Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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The installment method of recognizing revenue
a. | Should be used only in cases where there is no reasonable basis for estimating the
collectibility of receivables. | b. | Is not a generally accepted accounting
principle under any circumstances. | c. | Should be used for book purposes only if it is
used for tax purposes. | d. | Is an acceptable alternative accounting
principle for a firm which makes installment sales. |
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2.
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A development stage enterprise should use the same generally accepted accounting
principles that apply to established operating enterprises for
Capitalization Recognition
of costs
of revenues
a. | No
No | b. | No
Yes | c. | Yes
Yes | d. | Yes
No |
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3.
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Management can estimate the amount of the loss that will occur if a foreign
government expropriates some company assets. If expropriation is reasonably possible, a loss
contingency should be
a. | Neither accrued as a liability nor disclosed. | b. | Accrued as a
liability but not disclosed. | c. | Disclosed and accrued as a
liability. | d. | Disclosed but not accrued as a liability. |
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4.
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Snelling Co. did not record an accrual for a contingent loss, but disclosed the
nature of the contingency and the range of the possible loss. How likely is the
loss?
a. | Remote | b. | Reasonably possible. | c. | Probable. | d. | Certain. |
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5.
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Which of the following information should be included in Melay, Inc.'s 20X2
summary of significant accounting policies?
a. | Property, plant, and equipment is recorded at cost with depreciation computed
principally by the straight-line method. | b. | During 20X2, the Delay Segment was
sold. | c. | Business segment 20X2 sales are Alay $1M, Belay $2M, and Celay
$3M. | d. | Future common share dividends are expected to approximate 60% of
earnings. |
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6.
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Which of the following items would cause earnings to differ from comprehensive
income ?
a. | Unrealized loss on investments in trading marketable equity
securities. | b. | Unrealized loss on investments in available for sale marketable equity
securities. | c. | Loss on exchange of nonmoneteary assets. | d. | Gain on
exchange of nonmonetary assets. |
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Wall Drugs offered an incentive stock option
plan to its employees. On January 1, 2003, options were granted for sixty thousand $1 par common
shares. The exercise price equals the $5 market price of the common stock on the grant date. The
options cannot be exercised before January 1, 2006, and expire December 31, 2007. Each option has a
fair value of $1 based on an option pricing model.
Unexpected turnover during 2004 caused the forfeiture of 8% of the stock
options.
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7.
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Which is the correct entry to record
compensation expense for the year 2003?
a. | Compensation
expense
12,000
Paid in capital--stock
options
12,000 | b. | Compensation
expense
20,000
Common
stock
20,000 | c. | Compensation
expense
20,000
Paid in capital--stock
options
20,000 | d. | Compensation
expense
80,000
Paid in capital--stock
options
80,000 |
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8.
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Which is the correct entry to record
compensation expense for the year 2004?
a. | Compensation
expense
12,000
Paid in capital--stock
options
12,000 | b. | Compensation
expense
18,400
Paid in capital--stock
options
18,400 | c. | Compensation
expense
20,000
Paid in capital--stock
options
20,000 | d. | Compensation
expense
17,600
Paid in capital--stock
options
17,600 |
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9.
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For financial statement purposes, the installment
method of accounting may be used if the
a. | Collection period extends over more than 12
months. | b. | Installments are due in different
years. | c. | Ultimate amount collectible is
indeterminate. | d. | Percentage-of-completion method is
inappropriate. |
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10.
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On March 1, 20X2, a suit was filed against Dean
Company for patent infringement. Dean's legal counsel believes an unfavorable outcome is
probable, and estimates that Dean will have to pay between $500,000 and $900,000 in damages.
The situation was unchanged when the December 31, 20X2, financial statements were released on
February 24, 20X3. How much of a liability should Dean report on its balance sheet at December
31, 20X2, in connection with this suit?
a. | $0 | b. | $500,000 | c. | $600,000 | d. | $900,000 |
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