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6.1
1. Korman Company has the following securities in its portfolio of trading equity securities on December 31, 2010:
Cost
Fair Value
5,000 shares of Thomas Corp., Common
$155,000
$139,000
10,000 shares of Gant, Common
182,000
190,000
$337,000
$329,000
All of the securities had been purchased in 2010. In 2011, Korman completed the following securities transactions:
March 1
Sold 5,000 shares of Thomas Corp., Common @ $31 less fees of $1,500.
April 1
Bought 600 shares of Werth Stores, Common @ $45 plus fees of $550.
The Korman Company portfolio of trading equity securities appeared as follows on December 31, 2011:
Cost
Fair Value
10,000 shares of Gant, Common
$182,000
$195,500
600 shares of Werth Stores, Common
27,550
25,500
$209,550
$221,000
Instructions
Prepare the general journal entries for Korman Company for:
(a)
the 2010 adjusting entry.
(b)
the sale of the Thomas Corp. stock.
(c)
the purchase of the Werth Stores’ stock.
(d)
the 2011 adjusting entry.
2. The following information is available for Irwin Company for 2010:
Net Income
$120,000
Realized gain on sale of available-for-sale securities
10,000
Unrealized holding gain arising during the period on
available-for-sale securities
24,000
Reclassification adjustment for gains included in net
income
8,000
Instructions
(1)
Determine other comprehensive income for 2010.
(2)
Compute comprehensive income for 2010.
3. Dobson Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor’s business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost to cost basis. Dobson began work on a lump-sum contract at the beginning of 2011. As bid, the statistics were as follows:
Lump-sum price (contract price)
$4,000,000
Estimated costs
Labor
$ 850,000
Materials and subcontractor
1,750,000
Indirect costs
400,000
3,000,000
$1,000,000
At the end of the first year, the following was the status of the contract:
Billings to date
$2,230,000
Costs incurred to date
Labor
$ 464,000
Materials and subcontractor
1,098,000
Indirect costs
193,000
1,755,000
Latest forecast total cost
3,000,000
It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the costs incurred to date.
Instructions
(a)
Compute the percentage of completion on the contract at the end of 2011.
(b)
Indicate the amount of gross profit that would be reported on this contract at the end of 2011.
(c)
Make the journal entry to record the income (loss) for 2011 on Dobson’s books.
4, 5, 6 The following information for Cooper Enterprises is given below:
December 31, 2011
Assets and obligations
Plan assets (at fair value)
$100,000
Accumulated benefit obligation
185,000
Projected benefit obligation
200,000
Other Items
Pension asset / liability, January 1, 2011
5,000
Contributions
60,000
Accumulated other comprehensive loss
83,950
There were no actuarial gains or losses at January 1, 2011. The average remaining service life of employees is 10 years.
4.
What is the pension expense that Cooper Enterprises should report for 2011?
5.
What is the amount that Cooper Enterprises should report as its pension liability on its balance sheet as of December 31, 2011?
6.
The amortization of Other Comprehensive Loss for 2012 is:
Multiple Choice
1. Santo 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
a.
No Effect
Decrease
b.
Increase
Decrease
c.
No Effect
No Effect
d.
Decrease
No Effect
2. An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as
Fair Value Method
Equity Method
a.
Income
Income
b.
A reduction of the investment
A reduction of the investment
c.
Income
A reduction of the investment
d.
A reduction of the investment
Income
3.
When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?
a.
The investor should always use the equity method to account for its investment.
b.
The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise “significant influence” over the investee.
c.
The investor must use the fair value method unless it can clearly demonstrate the ability to exercise “significant influence” over the investee.
d.
The investor should always use the fair value method to account for its investment.
4.
If the parent company owns 90% of the subsidiary company’s outstanding common stock, the company should generally account for the income of the subsidiary under the
a.
cost method.
b.
fair value method.
c.
divesture method.
d.
equity method.
5.
Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as
a.
a reduction of the carrying value of the investment.
b.
additional paid-in capital.
c.
an addition to the carrying value of the investment.
d.
dividend income.
6.
Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
a.
investor sells the investment.
b.
investee declares a dividend.
c.
investee pays a dividend.
d.
earnings are reported by the investee in its financial statements.
7. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?
a.
Understate, overstate, overstate
b.
Overstate, understate, understate
c.
Overstate, overstate, overstate
d.
Understate, understate, understate
8. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011?
I.
$3,000,000
II.
$3,040,000
III.
$3,120,000
a.
I, II, or III.
b.
I or II only.
c.
II only.
d.
II or III only.
9.
The fair value option allows a company to
a.
value its own liabilities at fair value.
b.
record income when the fair value of its bonds increases.
c.
report most financial instruments at fair value by recording gains and losses as a separate component of stockholders’ equity.
d.
All of the above are true of the fair value option.
10.
Impairments are
a.
based on discounted cash flows for securities.
b.
recognized as a realized loss if the impairment is judged to be temporary.
c.
based on fair value for available-for-sale investments and on negotiated values for held-to-maturity investments.
d.
evaluated at each reporting date for every investment.
11.
A sale should not be recognized as revenue by the seller at the time of sale if
a.
payment was made by check.
b.
the selling price is less than the normal selling price.
c.
the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated.
d.
none of these.
12.
The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions?
a.
The amount of future returns can be reasonably estimated.
b.
The seller’s price is substantially fixed or determinable at time of sale.
c.
The buyer’s obligation to the seller would not be changed in the event of theft or damage of the product.
d.
The buyer is obligated to pay the seller upon resale of the product.
13.
In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be
a.
the terms of payment in the contract.
b.
the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.
c.
the method commonly used by the contractor to account for other long-term construction contracts.
d.
the inherent nature of the contractor’s technical facilities used in construction.
14.
The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions?
a.
Estimates of progress toward completion, revenues, and costs are reasonably dependable.
b.
The contractor can be expected to perform the contractual obligation.
c.
The buyer can be expected to satisfy some of the obligations under the contract.
d.
The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.
15.
When work to be done and costs to be incurred on a long-term contract can be estimated dependably, which of the following methods of revenue recognition is preferable?
a.
Installment-sales method
b.
Percentage-of-completion method
c.
Completed-contract method
d.
None of these
16.
How should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract?
a.
Progress billings as deferred income, construction in progress as a deferred expense.
b.
Progress billings as income, construction in process as inventory.
c.
Net, as a current asset if debit balance, and current liability if credit balance.
d.
Net, as income from construction if credit balance, and loss from construction if debit balance.
17.
In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the
a.
total costs incurred to date.
b.
total estimated cost.
c.
unbilled portion of the contract price.
d.
total contract price.
18.
How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?
a.
As construction in process in the current asset section of the balance sheet.
b.
As construction in process in the noncurrent asset section of the balance sheet.
c.
As a receivable in the noncurrent asset section of the balance sheet.
d.
In a note to the financial statements until the customer is formally billed for the portion of work completed.
19.
The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it
a.
is unacceptable for income tax purposes.
b.
gives results based upon estimates which may be subject to considerable uncertainty.
c.
is likely to assign a small amount of revenue to a period during which much revenue was actually earned.
d.
none of these.
20 & 21. The following information relates to Jackson, Inc.:
For the Year Ended December 31,
2010
2011
Plan assets (at fair value)
$1,260,000
$1,824,000
Pension expense
570,000
450,000
Projected benefit obligation
1,620,000
1,884,000
Annual contribution to plan
600,000
450,000
Accumulated OCI (PSC)
480,000
420,000
20.
The amount reported as the liability for pensions on the December 31, 2010 balance sheet is
a.
$ -0-.
b.
$30,000.
c.
$360,000.
d.
$390,000.
21.
The amount reported as the liability for pensions on the December 31, 2011 balance sheet is
a.
$ -0-.
b.
$60,000.
c.
$1,884,000.
d.
$520,000.
22.
Which of the following disclosures of pension plan information would not normally be required?
a.
The major components of pension expense
b.
The amount of prior service cost changed or credited in previous years.
c.
The funded status of the plan and the amounts recognized in the financial statements
d.
The rates used in measuring the benefit amounts
23.
The main purpose of the Pension Benefit Guaranty Corporation is to
a.
require minimum funding of pensions.
b.
require plan administrators to publish a comprehensive description and summary of their plans.
c.
administer terminated plans and to impose liens on the employer’s assets for certain unfunded pension liabilities.
d.
all of these.
24.
Which of the following statements is true about postretirement health care benefits?
a.
They are generally funded.
b.
The benefits are well-defined and level in dollar amount.
c.
The beneficiary is the retiree, spouse, and other dependents.
d.
The benefit is payable monthly.
25. Interest cost included in pension expense recognized for a period by an employer sponsoring a defined-benefit pension plan represents the
a.
shortage between the expected and actual returns on plan assets.
b.
increase in the projected benefit obligation due to the passage of time.
c.
increase in the fair value of plan assets due to the passage of time.
d.
amortization of the discount on accumulated OCI (PSC).
26.
Ohlman, Inc. maintains a defined-benefit pension plan for its employees. As of December 31, 2011, the market value of the plan assets is less than the accumulated benefit obligation. The projected benefit obligation exceeds the accumulated benefit obligation. In its balance sheet as of December 31, 2011, Ohlman should report a liability in the amount of the
a.
excess of the projected benefit obligation over the fair value of the plan assets.
b.
excess of the accumulated benefit obligation over the fair value of the plan assets.
c.
projected benefit obligation.
d.
accumulated benefit obligation.
27.
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
a.
an offset to the liability for prior service cost.
b.
pension asset/liability.
c.
as other comprehensive income (G/L)
d.
as accumulated other comprehensive income (PSC).
28.
Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?
Amortization of
Fair value
prior
of plan assets
service cost
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
29.
A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the
a.
projected benefit obligation exceeds the fair value of the plan assets.
b.
fair value of the plan assets exceeds the projected benefit obligation.
c.
amount of employer contributions exceeds the pension expense.
d.
amount of pension expense exceeds the amount of employer contributions.
30.
Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?
Transfers Ownership
Contains Bargain
Collectibility of Lease
Any Important
By End Of Lease?
Purchase Option?
Payments Assured?
Uncertainties?
a.
No
Yes
Yes
No
b.
Yes
No
No
No
c.
Yes
No
No
Yes
d.
No
Yes
Yes
Yes
31.
Which of the following would not be included in the Lease Receivable account?
a.
Guaranteed residual value
b.
Unguaranteed residual value
c.
A bargain purchase option
d.
All would be included
32.
On December 1, 2011, Goetz Corporation leased office space for 10 years at a monthly rental of $90,000. On that date Perez paid the landlord the following amounts:
Rent deposit
$ 90,000
First month’s rent
90,000
Last month’s rent
90,000
Installation of new walls and offices
495,000
$765,000
The entire amount of $765,000 was charged to rent expense in 2011. What amount should Goetz have charged to expense for the year ended December 31, 2011?
a.
$90,000
b.
$94,125
c.
$184,125
d.
$495,000
33.
On January 1, 2011, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $100,000 at the end of each year for ten years with title to pass to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2011
a.
lease expense of $100,000.
b.
interest expense of $44,734 and depreciation expense of $38,068.
c.
interest expense of $53,681 and depreciation expense of $44,734.
d.
interest expense of $45,681 and depreciation expense of $67,101.
34.
Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease A
Lease B
a.
Operating lease
Capital lease
b.
Operating lease
Operating lease
c.
Capital lease
Capital lease
d.
Capital lease
Operating lease
35.
A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal
a.
the current liability shown for the lease at the end of year 1.
b.
the current liability shown for the lease at the end of year 2.
c.
the reduction of the lease liability in year 1.
d.
one-tenth of the original lease liability.
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