UNIVERSITY OF PITTSBURGH

FINANCIAL ACOOUNTING

SAMPLE FINAL EXAM QUESTIONS

CHAPTERS 9, 10 & 11 :
True / False Questions
1. A current ratio that is high according to an industry average might mean the company may have
excessive inventory levels or slow moving inventory items.
2. A contingent liability that is "probable" and can be "reasonably estimated" must be accrued and
reported as a liability.
3. An advantage of bond financing is that issuing bonds does not affect owner control.
4. An advantage of bonds is that interest does not have to be paid.
. A discount on bonds payable occurs when a company issues bonds with an issue price less than par
value.
_6. Outstanding shares of stock are those shares which a corporation has the ability to issue as
documented in its charter in the state where incorporated.
_7. Treasury stock is a corporation's own stock that was sold, issued, repurchased, and is still held by the
corporation.
_8. To pay a cash dividend, a corporation needs adequate cash, authorization from the board of directors,
and adequate retained earnings.
_9. Common stockholders have voting rights and can declare cash dividends.
10 Preferred stock often has a preference in the distribution of assets over common stock in the event of
dissolution of the corporation.
_11. When preferred stock is cumulative and the board of directors passes on a dividend, the arrearage
must be shown as a liability on the balance sheet and a reduction from retained earnings on the statement
of stockholders' equity and the balance sheet.
Multiple Choice Questions
_1. Which of the following is always a current liability?
A. Pension obligations
B. Estimated warranty liability
C. Accounts payable
D. Bonds payable
_2. An accrued liability results from an expense that is
A. incurred and paid.
B. incurred but not yet paid.
C. paid but not yet incurred.
D. neither incurred nor paid.

_3. On December 1, Martin Company signed a $5,000 3-month 6% note payable, with the principle plus
interest due on March 1 of the following year. What amount of interest expense is accrued at December
31 on the note?
A. $0
B. $25
C. $50
D. $75
E. $300
_4. Conner Company borrows $185,600 cash on November 1, 2010, by signing a 120-day, 8% note. What
is the total amount of interest expense that Conner will recognize?
A. $4,949
B. $14,848
C. $2,467
D. $0, no interest expense is recognized
E. $1485
_5. A potential future liability arising from an event that has already happened, usually is called
A. an accrued liability.
B. a contingent liability.
C. a deferred liability.
D. an estimated liability.

_6. A bondholder that owns a $1,000, 10%, 10-year bond has:

A. Ownership rights
B. The right to receive $10 per year until maturity
C. The right to receive $1,000 at maturity
D. The right to receive $10,000 at maturity
E. The right to receive dividends of $1,000 per year
_7. When a bond sells at a premium:
A. The contract rate is above the market rate
B. The contract rate is equal to the market rate
C. The contract rate is below the market rate
D. It means that the bond is a zero coupon bond
E. The bond pays no interest
_8.On January 1, 2014, Huber Co. sold 12% bonds with a face value of $1,000,000. The bonds mature in
five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold
for $1,077,250 to yield 10%. Using the effective-interest method of amortization, interest expense
for 2014 is
A. $100,000.
B. $107,419.
C. $107,700.
D. $120,000.

_9.

On January 1, 2016, Tonika Company issued a four-year, $10,000, 7% bond. The interest is
payable annually each December 31. The issue price was $9,668 based on an 8% effective interest
rate. Tonika uses the effective-interest amortization method.
Rounding calculations to the nearest whole dollar, which of the following journal entries correctly
records the 2016 interest expense?
A.

Interest expense

700

Cash
B.

C.

Interest expense

700
883

Bond discount

183

Cash

700

Interest expense

773

Bond discount

73

Cash
D.

Interest expense
Bond discount
Cash

700
676
24
700

_10. A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 10%.
The amount of interest owed to the bondholders for each semiannual interest payment is.
A. $0
B. $33,750
C. $67,500
D. $750,000
E. $1,550,000

_11.What is the debt to equity ratio for a company that has $700,000 in total liabilities and $3,500,000
in total equity?
A. 20%
B. 5
C. $2,100,000
D. 2%
_12. Amortizing a bond discount:
A. Allocates a part of the total discount to each interest period
B. Increases the market value of the Bonds Payable
C. Decreases the Bonds Payable account
D. Decreases interest expense each period
E. Increases cash flows from the bond
_13. Which of the following represents the shares currently in the hands of investors?
A. Authorized shares
B. Issued shares
C. Outstanding shares
D. Unissued shares

_14. The par value of common stock is the

A. average market price of the stock during the period in which it is sold.
B. ceiling (maximum) amount above which the stock may not be sold initially.
C. nominal value per share established in the corporate charter.
D. selling price of the stock at the date it was issued by the corporation.
_15. Which of the following is a "contra" stockholders' equity account?
A. Retained earnings.
B. Preferred Stock.
C. Treasury stock.
D. Capital in excess of par value.
_16. Irish Corporation issued (sold) 10,000 shares of its common stock for $70 per share. The bylaws
established a par value of $10 per share. The transaction would increase the common stock account on the
balance sheet by how much?
A. $0
B. $600,000
C. $100,000
D. $700,000
_17. During 2010, Thomas Corporation repurchased some shares of its own common stock. What effect
did this transaction have on 2010 stockholders' equity and earnings per share, respectively?

_18. The balance sheet of Werther Company showed the following data about its common stock, par $1:
authorized shares, 10,000,000; outstanding shares, 4,300,000; and issued shares 4,700,000. Therefore, the
number of treasury stock shares was
A. 0.
B. 4,700,000.
C. 4,300,000.
D. 400,000.
4,700,000-4,300,000= 400,000
_19. On September 1, 2014, Valdez Company reacquired 20,000 shares of its $10 par value
common stock for $15 per share. Valdez uses the cost method to account for treasury stock. The
journal entry to record the reacquisition of the stock should debit
a. Treasury Stock for $200,000.
b. Common Stock for $200,000.
c. Common Stock for $200,000 and Paid-in Capital in Excess of Par for $75,000.
d. Treasury Stock for $300,000.
d

20,000 $15 = $300,000.

_20. Gannon Company acquired 10,000 shares of its own common stock at $20 per share on February 5,
2014, and sold 5,000 of these shares at $27 per share on August 9, 2015. The fair value of Gannon's
common stock was $24 per share at December 31, 2014, and $25 per share at December 31, 2015. The
cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2015
to record the sale of 5,000 shares?
a. Treasury Stock for $135,000.

b. Treasury Stock for $100,000 and Paid-in Capital from Treasury Stock for $35,000.
c. Treasury Stock for $100,000 and Retained Earnings for $35,000.
d. Treasury Stock for $120,000 and Retained Earnings for $15,000.
5,000 $20 = $100,000; 5,000 $7 = $35,000.
_21.

Which of the following statements correctly describes either the dividend yield or the earnings
per share?
A.
B.
C.
D.

The dividend yield decreases when net income increases.

Earnings per share is a measure per share of both common and preferred stock.
The dividend yield increases when the market price per share decreases.
Earnings per share decreases when dividends per share decrease.

Dividend yield equals dividends per share divided by market price per share. Therefore, the
dividend yield increases when the market price per share decreases.
_22.

On January 1, 2014, Culver Corporation had 110,000 shares of its $5 par value common stock
outstanding. On June 1, the corporation acquired 10,000 shares of stock to be held in the treasury.
On December 1, when the market price of the stock was $10, the corporation declared a 15%
stock dividend to be issued to stockholders of record on December 16, 2014. What was the
impact of the 15% stock dividend on the balance of the retained earnings account?
A. $937,500 decrease
B. $150,000 decrease
C. $165,000 decrease
D. No effect
100,000 .15 $10 = $150,000.

_23. At January 1, 2009, Grabowski Corporation had outstanding capital stock as shown below. On
December 31, 2009, it declared and paid cash dividends of $48,000 to the preferred stockholders.
Common stock1,000,000 shares outstanding, $1 par value.
Preferred stock2,000 shares outstanding, $75 par, 8%, cumulative. The stock was issued at a price of
$15 per share.
At December 31, 2009, how many years were the preferred dividends in arrears?(hint: dont count current
year)
A. One year.
B. Two years.
C.Three years.
D. Four years.

_24. Colson Inc. declared a $320,000 cash dividend. It currently has 12,000 shares of 7%, $100 par value
cumulative preferred stock outstanding. It is one year in arrears on its preferred stock. How much
cash will Colson distribute to the common stockholders?
A. $152,000.
B. $168,000.

C. $236,000.
D. None.
12,000 $100 .07 = $84,000

$320,000 - ($84,000 2) = $152,000.

_25. On June 30, 2014, when Ermler Co.'s stock was selling at $65 per share, its capital
accounts were as follows:
Capital stock (par value $50; 50,000 shares issued)
Premium on capital stock
Retained earnings

$2,500,000
600,000
4,200,000

If a 100% stock dividend were declared and distributed, capital stock would be
A. $2,500,000.
B. $3,100,000.
C. $5,000,000.
D. $7,300,000.
(50,000shares $50 par value) + $2,500,000 = $5,000,000.
_26.
A.
B.
C.
D.

A feature common to both stock splits and stock dividends is

a transfer to earned capital of a corporation.
that there is no effect on total stockholders' equity.
an increase in total liabilities of a corporation.
a reduction in the contributed capital of a corporation.

Sample Questions from Prior Chapters:

_1 At the beginning of 2010, a corporation had assets of $270,000 and liabilities of $160,000. During
2010, assets increased $25,000 and liabilities increased $5,000. What was stockholders' equity on
December 31, 2010?
A. $140,000
B. $130,000
C. $190,000
D. $80,000
_2. A company had the following partial list of account balances at year-end:

How much is net sales revenue?

A. $91,900
B. $90,700
C. $89,900
D. $88,600
_3. Huron has provided the following year-end balances:
Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Trademarks, $12,600

 Goodwill, $11,000
How much are Huron's current assets?
A. $85,900.
B. $71,300.
C. $74,900.
D. $102,100.
4. The Callie Company has provided the following information:
Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie's gross profit?
A. $564,000
B. $188,000
C. $333,000
D. $232,000
5. The Callie Company has provided the following information:
Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie's income before taxes?
A. $564,000
B. $188,000
C. $377,000
D. $232,000

6. Lauer Corporation uses the periodic inventory system and has provided the following information
about one of their laptop computers:

During the year, 750 laptop computers were sold.

What was cost of goods sold using the LIFO cost flow assumption?
A. $717,500
B. $730,000
C. $703,125
D. $725,500
7. Lauer Corporation uses the periodic inventory system and has provided the following information
about one of their laptop computers:

During the year, 750 laptop computers were sold.

What was ending inventory using the LIFO cost flow assumption?
A. $40,000
B. $52,500
C. $60,000
D. $55,000

8. On January 1, 2010, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle has
an estimated 6-year life and a $4,000 residual value. What is the vehicle's book value as of December 31,
2011 assuming Wasson uses the straight-line depreciation method?
A. $12,000
B. $24,000
C. $30,000
D. $28,000