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HBSP Harvard Financial Accounting Final Exam 3

Q1. Which statements are correct?

Characteristics of employee stock options include the following:

I. They motivate managers to make decisions that are aligned with company interests.
II. They are not forfeited if the manager leaves the firm.
III. They attract managers that are risk-averse.

• I only
• II only
• I and II only
• I, II and III

Q2. Presented below is the 2019 income statement for Melissa’s Magic Markers

During the year, Melissa’s Magic Markers charged $30 in depreciation and $10 in amortization. What is Melissa’s Magic Markers’ 2019 EBITDA to total interest coverage ratio?

• 23.6x
• 33.3x
• 34.3x
• 48.6x

Q3. Choose the option to correctly complete the sentence.

Ruthie’s Radios sells a $100 gift certificate to a customer on December 2. On December 2, Ruthie’s Radios will debit _________ and credit __________.

• cash; deferred revenue
• cash; sales
• deferred revenue; cash
• sales; cash

Q4. Which of the following criteria must be met to classify a lease arrangement as a capital lease?

• Ownership of the leased asset is not transferred to the lessee at the end of the term.
• The lessee has an option to purchase the leased asset at fair market value
• The term of the lease is 75 percent or more of the leased asset’s economic life (i.e., its productive life).
• The present value of the lease payment discounted by the lessee’s borrowing cost is 90 percent or less of the fair value of the property.

Q5. Which of the following statements about Goodwill are true?

I. It is amortized over its useful life.
II. It will be $0 for a firm that has never purchased another firm.
III. It can generally be attributed directly to a patent or trademark

• I only
• II only
• I and II only
• I, II and III

Q6. Choose the option that correctly completes the sentence.

Zack’s Zippers earned $500,000 for the year. On March 1 it declared a dividend equal to 20% of annual profits. The dividend was paid on March 31.

The journal entry to record the declaration of the dividend will ______________ dividends payable, while the journal entry to record the payment of the dividend will ___________ cash.

• credit; credit
• debit; debit
• credit; debit
• debit; credit

Q7. Stephen’s Suitcases has the following ratios:

Net Income/Sales = 0.100
Sales/Total Assets = 1.100
Return on Equity = 0.231

What is Stephen’s Suitcases Total Assets/Owners’ Equity ratio?

• 0.025
• 0.476
• 2.000
• 2.100

Q8. Assume that Zack’s Zippers buys a warehouse on January 1, 2005 for $1,000,000. The annual depreciation expense for this building is $50,000 and the journal entry to record the depreciation expense is made once a year on December 31.

On December 31, 2007, after making the 2007 journal entry for depreciation expense, what is the balance in the accumulated depreciation account?

• asset of $100,000
• asset of $150,000
• contra asset of $100,000
• contra asset of $150,000

Q9. Choose the option to correctly complete the sentence.

The following table reports information from Stephen’s Suitcases tax return and income statement for two years in a row. The tax rate is 30%.

In Year 1, Stephen’s Suitcases will record a ____________ to the deferred tax accrual account, and in Year 2, Stephen’s Suitcases will record a _____________ to the deferred tax accrual account.

• credit; credit
• debit; debit
• credit; debit
• debit; credit

Q10. Choose the option to correctly complete the sentence.

Compared to the straight-line depreciation method, an accelerated method of depreciation (such as the double-declining balance method) will result in a _______________ depreciation expense in the first year and a ______________ net asset balance for the asset at the end of the first year.

• lower; lower
• lower; higher
• higher; lower
• higher; higher

Q11. Assume Melissa’s Magic Markers wishes to lease a piece of equipment for 5 years. The economic life of the equipment is 6 years. The borrowing cost is assumed to be 10%.

The market value of the equipment is $750,000 and the annual lease payment due at the end of each year is $191,242.50.

The present value factor for an annuity for 5 years at 10% is 3.791. The present value factor for an annuity for 6 years at 10% is 4.355.

What is the initial value of the equipment that Melissa’s Magic Markers will record on the balance sheet (as both an asset and liability) at lease inception, rounded to the nearest dollar?

• $0
• $725,000
• $750,000
• $832,861

Q12. Choose the option to correctly complete the sentence.

Assume that Melissa’s Magic Markers signs an operating lease for a new retail location. The lease term is 5 years and the cost is $2,500 per month.

Melissa’s Magic Markers will record a lease obligation (liability) of ___________ at inception and an annual lease expense of ______________.

• $0; $30,000
• $30,000; $0
• $0; $2,500
• $2,500; $30,000

Q13. Which of the following actions will have a direct impact on Owners’ Equity?

I. Issuing preferred stock
II. A stock option exercise
III. The repurchase of Treasury Stock

• I only
• II only
• I and II only
• I, II and III

Q14. Which of the following statements is true?

I. Hold-to-maturity marketable securities are accounted for on the balance sheet at their cost.
II. Trading securities are debt and equity securities that the holder intends to sell in the near term.
III. Unrealized gains and losses on available-for-sale securities are shown as investment income.

• I only
• II only
• I and II only
• I, II and III

Q15. Stephen’s Suitcases bought a new machine to produce suitcase handles. The machine itself cost $40,000. Stephen’s Suitcases recorded a journal entry to debit Property, Plant, and Equipment for $48,000 and credit Cash for $48,000.

Which option(s) correctly complete the following sentence?

The additional $8,000 that Stephen’s Suitcases capitalized could have been incurred for:

I. installation of the machine.
II. the cost of a trial run of the machine.
III. delivery of the machine.

• I only
• II only
• I and III only
• I, II and III

Q16. Choose the option to correctly complete the sentence.

Ruthie’s Radios manufactured 1,000 radios in February of 2019 at a cost of $200 each and 400 radios in June of 2019 at a cost of $150 each. Ruthie’s Radios sold 300 radios during 2019.

Ruthie’s Radios uses the LIFO method of accounting for inventory and cost of goods sold (COGS).

If Ruthie’s Radios had instead used the FIFO method of accounting, its inventory would be _____________ and its net income would be _______________ than what Ruthie’s Radios reported in 2019 using LIFO.

• lower; lower
• lower; higher
• higher; lower
• higher; higher

Q17. Choose the option to correctly complete the following sentence.

Deferred revenue is future revenue that has already been __________, but has yet to be ___________.

• collected; earned
• earned; collected
• recorded as a sale; collected
• collected; spent on inventory

Q18. Choose the option to correctly complete the sentence.

Assume that Stephen’s Suitcases manufactured 2,500 suitcases in January of 2019 at a cost of $50 each, and 1,100 suitcases in July of 2019 at a cost of $60 each. Stephen’s Suitcases sold 3,000 suitcases during 2019. Stephen’s Suitcases uses the FIFO method of accounting for inventory and cost of goods sold (COGS).

At the end of 2019, Stephen’s Suitcases reports inventory of ________ and COGS of __________.

• $30,000; $161,000
• $36,000; $155,000
• $155,000; $36,000
• $161,000; $30,000

Q19. Choose the option that correctly completes the sentence.

Assume that a customer of Ruthie’s Radios has the option to pay her invoice early. If she pays early, she will receive a 3% discount. The initial invoice amount is $300. Assume that Ruthie’s Radios expects the customer to take advantage of this offer and has already set up an Allowance for Cash Discounts account.

The journal entry to record the customer’s early payment is:

• debit cash $291; debit allowance for cash discounts $9; credit accounts receivable $300
• debit cash $300; debit allowance for cash discounts $9; credit accounts receivable $309
• debit cash $291; debit allowance for cash discounts $9; debit accounts receivable $300
• debit cash $300; credit allowance for cash discounts $9; debit accounts receivable $291

Q20. Choose the option to correctly complete the sentence.

Ruthie’s Radios spent $50,000 in cash in 2019 developing a new type of radio knob. The wages allocated to this project were $20,000 and the raw materials for the prototype were $14,000. The remaining $16,000 was the cost of legal and other fees related to obtaining the patent.

The journal entry to record the patent is:

• Debit patent asset for $50,000; credit cash for $50,000
• Debit research and development expense for $20,000; debit patent asset for $30,000; credit cash for $50,000.
• Debit research and development expense for $14,000; debit patent asset for $36,000; credit cash for $50,000.
• Debit research and development expense for $34,000; debit patent asset for $16,000; credit cash for $50,000.

Q21. The realized or realizable criterion is satisfied if the seller has received payment or reasonably expects to be paid. True/ False

Q22. Choose the option to correctly complete the sentence.

Ruthie’s Radios had a Retained Earnings balance of $50,000 at the end of 2018. The firm paid a dividend of $10,000 during 2019. The balance in Retained Earnings at the end of 2019 was $35,000.

Assuming no other changes to the Retained Earnings account during 2019, Ruthie’s Radios had _________ during 2019.

• net income of $5,000
• net income of $25,000
• net loss of $5,000
• net loss of $25,000

Q23. Choose the best option to complete the following sentence.

The conservatism concept dictates that gain contingencies ____________.

• may not be recognized until they are realized
• may be recognized before they are realized in most cases
• may be recognized before they are realized if the probability of being collected is high
• may never be recognized, even if realized

Q24. Assume that Stephen’s Suitcases purchases a new piece of factory equipment for $300,000. The salvage value is $60,000 and the useful life is 6 years.

What is the Year 2 depreciation expense under the double-declining balance method?

• $53,333
• $66,667
• $80,000
• $100,000

Q25. Assume that Melissa’s Magic Markers purchases a new piece of factory equipment for $150,000. The salvage value is $30,000 and the useful life is 6 years.

What is the annual depreciation expense under the straight-line method?

• $5,000
• $20,000
• $25,000
• $30,000

Q26. Choose the option to correctly complete the sentence.

Zack’s Zippers uses the accelerated depreciation method for tax purposes and the straight-line depreciation method for financial accounting (book) purposes.

The use of accelerated depreciation for tax purposes causes a ____________ difference in timing of financial and tax reporting. As a result, Zack’s Zippers will have ___________ net income during the early years of depreciation and _____________ net income during later years of depreciation.

• permanent; lower; higher
• permanent; higher; lower
• temporary; lower; higher
• temporary; higher; lower

Q27. Stephen’s Suitcases acquired Tara’s Totes on 1/1/2018. Stephen’s Suitcases paid $400,000 for Tara’s Totes. Tara’s Totes had the following balance sheet items on 1/1/2018.

What is the amount of Goodwill that Stephen’s Suitcases should record at the time it purchases Tara’s Totes?

• $0
• $110,000
• $250,000
• $400,000

Q28. In March, Ruthie’s Radios learn that a sale of $75 made in February will never be paid by the customer. What is the journal entry that Ruthie’s Radios should record?

• Debit cash for $75; credit allowance for bad debts for $75
• Debit accounts receivable for $75; credit cash for $75
• Debit accounts receivable for $75; credit allowance for bad debts for $75
• Debit allowance for bad debts for $75; credit account receivable for $75

Q29. Which options correctly complete the sentence?

In most cases, revenue is earned when a sale has taken place. This is when:

I. the customer has agreed to buy the goods or services.
II. the goods or services have been delivered.
III. the seller has performed substantially all of its obligations to the buyer.

• I only
• II only
• III only
• I, II and III

Q30. Choose the option to correctly complete the following sentence.

If the purchase price is _________ the __________ value of the net assets acquired, the excess purchase price is recorded as _________ called Goodwill.

• greater than; book; an asset
• greater than; market; an asset
• less than; book; a liability
• less than; market; a liability

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