stock, dividend, investment, pension and tax benefits

1. Dryer Company had 300,000 shares of common stock issued and
outstanding at December 31, 2003. During 2004, no additional common
stock was issued. On January 1, 2004, Dryer issued 400,000 shares
of nonconvertible preferred stock. During 2004, Dryer declared and
paid $240,000 cash dividends on the common stock and $200,000 on the
nonconvertible preferred stock. Net income for the year ended
December 31, 2004, was $1,280,000. What should be Dryer’s 2004
earnings per common share, rounded to the nearest penny?
a. $1.55.
b. $2.80.
c. $4.26.
d. $3.60.

2. Young Co. acquired a 60% interest in Tomlin Corp. on December 31,
2003 for $630,000. During 2004, Tomlin had net income of $400,000
and paid cash dividends of $100,000. At December 31, 2004, the
balance in the investment account should be
a. $630,000.
b. $870,000.
c. $930,000.
d. $810,000.

3. The projected benefit obligation is the measure of pension
obligation that
a. is not sanctioned under generally accepted accounting principles
for reporting the service cost component of pension expense.
b. requires the longest possible period for funding to maximize the
tax deduction.
c. is required to be used for reporting the service cost component
of pension expense.
d. requires pension expense to be determined solely on the basis of
the plan formula applied to years of service to date and based on
existing salary levels.

4. Which of the following is NOT a change in accounting principle?
a. A change from completed-contract to percentage-of-completion
b. A change from full-cost to successful efforts in the extractive
c. A change from LIFO to FIFO for inventory valuation
d. Using a different method of depreciation for new plant assets

–Page 2

5. Peters Corporation had two issues of securities outstanding: common
stock and an 8% convertible bond issue in the face amount of
$12,000,000. Interest payment dates of the bond issue are June 30th
and December 31st. The conversion clause in the bond indenture
entitles the bondholders to receive forty shares of $20 par value
common stock in exchange for each $1,000 bond. On June 30, 2004,
the holders of $1,800,000 face value bonds exercised the conversion
privilege. The market price of the bonds on that date was $1,100
per bond and the market price of the common stock was $35. The
total unamortized bond discount at the date of conversion was
$750,000. In applying the book value method, what amount should
Peters credit to the account “paid-in capital in excess of par,” as
a result of this conversion?
a. $1,080,000.
b. $540,000.
c. $247,500.
d. $120,000.

6. Kimm, Inc. had net income for 2004 of $6,360,000 and earnings per
share on common stock of $5. Included in the net income was
$900,000 of bond interest expense related to its long-term debt.
The income tax rate for 2004 was 30%. Dividends on preferred stock
were $1,200,000. The payout ratio on common stock was 25%. What
were the dividends on common stock in 2004?
a. $1,447,500.
b. $1,935,000.
c. $1,290,000.
d. $1,590,000.

7. When applying the treasury stock method for diluted earnings per
share, the market price of the common stock used for the repurchase
is the
a. price at the beginning of the year.
b. none of these.
c. price at the end of the year.
d. average market price.

8. Recognition of tax benefits in the loss year due to a loss carry-
forward requires
a. the establishment of an income tax refund receivable.
b. only a note to the financial statements.
c. the establishment of a deferred tax liability.
d. the establishment of a deferred tax asset.

–Page 3

Barker Co. began operations on January 1, 2004. Financial statements
for 2004 and 2005 contained the following errors:

Dec. 31, 2004 Dec. 31, 2005
—————- —————-
Ending inventory $44,000 too high $52,000 too low
Depreciation expense 28,000 too high —
Insurance expense 20,000 too low 20,000 too high
Prepaid insurance 20,000 too high —

In addition, on December 31, 2005 fully depreciated equipment was
sold for $9,600, but the sale was not recorded until 2006. No
corrections have been made for any of the errors. Ignore income tax

9. The total effect of the errors on the amount of Barker’s working
capital at December 31, 2005 is working capital is understated by
a. $61,600.
b. $41,600.
c. $133,600.
d. $105,600.

10. On December 31, 2003, the stockholders’ equity section of Clark,
Inc., was as follows:

Common stock, par value $10; authorized 30,000 shares;
issued and outstanding 18,000 shares $180,000
Additional paid-in capital 232,000
Retained earnings 522,000
Total stockholders’ equity $934,000

On March 31, 2004, Clark declared a 10% stock dividend, and
accordingly 1800 additional shares were issued, when the fair market
value of the stock was $27 per share. For the three months ended
March 31, 2004, Clark sustained a net loss of $96,000. The balance
of Clark’s retained earnings as of March 31, 2004, should be
a. $404,400.
b. $426,000.
c. $399,000.
d. $377,400.

11. The actual return on plan assets
a. is equal to the actual rate of return times the fair value of the
plan assets at the beginning of the period.
b. all of these.
c. includes interest, dividends, and changes in the market value of
the fund assets.
d. is equal to the change in the fair value of the plan assets
during the year.

–Page 4

12. Renner Corporation’s taxable income differed from its accounting
income computed for this past year. An item that would create a
permanent difference in accounting and taxable incomes for Renner
would be
a. a fine resulting from violations of OSHA regulations.
b. making installment sales during the year.
c. using accelerated depreciation for tax purposes and straight-line
depreciation for book purposes.
d. a balance in the Unearned Rent account at year end.

13. Which of the following is not correct in regard to trading
a. All of these are correct.
b. They are held with the intention of selling them in a short
period of time.
c. Unrealized holding gains and losses are reported as part of net
d. Any discount or premium is not amortized.

14. Accounting for income taxes can result in the reporting of deferred
taxes as any of the following EXCEPT
a. All of these are acceptable methods of reporting deferred taxes.
b. a current or long-term asset.
c. a current or long-term liability.
d. a contra-asset account.

15. On December 29, 2005, Greer Co. sold an equity security that had
been purchased on January 4, 2004. Greer owned no other equity
securities. An unrealized holding loss was reported in the 2004
income statement. A realized gain was reported in the 2005 income
statement. Was the equity security classified as available-for-sale
and did its 2004 market price decline exceed its 2005 market price
2004 Market Price
Available- Decline Exceeded 2005
for-Sale Market Price Recovery
——— ———————
a. No No
b. Yes Yes
c. Yes No
d. No Yes

–Page 5

16. Franco Company acquired 16,000 shares of its own common stock at
$20 per share on February 5, 2003, and sold 8,000 of these shares
at $27 per share on August 9, 2004. The market value of Franco’s
common stock was $24 per share at December 31, 2003, and $25 per
share at December 31, 2004. The cost method is used to record
treasury stock transactions. What account(s) should Franco credit
in 2004 to record the sale of 8,000 shares?
a. Treasury Stock for $192,000 and Retained Earnings for $24,000.
b. Treasury Stock for $216,000.
c. Treasury Stock for $160,000 and Paid-in Capital from Treasury
Stock for $56,000.
d. Treasury Stock for $160,000 and Retained Earnings for $56,000.

Doral Company purchased a machine on January 1, 2002, for $900,000.
At the date of acquisition, the machine had an estimated useful life
of six years with no salvage. The machine is being depreciated on a
straight-line basis. On January 1, 2005, Doral determined, as a
result of additional information, that the machine had an estimated
useful life of eight years from the date of acquisition with no
salvage. An accounting change was made in 2005 to reflect this
additional information.

17. What is the amount of depreciation expense on this machine that
should be charged in Doral’s income statement for the year ended
December 31, 2005?
a. $225,000.
b. $90,000.
c. $112,500.
d. $180,000.

–Page 6

The following information for Nyland Enterprises is given below:

December 31, 2004
Assets and obligations
Plan assets (at fair value) $2,700,000
Market-related asset value 2,610,000
Accumulated benefit obligation 2,880,000
Projected benefit obligation 4,140,000

Amounts to be Recognized
Prepaid/(accrued) pension cost at beginning
of year (72,000)
Pension expense (540,000)
Contribution 486,000
Prepaid/(accrued) pension cost at end of year $(126,000)

Unrecognized prior service costs $ 618,750
Unrecognized gains (net) (315,000)

18. What is the pension expense that Nyland Enterprises should report
for 2004?
a. $378,000.
b. $486,000.
c. $180,000.
d. $540,000.

19. In 2003, its first year of operations, Landon Corp. has a $700,000
net operating loss when the tax rate is 30%. In 2004, Landon has
$300,000 taxable income and the tax rate remains 30%.

Assume the management of Landon Corp. thinks that it is more likely
than not that the loss carryforward will not be realized in the near
future because it is a new company (this is before results of 2004
operations are known).

(a) What are the entries in 2003 to record the tax loss

(b) What entries would be made in 2004 to record the current and
deferred income taxes and to recognize the loss carryforward?
(Assume that at the end of 2004 it is more likely than not that
the deferred tax asset will be realized.)

–Page 7

20. In 2004, Maxwell Corporation changed its method of inventory pricing
from LIFO to FIFO. Net income computed on a LIFO as compared to a
FIFO basis for the four years involved is: (Ignore income taxes.)

——- ——-
2001 $68,200 $73,700
2002 74,500 78,100
2003 77,000 81,400
2004 82,500 84,700

(a) Indicate the net income that would be shown on comparative
financial statements issued at 12/31/04 for each of the four
years, assuming that the company changed to the FIFO method in

(b) Assume that the company had switched from the average cost
method to the FIFO method with net income on an average cost
basis for the four years as follows: 2001, $70,400;
2002, $76,120; 2003, $80,300; and 2004, $83,600. Indicate the
net income that would be shown on comparative financial state-
ments issued at 12/31/04 for each of the four years under these

(c) Assuming that the company switched from the FIFO to the LIFO
method, what would be the net income reported on comparative
financial statements issued at 12/31/04 for 2001, 2002, and

21. Compare the fair value and equity methods of accounting for
investments in stocks subsequent to acquisition.

22. In 2003, Nichols Co. issued 200,000 of its 500,000 authorized shares
of $10 par value common stock at $35 per share. In January, 2004,
Nichols repurchased 10,000 shares at $30 per share. Assume these are
the only stock transactions the company has ever had.

(a) What are the two methods of accounting for treasury stock?
(b) Prepare the journal entry to record the purchase of treasury
stock by the cost method.
(c) 3,000 shares of treasury stock are reissued at $33 per share.
Prepare the journal entry to record the reissuance by the cost

–Page 8

23. Ramirez Corporation has 500,000 shares of common stock outstanding
throughout 2004. In addition, the corporation has 5,000, 20-year,
7% bonds issued at par in 2002. Each $1,000 bond is convertible into
25 shares of common stock after 9/23/05. During the year 2004, the
corporation earned $600,000 after deducting all expenses. The tax
rate was 30%.

Compute the proper earnings per share for 2004.

24. Briefly explain the following terms:
(a) Service cost
(b) Interest cost
(c) Prior service cost
(d) Vested benefits

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