If the beginning inventory for 2006 is overstated, what are the effects of this error on cost of goods sold for 2006, net income for 2006, and assets at December 31, 2007, respectively?
A. Overstatement, understatement, and no effect
B. Understatement, overstatement, and overstatement
C. Overstatement, understatement, and overstatement
D. Understatement, overstatement, and no effect
The amount to be recorded as the cost of an asset under capital lease is equal to the
A. present value of the minimum lease payments plus the present value of any unguaranteed residual value.
B. carrying value of the asset on the lessor’s books.
C. present value of the minimum lease payments.
D. present value of the minimum lease payments or the fair value of the
asset, whichever is lower.
Valuation of inventories requires the determination of all of the following EXCEPT
A. The physical goods to be included in inventory
B. The cost of goods held on consignment from other companies
C. The costs to be included in inventory
D. The cost flow assumption to be adopted
Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory, but did not record the transaction. What would be the effect of this on its financial statements for January 31?
A. Net income was correct and current assets were understated.
B. Net income and current assets were overstated and current liabilities were understated.
C. Net income, current assets, and retained earnings were overstated.
D. Net income, current assets, and retained earnings were understated.
If a corporation purchases a lot and a building, and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on
A. the length of time for which the building was held prior to its demolition.
B. the contemplated future use of the parking lot.
C. the significance of the cost allocated to the building in relation to the combined cost of the lot and building.
D. the intention of management for the property when the building was acquired.
The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to
A. a separate deferred charge account.
B. miscellaneous tax expense, which includes all taxes other than those on income.
C. the machinery account.
D. accumulated depreciation—machinery.
The cost of land typically includes the purchase price and all of the following costs EXCEPT
A. Street lights, sewers, and drainage systems cost
B. Private driveways and parking lots
C. Grading, filling, draining, and clearing costs
D. Assumption of any liens or mortgages on the property
On its December 31, 2006, balance sheet, Quinn Co. reported its investment in available-for-sale securities, which had cost $600,000, at fair value of $550,000. At December 31, 2007, the fair value of the securities was $585,000. What should Quinn report on its 2007 income statement as a result of the increase in fair value of the investments in 2007?
A. Realized gain of $35,000
B. Unrealized gain of $35,000
C. $0
D. Unrealized loss of $15,000
On November 1, 2007, Morton Co. purchased Gomez, Inc., 10-year, 9%, bonds with a face value of $250,000, for $225,000. An additional $7,500 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2014. Morton uses the straight-line method of amortization. Ignoring income taxes, what was the amount reported in Morton’s 2007 income statement as a result of Morton’s available-for-sale investment in Gomez?
A. $3,750
B. $3,333
C. $4,375
D. $4,167
On October 1, 2007, Porter Co. purchased to hold to maturity 1,000 of the $1,000 face value, 9% bonds for $990,000 which includes $15,000 accrued interest. The bonds, which mature on February 1, 2016, pay interest semiannually on February 1 and August 1. Porter uses the straight-line method of amortization. The bonds should be reported in the December 31, 2007 balance sheet at a carrying what value?
A. $990,000
B. $990,250
C. $975,000
D. $975,750
What effect does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?
A. The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
B. The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.
C. There is no impact as the option does not enter into the transaction until the end of the lease term.
D. The lessee must increase the present value of the minimum lease payments by the present value of the option price.
Although only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that
A. a lease reflects the purchase or sale of a quantifiable right to the use of property.
B. during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee.
C. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
D. at the end of the lease the property usually can be purchased by the lessee.
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