Question 1

Prior to the financial year end of 31 July 20X9, Cannon Co has received a claim of $100,000 from a supplier for providing poor quality goods which have damaged the supplier’s plant and equipment. Cannon Co’s lawyers have stated that there is a 20% chance that Cannon will successfully defend the claim. Which of the following is the correct accounting treatment for the claim in the financial statements for the year ended 31 July 20X9?

Options :

A : Cannon should neither provide for nor disclose the claim

B : Cannon should disclose a contingent liability of $100,000

C : Cannon should provide for the expected cost of the claim of $100,000

D : Cannon should provide for an expected cost of $20,000

Answer: C

Question 2

Which of the following requires filing a gift tax return if the transfer exceeds the available annual gift tax exclusion?

Options :

A : Medical expenses paid directly to a physician on behalf of an individual unrelated to the donor.

B : Tuition paid directly to an accredited university on behalf of an individual unrelated to the donor.

C : Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor.

D : Campaign expenses paid to a political organization.

Answer: C

Question 3

Drillfast is a drilling corporation with operations at oil rigs around the world. For the 2014 annual report, which business segment should be reported as an operating segment?

Options :

A : South American segment, which contributes 8% of total revenues, 5% of profits and accounts for 9% of assets. South American operating manager reports to the chief operating officer.

B : African segment, which contributes 9% of the company’s assets, 16% of total revenues, and 18% of profits. The African operating manager reports to the British operating manager.

C : Australian segment, which contributes 10% of total revenues, 2% of assets, and 4% of profits. The Australian manager reports to the chief operating officer.

D : Texas based corporate headquarters

Answer: C

Question 4

The target capital structure of Cerberus Co. is 50% debt, 10% preferred equity, and 40% common equity. The interest rate on debt is 8%, the yield on the preferred is 10%, the cost of common equity is 12%, and the tax rate is 40%. Cerberus does not anticipate issuing any new stock. What is Cerberus' weighted-average cost of capital?

Options :

A : 7.40%

B : 8.20%

C : 9.00%

D : 9.80%

Answer: B

Question 5

Knickerbocker Corp. issued $20 million of long-term debt in the current year. What is a major advantage to Knickerbocker with the debt issuance?

Options :

A : The reduced earnings per share possible through financial leverage.

B : The relatively low after-tax cost due to the interest deduction.

C : The increased financial risk resulting from the use of the debt.

D : The reduction of the shareholders' control over the company.

Answer: B

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