12/27/2015 Wiley CMA Test Bank Part 1

Question 1:
(1A2-W012)

The suppliers of a company provide cash discounts at 1/10, n/40. Other suppliers offer
cash discounts of 3/10, n/40. Assuming the current market borrowing rate is 15%,
which of the following decisions should the company take?
The company should not avail itself of the cash discount as the scheme
represents an opportunity cost of 12.29%, which is lower than the market
borrowing rate.
The company should avail itself of the cash discount as the scheme represents an
opportunity cost of 37.63%, which is higher than the market borrowing rate.
The company should make payments in 35 days to break even with the market
rate of borrowing.
The company should not avail itself of the cash discount as the scheme
represents an opportunity cost of 37.63%, which is higher than the market
borrowing rate.

The opportunity cost is calculated as follows:

Discount % 365
Effective Cost
= × (Net Period −
of Discount (100 − Discount %)
Discount Period)

1% 365
= ×
(100 − 1)% (40 − 10) = 12.29%

Since, the opportunity cost of the discount is lower than the market rate of
borrowing, the company will not benefit by availing itself the cash discount.

Question 2:
(1A2-W007)

Warner Machines missed recording purchases worth $10,000 in the current year's
income statement. While finalizing the financial statements, the company's
accountant detected the error and partially corrected it. Under which of the following
situations will the company report lower than actual net income?
If the accountant has reduced cash by $10,000.
If the accountant has only added missing purchases worth $10,000 to the cost of
goods sold.
If the accountant has only increased accounts payable by $10,000.
If the accountant has reduced inventory by $10,000.

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When the company misses recording a purchase but includes the purchase as part of
cost of goods sold (COGS) in the income statement, COGS will be understated and
the net income will be overstated. The missing $10,000 should have been included
both in purchases and in ending inventory, which will result in the COGS being
unaffected.

Question 3:
(1A2-W004)

Rogers Electronics is planning to make a market in the company's stock. The

company's CFO suggests the reacquisition of shares. Which of the following is most
likely to happen if the CFO's suggestion is implemented?
The risk of takeovers by competitors will increase.
This will hinder exercise of employee stock options.
The stock price will increase.
This could serve as an indication of the company's negative outlook about its
future performance.

Reacquisition reduces the number of shares a company has outstanding without

altering the value of the company. Therefore, the stock price of the company will
increase.

Question 4:
(1A2-W015)

A customer of Irving Gemstones owed $20,000 on account. Due to nonreceipt of

payments after 5 months of the due date, the amount was written off as doubtful using
the direct write-off method. After 2 years, the customer paid the full amount due. How
should this transaction be journalized?
The amount received should be debited to Cash and credited to the Accounts
Receivable account.
The amount received should be debited to Accounts Receivable and credited to
the Allowance for Doubtful accounts.
The amount received should be debited to Cash and credited to a revenue
account, such as Uncollectible Accounts Recovered.
The amount received should be debited to the Allowance for Doubtful accounts
and credited to Accounts Receivable.

If an account written off using the direct write-off method is subsequently collected,
the amount is debited to Cash and credited to a revenue account, such as
Uncollectible Accounts Recovered.

Question 5:
(1A2-W017)

The management accountant of Tillboard Inc. has recognized a sale of receivables or

factoring in the books for the current year. In doing so, he considered these three
factors:

1) Ability of the buyer to sell the asset.

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2) Surrender of control.
3) Asset outside the reach of the seller.

Under which of the following situations can the decision of the management
accountant go wrong?

The seller should be able to use the asset as collateral.

The asset is outside the reach of the creditors of the company.
The company has an agreement to repurchase the asset before its maturity.
The seller is liable for any loss realized or gain earned on the asset.

The asset should be outside the reach of the seller and the company's creditors.

Question 6:
(1A2-W009)

Shelton Devin Corp. has two subsidiaries, of which 30% of ownership in each
subsidiary lies with Shelton Devin. The CEO of the company is not in favor of
presenting consolidated financial statements. Based on the information, which of the
following is most likely true?
The decision of the CEO is correct as companies are required to issue
consolidated statements only when the ownership exceeds 50%.
The decision of the CEO is wrong as companies are required to issue consolidated
statements when the ownership exceeds 20%.
The decision of the CEO is wrong as companies are required to issue consolidated
statements only if they hold more than ten subsidiaries.
The decision of the CEO is correct as companies are required to issue
consolidated statements when they have three or more subsidiaries.

As required by ASC 810 Consolidation (formerly SFAS No. 94, Consolidation of All
Majority-Owned Subsidiaries), all companies with subsidiaries are required to issue
consolidated statements including each subsidiary they control, usually meaning
50% or more ownership.

Question 7:
(1A2-W014)

Elsa Fashions wants to eliminate its credit department. It also wants to get cash
immediately and continue all operational activities directly with the customers. Which
of the following approaches would be the best to fulfill the company's objectives?
Factoring.
Securitization.
Sale with recourse.
Special investment vehicle.

Companies that use factoring get immediate cash and can eliminate their credit
department, because factors usually take over these tasks. The company continues
all operational activities directly with the customers, such as order placement and
fulfillment.
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Question 8:
(1A2-W002)

Claire Enterprises has $150,000 in accounts receivable at the end of Year 1, and it
estimates its bad debts to be 5% of the receivables. Hence, the accountant reports
$7,500 as bad debts and the net realizable value as $142,500. Under which of the
following circumstances will the amount of bad debts reported most likely reduce?
If the company shortens the credit period allowed.
If the company lengthens the credit period allowed.
If the allowance for doubtful accounts has a credit balance of $1,500.
If the allowance for doubtful accounts has a debit balance of $1,500.

If there is an existing credit balance in the allowance for doubtful accounts, then the
bad debt expense should be adjusted downward, as it is necessary to adjust the
balance only to the desired level. Therefore, the correct balance will be $7,500 −
$1,500 = $6,000.

Question 9:
(1A2-W021)

Amanda Williams, a financial analyst, is converting a last in, first out (LIFO) income
statement to a first in, first out (FIFO) income statement to value a stock. She finds it
difficult to calculate make the adjustments and develops a mathematical expression
to calculate FIFO cost of goods sold (COGS). Which is the most likely expression that
she can derive to calculate FIFO COGS for all companies?
FIFO COGS = LIFO COGS + Change in LIFO reserve − Tax expenses
FIFO COGS = LIFO COGS − Change in LIFO reserve
LIFO COGS = FIFO COGS − Change in LIFO reserve
FIFO COGS = LIFO COGS − Change in LIFO reserve + Tax expenses

In simple terms, LIFO reserve is the difference between FIFO inventory and LIFO
inventory. Hence the difference is LIFO COGS and FIFO COGS will be the change in
LIFO reserve. FIFO COGS = LIFO COGS − Change in LIFO reserve

Question 10:
(1A2-W003)

The latest financial statements of Darlene Properties show 140,000 outstanding

shares, par value $10. The current market value per share is $25. At the beginning of
current year, the company reacquired 10,000 shares at $4 per share. The company
follows the cost method for the accounting of treasury stock. The current year's books
of accounts show the value of outstanding shares as follows:

Common stock, $10 par $1,400,000

Less: Treasury stock 100,000
Net common stock, $10 par $1,300,000

The company's CFO did not approve the financial statements. The most likely reason
for CFO's disapproval is that:

The treasury stock is incorrectly valued based on par value instead of being
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valued at the acquisition price.

The treasury stock is incorrectly valued based on par value instead of being
valued at the current market rate.
The par value of the treasury stock should be presented as a deduction from par
value of issued shares of the same class.
The treasury stock should be reported as an asset.

In the cost method, the treasury stock account is debited for the cost of the shares
reacquired. Therefore, the value of treasury stocks should be $40,000 (10,000 shares
× $4), valued at the acquisition price.

Question 11:
(1A2-W020)

The management accountant of Clifford Products has decided to value inventory using
last in, first out (LIFO) to reduce its tax expense. Under which of the following
situations can the decision of management accountant go wrong?
When the LIFO reserve has zero balance during rising prices.
When the prices are rising and LIFO liquidation has occurred.
When LIFO includes inventory holding gains in the net income.
When the company uses LIFO only for external financial reporting and average
cost method for internal reporting.

During rising prices, LIFO liquidation results in higher levels of income, thereby
increasing the tax expense. Hence, LIFO liquidations can reduce the benefits of
valuation of inventory using LIFO.

Question 12:
(1A2-W019)

Time Spent:
Bowman 1:36
Devices values Score
its inventory
16 Answered using31% Restart
last in, first End
out (LIFO) method. For the
current year, the inventory
0 usage exceeded the purchases. Assuming the prices are
Unanswered
falling, how will this situation affect net income for the year?
Net income will be lower due to higher LIFO liquidation.
Net income will be lower due to lower LIFO liquidation.
Net income will be higher due to lower LIFO liquidation.
Net income will be higher due to higher LIFO liquidation.

If usage of goods exceeds purchases during a period, a situation called LIFO

liquidation can occur. If prices are falling, LIFO liquidation results in lower income
levels being reported and likely lower taxes as well.

Question 13:
(1A2-W006)

Calvin Software has invested in the equity stock of BioTech Corp. Its holdings
consisted of 35% of the voting stock. The CFO suggests acquiring more stock of
BioTech Corp. Based on the information, which of the following will be true?
Additional acquisitions beyond 15% will require Calvin Software to issue
consolidated financial statements.
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Calvin's total value will decrease as incidental costs of acquisition must be

subtracted when holdings exceed 35%.
The circumstances leading to the decision to acquire additional shares shall be
disclosed in the notes to the financial statements.
Any additional acquisition of assets up to 20% should be classified as held to
maturity.

When an investor acquires an interest in the investee, the acquired percentage of

voting stock determines the method of accounting. If the holdings are greater than
50%, the investor company needs to issue consolidated financial statements.

Question 14:
(1A2-W022)

Brendan Bishop Scientific is considering acquisition of a plant in exchange of the par

value of its stock. However, the CFO is not in favor of the acquisition. Which of the
following is the most likely reason for the CFO's disagreement?
The company has fewer amounts of long-term assets.
The company's stock is most likely overpriced.
It is difficult to estimate the net realizable value of the asset and, hence, difficult
to estimate the annual depreciation expenses.
The true cost of the asset cannot be determined as the stock's trading activity
should also be considered.

When property, plant, and equipment assets are acquired through the issuance of
stock or other securities, the par value of the stock will be inadequate to measure the
true cost of the property. Instead, if the stock is being actively traded, its current
market value is used. If the stock value cannot be determined because the stock is
not actively traded, an estimate of the market value of the property should be made
and used as the basis for recording the value of both the asset and the issuance of
the stock.

Question 15:
(1A2-W008)

Sandra Bellucci, a financial analyst, is analyzing inventory of companies from four

different industries: consumer goods, sports goods manufacturers, electronics, and
aircraft manufacturers. Assuming that the inventory valuation methods reflect the
actual flow of inventory and the inventory includes finished goods only, which of the
following industries will most likely have zero last in, first out (LIFO) reserve?
Consumer goods.
Sports goods manufacturers.
Electronics.
Aircraft manufacturers.

Since this industry deals with high-value and customized orders, the production
usually starts after the order is received. Since there will not be any equipment lying
in inventory, the inventory balance will be zero, irrespective of the method of
valuation used. Therefore, the balance in LIFO reserve will most likely be zero.

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Question 16:
(1A2-W023)

Under which of the following situations will a company appropriate, or restrict, its
retained earnings?
When the company has potentially dilutive shares outstanding.
When the company has disclosed contingent liabilities in footnotes.
When the dividends paid by the company are more than the industry average.
When the fair value of one or more securities cannot be determined.

Reasons that a firm might appropriate, or restrict, retained earnings include:

Loss contingencies (such as pending lawsuits).

Legal restrictions related to treasury stock.
Contractual restrictions related to bond indentures.
Plant expansion or debt retirement.

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