11.11.18

Question 1

What information about capital assets should be included in the summary of significant accounting policies in the notes to the financial statements of a state or governmental entity?

Composition:
Depreciation method:

Answer 1

No
Yes

Disclosure of significant accounting policies is required when (1) a selection has been made from existing acceptable alternatives; (2) a policy is unique to the industry in which the government operates, even if the policy is predominantly followed in that industry; and (3) GAAP have been applied in an unusual or innovative way. For example, a depreciation method is a selection from existing acceptable alternatives and should be included in the summary of significant accounting policies. But financial statement disclosure of accounting policies should not duplicate details presented elsewhere in the financial statements, such as the composition of inventories and capital assets.

Question 2

Which of the following should be disclosed in the summary of significant accounting policies?

Composition of inventories:
Maturity dates of long-term debts:

Answer 2

No
No

Certain items are commonly required disclosures in a summary of significant accounting policies. These items include (1) the basis of consolidation, (2) depreciation methods, (3) amortization of intangibles, (4) inventory pricing, (5) recognition of revenue from contracts with customers, and (6) recognition of revenue from leasing operations. But financial statement disclosure of accounting policies should not duplicate details presented elsewhere in the financial statements. Details about the composition of inventories and the maturity dates of long-term debts are disclosed elsewhere in the financial statements. Thus, the summary of significant accounting policies should refer to these details but need not duplicate them.

Question 3

Oak Co. offers a standard 3-year warranty against manufacturing defects on its products. Oak previously estimated warranty costs to be 2% of sales. Due to a technological advance in production at the beginning of Year 4, Oak now believes 1% of sales to be a better estimate of warranty costs. Warranty costs of $80,000 and $96,000 were reported in Year 2 and Year 3, respectively. Sales for Year 4 were $5 million. What amount should be disclosed in Oak’s Year 4 financial statements as warranty expense?

Answer 3

$50,000

An assurance-type warranty creates a loss contingency. The change affects only Year 4 sales. No change in the previously recorded estimates is necessary. Thus, the debit to warranty expense is $50,000 ($5,000,000 sales × 1%). Estimated liability under warranties is credited for $50,000.

Question 4

The sale of available-for-sale debt securities should be accounted for on the statement of cash flows as a(n)

Answer 4

Investing activity.

Investing activities include acquiring and disposing of debt or equity instruments.

Question 5

Fact Pattern: The city of Lud formally integrates budgetary accounts into its general fund. Lud uses an internal service fund to account for the operations of its data processing center, which provides services to Lud’s other governmental units.
Lud’s current year expenditures from the general fund include payments for structural alterations to a firehouse and furniture for the mayor’s office.

To report the billing for data processing services provided to Lud’s other governmental units in the statement of revenues, expenses, and changes in fund net position, which of the following should be credited in the internal service fund?

Answer 5

Operating revenues.

The statement of revenues, expenses, and changes in fund net position is the operating statement for proprietary funds (enterprise funds and internal service funds), which use the accrual basis of accounting. This statement distinguishes operating and nonoperating revenues and expenses. Internal service funds may be used for activities that provide goods and services to other subunits of the primary government and its component units or to other governments on a cost-reimbursement basis. The provision by an internal service fund of data processing services to other units of the same reporting entity is an interfund service provided and used. These services result in revenues to seller funds. Given that the principal purpose of the internal service fund is to provide data processing services to other subunits of the primary government, the revenues are classified as operating.

Question 6

On January 1, Year 1, Wolf Corp. issued its 10% bonds in the face amount of $1 million. They mature on January 1, Year 11. The bonds were issued for $1,135,000 to yield 8%, resulting in bond premium of $135,000. Wolf uses the interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, Year 1, Wolf’s adjusted unamortized bond premium should be

Answer 6

$125,800.

Under the interest method, interest expense is the carrying amount of the bonds at the beginning of the interest period times the market (yield) rate of interest. For the first year, interest expense is $90,800 ($1,135,000 carrying amount × 8% yield rate). The periodic interest payment is $100,000 ($1,000,000 face amount × 10% coupon rate). The $9,200 ($100,000 – $90,800) difference is the amount of premium to be amortized. Thus, the $135,000 balance in the premium account at the beginning of the year should be reduced by $9,200 to an adjusted unamortized bond premium at year end of $125,800.

Question 7

Under IFRS, which of the following statements is true regarding remeasurements of plan assets by an entity that sponsors a defined benefit pension plan?

Answer 7

They must be recognized in OCI and must not be reclassified to profit or loss in subsequent periods.

The remeasurement of plan assets for the period is the return on plan assets minus interest income on plan assets. Remeasurements of plan assets are recognized in OCI and are never reclassified to profit or loss.

Question 8

On March 1, Year 1, Cain Corp. issued, at 103 plus accrued interest, 200 of its 9%, $1,000 bonds. The bonds are dated January 1, Year 1, and mature on January 1, Year 11. Interest is payable semiannually on January 1 and July 1. Cain paid bond issue costs of $10,000. Cain should realize net cash receipts from the bond issuance of

Answer 8

$199,000.

The face amount of the bonds is $200,000 (200 bonds × $1,000 face amount). Excluding interest, the proceeds from the issuance of the bonds were $206,000 ($200,000 × 103%). Accrued interest for 2 months (January 1 through March 1) was $3,000 ($200,000 face amount × 9% coupon rate × 2/12). The net cash receipts from the issuance of the bonds were therefore equal to $199,000 ($206,000 bond proceeds + $3,000 accrued interest – $10,000 bond issue costs).

Question 9

Which of the following assets of a nongovernmental not-for-profit charitable entity must be depreciated?

Answer 9

A freezer costing $150,000 for storing food for the soup kitchen.

NFPs recognize depreciation for most property and equipment. Exceptions are land used as a building site and certain individual works of art and historical treasures with extremely long useful lives. A freezer is a long-lived tangible asset that is depreciable equipment.

Question 10

Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to

Answer 10

Accrual accounting.

A basic feature of financial accounting is that it is an accrual system under which the determination of periodic earnings and financial position is dependent upon the measurement of all economic resources and obligations (e.g., receivables and payables) and changes in them as the changes occur.

Question 11

What factor must be present to use the units-of-production (activity) method of depreciation?

Answer 11

Total units to be produced must be estimated.

The units-of-production depreciation method allocates asset cost based on the level of production. As production varies, so will the credit to accumulated depreciation. Each unit is charged with a constant amount of depreciation equal to the cost of the asset minus salvage value, divided by the total units expected to be produced.

Question 12

The revenue recognition from contracts with customers standard (ASC 606) provides a model that .

List A:
List B:

Answer 12

Singles principles-based
Eliminates most current industry-specific guidance

The revenue recognition standard provides a single principles-based model (the five-step approach) that can be applied to all contracts with customers regardless of the industry-specific or transaction-specific fact pattern.

Question 13

Beach City’s internal service fund received an interfund transfer of $100,000 in cash from the general fund. This transfer should be reported in Beach’s proprietary fund statement of revenues, expenses, and changes in fund net position as

Answer 13

The final item before the change in net position.

Nonreciprocal interfund activity is similar to nonexchange transactions. Interfund transfers are one-way asset flows with no repayment required. In a governmental fund, a transfer is an other financing use (source) in the transferor (transferee) fund. In a proprietary fund’s statement of revenues, expenses, and changes in fund net position, transfers should be reported separately after nonoperating revenues and expenses. This component includes (1) capital contributions, (2) additions to endowments, and (3) special and extraordinary items. Transfers are presented as the final item before the change in net position.

Question 14

On January 1, Year 4, Hook Oil Co. sold equipment with a carrying amount of $100,000 and a remaining useful life of 10 years to Maco Drilling for $150,000. Hook immediately leased the equipment back under a 10-year capital lease with a present value of $150,000. It will depreciate the equipment using the straight-line method. Hook made the first annual lease payment of $24,412 in December Year 4. In Hook’s December 31, Year 4, balance sheet, the unearned gain on the equipment sale should be

Answer 14

$45,000.

A profit or loss on the sale in a sale-leaseback transaction is ordinarily deferred and amortized in proportion to the amortization of the leased asset if the leaseback is classified as a capital lease. At 12/31/Year 4, a gain proportionate to the lease amortization will be recognized [($150,000 – $100,000) ÷ 10 years = $5,000]. Hence, the deferred gain will be $45,000 ($50,000 – $5,000).

Question 15

A firm’s ending inventory balance was overstated by $1,000. Which of the following statements is correct according to a periodic inventory system?

Answer 15

The retained earnings would be overstated by $1,000.

Cost of goods sold (COGS) equals beginning inventory, plus purchases during the period, minus ending inventory. Thus, a $1,000 overstatement of the ending inventory results in a $1,000 understatement of cost of goods sold. The $1,000 understatement of COGS results in a $1,000 overstatement of gross profit, and $1,000 overstatement of retained earnings.

Question 16

The following information pertains to Deal Corp.’s Year 2 cost of goods sold:
Inventory, 12/31/Year 1: $90,000
Year 2 purchases: 124,000
Year 2 write-off of obsolete inventory: 34,000
Inventory, 12/31/Year 2: 30,000

The inventory written off became obsolete because of an unexpected and unusual technological advance by a competitor. In its Year 2 income statement, what amount should Deal report as cost of goods sold?

Answer 16

$150,000.

Cost of goods sold equals beginning inventory plus purchases, minus write-offs, minus ending inventory. Deal’s cost of goods sold can thus be calculated as follows:
Beginning inventory: $90,000
Purchases: 124,000
Write-off: (34,000)
Cost of goods sold: (150,000)
Ending inventory: $30,000

Question 17

On October 1, Velec Co., a U.S. company, contracted to purchase foreign goods requiring payment in euros 1 month after their receipt at Velec’s factory. Title to the goods passed on December 15. The goods were still in transit on December 31. Exchange rates were one dollar to 1.06 euros, 1.04 euros, and 1.05 euros on October 1, December 15, and December 31 respectively. Velec should account for the exchange rate fluctuation for the year as

Answer 17

A gain included in net income.

A receivable or payable stated in a foreign currency is adjusted to its current exchange rate at each balance sheet date. The transaction gain or loss arising from this adjustment should ordinarily be reflected in current income. Because title passed on December 15, the liability fixed in euros should have been recorded on that date at the 1.04 euro exchange rate. The increase to 1.05 euros per dollar at year-end decreases the dollar value of the liability and results in a transaction gain. Such a gain is reported as a component of income from continuing operations.

Question 18

Which of the following is an example of an exchange transaction of a state or local government?

Answer 18

A city-run hospital provides medical services for a fee.

Exchange revenues result from sales transactions in which each party receives benefits and incurs costs. Each party receives and gives up essentially equal values.