Practice Test Problems
Each of the following should be answered in
grammatically correct, complete sentences.
What is the definition of “liability?”
What is the matching principle and how does it affect the measurement of income?
When should revenue be recognized?
Each of the following represents a decision made by CPP, Inc. State whether you agree or disagree
and explain your answer using explicit accounting terminology. Be sure to give a complete answer.
During 2007, CPP, Inc. sold 10,000 options for $50,000. Each option gave the holder the right to
purchase one share of stock from CPP, Inc. for $45. CPP, Inc. made the following entry:
Stock Option Liability
During December, 2006, CPP, Inc. paid $10,000,000 for advertising that took place in December,
2006. CPP, Inc. believes that the advertising increased sales revenue by $4,000,000 in December,
2006 and will increase 2007 sales revenue by $16,000,000. Because CPP, Inc. expects the benefit