11.12.18 Flashcards
Based on current-year sales of music recorded by an artist under a contract with Bain Co., the artist earned $100,000 after an adjustment of $8,000 for anticipated returns. In addition, Bain paid the artist $75,000 in the current year as a reasonable estimate of the amount recoverable from future royalties to be earned by the artist. What amount should Bain report in its current-year income statement for royalty expense?
$100,000.
Income is earned by the artist and an expense is incurred by Bain based on net sales (sales minus returns). Amounts paid in advance and recoverable from future royalties are classified as prepaid expenses. Thus, Bain should report royalty expense of $100,000 in its current-year income statement.
Which of the following accounts of a governmental unit is credited when the government has a legally enforceable right to property taxes?
Deferred inflow of resources.
Deferred inflows of resources is increased (credited) when the government has a legally enforceable right to the levy. Deferred inflows of resources is debited and revenues credited when the period begins for which the property taxes were levied.
The standards for reporting interfund activity classifies such activity as
Reciprocal and nonreciprocal.
Interfund activity may be reciprocal or nonreciprocal. Reciprocal interfund activity is similar to exchange and exchange-like transactions, for example, interfund loans and services provided and used. Nonreciprocal interfund activity is similar to nonexchange transactions, for example, interfund transfers and reimbursements.
A government may report which fiduciary funds?
Private-purpose trust funds.
Fiduciary funds report assets held for (1) specific individuals, (2) private organizations, or (3) other governments. They include (1) pension (and other employee benefit) trust funds, (2) investment trust funds, (3) private-purpose trust funds, and (4) agency funds. Private-purpose trust funds are used for all trust arrangements other than those for (1) employee benefits and (2) the external portion of an external investment pool.
Winn Co. manufactures equipment that is sold or leased. On December 31, Year 4, Winn leased equipment to Bart for a 5-year period ending December 31, Year 9, at which date ownership of the leased asset will be transferred to Bart. Equal payments under the lease are $22,000 (including $2,000 of executory costs) and are due on December 31 of each year. The first payment was made on December 31, Year 4. Collectibility of the remaining lease payments is reasonably assured, and Winn has no material cost uncertainties. The normal sales price of the equipment is $77,000, and cost is $60,000. For the year ended December 31, Year 4, what amount of income should Winn realize from the lease transaction?
$17,000.
For a lessor to treat a lease as a capital lease, it must first meet one of four criteria. Ownership of the leased equipment transfers to the lessee at the end of the lease term, so one of the four criteria is satisfied. In addition, the lessor cannot treat the lease as a capital lease unless collectibility of the remaining lease payments is reasonably assured and there are no material cost uncertainties. These conditions are met, and Winn should therefore record this lease as either a sales-type or a direct-financing lease. Because the $77,000 fair value is greater than the $60,000 recorded cost of the equipment on the lessor’s books, a manufacturer’s profit is present, and the lease should be accounted for as a sales-type lease. In a sales-type lease, two components of income are recognized: the profit on the sale and interest income. The profit on the sale recorded at the inception of the lease is $17,000 ($77,000 normal sales price – $60,000 cost). At the inception of the lease on December 31, Year 4, no interest income should be recorded. Thus, Winn should realize $17,000 of income from this lease transaction in Year 4.
King City Council will be establishing a library fund. Library fees are expected to cover 55% of the library’s annual resource requirements. King has decided that an annual determination of net income is desirable in order to maintain management control and accountability over the library. What type of fund should King establish in order to meet its measurement objectives?
Enterprise fund.
Enterprise funds may be used for any activities for which fees are charged to external users. Moreover, an enterprise fund (a proprietary fund) reports using the economic resources measurement focus and the accrual basis of accounting. This approach provides longer-term operational accountability information about economic activity. It measures revenues and expenses in the same way as in for-profit accounting. Thus, the enterprise fund’s statement of revenues, expenses, and changes in fund net position presents amounts for (1) operating income (loss); (2) income before other revenues, expenses, etc.; and (3) change in net position. Because the library fund will charge fees and report on the accrual basis, King should account for it using an enterprise fund.
On June 30, Year 2, Lomond, Inc., issued 20, $10,000, 7% bonds at par. Each bond was convertible into 200 shares of common stock. On January 1, Year 3, 10,000 shares of common stock were outstanding. The bondholders converted all the bonds on July 1, Year 3. The following amounts were reported in Lomond’s income statement for the year ended December 31, Year 3: Revenues: $977,000 Operating expenses; (920,000) Interest on bonds: (7,000) Income before income tax: 50,000 Income tax at 30%: (15,000) Net income: $35,000
What amount should Lomond report as its Year 3 diluted earnings per share (DEPS)?
$2.85.
On October 1, Year 1, Gold Co. borrowed $900,000 to be repaid in three equal, annual installments. The note payable bears interest at 5% annually. Gold paid the first installment of $300,000 plus interest on September 30, Year 2. What amount should Gold report as a current liability on December 31, Year 2?
$307,500.
Noncurrent notes that are payable in installments are classified as current to the extent of any payments due in the coming year. The current portion of the note payable as of December 31, Year 2, would consist of the $300,000 of principal due September 30, Year 3, and the accrued interest from October 1, Year 2, to December 31, Year 2. The accrued interest is calculated by multiplying the 5% annual interest rate by the $600,000 outstanding principal balance as of October 1, Year 2, and multiplying that annual interest expense by the 3 months the note is outstanding since the first $300,000 annual payment was made. This results in current accrued interest expense of $7,500 [$600,000 × 5% × (3 months ÷ 12 months)]. Adding this amount to the current portion of principal results in a total reported current liability of $307,500 ($300,000 + $7,500).
The following information pertains to Pine City’s general fund for Year 1: Appropriations: $6,500,000 Expenditures: 5,000,000 Other financing sources: 1,500,000 Other financing uses; 2,000,000 Revenues: 8,000,000
After Pine City’s general fund accounts were closed at the end of Year 1, the fund balance increased by
$2,500,000.
The change in the fund balance during the period is determined by the changes in the operating account balances. Appropriations is a budgetary control account, the balance of which usually does not change except when it is established and closed. Revenues of $8,000,000, plus other financing sources of $1,500,000, equal $9,500,000 of total credits. Thus, the increase in fund balance was $2,500,000 ($9,500,000 – $5,000,000 expenditures – $2,000,000 other financing uses).
Tech Co. bought a trademark 2 years ago on January 2. Tech accounted for the trademark as instructed under the provisions of the Accounting Standards Codification during the current year. The intangible was being amortized over 40 years. The carrying amount at the beginning of the year was $38,000. It was determined that the cash flow will be generated indefinitely at the current level for the trademark. What amount should Tech report as amortization expense for the current year?
$0.
An intangible asset with an indefinite useful life to the reporting entity is not amortized.
Hansen, Inc., purchased a patent at the beginning of Year 1 for $22,100 that was to be amortized over 17 years. On July 1 of Year 8, Hansen incurred legal costs of $11,400 to successfully defend the patent. The amount of amortization expense that Hansen should record for Year 8 is
$1,900.
Hansen will amortize the cost of the patent on a straight-line basis at the rate of $1,300 per year ($22,100 ÷ 17). The costs of a successful legal defense of a patent are capitalized and amortized over the shorter of the remaining legal life or the estimated useful life of the patent. Because the legal costs to defend the patent were incurred when the patent had 9.5 years of life remaining, they will be amortized at a rate of $1,200 per year ($11,400 ÷ 9.5). Because Year 8 only includes a half year’s depreciation for the legal costs, total amortization expense for that year is $1,900 ($1,300 + $600).
Brite Corp. had the following liabilities at December 31, Year 6:
Accounts payable: $55,000
Unsecured notes, 8%, due 7/1/Year 7: 400,000
Accrued expenses: 35,000
Contingent liability: 450,000
Deferred income tax liability: 25,000
Senior bonds, 7%, due 3/31/Year 7: 1,000,000
The contingent liability is an accrual for possible losses on a $1 million lawsuit filed against Brite. Brite’s legal counsel expects the suit to be settled in Year 8 and has estimated that Brite will be liable for damages in the range of $450,000 to $750,000. The deferred income tax liability is not related to an asset for financial reporting and is expected to reverse in Year 8. What amount should Brite report in its December 31, Year 6, balance sheet for current liabilities?
$1,490,000.
The following are current liabilities: (1) Obligations that, by their terms, are or will be due on demand within 1 year (or the operating cycle if longer) and (2) obligations that are or will be callable by the creditor within 1 year because of a violation of a debt covenant. Deferred tax assets and liabilities are classified as noncurrent. Thus, current liabilities are calculated as
Accounts payable: $55,000
Unsecured notes, 8%, due 7/1/Year 7: 400,000
Accrued expenses: 35,000
Senior bonds, 7%, due 3/31/Year 7: 1,000,000
Current liabilities: $1,490,000
On December 31, Calla Township paid a contractor $4 million for the total cost of a new police building built during the year. Financing was by means of a $3 million general obligation bond issue sold at face amount on December 31, with the remaining $1 million transferred from the general fund. What amount should Calla record as revenues in the capital projects fund in connection with the bond issue proceeds and the transfer?
$0.
In governmental funds, revenues are increases of fund financial resources other than from interfund transfers and debt issue proceeds and redemption of demand bonds. Accordingly, proceeds from the issuance of general long-term debt should be recorded in the capital projects fund as other financing sources. The amount received from the general fund should be classified as an interfund transfer and credited to other financing sources. Thus, the amount that should be recorded as revenues in the capital projects fund in connection with the bond issue proceeds and the transfer is $0.
A company has a current ratio of 2 to 1. This ratio will decrease if the company
Borrows cash on a 6-month note.
If a ratio is greater than 1.0, an equal increase in the numerator (current assets) and denominator (current liabilities), like borrowing cash on a short-term basis, decreases the ratio.
Which of the following normally is included in the other revenue, gains, or losses of a hospital?
Fees for educational programs:
Unrestricted funds:
Yes
Yes
Other revenue, gains, or losses may appropriately be recognized by a hospital for services other than healthcare or coverage provided to patients. Other revenue may include (1) donated medicine or supplies, (2) donated labor, (3) fees for educational programs, (4) proceeds from the sale of cafeteria meals, and (5) gifts and grants. Revenue or expense results from an entity’s ongoing major or central operations. Gains or losses result from peripheral or incidental transactions and from all transactions and other events and circumstances that do not generate revenue or expense. Thus, contributions, either unrestricted or for a specific purpose, should be treated as other revenue, gains, or losses unless fundraising is an ongoing major activity of the hospital. They are recognized at fair value.
