Question 1

At December 31, 2007, Quirk Company had 2,000,000 shares of common stock outstanding. On January 1, 2008, Quirk issued 500,000 shares of preferred stock which were convertible into 1,000,000 shares of common stock. During 2008, Quirk declared and paid $1,500,000 cash dividends on the common stock and $500,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2008, was $5,000,000. Assuming an income tax rate of 30%, what should be diluted earnings per share for the year ended December 31, 2008? (Round to the nearest penny.)

Accepted Answer

A)  $1.50 
B)  $1.67 
C)  $2.50 
D)  $2.08

Question 2

Peine Co. had 300,000 shares of common stock issued and outstanding at December 31, 2007. No common stock was issued during 2007. On January 1, 2008, Peine issued 200,000 shares of nonconvertible preferred stock. During 2008, Peine declared and paid $100,000 cash dividends on the common stock and $80,000 on the preferred stock. Net income for the year ended December 31, 2008 was $620,000. What should be Peine's 2008 earnings per common share?

Accepted Answer

A)  $2.07 
B)  $1.80 
C)  $1.73 
D)  $1.47

Question 3

On December 31, 2008, Ellworth, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $1,500,000 increase in the beginning inventory at January 1, 2008. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is

Accepted Answer

A)  $0. 
B)  $450,000. 
C)  $1,050,000. 
D)  $1,500,000.

Question 4

The FASB requires companies to use the prospective (in the future) approach for reporting changes in accounting principles.

Accepted Answer

A) True 
 B)False

Question 5

A change in accounting principle results when a company changes from one generally accepted accounting principle to another.

Accepted Answer

A) True 
 B)False

Question 6

On January 1, 2005, Neer Co. purchased a patent for $595,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2020. During 2008, Neer determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2008?

Accepted Answer

A)  $357,000 
B)  $408,000 
C)  $420,000 
D)  $436,375

Question 7

Which of the following is not considered a direct effect of a change in accounting principle?

Accepted Answer

A)  An employee profit-sharing plan based on net income when a company uses the percentage-of-completion method. 
B)  The inventory balance as a result of a change in the inventory valuation method. 
C)  An impairment adjustment resulting from applying the lower-of-cost-or-market-test to the adjusted inventory balance. 
D)  Deferred income tax effects of an impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance.

Question 8

The following information is available for Alley Corporation:
 The number of shares to be used in computing earnings per common share for 2008 is

Accepted Answer

A)  2,825,500. 
B)  2,737,500. 
C)  2,725,000. 
D)  1,706,250.

Question 9

Earnings per share data are required for each of the following: (a) income from continuing operations, (b) income before extraordinary items, and (c) net income.

Accepted Answer

A) True 
 B)False

Question 10

Handy Company purchased equipment that cost $750,000 on January 1, 2006. The entire cost was recorded as an expense. The equipment had a nine-year life and a $30,000 residual value. Handy uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2008. Handy is subject to a 40% tax rate.
-Handy's net income for the year ended December 31, 2006, was understated by

Accepted Answer

A)  $402,000. 
B)  $450,000. 
C)  $670,000. 
D)  $750,000.

Exam 18: Additional Reporting Issues

The FASB requires companies to use the prospective (in the future) approach for reporting changes in accounting principles.

A change in accounting principle results when a company changes from one generally accepted accounting principle to another.

Which of the following is not considered a direct effect of a change in accounting principle?

The following information is available for Alley Corporation: The number of shares to be used in computing earnings per common share for 2008 is

Earnings per share data are required for each of the following: (a) income from continuing operations, (b) income before extraordinary items, and (c) net income.