1. Which of the following transactions would cause an asset to be recorded on a business’s balance sheet based upon the "probable future economic benefit’ criterion?

a. $1 million spent on an advertising campaign

b. $5 million spent to search offshore for oil where it is believed that a $500 million deposit can be found.

c. Filing of a lawsuit claiming $10 million for patent infringement

d. Donation of a parcel of land by the city to the business providing it will build a plant on the land and employ 250 people.

2. Which of the following transactions will cause an asset to be recorded based upon the "owned and controlled by a particular entity" criterion?

a. XYZ Co. acquires 75% of the voting stock of ABC corp.

b. Mountain Airways leases (rents) aircraft on a seasonal basis

c. Costco Wholesale has a store in Chico that is a superior location due to the excellent traffic flow in the area.

d. Research and development projects are believed to yield patents that could be very valuable.

3. Which of the following transactions will cause an asset to be recorded on the balance sheet based upon the "as a result of a past transaction" criterion.

a. A contract to create special software for a customer

b. Congress has passed legislation favorable to a company’s sale of its safety products

c. A claim is made on an insurance policy for $100,000 for damages from a fire.

d. A partner in a business just inherited a large sum making it possible for him to contribute additional capital to the business.

4. The difference between the accounting definition of "asset" and the everyday use of the word is:

a. There is no difference

b. The accounting definition rests on economic effects of an asset such as future cash flows

c. Accounting assets are tangible whereas general use refers to intangible assets

d. None of the above

5. A liability is generally:

a. Not of concern unless created from an equipment or building purchase

b. Created when an owner borrows money to pay off a gambling debt

c. A claim against the assets of the entity

d. Paid off within the current operating period

6. A use of the accrual basis of accounting would be:

a. To record a liability for the wages earned by employees but not yet paid to them

b. To record a legal expense involving litigation only after the case is settled

c. To record an asset purchased on credit only after it is paid off

d. To record income tax expense in the final month of the fiscal year when it is more like to make an accurate estimate of the full year expense.

7. For expenses, the difference between accrual and cash bases is:

a. Expenses are recorded earlier in cash basis than in accrual basis

b. Expenses are recorded at the same time under each method

c. Expenses are recorded later under the cash basis

d. None of the above answers accurately describes the difference.

8. For a lawsuit against a company to be disclosed in that company’s footnotes to financial statements:

a. There must be an agreed out-of-court settlement

b. The loss is probable

c. It is reasonably possible that the plaintiff will win the case

d. The judge appears to be favorable to the plaintiff’s case.

9. Up-In-Smoke Cigar Co. has been sued for $10 million by members of a cigar club for illnesses its members sustained as a result of pesticides in the tobacco leaves. Some of the members will testify that they have had to miss work on several occasions. The company replied that the suit is without merit because two independent labs have tested the company’s manufacturing processes and found no trace of pesticide residue on the tobacco leaves. How should this loss contingency be handled?

a. No disclosure

b. Disclose in a footnote

c. Record the $10 liability and loss based upon conservatism

d. Record $1 million liability and losses because of information that club members would probably settle out of court for that sum.

10. High-Rev Washing Machine Company give a 24-month in-home warranty on all of its products. Even though its products are very reliable, High-Rev estimates that the average warranty expense will be $50 for each unit sold in 2001. If 200,000 washers were sold in 2001, what warranty expense should be recorded in 2001,2002,and 2003 respectively?

a. 0; $5,000,000; $5,000,000

b. $2,500,000; $5,000,000; $2,500,000

c. $10,000,000; 0; 0

d. 0; $10,000,000; 0

11. Sharkless Finance Co. agreed to provide working capital to Plentiful Inc. in the form of a $100,000 loan at 10% interest. Sharkless charged $5,000 as a loan origination fee (basically prepaid interest) in addition to the 10% interest. It is 12/31/2001 and 6 months after the 24 month loan granted. What interest should be reported by Plentiful?

a. $5,000

b. $10,000

c. $25,000

d. $6,250