinery at a cost of $250,000. Foley adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2008, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense to be recorded for the machinery in 2008 is (round to the nearest dollar)

47) During 2008, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but NOT for tax purposes. Gross profit figures under both methods for the past three years appear below:

Completed-ContractPercentage-of-Completion

2006$ 475,000$ 800,000

2007625,000950,000

2008700,0001,050,000

$1,800,000$2,800,000

Assuming an income tax rate of 40% for all years, the effect of this accounting change on prior periods should be reported by a credit of

48) Accrued salaries payable of $51,000 were NOT recorded at December 31, 2007. Office supplies on hand of $24,000 at December 31, 2008 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause

49) The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should

50) Which type of accounting change should always be accounted for in current and future periods?

51) When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a