11.12.18 Flashcards
How should a state or local governmental unit that sponsors an external investment pool report the external portion of the pool?
Fund:
Measurement focus:
Basis of Accounting:
Investment trust fund
Economic resources
Accrual
An investment trust fund (a fiduciary fund) is used by a sponsoring government to report the external portion of an external investment pool (the portion belonging to legally separate entities not part of the sponsor’s reporting entity). Moreover, the sponsor should report each external pool as a separate fund. Transactions and balances are reported on the accrual basis with an economic resources measurement focus. This measurement focus differs from the shorter-term current-financial-resources approach used in governmental funds, which emphasizes fiscal accountability for expendable, available financial resources. The economic resources approach provides operational accountability information about economic activity by measuring revenues and expenses in the same way as in commercial accounting but without necessarily emphasizing net income. Instead, the emphasis is on a longer-range measure of revenues earned or levied (and accrued immediately if measurable). Moreover, the economic resources model focuses on cost of services.
Flex Co. uses a periodic inventory system. The following are inventory transactions for the month of January:
1/1 Beginning inventory: 10,000 units at $3
1/5 Purchase: 5,000 units at $4
1/15 Purchase: 5,000 units at $5
1/20 Sales at $10 per unit: 10,000 units
Flex uses the average pricing method to determine the value of its inventory. What amount should Flex report as cost of goods sold on its income statement for the month of January?
$37,500.
The total cost of beginning inventory and purchases is $75,000 ($30,000 + $20,000 + $25,000), and the total number units of beginning inventory and purchases is 20,000. The average price of the beginning inventory and purchases is $3.75 ($75,000 cost ÷ 20,000 units). The total cost of goods sold equals $37,500 (10,000 units sold × $3.75).
In a statement of financial position, a nongovernmental not-for-profit entity must at a minimum report amounts for which of the following classes of net assets?
I. Without donor restrictions
II. With donor restrictions
III. Permanently restricted
I & II only.
A not-for-profit entity must at a minimum report amounts for two classes: net assets without donor restrictions and net assets with donor restrictions. Information regarding the nature and amounts of restrictions must be provided on the face of the statement or in the notes. Also, separate line items may be included in (1) net assets with donor restrictions or (2) the notes.
Stone Co. had the following consignment transactions during December:
Inventory shipped on consignment to Beta Co.: $18,000
Freight paid by Stone: 900
Inventory received on consignment from Alpha Co.: 12,000
Freight paid by Alpha: 500
No sales of consigned goods were made through December 31. Stone’s December 31 balance sheet should include consigned inventory at
$18,900.
In a consignment, the consignor ships merchandise to the consignee, who acts as agent for the consignor in selling the goods. The goods are in the physical possession of the consignee but remain the physical property of the consignor and are included in the consignor’s inventory. Costs incurred by a consignor on the transfer of goods to a consignee are inventoriable. Thus, Stone’s inventory account should include $18,900 equal to the $18,000 inventory shipped to Beta on consignment and the $900 associated freight charges.
Which of the following should normally be considered ongoing or central transactions for a not-for-profit hospital?
I. Room and board fees from patients
II. Recovery room fees
Both I & II.
Revenues result from an entity’s ongoing major or central operations. Revenues of an HCE include (1) patient service revenue, (2) premium revenue, and (3) other revenue. Room and board fees and recovery room fees are patient services revenues.
On January 2, Year 1, Union Co. purchased a machine for $264,000 and depreciated it by the straight-line method using an estimated useful life of 8 years with no salvage value. On January 2, Year 4, Union determined that the machine had a useful life of 6 years from the date of acquisition and will have a salvage value of $24,000. An accounting change was made in Year 4 to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, Year 4, of
$146,000.
A change in the estimates for depreciation is accounted for prospectively. The new estimates are used in the year of the change, and no “catch-up” amounts are recorded. For Years 1 through 3, the amount of depreciation was $33,000 per year ($264,000 old depreciable base ÷ 8 old estimate of useful life), resulting in a balance of accumulated depreciation at December 31, Year 3, of $99,000 ($33,000 × 3 years). On January 2, Year 4, Union estimates the machine’s original depreciable base to be $240,000 ($264,000 historical cost – $24,000 revised salvage value). The remaining depreciable base at January 2, Year 4, is thus $141,000 ($240,000 revised depreciable base – $99,000 accumulated depreciation), resulting in a new annual depreciation expense of $47,000 ($141,000 ÷ 3 years revised estimated life remaining). Thus, accumulated depreciation at December 31, Year 4, is $146,000 ($99,000 + $47,000).
Ray Finance, Inc., issued a 10-year, $100,000, 9% note on January 1, Year 1. The note was issued to yield 10% for proceeds of $93,770. Interest is payable semiannually. The note is callable after 2 years at a price of $96,000. Due to a decline in the market rate to 8%, Ray retired the note on December 31, Year 3. On that date, the carrying amount of the note was $94,582, and the discounted amount of its cash flows based on the market rate was $105,280. What amount should Ray report as gain (loss) from retirement of the note for the year ended December 31, Year 3?
$(1,418).
The amount of gain or loss resulting from the extinguishment of debt is the difference between the amount paid and the carrying amount of the note. Thus, a loss of $1,418 ($94,582 carrying amount – $96,000 amount paid) results from the extinguishment.
Wyatt Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be
The minimum of the range.
Because the loss is probable and can be reasonably estimated, it should be accrued if the amount is material. If the estimate is stated within a given range and no amount within that range appears to be a better estimate than any other, the minimum of the range should be accrued.
Which of the following would a nongovernmental not-for-profit educational institution report as program services?
Teacher salaries.
Program services result in goods and services being distributed to beneficiaries, customers, or members to fulfill the purposes of the entity. Those services are the major purpose and output of the entity and often relate to several major programs. Because teaching is a major purpose of an educational institution, it reports teacher salaries as expenses of providing program services.
Program services result in goods and services being distributed to beneficiaries, customers, or members to fulfill the purposes of the entity. Those services are the major purpose and output of the entity and often relate to several major programs. Because teaching is a major purpose of an educational institution, it reports teacher salaries as expenses of providing program services.
The number of parties involved in the litigation.
The number of parties involved in the litigation is relevant to the amount of the liability, not whether it should be recognized. The following are the recognition criteria: (1) it is probable that, at the balance sheet date, a liability has been incurred, and (2) the amount of loss can be reasonably estimated. The number of parties is not itself a recognition criterion. For example, the same accounting treatment is applied whether a claim is brought by an individual or in a class action suit.
Beginning on the first day of the new fiscal year, Modi Township’s commission approved and established a self-insurance fund by collecting insurance premiums from employees and paying medical bills directly. The fund balance classification used for this type of activity is
Committed.
Amounts in committed fund balance may be spent only for specific purposes established by a formal act of the entity’s highest decision maker (e.g., a county commission). However, this decision maker may redirect the resources by following the necessary due process procedures.
During the year just ended, Jase Co. incurred research and development costs of $136,000 in its laboratories relating to a patent that was granted on July 1. Costs of registering the patent equaled $34,000. The patent’s legal life is 20 years, and its estimated economic life is 10 years. In its December 31 balance sheet, what amount should Jase report for the patent, net of accumulated amortization?
$32,300.
R&D costs are expensed as incurred. However, legal work in connection with patent applications or litigation and the sale or licensing of patents are specifically excluded from the definition of R&D. Hence, the legal costs of filing a patent should be capitalized. The patent should be amortized over its estimated economic life of 10 years. Amortization for the year equals $1,700 [($34,000 ÷ 10) × (6 ÷ 12)]. Thus, the reported amount of the patent at year end equals $32,300 ($34,000 – $1,700).
On July 31, Year 1, Tern Co. amended its single employee defined benefit pension plan by granting increased benefits for services provided prior to Year 1. This prior service cost will be reflected in the financial statement(s) for
Year 1 and following years only.
Prior service cost is recognized when a plan is amended to grant additional benefits for services already rendered by employees. The amortization of prior service cost should be recognized as a component of pension expense during the future service periods of those employees active at the date of the plan amendment and who are expected to receive benefits under the plan. Thus, prior service cost is reflected in the Year 1 financial statements when the plan was amended and in the following years as it is amortized.
Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?
A proposed accounting standards update.
The FASB follows a due-process procedure before issuing final pronouncements: After discussing the issues and considering input from interested parties (e.g., business, academia, and the accounting profession), the FASB votes on a final draft proposal. If a majority of the board members approves, an Accounting Standard Update (ASU) is issued. Once an ASU has been incorporated into the FASB’s Accounting Standards Codification, it has the status of U.S. GAAP.
Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?
A patent.
Intangible assets include those with finite useful lives (an amortized intangible asset) and those with indefinite useful lives (a nonamortized intangible asset). An intangible asset with a finite useful life (e.g., a patent) is reviewed for impairment when events or changes in circumstances indicate that its carrying amount may not be recovered. The test for impairment is a two-step test: (1) perform the recoverability test (the carrying amount is not recoverable if it exceeds the sum of the undiscounted future cash flows expected from the use and disposition of the asset) and (2) determine the impairment loss for the excess of the carrying amount over the fair value. A patent is an intangible asset with a finite useful life, so it is subject to the recoverability test when testing for impairment.
