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Financial Accounting, 11^th edition

Test Bank and Video Questions

By Pratt and Peters

Chapter 3: The Measurement Fundamentals of Financial Accounting

For Instructor Use Only

Copyright © 2021 John Wiley & Sons, Inc. or the author, all rights reserved.

Table of Contents

Multiple Choice Questions 2

Matching Questions 34

Short Problems 39

Short Essay Questions 45

Data Analytic Questions 50

Multiple Choice Questions

1) When preparing the financial statements, we assume that the life of the entity will continue beyond the current period. Which assumption are we most likely following?

A) Stable dollar theory

B) Going concern assumption

C) Economic entity assumption

D) Fiscal period assumption

Diff: Easy

Learning Objective: 3.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 1 / None

2) By recognizing the economic effects of inflation on the accounting financial statements, which accounting assumption is ignored?

A) Economic entity assumption

B) Going concern assumption

C) Stable dollar assumption

D) Fiscal period assumption

Diff: Easy

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 2 / None

3) A company prepares financial statements once every year. What practice does this assumption illustrate?

A) Going concern assumption

B) Fiscal period assumption

C) The five-year moving theory

D) Stable dollar assumption

Diff: Easy

Learning Objective: 3.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 3 / None

4) Which assumption is applied when Laramie recognizes the operations of its wholly owned subsidiary, Big Sky, separately and distinctly from its own operations?

A) Economic entity assumption

B) Going concern assumption

C) Fiscal period assumption

D) The subsidiary stability assumption

Diff: Easy

Learning Objective: 3.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 4 / None

5) Recognition of increases in purchasing power of monetary units is inconsistent with the:

A) economic entity assumption.

B) going concern assumption.

C) consistency principle.

D) stable dollar assumption.

Diff: Easy

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 5 / None

6) Most companies prepare annual financial statements:

A) with a fiscal ending date of June 30.

B) on the calendar year.

C) at a different date each year.

D) every two weeks.

Diff: Easy

Learning Objective: 3.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 6 / None

7) Which one of the following assumptions is violated when a company pays for its CEO's personal groceries using the company's bank account?

A) Stable dollar

B) Economic entity

C) Going concern

D) Consistency principle of accounting

Diff: Medium

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 7 / None

8) The fiscal period assumption states that the operating life of an economic entity:

A) is generally for a period of one year.

B) can be any period management decides it to be.

C) refers to an entity that is separate and distinct from its owners.

D) can be divided into time periods over which measures of performance and financial position can be developed and applied.

Diff: Medium

Learning Objective: 3.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 8 / None

9) As fiscal periods become shorter, the application of certain accounting methods become:

A) more arbitrary and subjective.

B) more objective.

C) more accurate.

D) more conservative.

Diff: Medium

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 9 / None

10) The stable dollar assumption assumes that:

A) the monetary unit is the functional currency of any country in which a company operates.

B) inflationary effects should be recognized in the financial statements.

C) economic wealth is not measurable.

D) the monetary unit is stable across time.

Diff: Easy

Learning Objective: 3.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 10 / None

11) The monetary unit that a company uses to measure economic transactions is primarily determined by the:

A) stable dollar concept adjusted for inflationary effects.

B) markets in which a company operates.

C) fiscal period a company has chosen.

D) decision by the shareholders to elect to use a given currency.

Diff: Easy

Learning Objective: 3.1; 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 11 / None

12) Morgan Shipping held cash of $1 million throughout 2020, a time period over which the general price level decreased. Morgan Shipping:

A) has more than $1 million of purchasing power at the end of the period.

B) has less than $1 million purchasing power at the end of the period.

C) must recognize the gain due to general price level increases in its income statement.

D) has the same $1 million purchasing power at the end of the period as at the beginning of the period.

Diff: Medium

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 12 / None

13) Everett, Inc.'s reporting period ends on June 30th every year. This is an example of:

A) matching.

B) fiscal period.

C) materiality.

D) relevance.

Diff: Easy

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 13 / None

14) Ten years after a company purchases a plot of land, it is reported on the balance sheet at its cost from the year it was purchased instead of its current selling price. This accounting practice is justified by the:

A) financial period assumption.

B) matching principle.

C) fiscal period assumption.

D) principle of objectivity.

Diff: Medium

Learning Objective: 3.1; 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 14 / None

15) Why must measures of performance and financial position be available on a timely basis?

A) For the users of financial information to make timely decisions

B) For the SEC to determine whether the company should be shut down

C) Because the FASB requires this information to be submitted to it for approval

D) For management to have adequate time to prepare the financial statements

Diff: Medium

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 15 / None

16) Expensing the cost of a pencil holder that cost $1.25 instead of capitalizing it as a plant asset and depreciating it over its estimated useful life of 10 years:

A) violates the economic entity assumption.

B) violates GAAP since pencil holders are important assets.

C) is justified because of materiality.

D) is appropriate because of the stable dollar assumption.

Diff: Medium

Learning Objective: 3.1; 3.5

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 16 / None

17) Original cost may be defined as the:

A) cash price of the asset when purchased.

B) discounted future cash flows.

C) selling price.

D) price paid by the consumer when it was first released for consumer sales.

Diff: Easy

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 17 / None

18) Today's fair market value would be the same as:

A) the cash price of the asset when it was originally purchased.

B) the original cost less accumulated depreciation.

C) the price at which an items could be sold less the cost of selling it.

D) the discounted future cash flows from input and output markets.

Diff: Medium

Learning Objective: 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 18 / None

19) Sales price is:

A) the input price of liabilities.

B) a form of market value.

C) a present value concept.

D) the current input cost.

Diff: Easy

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 19 / None

20) Present value is defined as:

A) the cash price of the asset when it was purchased.

B) the present price of any given product or service.

C) the selling price.

D) the discounted value of future cash flows.

Diff: Medium

Learning Objective: 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 20 / None

21) The valuation basis used to measure long-term liabilities is:

A) present value.

B) net realizable value.

C) fair market value.

D) historical cost.

Diff: Easy

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 21 / None

22) The valuation basis used to measure accounts payable is:

A) fair value.

B) net realizable value.

C) face value.

D) market value.

Diff: Easy

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 22 / None

23) Which one of the following is violated when a firm measures property, plant, and equipment at its estimated selling price?

A) Objectivity

B) Economic entity assumption

C) Materiality

D) Conservatism

Diff: Medium

Learning Objective: 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 23 / None

24) The shareholders' equity section of the balance sheet is:

A) a residual interest of the shareholders or the book value of the company.

B) the amount for which the owner could sell the company.

C) valued at the present value of the dividends paid to shareholders.

D) the difference between the fair market value and the original cost of the company's assets.

Diff: Medium

Learning Objective: 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 24 / None

25) The valuation basis used to measure short-term investments is:

A) net realizable value.

B) historical cost.

C) original cost.

D) present value.

Diff: Easy

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 25 / None

26) The valuation basis used to measure accounts receivable is:

A) the original cost of the goods sold.

B) the original cost or market value, whichever is lower

C) net realizable value.

D) present value of the gross amount of the receivable.

Diff: Easy

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 26 / None

27) The valuation basis used to measure equipment and other plant assets on the balance sheet is:

A) the dollar amount for which the assets can be sold.

B) the cash expected to be received in the future associated with the asset.

C) the original cost adjusted for depreciation or market value, whichever is lower.

D) the assets' net realizable value.

Diff: Easy

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 27 / None

28) Technically, the valuation basis used to measure shareholders' equity is:

A) original cost adjusted to net book value.

B) market value in terms of share prices.

C) net realizable value.

D) None of these answer choices are correct.

Diff: Medium

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 28 / None

29) Which one of the following reflects the proper inventory valuation on a company's balance sheet?

A) Lower of original cost or face value

B) Net realizable value

C) Lower of cost or market (net realizable value)

D) Expected selling price

Diff: Medium

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 29 / None

30) Which one of the following is violated when a firm reports its long-term debt at the present value of the cash flows associated with that debt?

A) Matching

B) No violations occurred. This accounting is correct.

C) Revenue recognition

D) Gross value of the debt

Diff: Medium

Learning Objective: 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 30 / None

31) A business entity operates in two general markets. They are:

A) a sales market and a consumer market.

B) an economic market and a fiscal market.

C) an input market and an output market.

D) a profit market and a non-profit market.

Diff: Medium

Learning Objective: 3.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking, Resource Management; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 31 / None

32) Which one of the following is violated when a sole proprietorship records its magazine stand at the present value of the cash flows expected to be earned from the sale of magazines over the expected life of the stand?

A) Objectivity principle

B) Fair market value assumption

C) Going concern assumption

D) Stable dollar assumption

Diff: Medium

Learning Objective: 3.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 32 / None

33) Which one of the following assumptions is considered unrealistic because it does not accurately reflect the real world?

A) Economic entity

B) Stable dollar

C) Going concern

D) Fiscal period

Diff: Easy

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 33 / None

34) Which one of the following statements best describes objectivity?

A) When uncertainty exists, understating assets, overstating liabilities, accelerating recognition of losses, and delaying recognition of gains is preferred.

B) The measurement of an event should be verifiable and reliable.

C) Different firms use similar accounting measurement methods for similar events.

D) Management's objectives must be realistic.

Diff: Medium

Learning Objective: 3.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 34 / None

35) Objective accounting information:

A) cannot be used in the financial statements.

B) recognizes that values of transactions and related assets and liabilities created by them are sometimes arbitrarily determined.

C) ensures that revenue matches expenses for every accounting period.

D) states that financial accounting information must be reliable and verifiable.

Diff: Medium

Learning Objective: 3.3

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 35 / None

36) Which one of the following statements best describes the concept of consistency?

A) When uncertainty exists, understating assets, overstating liabilities, accelerating recognition of losses, and delaying recognition of gains is preferred.

B) Accounting numbers should reflect market value as closely as possible.

C) Different firms use similar accounting measurement methods for similar events.

D) A company should measure similar events using similar accounting procedures from period to period.

Diff: Medium

Learning Objective: 3.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 36 / None

37) Which one of the following is violated if a department store increases its sales number when it sells for cash a gift certificate not expected to be redeemed until next year?

A) Matching

B) Revenue recognition

C) Going concern

D) Expense versus revenue concept

Diff: Medium

Learning Objective: 3.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 37 / None

38) Which one of the following is violated when a retail store records revenue for a sale on account where the cash is expected to be received in 30 days?

A) No violation occurred

B) Objectivity

C) Going concern

D) Revenue recognition

Diff: Medium

Learning Objective: 3.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 38 / None

39) Which one of the following is violated when a company recognizes revenue upon the receipt of cash from a customer who has paid in advance for services to be provided later?

A) No violation occurred

B) Objectivity

C) Matching

D) Revenue recognition

Diff: Medium

Learning Objective: 3.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 39 / None

40) Which one of the following principles is violated when a company records cost of goods sold at the time when inventory is purchased?

A) Relevance

B) Objectivity

C) Matching

D) Revenue recognition

Diff: Medium

Learning Objective: 3.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 40 / None

41) The matching principle states that:

A) expenses should be recognized in the same period when the related revenue is recognized.

B) after expenses have been identified in a particular accounting period in which they were incurred, revenues can be recognized.

C) companies should use the same accounting principles as are used by the other companies in the same industry.

D) for every dollar of revenue recognized, the company should recognize a corresponding dollar of expenses.

Diff: Easy

Learning Objective: 3.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 41 / None

42) The most common point of revenue recognition is:

A) when the cash is collected from the customer.

B) when the customer elects to issue the check to pay for goods shipped.

C) when the goods are delivered to the customer.

D) as the goods are being produced.

Diff: Medium

Learning Objective: 3.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 42 / None

43) The principle of consistency states that:

A) companies should choose a set of accounting methods and use them from one period to the next unless conditions change significantly.

B) once a company selects an accounting method, it must use that method throughout the company's entire existence.

C) a company may change any accounting method, provided the SEC approves the change.

D) companies should elect to use methods that show a consistent trend in profits.

Diff: Medium

Learning Objective: 3.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 43 / None

44) Which of the following represents two of the four criteria that must be met before revenue can be included in the income statement?

A) The amount of revenue must be objectively measurable and the cash must be collected.

B) The company completes production of a product and the cash for payment is relatively certain.

C) The company must intend to transfer the product or services to the buyer and the collection of cash must be reasonably assured.

D) The product or service has been delivered to the customer and collection of cash from the customer is reasonably assured.

Diff: Medium

Learning Objective: 3.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 44 / None

45) Why would a company include on its balance sheet the cost of equipment with an expected useful life of 5 years rather than treat the cost as an expense on the income statement?

A) Conservatism requires this recognition.

B) Matching requires costs to be matched against the related revenues of the asset.

C) To strictly record the amount in the most economically favorable manner possible for the company.

D) The stable dollar concept does not allow inflation to be added to expenses but does allow inflation to be added to assets.

Diff: Medium

Learning Objective: 3.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 45 / None

46) Which one of the following is most likely violated if a firm increases the dollar amount reported for unsold inventory on the balance sheet to the amount it anticipates it will have to pay for future inventory items?

A) Revenue recognition

B) Conservatism

C) Going concern

D) Economic entity

Diff: Medium

Learning Objective: 3.4; 3.5

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 46 / None

47) Which one of the following is violated when a firm has a policy of increasing the amount of depreciation expense during good years and decreasing depreciation expense during poor years?

A) Relevance

B) Matching

C) Consistency

D) Conservatism

Diff: Medium

Learning Objective: 3.5

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 47 / None

48) Which one of the following statements best describes the concept of conservatism?

A) Profits should be understated in all cases.

B) The measurement of an event is verifiable and reliable.

C) The value of goods and services provided is recognized when earned.

D) When uncertainty exists, understating assets, overstating liabilities, accelerating recognition of losses, and delaying recognition of gains is preferred.

Diff: Medium

Learning Objective: 3.5

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 48 / None

49) Which one of the following is violated when a firm measures accounts receivable at its face amount even though it expects that a fair amount of the customers will not pay the amounts due?

A) Consistency

B) Conservatism

C) Materiality

D) Objectivity

Diff: Medium

Learning Objective: 3.5

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 49 / None

50) Information is considered material if:

A) it would have a bearing on decisions of those who use the financial statements.

B) there is a substantial likelihood that a reasonable investor would not be concerned about the information.

C) an item is so insignificant that users would likely ignore it.

D) the FASB explicitly rules the transaction or item to be material.

Diff: Medium

Learning Objective: 3.5

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 50 / None

51) Which of the following are exceptions to financial accounting measurement?

A) Consistency and conservatism

B) Objectivity and materiality

C) Going concern and materiality

D) Conservatism and materiality

Diff: Medium

Learning Objective: 3.5

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 51 / None

52) When in doubt, financial statements should:

A) understate assets, overstate liabilities, delay the recognition of gains, and accelerate the recognition of losses.

B) understate assets and liabilities and delay the recognition of gains and losses.

C) understate assets, overstate liabilities, and delay the recognition of gains and losses.

D) overstate assets and understate liabilities.

Diff: Medium

Learning Objective: 3.5

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 52 / None

53) Equipment with an original cost of $78,000 has an estimated fair market value of $88,000, and a depreciated value of $74,000 on December 31, 2021. The company also estimates that it would have to pay $85,000 to replace the equipment. At what amount would net equipment be measured on the December 31, 2021 balance sheet?

A) $78,000

B) $74,000

C) $88,000

D) $85,000

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 53 / None

54) Short-term investments have an original cost of $30,000 and a fair market value of $31,000 at December 31, 2021. At what amount would the investments be measured on the December 31, 2021 balance sheet?

A) $30,000

B) $31,000

C) ($2,000)

D) $2,000

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 54 / None

55) As of December 31, 2021, Sheena Company has accounts receivable outstanding of $13,000 and of that amount $1,000 is not expected to be collected. Sheena could sell these accounts to a bank for $11,500. At what amount would the accounts receivable be measured on the December 31, 2021 balance sheet?

A) $11,500

B) $13,000

C) $12,000

D) $11,000

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 55 / None

56) As of the end of 2021 Seinfeld Company has land with an original cost of $70,000 and estimates its fair market value to be $81,000. Seinfeld is considering selling the land, has listed it with a realtor, and is asking $100,000. At what amount would land appear on the December 31, 2021 balance sheet?

A) $100,000

B) $81,000

C) $11,000

D) $70,000

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 56 / None

57) Three years ago, Astro Masters, Inc. purchased an asset listed in the following table. The chief financial officer, Bill Moss, is presently trying to decide what to do with it. He has three options: (1) sell it; (2) keep it; and (3) sell it and replace it with an equivalent asset. The following information about the asset is provided to aid his decision.

Which of the following options creates the highest value?

A) Option 1

B) Option 2

C) Option 3

D) Both Options 2 & 3 provide the same value.

Explanation:

Cash Inflows Cash Outflow Present value Total

From Sale for Replacement of Cash Flows Value

Option 1 $2,000 $0 $0 = $2,000

Option 2 0 0 3,000 = 3,000

Option 3 2,000 (1,500) 5,000 = 5,500

Therefore, Bill should sell and replace with an equivalent asset (Option 3).

Diff: Medium

Learning Objective: 3.2; 3.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Reflective / BB: Critical Thinking; FN: Decision Modeling

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 57 / None

58) Three years ago, Astro Masters, Inc. purchased an asset. The chief financial officer, Bill Moss, is presently trying to decide what to do with it. He has three options: (1) sell it; (2) keep it; and (3) sell it and replace it with an equivalent asset. The following information about the asset is provided to aid his decision.

Compute the value of selling and replacing the asset with an equivalent asset?

A) $2,500

B) $5,500

C) $5,000

D) $4,500

Explanation:

Cash Inflows Cash Outflow Future Total

From Sale for Replacement Cash Flows Cash Flows

$3,500 $(4,000) $6,000 = $5,500

Diff: Medium

Learning Objective: 3.2; 3.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Reflective / BB: Critical Thinking; FN: Decision Modeling

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 58 / None

59) Three years ago, Astro Masters, Inc. purchased an asset. The chief financial officer, Bill Moss, is presently trying to decide what to do with it. He has three options: (1) sell it; (2) keep it; and (3) sell it and replace it with an equivalent asset. The following information about the asset is provided to aid his decision.

Which of the following options creates the highest value?

A) Option 1

B) Option 2

C) Option 3

D) Both Options 2 & 3 provide the same value.

Explanation:

Cash Inflows Cash Outflow Future Cash Total Cash

From Sale for Replacement Flows Flows

Option 1 $1,000 $ 0 $ 0 = $1,000

Option 2 0 0 3,000 = 3,000

Option 3 1,000 (2,500) 4,500 = 3,000

Diff: Medium

Learning Objective: 3.2; 3.3

Bloom's: Analysis

AACSB/AICPA: Analytic; Reflective / BB: Critical Thinking; FN: Decision Modeling

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 59 / None

60) Some time ago, Astro Masters, Inc. purchased three tracts of real estate that produce rent revenue. Information about each tract is provided below.

Near the end of 2021, Bill replaced Tract A and kept both Tract B and Tract C. According to generally accepted accounting principles, at what dollar amount should each of these tracts be reported on the 2021 balance sheet, respectively?

A B C

A) $4,500; $2,000; $2,500

B) $1,500; $2,000; $2,500

C) $2,000; $1,000; $3,500

D) $1,500; $2,500; $4,000

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 60 / None

61) On October 1, 2021, Cat World Magazine received upfront payments of $30,000 for annual magazine subscriptions. The subscribed magazines are delivered on the first day of each month beginning on October 1, 2021. The total annual cost of producing and mailing the subscribed magazines is $18,000, equal to $1,500 per month. What is the amount of revenue to be recognized during 2021?

A) $30,000

B) $4,500

C) $7,500

D) $3,000

Explanation: Revenue for 2021 is the amount earned for the 3 months of subscriptions delivered for a total of $7,500 ($30,000 × 3/12).

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 61 / None

62) On October 1, 2021, Cat World Magazines received upfront payments of $30,000 for annual magazine subscriptions. The total cost of producing and mailing the subscribed magazines is $18,000, equal to $1,500 per month. The subscribed magazines are delivered on the first day of each month beginning on October 1, 2021. What amount of expense (cost of sold magazines) should be recognized on the 2021 income statement?

A) $18,000

B) $12,000

C) $3,000

D) $4,500

Explanation: Cost of goods sold is $4,500 (3 months × $1,500 per month).

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 62 / None

63) On March 1, 2021, $60,000 in cash was received for annual magazine subscriptions by Traveler's Monthly Magazines. The subscribed magazines are delivered on the first day of each month beginning on March 1, 2021. The total cost of producing and delivering the subscribed magazines is $30,000 or $2,500 per month. How much profit will the company recognize during 2021?

A) $60,000

B) $30,000

C) $25,000

D) $5,000

Explanation:

Revenue: 2021 2022

($60,000 × 10/12) $50,000

($60,000 × 2/12) $10,000

Cost of goods sold:

($30,000 × 10/12) 25,000

($30,000 × 2/12) ______ 5,000

Profit $25,000 $5,000

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 63 / None

64) On March 1, 2021, $60,000 in cash was received for annual magazine subscriptions sold by Traveler's Monthly Magazines. The subscribed magazines are delivered on the first day of each month beginning on March 1, 2021. The total cost of producing and delivering the subscribed magazines is $30,000 or $2,500 per month. How much profit will the company recognize during 2022?

A) $5,000

B) $42,000

C) $25,000

D) $0

Explanation:

Revenue: 2021 2022

(($60,000/12) × 10 months) $50,000

(($60,000/12) × 2 months) $10,000

Cost of goods sold:

(($30,000/12) × 10 months) 25,000

(($30,000/12) × 2 months) ______ 5,000

Profit $25,000 $5,000

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Multiple Choice Question 64 / None

65) Joseph Corporation purchased an extruding machine on January 1, 2019 for $30,000. The machine was expected to be used for 5 years, and the company believed an equal portion of the cost should be allocated to each of the 5 accounting periods. Based on this information, what is the net book value of the machine on January 1, 2021?

A) $6,000

B) $18,000

C) $12,000

D) $30,000

Explanation: $30,000 ÷ 5 = $6,000 × 2 years = $12,000; $30,000 - 12,000 = $18,000

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Multiple Choice Question 65 / None

66) Karr Construction built a levee for the state of Mississippi over a three-year period. The contracted price for the levee was $3,000,000. The costs incurred by Karr and the payments from the state over the three year period are as follows:

2020 2021 2022 Total

Costs incurred by Karr $ 600,000 $800,000 $ 200,000 $1,600,000

Payments from Mississippi 1,200,000 800,000 1,000,000 3,000,000

If revenue is recognized when payments are received, which of the following present the net income amounts reported in 2020, 2021, and 2022, respectively?

A) $1,200,000; $800,000; $1,000,000

B) $600,000; $0; $800,000

C) $800,000; $800,000; $800,000

D) $600,000; $400,000; $200,000

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 66 / None

67) Karr Construction built a levee for the state of Mississippi over a three-year period. The contracted price for the levee was $3,000,000. The costs incurred by Karr and the payments from the state over the three year period are as follows:

2020 2021 2022 Total

Costs incurred by Karr $ 600,000 $800,000 $ 200,000 $1,600,000

Payments from Mississippi 1,200,000 800,000 1,000,000 3,000,000

If revenue is recognized in proportion to the costs incurred by Karr, how much net income is reported in 2021?

A) $200,000

B) $400,000

C) $700,000

D) $800,000

Explanation:

Karr Construction

Income Statement

For the Year Ending December 31

a $1,125,000 = ($600,000 ÷ $1,600,000) × $3,000,000

b $1,500,000 = ($800,000 ÷ $1,600,000) × $3,000,000

c $375,000 = ($200,000 ÷ $1,600,000) × $3,000,000

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 67 / None

68) Karr Construction built a levee for the state of Mississippi over a three-year period. The contracted price for the levee was $3,000,000. The costs incurred by Karr and the payments from the state over the three year period are as follows:

2020 2021 2022 Total

Costs incurred by Karr $ 600,000 $800,000 $ 200,000 $1,600,000

Payments from Mississippi 1,200,000 800,000 1,000,000 3,000,000

If revenue is recognized in proportion to the costs incurred by Karr, how much net income is reported in 2022?

A) $1,200,000

B) $800,000

C) $600,000

D) $175,000

Explanation:

Karr Construction

Income Statement

For the Year Ending December 31

a $1,125,000 = ($600,000 ÷ $1,600,000) × $3,000,000

b $1,500,000 = ($800,000 ÷ $1,600,000) × $3,000,000

c $375,000 = ($200,000 ÷ $1,600,000) × $3,000,000

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 68 / None

69) Jeter Company received an order of 400 toy wagons from Lamar, Inc. on May 1, 2021. Jeter Company paid for them on May 20 at a cost of $3 each. Jeter sold 50 of them on June 2 for $4 each to Gilloz Company. Gilloz Company paid Jeter on June 10.

On which date should Jeter Company recognize revenue?

A) May 1

B) May 20

C) June 10

D) June 2

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 69 / None

70) Jeter Company received an order of 400 toy wagons from Lamar, Inc. on May 1, 2021. Jeter Company paid for them on May 20 at a cost of $3 each. Jeter sold 50 of them on June 2 for $4 each to Gilloz Company. Gilloz Company paid Jeter on June 10.

How much revenue should Jeter Company have recognized by June 10?

A) $240

B) $100

C) $1,000

D) $200

Explanation: (50 units sold × $4 per unit)

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 70 / None

71) Jeter Company received an order of 400 toy wagons from Lamar, Inc. on May 1, 2021. Jeter Company paid for them on May 20 at a cost of $3 each. Jeter sold 50 of them on June 2 for $4 each to Gilloz Company. Gilloz Company paid Jeter on June 10.

How much profit should Jeter Company's recognize on this sale?

A) $50

B) $200

C) $150

D) $1,200

Explanation: (50 units sold × $1 profit ($4 - $3))

Diff: Medium

Learning Objective: 3.2; 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 71 / None

Matching Questions

72) Match the 4 assumptions listed below with the proper descriptions listed above them.

Descriptions

a The economic life of an entity can be divided into time periods.

b The financial statements should contain transactions related to only the business and not the individual owners.

c Purchasing power of money is constant over time.

d The dollar value attached to an item on a company's balance sheet is determined by the market in which the company operates.

e Life of the entity is indefinite.

_______ 1. Economic entity assumption

_______ 2. Stable dollar assumption

_______ 3. Going concern assumption

_______ 4. Fiscal period assumption

1. b

2. c

3. e

4. a

Diff: Easy

Learning Objective: 3.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Matching Question 1 / None

73) For each financial statement item listed in 1 through 5 below, identify the financial statement valuation (listed in a through f) that serves as the basis for its reported amounts on the balance sheet. You may use each letter more than once or not at all.

Financial Statement Valuations

a Face value

b Present value

c Original cost

d Fair market value

e Net realizable value

f Original cost less accumulated depreciation

_______ 1. Cash

_______ 2. Short-term investments

_______ 3. Accounts receivable

_______ 4. Long-term liabilities

_______ 5. Office building

1. a

2. d

3. e

4. b

5. f

Diff: Easy

Learning Objective: 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Matching Question 2 / None

74) Match the 4 valuation bases listed below with the proper descriptions listed above them (a through e).

Descriptions

a The valuation basis for inventory

b Amount that would have to be paid to acquire the same asset at the balance sheet date

c Discounted future cash flows

d Amount paid when the asset was acquired

e Amount received if the asset were sold less the costs of selling it

_______ 1. Present value

_______ 2. Net realizable value

_______ 3. Original (historical) cost

_______ 4. Lower of cost or market

1. c

2. e

3. d

4. a

Diff: Easy

Learning Objective: 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Matching Question 3 / None

75) For each balance sheet item listed in 1 through 5 below, identify which valuation base (listed in a through e) is used to attach a value to it on the balance sheet. You may use each letter more than once or not at all.

Financial Statement Valuations

a Present value

b Face value

c Original cost

d Original cost less accumulated depreciation

e Lower of cost or market

_______ 1. Inventory

_______ 2. Plant and equipment (book value)

_______ 3. Land used for plant site

_______ 4. Current liabilities

_______ 5. Long-term notes receivable

1. e

2. d

3. c

4. b

5. a

Diff: Easy

Learning Objective: 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Matching Question 4 / None

76) For each financial concept listed in 1 through 5 below, identify the category (listed in a through f) with which it should be matched. You may use each letter more than once or not at all.

Categories

a Similar events are measured using similar accounting methods from one period to the next.

b Expense is recognized in the same period that its generated revenue is recognized.

c Different firms use similar accounting methods to measure similar events.

d Present value of future cash flows.

e Significant portion of effort made; major portion of cost incurred, objectively measured, and reasonably assured of ultimate cash receipt.

f Reliable measure that is verified by documented evidence.

_______ 1. Comparability

_______ 2. Objectivity

_______ 3. Revenue recognition principle

_______ 4. Matching principle

_______ 5. Consistency

1. c

2. f

3. e

4. b

5. a

Diff: Medium

Learning Objective: 3.3; 3.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Matching Question 5 / None

Short Problems

77) On May 1, 2021, $12,000 in cash was received for annual magazine subscriptions sold by Glolar, Inc. The subscribed magazines are delivered on the first day of each month beginning on May 1, 2021. The total cost of producing and delivering the subscribed magazines is $3,600 or $300 per month.

A. Determine the amount of revenue Glolar should recognize during 2021.

B. Determine the amount of expense Glolar should recognize in 2021.

C. Determine the amount of profit that Glolar should report in 2021.

D. Explain how the matching concept is applied in this case.

A. The amount of revenue for 2021 is $8,000, the amount earned (8 months at $1,000 per month.)

B. The amount of expense to be recognized for 2021 is $2,400 (8 months at $300 per month)

C. The amount of profit is $5,600 (8 months at $700 ($1,000 - $300) per month)

D. The matching principle is achieved by matching on the income statement the cost of goods sold expense ($300 × 8 = $2,400) incurred over the 8 months from May through December against the revenue recognized over that same 8-month period.

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 8 min.

Title/Media Ref.: Short Problem 1 / None

78) During 2006, Jeter Company purchased property for $90,000. During December of 2021, 15 years later, a very similar neighboring plot of land was sold for $120,000. At what amount would the property purchased in 2006 be valued on Jeter Company's December 31, 2021 balance sheet?

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Short Problem 2 / None

79) During January of 2021, Barry Corporation purchased five acres of land for cash of $120,000 from Foley Company. On December 31, 2021, after Barry built its plant, it was estimated that the land's fair market value was $140,000. At what amount would land be measured on Barry's December 31, 2021 balance sheet?

Diff: Easy

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Short Problem 3 / None

80) On December 31, 2021, total assets and liabilities are measured at $24,000 and $16,000, respectively. The total market value of the company's common stock is $9,000. At what amount would shareholders' equity be measured on the December 31, 2021 balance sheet?

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Short Problem 4 / None

81) Equipment with an original cost of $23,000 has an estimated fair market value of $19,000, and a book value (cost less accumulated depreciation) of $17,000 on December 31, 2021. At what amount would net equipment be valued on the December 31, 2021 balance sheet?

Diff: Medium

Learning Objective: 3.1; 3.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Short Problem 5 / None

82) Short-term investments have an original cost of $2,500 and a market price of $3,500 at December 31, 2021. At what amount would the investments be valued on the December 31, 2021 balance sheet?

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Short Problem 6 / None

83) Inventory was originally purchased for $10,000 and now has an estimated market value (net realizable value) of $9,000. At what amount would it be valued on the balance sheet?

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Short Problem 7 / None

84) Equipment with an original cost of $165,000 has a fair market value of $195,000 and accumulated depreciation of $45,000 on December 31, 2021. What amount would the December 31, 2021 balance sheet show as the equipment's net book value?

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Short Problem 8 / None

85) On December 1, 2021, Karr Company purchased inventory for $54,000. On December 31, 2021, the net realizable value of that inventory is estimated to be $57,000. At what amount would inventory be valued on the December 31, 2021 balance sheet?

Diff: Medium

Learning Objective: 3.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 1 min.

Title/Media Ref.: Short Problem 9 / None

86) During 2021 and 2022, Orange Company recognized $100,000 and $120,000 of sales, respectively. The inflation rate between 2021 and 2022 was 10 percent. Did sales increase 20 percent from 2021 to 2022? Explain.

Diff: Medium

Learning Objective: 3.2; 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Decision Modeling

TOT: 3 min.

Title/Media Ref.: Short Problem 10 / None

87) On October 1, 2021, $30,000 in cash was received for annual magazine subscriptions sold by Motocross Monthly Magazines. The subscribed magazines are delivered on the first day of each month beginning on October 1, 2021. The total cost of producing and delivering the subscribed magazines is $18,000 or $1,500 per month. Determine the amount of revenue and the cost of the magazines to be recognized during 2021 and 2022, respectively. How much profit will the company recognize during 2021 and 2022?

Revenue: 2021 2022

($30,000 × 3/12) $7,500

($30,000 × 9/12) $22,500

Cost of goods sold:

($18,000 × 3/12) 4,500

($18,000 × 9/12) _____ 13,500

Profit $3,000 $9,000

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 11 / None

88) Zurich Corporation sells cases of champagne to its customers. Each customer pays $50 when the case is picked up and then $50 a month for the next five months. The cost of a case of champagne is $60. Although the payment plan has significantly increased sales, Zurich has decided to delay the recognition of revenue until cash is received because of the questionable credit history of the new customers. During January, 2021, 10 cases of champagne were sold and the initial payment of $50 per case was collected. Payments for these sales were also collected on February 1, 2021. List the four revenue recognition criteria and state how each criterion is either met or not met based on the information provided.

1. The company must have completed a significant portion of the production and sales effort. The customers have received the champagne, so the sales effort is complete. This condition is met.

2. The amount of revenue can be objectively measured. The revenue amount is $50 per month per case. This condition is met.

3. The major portion of the costs has been incurred, and the remaining costs can be reasonably estimated. Zurich has fulfilled all of its responsibilities. This condition is met.

4. The eventual collection of the cash is reasonably assured. Zurich questions the credit history of the customers, so this condition is not met, meaning that Zurich should not recognize revenue until it receives the cash.

Diff: Hard

Learning Objective: 3.4

Bloom's: Evaluation

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Decision Modeling

TOT: 8 min.

Title/Media Ref.: Short Problem 12 / None

89) During 2021, Hamot Company sold $40,000 of computer chips to a distributor on account. The distributor planned to sell those chips to a German company. The sold chips were shipped to a warehouse owned by Hamot and were still there on December 31, 2021. Hamot's CFO left two messages for the distributor but received no return calls. The distributor has had no prior dealings with Hamot or any other manufacturer of computer chips. Hamot has invoiced the distributor for $40,000 but has received no payments. How much sales revenue associated with this transaction should be reported on Hamot's income statement for the year ending December 31, 2021? Explain your selection.

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Decision Modeling

TOT: 4 min.

Title/Media Ref.: Short Problem 13 / None

90) Victor Corporation purchased a packaging machine on January 1, 2021 for $12,000. The machine is expected to be used for 3 years, and the company believes an equal portion of the cost should be allocated to each accounting period. How much expense should Victor recognize during 2021? What accounting principle requires that the cost of the machine be capitalized and depreciated over its useful life?

The matching concept is illustrated.

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 14 / None

91) On January 27, 2021, Lock Company entered into a three-year agreement with Strong Enterprises to supply 2,000 ounces of platinum for $200 an ounce. During 2021, Lock mined and purified the 2,000 ounces of platinum at a cost of $200,000. The platinum was shipped on January 14, 2022 and arrived on January 15, 2022, at Strong's warehouse. What is Lock's revenue and gross profit recognized during 2021, consistent with the criteria for revenue recognition and the matching concept? Explain.

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 15 / None

92) On October 1, 2021, $24,000 in cash was received for annual magazine subscriptions by Kitchen Design Magazines. The subscribed magazines are delivered on the first day of each month beginning on October 1, 2021. The total cost of producing and delivering the subscribed magazines is $9,000, equal to $750 per month. Determine the amount of revenue and the cost of the magazines to be recognized during 2021.

Diff: Medium

Learning Objective: 3.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 16 / None

Short Essay Questions

93) What is the fiscal period assumption and why is it used?

Diff: Easy

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Essay Question 1 / None

94) Name the four basic assumptions of financial accounting, and briefly describe why these assumptions, as a group, are important.

Diff: Medium

Learning Objective: 3.1

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Short Essay Question 2 / None

95) Explain the 'markets' in which a business entity operates.

Diff: Medium

Learning Objective: 3.2

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking, Resource Management, Industry; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Essay Question 3 / None

96) Why is inflation ignored in accounting?

Diff: Medium

Learning Objective: 3.2

Bloom's: Evaluation

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 4 min.

Title/Media Ref.: Short Essay Question 4 / None

97) Why are market values not used for property, plant, and equipment on the balance sheet?

Diff: Medium

Learning Objective: 3.2; 3.3

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Essay Question 5 / None

98) When is present value used on the financial statements? Give an example in your explanation.

Diff: Medium

Learning Objective: 3.3

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Short Essay Question 6 / None

99) On October 1, 2021, $16,000 in cash was received for annual magazine subscriptions sold by Boating Monthly. The subscribed magazines are delivered on the first day of each month beginning on October 1, 2021. The total cost of producing and delivering the subscribed magazines is $6,000 or $500 per month. Using the four criteria necessary for revenue recognition, present an argument for not recognizing $16,000 of revenue during 2021.

Diff: Hard

Learning Objective: 3.4

Bloom's: Evaluation

AACSB/AICPA: Analytic; Communication; Reflective / BB: Critical Thinking; FN: Decision Modeling

TOT: 5 min.

Title/Media Ref.: Short Essay Question 7 / None

100) If a company changes its accounting method, does this mean that consistency is violated?

Diff: Medium

Learning Objective: 3.4

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Short Essay Question 8 / None

101) What major accounting principle must be addressed before the matching principle can be applied and why?

Diff: Medium

Learning Objective: 3.4

Bloom's: Evaluation

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 2 min.

Title/Media Ref.: Short Essay Question 9 / None

102) Why is materiality a major problem in accounting?

Diff: Medium

Learning Objective: 3.5

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FN: Measurement

TOT: 3 min.

Title/Media Ref.: Short Essay Question 10 / None

Data Analytic Questions

Important Note to Instructor: All of the real world data included in the data analytic test bank questions was taken from the company information data base used for the data analytic concept practice exercises in the text located at www.wiley.com/go/pratt/financialaccounting11e. These questions can be used in at least two different ways to test two levels of data analytic skills. To test only the basic analysis required simply provide the student with the financial information followed by the questions just as they are illustrated in the test bank. Alternatively, to test both their ability to access and navigate the data base as well as their analysis skills, you can provide for the students only the questions and require them to access and navigate the data base, organize the data, and perform the analysis.

103) Income statements covering 2016 - 2019 for Imperial Oil and Suncor Energy, competitors in the oil and gas industry, are provided below. The Imperial Oil statement is in Canadian dollar, while the Suncor Energy statement is expressed in U.S. dollars. As of end of 2018 and 2019, one Canadiana dollar could be exchanged for $0.74 and $0.77, respectively.

Imperial Oil Ltd (in Millions)

Fiscal Year-End 2019 2018 2017 2016

Sales $32,194 $33,297 $27,452 $23,399

Cost of sales 29,064 29,217 23,843 20,344

Operating expenses 1,090 1,034 3,248 2,851

Interest expense 141 136 116 114

Income tax expense (154) 759 92 279

Unusual Gains (46) (8) (220) (2,244)

Unusual Losses - - - -

Net income before Tax 2,046 3,073 582 2,444

Net Income after Tax 2,200 2,314 490 2,165

Suncor Energy Inc (in Millions)

Fiscal Year-End 2019 2018 2017 2016

Sales $38,344 $38,542 $31,954 $26,807

Cost of sales 14,004 15,452 12,118 10,949

Operating expenses 21,819 16,409 14,291 15,488

Interest expense 875 741 216 415

Income tax expense (366) 1,690 1,458 (359)

Unusual Gains - (141) (538) -

Unusual Losses 2,668 - - 171

Net income before Tax 2,533 4,983 5,916 86

Net Income after Tax 2,899 3,293 4,458 434

Using the information reported in these two income statements, which of the two companies reports higher 2019 sales and net income amounts and by what percents are they higher?

2019 Sales: Suncor 38.344 billion U.S. dollars; Imperial 32.194 billion Canadian dollars = $32,194 × .77 = $24,789 U.S. dollars. Thus, Suncor's sales amount is 55% ([$38.344 - 24.789} ÷ $24.789) higher than Imperial's.

2019 Net income: Suncor 2.899 billion U.S. dollars; Imperial 2.200 billion Canadian dollars = $2.200 × .77 = 1.694 billion U.S. dollars. Thus, Suncor's net income amount is 71% ([2.899 - 1.694] ÷ 1.694) higher than Imperial's.

Convert both to Canadian dollars:

2019 Sales: Imperial 32.194 billion Canadian dollars; Suncor 38.344 billion U.S. dollars = 38.344 ÷ .77 = 49.797 billion Canadian dollars. Thus, Suncor's sales amount is 55% ([49.797 - 32.194] ÷ 32.194) higher than Imperial's.

2019 Net income: Imperial 2.200 billion Canadian dollars; Suncor 2.899 billion U.S. dollars = 2.899 ÷ .77 = 3.765 billion Canadian dollars. Thus, Suncor's net income amount is 71% ([3.765 - 2.200] / 2.200) higher than Imperial's.

Diff: Medium

Learning Objective: 3.7

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 10 min.

Title/Media Ref.: Data Analytic Question 1 / None

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