Question-Keller Graduate School of Management AC555ON Financial 7 PassMaster
CPA-00928 Type1 M/C A-D Corr Ans: A PM#1 F 7-01
1. CPA-00928 FARE R03 #4 Page 5
On November 2, 2001, Platt Co. entered into a 90-day futures contract to purchase 50,000 Swiss francs
when the contract quote was $.70. The purchase was for speculation in price movement. The following
exchange rates existed during the contract period:
| 30-day futures | Spot rate | |
| November 2, 2001 | $0.62 | $0.63 |
| December 31, 2001 | 0.65 | 0.64 |
| January 30, 2002 | 0.65 | 0.68 |
What amount should Platt report as foreign currency exchange loss in its income statement for the year ended December 31, 2001?
CPA-00930 Type1 M/C A-D Corr Ans: D PM#3 F 7-01
2. CPA-00930 FARE C98 #1 Page
Fair value disclosure of financial instruments may be made in the:
CPA-00931 Type1 M/C A-D Corr Ans: B PM#4 F 7-01
3. CPA-00931 FARE C98 #2 Page 3
Disclosures about the following kinds of risks are required for most financial instruments.
CPA-00933 Type1 M/C A-D Corr Ans: B PM#5 F 7-01
4. CPA-00933 FARE C98 #3 Page 3
Which of the following assets are financial instruments?
CPA-00934 Type1 M/C A-D Corr Ans: D PM#6 F 7-01
5. CPA-00934 FARE C98 #4 Page 3
Which of the following must be disclosed for most financial instruments?
CPA-00936 Type1 M/C A-D Corr Ans: A PM#7 F 7-01
6. CPA-00936 FARE C98 #5 Page 4
In order for a financial instrument to be a derivative for accounting purposes, the financial instrument
must:
I. Have one or more underlyings.
II. Require an initial net investment.
CPA-00938 Type1 M/C A-D Corr Ans: C PM#8 F 7-01
7. CPA-00938 FARE C98 #6 Page 4
The determination of the value or settlement amount of a derivative involves a calculation which uses:
I. An underlying.
II. A notional amount.
CPA-00941 Type1 M/C A-D Corr Ans: B PM#9 F 7-01
8. CPA-00941 FARE C98 #7 Page 6
On December 31, 199X, the end of its fiscal year, Smarti Company held a derivative instrument which it
had acquired for speculative purposes during November, 199X. Since its acquisition the fair value of the
derivative had increased materially. On December 31, how should the increase in fair value of the
derivative instrument be reported by Smarti in its financial statements?
CPA-00945 Type1 M/C A-D Corr Ans: C PM#11 F 7-01
9. CPA-00945 FARE C98 #9 Page 6
Gains and losses from changes in the fair value of a derivative designated and qualified as a fair value
hedge should be:
CPA-00948 Type1 M/C A-D Corr Ans: A PM#12 F 7-01
10. CPA-00948 FARE C98 #10 Page 5
Qualified derivatives may be used to hedge the cash flow associated with an/a:
CPA-00951 Type1 M/C A-D Corr Ans: C PM#13 F 7-01
11. CPA-00951 FARE C98 #11 Page 6
A change in the fair value of a derivative qualified as a cash flow hedge is determined to be either
effective in offsetting a change in the hedged item or ineffective in offsetting such a change. How should
the effective and ineffective portions of the change in value of a derivative which qualifies as a cash flow
hedge be reported in financial statements?
12. CPA-00954 FARE R96 #8 Page 4
Which of the following risks are inherent in an interest rate swap agreement?
I. The risk of exchanging a lower interest rate for a higher interest rate.
II. The risk of nonperformance by the counterparty to the agreement.
CPA-00958 Type1 M/C A-D Corr Ans: C PM#15 F 7-01
13. CPA-00958 FARE R96 #9 Page 3
If it is not practicable for an entity to estimate the fair value of a financial instrument, which of the
following should be disclosed?
I. Information pertinent to estimating the fair value of the financial instrument.
II. The reasons it is not practicable to estimate fair value.
CPA-00965 Type1 M/C A-D Corr Ans: A PM#16 F 7-01
14. CPA-00965 FARE May 95 #4 Page 3
Disclosure of information about significant concentrations of credit risk is required for:
CPA-04658 Type1 M/C A-D Corr Ans: B PM#17 F 7-01
15. CPA-04658 Released 2005 Page 3
Where in its financial statements should a company disclose information about its concentration of credit
risks?
CPA-05221 Type1 M/C A-D Corr Ans: D PM#26 F 7-01
16. CPA-05221 Released 2006 Page 3
Whether recognized or unrecognized in an entity’s financial statements, disclosure of the fair values of the
entity’s financial instruments is required when:
CPA-05193 Type1 M/C A-D Corr Ans: D PM#27 F 7-01
17. CPA-05193 Released 2006 Page 3
Which of the following financial instruments is not considered a derivative financial instrument?
CPA-00971 Type1 M/C A-D Corr Ans: A PM#2 F 7-02
18. CPA-00971 FARE R99 #10 Page 18
On January 15, 2000, Rico Co. declared its annual cash dividend on common stock for the year ended
January 31, 2000. The dividend was paid on February 9, 2000, to stockholders of record as of January
28, 2000. On what date should Rico decrease retained earnings by the amount of the dividend?
CPA-00976 Type1 M/C A-D Corr Ans: A PM#4 F 7-02
19. CPA-00976 FARE Nov 95 #18 Page 20
Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at
December 31, 1993. During 1994, transactions involving Nest’s common stock were as follows:
May 3 – 1,000 shares of treasury stock were sold.
August 6 – 10,000 shares of previously unissued stock were sold.
November 18 – A 2-for-1 stock split took effect.
Laws in Nest’s state of incorporation protect treasury stock from dilution. At December 31, 1994, how
many shares of Nest’s common stock were issued and outstanding?
CPA-00981 Type1 M/C A-D Corr Ans: A PM#5 F 7-02
20. CPA-00981 FARE Nov 95 #19 Page 13
Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, 1993,
Cyan’s retained earnings were $300,000. In March 1994, Cyan reacquired 5,000 shares of its common
stock at $20 per share. In June 1994, Cyan sold 1,000 of these shares to its corporate officers for $25
per share. Cyan uses the cost method to record treasury stock. Net income for the year ended
December 31, 1994, was $60,000. At December 31, 1994, what amount should Cyan report as retained
earnings?
CPA-01003 Type1 M/C A-D Corr Ans: C PM#7 F 7-02
21. CPA-01003 FARE Nov 95 #21 Page 17
A company issued rights to its existing shareholders without consideration. The rights allowed the
recipients to purchase unissued common stock for an amount in excess of par value. When the rights are
issued, which of the following accounts will be increased?
CPA-01004 Type1 M/C A-D Corr Ans: C PM#8 F 7-02
22. CPA-01004 FARE Nov 95 #22 Page 17
In September 1989, West Corp. made a dividend distribution of one right for each of its 120,000 shares of
outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West’s
$50 variable rate preferred stock at an exercise price of $80 per share. On March 20, 1993, none of the
rights had been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a
result of this redemption, West’s stockholders’ equity was reduced by:
CPA-01007 Type1 M/C A-D Corr Ans: A PM#9 F 7-02
23. CPA-01007 FARE Nov 94 #28 Page 17
East Co. issued 1,000 shares of its $5 par common stock to Howe as compensation for 1,000 hours of
legal services performed. Howe usually bills $160 per hour for legal services. On the date of issuance,
the stock was trading on a public exchange at $140 per share. By what amount should the additional
paid-in capital account increase as a result of this transaction?
CPA-01009 Type1 M/C A-D Corr Ans: A PM#10 F 7-02
24. CPA-01009 FARE Nov 94 #29 Page 9
During 1992, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share.
One share of preferred stock can be converted into three shares of Brad’s $25 par common stock at the
option of the preferred shareholder. On December 31, 1993, when the market value of the common stock
was $40 per share, all of the preferred stock was converted. What amount should Brad credit to
Common Stock and to Additional Paid-in Capital- Common Stock as a result of the conversion?
CPA-01011 Type1 M/C A-D Corr Ans: A PM#11 F 7-02
25. CPA-01011 FARE Nov 94 #30 Page 18
When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend
on the date of:
CPA-01014 Type1 M/C A-D Corr Ans: B PM#12 F 7-02
26. CPA-01014 FARE Nov 94 #31 Page 18
Long Co. had 100,000 shares of common stock issued and outstanding at January 1, 1993. During 1993,
Long took the following actions:
March 15 – Declared a 2-for-1 stock split, when the fair value of the stock was $80 per share.
December 15 – Declared a $.50 per share cash dividend.
In Long’s statement of stockholders’ equity for 1993, what amount should Long report as dividends?
CPA-01018 Type1 M/C A-D Corr Ans: C PM#13 F 7-02
27. CPA-01018 FARE Nov 94 #32 Page 13
If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be:
CPA-01025 Type1 M/C A-D Corr Ans: C PM#14 F 7-02
28. CPA-01025 FARE Nov 94 #37 Page 11
The primary purpose of a quasi-reorganization is to give a corporation the opportunity to:
CPA-01028 Type1 M/C A-D Corr Ans: D PM#15 F 7-02
29. CPA-01028 FARE May 94 #31 Page 18
East Corp., a calendar-year company, had sufficient retained earnings in 1993 as a basis for dividends,
but was temporarily short of cash. East declared a dividend of $100,000 on April 1, 1993, and issued
promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, 1993, had a
maturity date of March 31, 1994, and a 10% interest rate.
How should East account for the scrip dividend and related interest?
CPA-01031 Type1 M/C A-D Corr Ans: B PM#16 F 7-02
30. CPA-01031 FARE May 94 #32 Page 18
On January 2, 1994, Lake Mining Co.’s board of directors declared a cash dividend of $400,000 to
stockholders of record on January 18, 1994, payable on February 10, 1994. The dividend is permissible
under law in the state where Lake is incorporated. Selected balances from its December 31, 1993
balance sheet are as follows:
Accumulated depletion $100,000
Capital stock 500,000
Additional paid-in capital 150,000
Retained earnings 300,000
CPA-01041 Type1 M/C A-D Corr Ans: A PM#18 F 7-02
31. CPA-01041 Th Nov 93 #15 Page 17
On November 2, 1992, Finsbury, Inc. issued warrants to its stockholders giving them the right to purchase
additional $20 par value common shares at a price of $30. The stockholders exercised all warrants on
March 1, 1993. The shares had market prices of $33, $35, and $40 on November 2, 1992, December 31,
1992, and March 1, 1993, respectively. What were the effects of the warrants on Finsbury’s additional
paid-in capital and net income?
CPA-01043 Type1 M/C A-D Corr Ans: C PM#19 F 7-02
32. CPA-01043 PI Nov 93 #48 Page 19
Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12, 1993. Cobb received a
stock dividend of 2,000 shares on March 31, 1993, when the carrying amount per share on Roe’s books
was $35 and the market value per share was $40. Roe paid a cash dividend of $1.50 per share on
September 15, 1993. In Cobb’s income statement for the year ended October 31, 1993, what amount
should Cobb report as dividend income?
CPA-01046 Type1 M/C A-D Corr Ans: A PM#20 F 7-02
33. CPA-01046 PII May 93 #1 Page 13
Rudd Corp. had 700,000 shares of common stock authorized and 300,000 shares outstanding at
December 31, 1991. The following events occurred during 1992:
January 31 Declared 10% stock dividend
June 30 Purchased 100,000 shares
August 1 Reissued 50,000 shares
November 30 Declared 2-for-l stock split
At December 31, 1992, how many shares of common stock did Rudd have outstanding?
CPA-01048 Type1 M/C A-D Corr Ans: D PM#21 F 7-02
34. CPA-01048 PII May 93 #2 Page 13
Beck Corp. issued 200,000 shares of common stock when it began operations in 1990 and issued an
additional 100,000 shares in 1991. Beck also issued preferred stock convertible to 100,000 shares of
common stock. In 1992, Beck purchased 75,000 shares of its common stock and held it in Treasury. At
December 31, 1992, how many shares of Beck’s common stock were outstanding?
CPA-01050 Type1 M/C A-D Corr Ans: A PM#22 F 7-02
35. CPA-01050 Th May 93 #2 Page 18
A property dividend should be recorded in retained earnings at the property’s:
36. CPA-01052 PII May 93 #3 Page 11
The following changes in Vel Corp.’s account balances occurred during 1992:
Increase
Assets $89,000
Liabilities 27,000
Capital stock 60,000
Additional paid-in capital 6,000
Except for a $13,000 dividend payment and the year’s earnings, there were no changes in retained
earnings for 1992. What was Vel’s net income for 1992?
CPA-01056 Type1 M/C A-D Corr Ans: B PM#24 F 7-02
37. CPA-01056 PII May 93 #4 Page 9
At December 31, 1991 and 1992, Carr Corp. had outstanding 4,000 shares of $100 par value 6%
cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, 1991,
dividends in arrears on the preferred stock were $12,000. Cash dividends declared in 1992 totaled
$44,000. Of the $44,000, what amounts were payable on each class of stock?
CPA-01058 Type1 M/C A-D Corr Ans: A PM#25 F 7-02
38. CPA-01058 PII May 93 #5 Page 11
At December 31, 1991, Eagle Corp. reported $1,750,000 of appropriated retained earnings for the
construction of a new office building, which was completed in 1992 at a total cost of $1,500,000. In 1992,
Eagle appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000
of cash was restricted for the retirement of bonds due in 1993. In its 1992 balance sheet, Eagle should
report what amount of appropriated retained earnings?
CPA-01061 Type1 M/C A-D Corr Ans: A PM#26 F 7-02
39. CPA-01061 PI May 93 #6 Page 8
On April 1, 1993, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
• Common stock, no par, $1 stated value, 20,000 shares originally issued for $30 per share.
• Preferred stock, $10 par value, 6,000 shares originally issued for $50 per share.
Hyde’s April 1, 1993, statement of stockholders’ equity should report:
CPA-01094 Type1 M/C A-D Corr Ans: C PM#27 F 7-02
40. CPA-01094 Th May 93 #10 Page 15
In 1990, Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock
transactions occurred until March 31, 1992, when Fogg acquired some of the issued shares for $20 per
share and retired them. Which of the following statements correctly states an effect of this acquisition
and retirement?
CPA-01095 Type1 M/C A-D Corr Ans: D PM#28 F 7-02
41. CPA-01095 PI May 93 #11 Page 15
On December 1, 1992, Line Corp. received a donation of 2,000 shares of its $5 par value common stock
from a stockholder. On that date, the stock’s market value was $35 per share. The stock was originally
issued for $25 per share. By what amount would this donation cause total stockholders’ equity to
decrease?
CPA-01097 Type1 M/C A-D Corr Ans: D PM#29 F 7-02
42. CPA-01097 Th May 93 #13 Page 9
Quoit, Inc. issued preferred stock with detachable common stock warrants. The issue price exceeded the
sum of the warrants’ fair value and the preferred stock’s par value. The preferred stock’s fair value was
not determinable. What amount should be assigned to the warrants outstanding?
CPA-01099 Type1 M/C A-D Corr Ans: D PM#30 F 7-02
43. CPA-01099 Th May 93 #14 Page 22
In a compensatory stock option plan for which the grant and exercise dates are different, the stock
options outstanding account should be reduced at the:
CPA-04681 Type1 M/C A-D Corr Ans: A PM#31 F 7-02
44. CPA-04681 Released 2005 Page 19
Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30%
stock dividend. The market value was $50 per share, the par value was $10, and the average issue price
was $30 per share. By what amount will Universe decrease stockholders’ equity for the dividend?
CPA-04682 Type1 M/C A-D Corr Ans: B PM#32 F 7-02
45. CPA-04682 Released 2005 Page 13
Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year.
Murphy reacquired 30,000 of those shares at a cost of $15 per share, and recorded the transaction using
the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share, and recognized a
$50,000 gain on its income statement on May 20. Which of the following statements is correct?
CPA-05228 Type1 M/C A-D Corr Ans: B PM#33 F 7-02
46. CPA-05228 Released 2006 Page 13
Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The
par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares
at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were
reissued later in the current year at $10 per share. Porter used the cost method to account for its equity
transactions. What amount should Porter report as paid-in capital related to its treasury stock
transactions on its balance sheet for the current year?
CPA-05442 Type1 M/C A-D Corr Ans: A PM#35 F 7-02
47. CPA-05442 Released 2007 Page 13
Baker Co. issued 100,000 shares of common stock in the current year. On October 1, Baker
repurchased 20,000 shares of its common stock on the open market for $50.00 per share. At that date,
the stock’s par value was $1.00 and the average issue price was $40.00 per share. Baker uses the cost
method for treasury stock transactions. On December 1, Baker reissued the stock for $60.00 per share.
What amount should Baker report as treasury stock gain at December 31?
CPA-01102 Type1 M/C A-D Corr Ans: A PM#1 F 7-03
48. CPA-01102 FARE R01 #9 Page 29
Deck Co. had 120,000 shares of common stock outstanding at January 1, 1998. On July 1, 1998, it
issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of
nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to
calculate 1998 earnings per share?
CPA-01105 Type1 M/C A-D Corr Ans: B PM#2 F 7-03
49. CPA-01105 FARE C98 #10 Page 29
Which of the following items, if dilutive and if other conditions are met, would enter into the determination
of the weighted average shares outstanding to be used in the basic earnings per share (basic EPS)
calculation?
I. Stock options.
II. Contingent shares.
CPA-01107 Type1 M/C A-D Corr Ans: C PM#3 F 7-03
50. CPA-01107 FARE C98 #11 Page 28
Elizabeth Corporation acquired Allen Corporation at the end of 19X8. Under terms of the acquisition
agreement, Elizabeth agreed to provide former Allen shareholders 1,000 additional shares of Elizabeth
stock for each new retail outlet opened during 19X9. Two new outlets were opened during 19X9:
One on May 1, 19X9
One on September 1, 19X9
What number of shares related to the openings of the new retail outlets should enter into the calculation
of Elizabeth’s basic earnings per share as of December 31, 19X9, the end of its fiscal year?
CPA-01123 Type1 M/C A-D Corr Ans: A PM#4 F 7-03
