Intermediate Accounting Volume 1, 11th Canadian Edition by Bruce J. McConomy; Donald E. Kieso – Test Bank
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CHAPTER 3
THE
ACCOUNTING INFORMATION SYSTEM& MEASUREMENT ISSUES
CHAPTER
LEARNING OBJECTIVES
1. Understand
basic accounting terminology and explain double-entry rules.It is
important to understand the following terms: (1) event, (2) transaction,
(3)account, (4) permanent and temporary accounts, (5) ledger, (6) journal, (7)
posting,(8) trial balance, (9) adjusting entries, (10) financial statements,
(11) closingentries, and (12) reversing entries.
The left side of any account is the debit side; theright side is
the credit side. All asset and expense accountsare increased on the left or
debit side and decreased onthe right or credit side. Conversely, all liability
and revenueaccounts are increased on the right or credit sideand decreased on
the left or debit side. Shareholders’equity accounts, Common Stock, and
Retained Earningsare increased on the credit side, whereas Dividends
isincreased on the debit side.
2.Explain
how transactions affect the accounting equation.In a
double-entry accounting system, for every debit there must be a credit, and
viceversa. This leads us to the basic accounting equation for corporations:
Assets =Liabilities + Shareholders’ Equity. The effect of individual
transactions on the statementof financial position can be explained using the
basic accounting equation. Theshareholders’ equity portion of the equation can
also be expanded to illustrate theeffect of transactions on components of
equity such as common shares and retainedearnings. Whenever a transaction
occurs, the elements of the equation change, butthe equality of the two sides
of the equation remains unaffected.
3. 3. Identify the steps in the
accounting cycle and the steps in the recordingprocess.The
basic steps in the accounting cycle are (1) identification and measurement
oftransactions and other events, (2) journalizing, (3) posting, (4) the
unadjusted trialbalance, (5) adjustments, (6) the adjusted trial balance, (7)
statement preparation, and(8) closing. The first three steps in the accounting
cycle form the basis of the recordingprocess used by most medium-sized
companies on a daily basis. The simplestjournal form is a chronological listing
of transactions and events that are expressed asdebits and credits to
particular accounts. The items entered in a general journal mustthen be
transferred (posted) to the general ledger.
To help prepare financial statements, an unadjusted trial
balance should be preparedat the end of a specific period (usually a month,
quarter, or year) after theentries have been recorded in the journals and
posted to the general ledger.
4.Explain
the reasons for and prepare adjusting entries.Adjustments
achieve a proper matching of revenues and expenses, which is needed todetermine
the correct net income for the current period and to achieve an
accuratestatement of the end-of-the-period balances in assets, liabilities, and
owners’ equityaccounts. When preparing adjusting journal entries, you must
first determine howthe original transaction was recorded. For example, was an
asset created earlier in thefiscal year (such as prepaid rent) when the initial
payment was made? If so, an adjustmentfor the related expense is required.
Alternatively, if a statement of comprehensiveincome account was used
initially, an adjustment may be required to set up theproper statement of
financial position account at the end of the period.
5.Explain how the type of ownership
structure affects the financial statements.The type of
ownership structure that a business enterprise uses determines the typesof
accounts that are part of the equity section. In a corporation, ordinary or
commonshares, contributed surplus, retained earnings, and accumulated other
comprehensiveincome are commonly shown separately on the statement of financial
position. In aproprietorship or partnership, a capital account is used to
indicate the investment inthe company by the owner(s). A drawings or withdrawal
account may be used to indicatewithdrawals by the owner(s). These two accounts
are grouped or netted underowners’ equity.
6.Prepare
closing entries and consider other matters relating to the closingprocess.In
the closing process, all of the revenue and expense account balances (income
statementitems) are transferred to a clearing account called Income Summary,
which isused only at the end of the fiscal year. Revenues and expenses are
matched in theIncome Summary account. The net result of this matching, which
represents the netincome or net loss for the period, is then transferred to a
shareholders’ equity account(Retained Earnings for a corporation and capital
accounts for proprietorships andpartnerships).Reversing entries may be used for
reversingaccrued revenues and accrued expenses. Prepaymentsmay also be reversed
if the initial entry to record thetransaction is made to an expense or revenue
account.
7. Use
valuation techniques to measure financial statement elements.IFRS
and ASPE incorporate a mixed-attribute measurementmodel including measurements
that are cost-based(such as historical cost), those that are based on
currentvalue (such as fair value), and many hybrid measures that have
attributes of both cost-based and current value measurements.Valuation
techniques are used to help withmeasurement of financial statement elements.
Commonexamples include market models and income models.Income models are widely
used and include discountedcash flow methods and present value concepts.
Whenusing models, you must determine what inputs shouldbe used. Common inputs
include discount rates and cashflow estimates. The quality of these inputs
affects thequality of the final measurement. Accountants often useprobabilities
to help deal with risk and uncertainty.
8. Use
IFRS 13 to measure fair value.IFRS 13 establishes a fairly
detailed body of knowledgerelating to measurement of fair value. Fair value
measurementunder IFRS 13 is a market-based approachthat incorporates the
specific attributes of the asset/liability being measured, the valuation
premise (how theasset/liability is to be used), the principal market, and
thevaluation technique. Since market prices are not alwaysavailable, valuation
models are used to measure the value.Inputs to these models are either
observable in the marketor not. Observable inputs are most useful since theyare
more objective. The fair value hierarchy establishesthree levels of inputs,
with level 1 being the highest andbest type of input (based on observable market
prices).Because level 3 inputs are more subjective, additional disclosuresare
required.
9. Identify
differences in accounting between ASPE and IFRS, and what changes are expected
in the near future.The main difference is that IFRS contains
specific guidance
in IFRS 13 regarding fair value measurements.Under ASPE,
guidance is spread throughout the body ofknowledge and is less detailed.
10. Prepare
a 10-column work sheet and financial statements (Appendix 3A).The
10-column work sheet provides columns for thefirst trial balance, adjustments,
adjusted trial balance,statement of comprehensive income, and statement
offinancial position. The work sheet does not replace thefinancial statements.
Instead, it is the accountant’s informaldevice for accumulating and sorting the
informationthat is needed for the financial statements.
11. Understand
and apply present value concepts (Appendix 3B).Present
value concepts are used to acknowledge the timevalue of money. There are
various techniques and toolsto calculate present value, including formulas,
tables,financial calculators, and spreadsheets. Inputs to thecalculation
include interest, payments, number of periods,and if the calculation involves
an annuity, informationabout whether it is an ordinary annuity or an annuity
due.Present value concepts are frequently used in measuringfinancial statement
elements.
Multiple Choice QUESTIONS—Conceptual
Answer
No. Description
d
1. Purpose of an accounting system
b
2. Definition of transaction
d
3. Purpose of an accounting system
b
4. Identification of a temporary account
d
5. Accounting equation
a
6. Accounting equation
a
7. Criteria for recording transactions
c
8. Internal event
b
9. Definition of journal
c
10. Impact of transaction on the accounting
equation
d
11. Transaction analysis
c
12. Transaction analysis
c
13. Event recording
c
14. Double-Entry Accounting System
c
15. Event recording
b
16. Trial balance
d
17. Trial balance
c
18. Trial balance
d
19. Uses of adjusting entries
c
20. Adjusting for accrued expenses
d
21. Adjusting for accrued revenues
d
22. Adjusting entries
c
23. Factors to consider in estimating
depreciation
b
24. Contra-asset account
a
25. Effect of not recording depreciation
c
26. Adjusting for bad debts
c
27. Definition of accrued revenue
b
28. Closing process
c
29. Closing process
c
30. Balance Sheet
c
31. Closing process
b
32. Definition of unearned revenue
c
33. Closing process
a
34. Fair value adjustments for investments
d
35. Closing process
c
36. Closing net income or loss
b
37. Post-closing trial balance
a
38. Trial balance – correct statement
a
39. Effect of understating ending inventory
a
40. Discounted Cash Flow approach
a
41. Fair value measurement under IFRS 13
d
42. Fair value measurement under IFRS 13
c
43. Differences in accounting between ASPE
and IFRS
a
44. Differences in accounting between ASPE
and IFRS
Multiple Choice QUESTIONS—Computational
Answer
No. Description
c
45. Adjusting entry for prepaid lease
a
46. Adjusting entry for interest receivable
c
47. Adjusting entry for interest expense
d
48. Adjusting entry for bad debts
b
49. Adjusting entry for bad debts
b
50. Adjusting entry for unearned rent
c
51. Adjusting entry for interest receivable
d
52. Calculate property tax adjustment
c
53. Calculate balance in unearned revenue
c
54. Adjusting entry for investments
d
55. Adjusting entry for investments
c
56. Calculate cash received for interest
a
57. Calculate cash paid for salaries
c
58. Calculate cash paid for insurance
c
59. Calculate insurance expense
a
60. Calculate interest revenue
b
61. Calculate salary expense
c
62. Valuation of entity-specific asset
c
63. Calculate accrued interest payable
c
64. Calculate balance of unearned revenues
b
65. Calculate prepaid insurance
c
66. Calculate interest receivable
c
67. Calculate accrued salaries
c
68. Calculate royalty revenue
c
69. Closing entry
b
*70. Calculate present value
a
*71. Calculate present value
*This topic is dealt with in an Appendix to the chapter.
Exercises
Item
Description
E3-72
Definitions
E3-73
The accounting cycle
E3-74
Adjusting entries
E3-75
Recordable events
E3-76
Adjusting entries
E3-77
Calculation of expense
E3-78
Adjusting and Closing Entries
E3-79
Valuation of Equipment under IFRS 13
E3-80
Calculation of expense
E3-81
Calculation of revenue
E3-82
Type of ownership structure
E3-83
Valuation of Entity-Specific assets
E3-84
Measurement of financial statement elements
E3-85
Transaction journal entries
E3-86
Adjusting entries
*E3-87
Calculate market price of a bond
*E3-88
Present value of an annuity due
PROBLEMS
Item
Description
P3-89
Adjusting entries and calculation of pre-tax income
P3-90
Adjusting entries
P3-91
Adjusting and closing entries
P3-92
Closing entries
P3-93
Accrual accounting
P3-94
Accrual accounting
*P3-95
Adjusting entries
P3-96
Trial balance correction
P3-97
Accrual accounting
P3-98
Ten-column work sheet
*P3-99
Preparation of financial statements
*This topic is dealt with in an Appendix to the chapter.
MULTIPLE CHOICE–Conceptual
1.Which of the following statements is true regarding accounting
information systems?
1. a)
Both large and small firms should use the same type of accounting system.
2. b)
All firmsshould have the same types of transactions.
3. c)
The volume of data to be handled should not vary between firms.
4. d)
The kind of information that management requires of an accounting system will
vary, depending on the type of firm.
Answer: d
Difficulty: Easy
Learning Objective: Understand basic accounting terminology and
explain double-entry rules.
Section Reference: Basic Terminology and Double-Entry Rules
CPA: Financial Reporting
Bloomcode: Comprehension
2.An external event involving a transfer or exchange between two
or more entities or parties is called a(n)
1. a)
account.
2. b)
transaction.
3. c)
ledger.
4. d)
accounting system.
Answer: b
Difficulty: Easy
Learning Objective: Understand basic accounting terminology and
explain double-entry rules.
Section Reference: Basic Terminology and Double-Entry Rules
CPA: Financial Reporting
Bloomcode: Comprehension
3.Factors that shape an accounting system include the
1. a)
nature of the business.
2. b)
size of the firm.
3. c)
volume of data to be handled.
4. d)
All of these answer choices are correct.
Answer: d
Difficulty: Easy
Learning Objective: Understand basic accounting terminology and
explain double-entry rules.
Section Reference: Basic Terminology and Double-Entry Rules
CPA: Financial Reporting
Bloomcode: Comprehension
4. An
example of a temporary account is
a)Unearned Revenue.
b)Salary Expense.
c)Inventory.
d)Retained Earnings.
Answer: b
Difficulty: Medium
Learning Objective: Understand basic accounting terminology and
explain double-entry rules.
Section Reference: Basic Terminology and Double-Entry Rules
CPA: Financial Reporting
Bloomcode: Comprehension
5.Which of the following equations is correct?
a)Assets plus Liabilities = Equity.
b)Assets = Liabilities minus Equity.
c)Liabilities = Assets plus Equity.
d)Equity = Assets minus Liabilities.
Answer: d
Difficulty: Easy
Learning Objective: Explain how transactions affect the
accounting equation.
Section Reference: Accounting Equation
CPA: Financial Reporting
Bloomcode: Comprehension
6. The
accounting equation must remain in balance
7. a)
throughout each step in the accounting cycle.
8. b)
only when journal entries are recorded.
9. c)
only at the time the trial balance is prepared.
10. d)
only when formal financial statements are prepared.
Answer: a
Difficulty: Medium
Learning Objective: Explain how transactions affect the
accounting equation.
Section Reference: Accounting Equation
CPA: Financial Reporting
Bloomcode: Comprehension
7. Which
of the following criteria does NOT have to be met before an event or
transaction should be recorded for accounting purposes?
8. a)
The event or transaction must be an external event.
9. b)
The event or transaction can be measured objectively in financial terms.
10. c)
The event or transaction is relevant and reliable.
11. d)
The event or transaction must meet the definition of an element.
Answer: a
Difficulty: Medium
Learning Objective: Explain how transactions affect the
accounting equation.
Section Reference: Accounting Equation
CPA: Financial Reporting
Bloomcode: Comprehension
8. Which
of the following is an internal event?
9. a)
sale of goods or services
10. b)
payment of dividends
11. c)
using raw materials in production
12. d)
purchase of materials
Answer: c
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
9.The book of original entry where transactions and other
selected events are first recorded is called the
1. a) ledger.
2. b)
journal.
3. c)
account.
4. d)
statement of financial position.
Answer: b
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
10.The debit and credit analysis of a transaction normally takes
place
1. a)
before an entry is recorded in a journal.
2. b)
when the entry is posted to the ledger.
3. c)
when the trial balance is prepared.
4. d)
when the financial statements are prepared.
Answer: c
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
11.Performing a service for a client on account will
1. a)
increase one asset and decrease another asset.
2. b)
decrease an asset and decrease a liability.
3. c)
increase an asset and decrease equity.
4. d)
increase an asset and increase equity.
Answer: d
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
12.The account credited for a receipt of cash on account is
1. a)
Cash.
2. b)
Service Revenue.
3. c)
Accounts Receivable.
4. d)
Accounts Payable.
Answer: c
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
13.Some events are NOT recorded in the accounting information
system because
1. a)
the service has been provided but the cash has not yet been received.
2. b)
the service has not been provided but the cash has already been received.
3. c)
their measurement is too complex.
4. d)
the amounts are not material.
Answer: c
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
14.The double-entry accounting system means
1. a)
each transaction is recorded with two journal entries.
2. b)
each item is recorded in a journal entry, then in a general ledger account.
3. c)
the dual effect of each transaction is recorded with debits and credits of
equal amount.
4. d)
None of these answer choices is correct.
Answer: c
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
15. Which
of the following criteria must be met before an event or item should be
recorded for accounting purposes?
16. a)
The event or item can be measured objectively in financial terms.
17. b)
The event or item is relevant and reliable.
18. c) The
event or item is an element.
19. d)
All of these must be met.
Answer: c
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording Process
CPA: Financial Reporting
Bloomcode: Knowledge
16.A trial balance
1. a) is
a list of all the accounts in the ledger.
2. b) is
a list of all the accounts and their balances at a specific date.
3. c)
cannot be used in the preparation of financial statements.
4. d)
cannot be used as a basis for preparation of adjusting entries.
Answer: b
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
17.A trial balance will NOT balance if
1. a) an
amount is posted to the wrong account.
2. b) a
transaction has been entered twice.
3. c) a
transaction has been omitted.
4. d)
only the debit side of a journal entry has been posted.
Answer: d
Difficulty: Easy
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
18. The
main purpose of a trial balance is
19. a) to
serve as a basic internal control.
20. b) to
assist in preparation of the financial statements.
21. c) to
prove the mathematical equity of debits and credits after posting.
22. d) to
uncover errors in journalizing and posting.
Answer: c
Difficulty: Medium
Learning Objective: Identify the steps in the accounting cycle
and the steps in the recording process.
Section Reference: The Accounting Cycle and the Recording
Process
CPA: Financial Reporting
Bloomcode: Knowledge
19. Adjusting
entries are necessary to
1.obtain a proper matching of revenue and expense.
2.achieve an accurate statement of assets and equities.
3.adjust assets and liabilities to their fair market value.
1. a) 1
2. b) 2
3. c) 3
4. d) 1 and
2
Answer: d
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
20.If, during an accounting period, an expense item has been
incurred and consumed but not yet paid for or recorded, then the end-of-period
adjusting entry would involve
1. a) a
liability account and an asset account.
2. b) an
asset or contra-asset and an expense account.
3. c) a
liability account and an expense account.
4. d) a
receivable account and a revenue account.
Answer: c
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
21.For adjusting entries relating to accrued revenues,
1. a) a
liability-revenue account relationship exists.
2. b)
the adjusting entry involves a credit to an asset account and a debit to a
revenue account.
3. c) if
an adjustment is not made, assets will be overstated.
4. d)
before adjustment, both assets and revenues are understated.
Answer: d
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
22. Which
of the following would NOTbe a correct form for an adjusting entry?
23. a) a
debit to a revenue and a credit to a liability
24. b) a
debit to an expense and a credit to a liability
25. c) a
debit to a liability and a credit to a revenue
26. d) a
debit to an asset and a credit to a liability
Answer: d
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
23.Which of the following must be considered in estimating
depreciation on an asset for an accounting period?
1. a)
only the original cost of the asset
2. b)
only the asset’s useful life
3. c)
both the original cost of the asset and its useful life
4. d)
the decline in its fair market value
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
24.The type of account and normal balance of “Accumulated
Depreciation, Equipment” is
1. a)
Asset, Credit.
2. b)
Contra-asset, Credit.
3. c)
Contra-asset, Debit.
4. d)
Liability, Credit.
Answer: b
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
25.If the accountant forgets to record an adjustment for
Accumulated Depreciation, Building at the end of the accounting period, this
will cause
1. a) an
overstatement of assets.
2. b) an
understatement of assets.
3. c) an
overstatement of expenses.
4. d) an
overstatement of liabilities.
Answer: a
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
26.An adjusting entry for bad debts will generally
1. a)
increase an expense account and decrease an asset account.
2. b)
increase an expense account and increase an asset account.
3. c)
increase an expense account and increase a contra-asset account.
4. d)
increase an expense account and increase a liability account.
Answer: c
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
27.An accrued revenue can best be described as an amount
1. a)
collected and currently matched with expenses.
2. b)
collected and not currently matched with expenses.
3. c)
not collected and currently matched with expenses.
Answer: c
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Comprehension
28. What account
are revenues and expenses transferred to at the end of the accounting cycle?
29. a)
Comprehensive Income
30. b)
Retained Earnings
31. c)
Accumulated Other Comprehensive Income
32. d)
Income Summary
Answer: b
Difficulty: Medium
Learning Objective: Explain how the type of ownership structure
affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
29. Which
of the following is NOT an account appearing in the equity section of a
corporation’s statement of financial position?
30. a)
Contributed Surplus
31. b)
Common Shares
32. c)
Owner’s Equity
33. d)
Accumulated Other Comprehensive Income
Answer: c
Difficulty: Medium
Learning Objective: Explain how the type of ownership structure
affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
30. Zack
Jones operates a sole proprietorship, selling sporting equipment. He has
recently prepared financial statements for the fiscal year end of the business.
Which equity accounts would you expect to see on the balance sheet?
a)Common Shares, Dividends, and Owner’s Equity
b)Common Shares, Capital, and Withdrawals
c)Capital and Withdrawals, grouped or added under Owner’s Equity
d)Owner’s Equity and Dividends, netted together as Retained
Earnings
Answer: c
Difficulty: Easy
Learning Objective: Explain how the type of ownership structure
affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
31. Marvin
holds 10% of the common shares of Pink Limited. For the 2017 fiscal year end,
all shareholders received a cash payment to represent their share in the net income
of Pink Limited. How would this cash payment be reported in the equity section
of Pink Limited’s financial statements?
32. a) as
a reduction in the Owner’s Equity account
33. b) as
an owner withdrawal, reducing Shareholder’s Equity of Pink Limited
34. c) as
a dividend, reducing Shareholder’s Equity of Pink Limited
d)This payment would not impact the equity section of the
financial statements.
Answer: c
Difficulty: Easy
Learning Objective: Explain how the type of ownership structure
affects the financial statements.
Section Reference: Financial Statements and Ownership Structure
CPA: Financial Reporting
Bloomcode: Comprehension
32.An unearned revenue can best be described as an amount
1. a)
collected and currently matched with expenses.
2. b)
collected and not currently matched with expenses.
3. c)
not collected and currently matched with expenses.
4. d)
not collected and not currently matched with expenses.
Answer: b
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
33.Which type of account is always debited during the closing
process?
1. a)
dividends
2. b)
expense
3. c)
revenue
4. d)
retained earnings
Answer: c
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
34.Which of the following statements is INCORRECT regarding fair
value adjustments for investments?
1. a)
Both FV–NI investments and FV–OCI investments could include equity investments
orinvestments in debt securities.
2. b)
FV–OCI investments exclude debt securities.
3. c) At
each period end, an estimate is made of the fair value of both FV–NI and FV–OCI
investments.
4. d) An
adjusting entry is required to record a holding gain or loss on FV–NI
investments.
Answer: a
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Comprehension
35.In the closing process, all the revenue and expense accounts
are transferred to a clearing or suspense account called
1. a)
Other Comprehensive Income.
2. b)
Common Shares.
3. c)
Retained Earnings.
4. d)
Income Summary.
Answer: d
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
36.A corporation’s net income or loss is closed at year end to
1. a)
Accumulated Other Comprehensive Income.
2. b)
Common Shares.
3. c)
Retained Earnings.
4. d)
Other Comprehensive Income.
Answer: c
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
37.A post-closing trial balance
1. a)
includes temporary accounts only.
2. b)
includes permanent accounts only.
3. c)
includes both temporary and permanent accounts.
4. d)
may include expense accounts.
Answer: b
Difficulty: Easy
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
38.Which of the following statements about the trial balanceis
correct?
1. a)
The debits and credits must balance.
2. b)
The equality of credits and debits ensures that no errors were made.
3. c)
The post-closing trial balance includes temporary accounts only.
4. d)
The post-closing trial balance is used to prepare the financial statements.
Answer: a
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Knowledge
39.If the inventory account at the end of the year is
understated, the effect will be to
1. a)
overstate the cost of goods sold.
2. b)
understate the net purchases.
3. c)
overstate the gross profit on sales.
4. d)
overstate the goods available for sale.
Answer: a
Difficulty: Medium
Learning Objective: Prepare closing entries and consider other
matters relating to the closing process.
Section Reference: The Closing Process
CPA: Financial Reporting
Bloomcode: Comprehension
40. Which
of the following is true regarding the traditional discounted cash flow approach?
41. a)
The discount rate is adjusted to accommodate the riskiness of the cash flows.
42. b)
The cash flows have been adjustment to accommodate their riskiness.
43. c)
This model is best used where cash flows are fairly uncertain.
44. d)
Both a) and c) are correct.
Answer: a
Difficulty: Medium
Learning Objective: Use valuation techniques to measure
financial statement elements.
Section Reference: Measuring Financial Statement Elements
CPA: Financial Reporting
Bloomcode: Knowledge
41. A
fair value measure under IFRS 13 is based on which view of fair value?
42. a)
market participant view
43. b)
shareholder view
44. c)
fair value view
45. d)
unbiased view
Answer: a
Difficulty: Hard
Learning Objective: Use IFRS 13 to measure fair value.
Section Reference: Measuring Fair Value Using IFRS 13
CPA: Financial Reporting
Bloomcode: Knowledge
42. In
order to measure fair value under IFRS13, an entity must determine
43. a)
the item being measured, and how the item could or would be used.
44. b)
the market the item would be (or is) bought and sold in.
45. c)
which fair value model is being used to value the item.
46. d)
all of the above
Answer: d
Difficulty: Medium
Learning Objective: Use IFRS 13 to measure fair value.
Section Reference: Measuring Fair Value Using IFRS 13
CPA: Financial Reporting
CPA: Finance
CPA: Management Accounting
Bloomcode: Knowledge
43. Under
ASPE, Other Comprehensive Income (OCI) and Accumulated Other Comprehensive
Income (AOCI) accounts
44. a)
appear as separate line items, the same as under IFRS.
45. b)
are part of accounts such as Fair Value–OCI Investments.
46. c)
are not included in financial statements.
47. d)
are measured differently than under IFRS.
Answer: c
Difficulty: Medium
Learning Objective: Identify differences in accounting between
ASPE and IFRS, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
44. The
main difference in the accounting for measurement issues between IFRS and ASPE
is that
45. a)
IFRS has a well-developed framework for measuring fair values (IFRS13), whereas
ASPE does not.
46. b)
there is no difference between accounting for measurement issues between these
standards.
47. c)
guidance under ASPE is concentrated in a single area of the ASPE body of
knowledge.
48. d)
IFRS requires explicit disclosure of fair value amounts, whereas these
disclosures under ASPE are optional.
Answer: a
Difficulty: Medium
Learning Objective: Identify differences in accounting between
ASPE and IFRS, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
MULTIPLE CHOICE QUESTIONS–Computational
45.On September 1, 2017, BrownCorp. made the annual lease
payment of $12,000 for its fleet of delivery trucks. The payment covered the
period September 1, 2017 to August 31, 2018. Assuming the entire amount had
originally been debited to Lease Expense, the required adjustment at December
31, 2017 is
1. a)
debit Lease Expense and credit Prepaid Lease $4,000.
2. b)
debit Prepaid Lease and credit Lease Expense $4,000.
3. c)
debit Prepaid Lease and credit Lease Expense $8,000.
4. d)
debit Lease Expense and credit Prepaid Lease $8,000.
Answer: c
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting
entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $12,000 – ($12,000 x 4 ÷ 12) = $8,000
46.White Resources determines that it has NOT yet recorded the
2017accrual for Interest Revenue to be received in 2018. Assuming the amount to
be recorded for 2017 is $2,000, the required adjustment at December 31, 2017 is
1. a)
debit Interest Receivable and credit Interest Revenue $2,000.
2. b)
debit Interest Revenue and credit Interest Receivable $2,000.
3. c) debit
Interest Payable and credit Interest Revenue $2,000.
4. d)
Silly question: no adjusting entry is required.
Answer: a
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: No calculation necessary ($2,000 is figure given in
the question.)
47.On November 1, 2017, GreenCorp. purchased equipment by
signing a 5-month, 7% note for $120,000. The December 31, 2017adjusting entry
required in connection with this note is
400.
a) debit Interest Expense and credit Interest Payable, $8,400.
401.
b) debit Interest Expense and credit Interest Payable, $3,500.
402.
c) debit Interest Expense and credit Interest Payable, $1,400.
403.
d) debit Interest Expense and credit Cash, $1,400.
Answer: c
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $120,000 x 7% × 2 ÷ 12 = $1,400
48.Blue Corp.’s account balances at December 31, 2017 included
Accounts Receivable, $385,000 debit; Allowance for Doubtful Accounts, $2,500
credit. From a review of the receivables, Blue estimates that $14,000of the
December 31 receivables will be uncollectible. The required adjusting entry
would include a credit to the allowance account for
500.
a) $2,500.
501.
b) $16,500.
502.
c) $14,000.
503.
d) $11,500.
Answer: d
Difficulty: Easy
Learning Objective: Explain the reasons for and prepare adjusting
entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $14,000 – $2,500= $11,500
49. YellowCorp.’s
account balances at December 31, 2017included Accounts Receivable, $720,000
debit; Allowance for Doubtful Accounts, $800debit.Sales during 2017were
$1,840,000. It is estimated that 2% of sales will be uncollectible. The
required adjusting entry would include a credit to the allowance account for
50. a)
$28,800.
51. b)
$36,800.
52. c)
$14,400.
53. d)
$30,600.
Answer: b
Difficulty: Hard
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: $1,840,000 × 2% = $36,800. (ADA balance is irrelevant)
50. On
September 1, 2017, Black Corporation received $36,000 cash from a tenant for
one year’s rent in advance, and recorded the transaction with a credit to Rent
Revenue. The December 31, 2017required adjusting entry in connection with this
would be
51. a)
debit Rent Revenue and credit Unearned Rent, $12,000.
52. b)
debit Rent Revenue and credit Unearned Rent, $24,000.
53. c)
debit Unearned Rent and credit Rent Revenue, $12,000.
54. d)
debit Cash and credit Unearned Rent, $6,000.
Answer: b
Difficulty: Medium
Learning Objective: Explain the reasons for and prepare
adjusting entries.
Section Reference: Adjusting Entries
CPA: Financial Reporting
Bloomcode: Application
Feedback: 8 ÷ 12 × $36,000 = $24,000
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