16. All of the following would qualify a lease as a capital lease except:

16. All of the following would qualify a lease as a capital lease except:

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The lease term is 80% of the asset’s estimated useful life.

The lease agreement contains a bargain purchase option.

The present value of the lease payments equals 70% of the fair market value of the leased asset.

Title to the leased asset transfers to the lessee at the end of the lease term.

17. Which of the following is/are criteria for recognizing revenue from a sale?

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Title and risks of ownership have been exchanged.

The company is reasonably assured of collecting the receivable.

The customer has, in turn, sold the product to its own customer.

Both title and risks of ownership have been exchanged and the company is reasonably assured of collecting the receivable.

18. Use the following information to answer the next two questions.

Downey Company bought a delivery truck for $62,000 on January 1, 2005. They installed a rear hydraulic lift for $8,000 and paid sales tax of $3,000. In addition, Downey paid $2,400 for a one-year insurance policy. They estimate the useful life of the truck to be 10 years and its residual value to be $8,000.

If Downey uses the straight-line method of depreciation, what is the depreciation expense for 2006 and book value at the end of 2006?

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$7,300 and $58,400

$6,500 and $60,000

$6,790 and $62,320

$6,500 and $66,500

19. Downey Company bought a delivery truck for $62,000 on January 1, 2005. They installed a rear hydraulic lift for $8,000 and paid sales tax of $3,000. In addition, Downey paid $2,400 for a one-year insurance policy. They estimate the useful life of the truck to be 10 years and its residual value to be $8,000.

If Downey uses the double declining-balance method, how much is the truck’s depreciation expense for2006?

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$11,680

$12,144

$10,400

$11,760

20. For accounting purposes, goodwill

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is recorded whenever a company achieves a level of net income that exceeds the industry average.

is recorded when a company purchases another business.

is expensed in the period it is recorded because benefits from goodwill are difficult to identify.

is never recorded

21. Goodwill should

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be written off as soon as possible against retained earnings.

absent impairment, not be written off because it has an indefinite life.

written off as soon as possible as an expense.

amortized over a maximum of forty years.

22. Freeman, Inc., reported net income of $40,000 for 2005. However, the company’s income tax return excluded a revenue item of $3,000 (reported on the income statement) because under the tax laws the $3,000 would not be reported for tax purposes until 2006. Assuming a 30% income tax rate, this situation would cause a 2005 deferred tax amount of

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$3,000 asset.

$3,000 liability

$ 900 asset.

$ 900 liability.

23. Before closing entries were recorded at the end of the accounting period (December 31, 2005), the following data were taken from the accounts of Buynow Corporation:

The total amount of owners’ equity that should be reported on the balance sheet dated December 31, 2005, after all the closing entries, is

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$ 338,000.

$128,000.

$300,000.

$304,000.

24. The major accounting difference between interest incurred during a period and cash dividends declared during the same period is:

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Interest decreases retained earnings while dividend declared increases retained earnings

Interest reduces net income while dividends declared do not affect net income

Interest does not affect net income while dividends reduce net income

There is no major difference. Both are treated identically for accounting purposes.

25. In December, a Global Grocer customer pays in time and receives a 2% discounts for prompt payment. The customer had purchased goods worth $500. Which of the possible answers below correctly states the journal entries to record the payment and the discount taken. Previously, Global Grocer had established an allowance for prompt payment discounts.

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Debit Accounts receivable ($500); Credit Cash ($490); credit allowance for discounts ($10).

Debit Cash ($500); Credit Accounts receivable ($500).

Debit Cash ($490); Debit Allowance for sales discounts ($10); Credit Accounts receivable ($500)

None of the above

26. Here is International Corp.’s income statement for the month of December.

What is the company’s December EBITDA to total interest coverage ratio?

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6.5x

18.5x

14.5x

20.2x

27. The following financial ratios are for Average Corp. and Superior Corp., two hardware stores.

Which of the following statements is inconsistent with the above ratios?

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Superior Corp has a higher return on equity primarily because it has a significantly higher net income margin

Average Corp. on a relative basis uses significantly more debt financing than Superior Corp.

Average Corp. utilizes its assets more effectively than Superior Corp.

Superior Corp. generates more income per dollar of sales than Average Corp.

28.On June 30, 2000, Microsoft Corporation was holding $4.8 billion of cash that it had collected from customers in advance for future software licenses and the future delivery of other products and services. In its financial statements, Microsoft classified and recorded this amount as:

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part of revenue on its income statement.

the asset Accounts Receivable on its balance sheet.

the liability Unearned Revenue on its balance sheet.

an expense on its income statement.

29. Which statement is false?

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An unrealized gain or loss on hold-to-maturity marketable securities is recognized in income.

An unrealized gain or loss on trading securities is recognized in income.

An unrealized gain or loss on a company’s common stock held by the owners’ of the company is not recognized by the company.

An unrealized gain or loss on available-for-sale marketable securities is not recognized in income.

30. International, Inc. established an allowance for bad debts at the end of October. In November, International wrote off a $500 account receivable because payment was considered to be remote. What would be the effect of the $500 account receivable write-off on International’s November financial statements?

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Assets would decrease, liabilities would remain constant and retained earning would decrease.

Assets would remain constant; liabilities would increase and retained earnings would decrease.

No change would be made in total assets, liabilities or shareholder’s equity.