11.13.18 Flashcards
Pane Co. had the following borrowings on its books at the end of the current year:
- $100,000, 12% interest rate, borrowed 5 years ago on September 30; interest payable March 31 and September 30.
- $75,000, 10% interest rate, borrowed 2 years ago on July 1; interest paid April 1, July 1, October 1, and January 1.
- $200,000, noninterest bearing note, borrowed July 1 of current year, due January 2 of next year; proceeds $178,000.
What amount should Pane report as interest payable in its December 31 balance sheet?
$4,875.
Accrued expenses meet recognition criteria in the current period but have not been paid as of year end. The amount of interest payable that should be reported by Pane in its December 31 balance sheet is $4,875 [$100,000 × 12% × (3 ÷ 12) + $75,000 × 10% × (3 ÷ 12)].
How should a nongovernmental not-for-profit organization classify gains and losses on investments purchased with net assets with donor restrictions?
Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restrictions.
Unless explicitly restricted by the donor or law, gains and losses on net assets with donor restrictions should be reported in the statement of activities as increases or decreases in net assets without donor restrictions.
A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred:
Dividends paid: $300
Proceeds from the issuance of common stock: 250
Borrowings under a line of credit: 200
Proceeds from the issuance of convertible bonds: 100
Proceeds from the sale of a building: 150
What is the company’s increase in cash flows provided by financing activities for the year?
$250.
Cash flows from financing activities generally involve the cash effects of transactions and other events that relate to the issuance, settlement, or reacquisition of the entity’s debt and equity instruments. The proceeds from the sale of a building is an investing cash flow. All of the other transactions represent cash flows from financing activities. Thus, the company’s increase in cash flows provided by financing activities is $250 [($300) + $250 + $200 + $100].
On January 1, Year 1, Gilson Corporation issued 1,000 of its 9%, $1,000 callable bonds for $1,030,000. The bonds are dated January 1, Year 1, and mature on December 31, Year 15. Interest is payable semiannually on January 1 and July 1. The bonds can be called by the issuer at 102 on any interest payment date after December 31, Year 5. The unamortized bond premium was $14,000 at December 31, Year 8, and the market price of the bonds was 99 on this date. In its December 31, Year 8, balance sheet, at what amount should Gilson report the carrying value of the bonds?
$1,014,000.
The face amount of the bonds is $1,000,000 (1,000 × $1,000), and the unamortized premium is $14,000 (given). The carrying amount is thus $1,014,000. The other data are irrelevant.
Financial information is most likely to be verifiable when an accounting transaction occurs that
Involves an arm’s-length transaction between two independent parties.
Verifiability is an enhancing qualitative characteristic of relevant and faithfully represented financial information. Information is verifiable (directly or indirectly) if knowledgeable and independent observers can reach a consensus (but not necessarily unanimity) that it is faithfully represented. The existence of an arm’s-length transaction between independent interests suggests that the transaction is verifiable.
Dart Company’s accounting records indicated the following information:
Beginning inventory: $500,000
Purchases during the year: 2,500,000
Sales during the year: 3,200,000
A physical inventory taken at year end resulted in an ending inventory of $575,000. Dart’s gross profit on sales has remained constant at 25% in recent years. Dart suspects some inventory may have been taken by a new employee. At the balance sheet date, what is the estimated cost of missing inventory?
$25,000.
To estimate the missing inventory, the estimated cost of goods sold is subtracted from the cost of goods available for sale to estimate the amount of inventory that should be on hand. Given that the gross margin is 25% of sales, 75% of sales, or $2,400,000, is the estimated cost of goods sold. Beginning balance: $500,000 Purchases: 2,500,000 Cost of goods available: $3,000,000 Estimated cost of goods sold: [$3,200,000 sales × (1.0 – .25)]: (2,400,000) Estimated year-end balance: $600,000 Physical inventory year end: (575,000) Estimated theft loss: $25,000
During the current year, Lyle Co. incurred $204,000 of research and development costs in its laboratory to develop a patent that was granted on July 1. Legal fees and other costs associated with registration of the patent totaled $41,000. The estimated useful life of the patent is 10 years. What amount should Lyle capitalize for the patent on July 1?
$41,000.
R&D costs are required to be expensed as they are incurred. Legal fees and registration fees are excluded from the definition of R&D. Thus, the $41,000 in legal fees and other costs associated with the registration of the patent should be capitalized. The $204,000 in R&D costs should be expensed.
According to the FASB’s conceptual framework, which of the following best describes the distinction between expenses and losses?
Losses result from peripheral or incidental transactions, and expenses result from ongoing major or central operations of the entity.
According to the FASB’s conceptual framework, expenses are outflows or other uses of assets or incurrences of liabilities (or both) from (1) delivering or producing goods, (2) providing services, or (3) other activities that qualify as ongoing major or central operations. Losses are decreases in equity (net assets) from peripheral or incidental transactions or other events and circumstances except expenses or distributions to owners.
Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share and recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share and recognized a $50,000 gain on its income statement on May 20. Which of the following statements is correct?
Murphy’s net income for the current year is overstated.
The cost method debits cash and credits treasury stock and paid-in capital from treasury stock transactions when a reissuance of shares is made for an amount in excess of cost. The credit to treasury stock is $450,000 (30,000 shares × $15), and the credit to paid-in capital from treasury stock transactions is $150,000 [$600,000 cash (debit) – $450,000 treasury stock (credit)]. The reason for the latter credit (an equity account) instead of a gain is that the effects of transactions in the entity’s own stock are always excluded from net income or the results of operations. Thus, recognizing a gain on the reissuance of treasury stock overstates current net income.
In its Year 4 financial statements, Cris Co. reported interest expense of $85,000 in its income statement and cash paid for interest of $68,000 in its cash flow statement. There was no prepaid interest or interest capitalization at either the beginning or the end of Year 4. Accrued interest at December 31, Year 3, was $15,000. What amount should Cris report as accrued interest payable in its December 31, Year 4, balance sheet?
$32,000.
The cash paid for interest was $68,000, including $15,000 of interest paid for Year 3. Consequently, $53,000 ($68,000 – $15,000) of the cash paid for interest related to Year 4. Interest payable is therefore $32,000 ($85,000 – $53,000).
On January 2, Year 1, Cruises, Inc., borrowed $3 million at a rate of 10% for 3 years and began construction of a cruise ship. The note states that annual payments of principal and interest in the amount of $1.3 million are due every December 31. Cruises used all proceeds as a down payment for construction of a new cruise ship that is to be delivered 2 years after start of construction. What should Cruises report as interest expense related to the note in its income statement for Year 2?
$0.
An asset produced by an entity for its own use qualifies for interest capitalization. Capitalized interest is limited to the amount theoretically avoidable if expenditures for the asset had not been made. It is also limited to the interest incurred for the period. Interest capitalized equals average accumulated expenditures (AAE) for the qualifying asset times the appropriate interest rate(s). The capitalization period (e.g., 2 years for the cruise ship beginning January 2 of Year 1) is the time required to carry out the activities necessary to bring the asset to the condition and location necessary for its intended use. Accordingly, no interest expense related to the note is recognized in the second year. The 10% interest rate on the note, a specific new borrowing outstanding during the capitalization period and identified with the qualifying asset, may be used as the capitalization rate to the extent that AAE do not exceed the amount of the new borrowing. Given that the $3 million of proceeds were used as a down payment, the total interest on the note (the carrying amount of the note for Year 2 × 10%) qualifies for capitalization. Thus, the AAE are at least equal to the carrying amount of the note for the second year. A weighted-average rate must be applied to the amount exceeding the specified new borrowings.
A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price by a material amount. Which of the following accounting treatments is most appropriate?
Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss.
A commitment to acquire goods in the future is not recorded at the time of the agreement, e.g., by debiting an asset and crediting a liability. But recognition in earnings of a loss on goods subject to a firm purchase commitment is required if the market price of these goods declines below the commitment price. The reason for current loss recognition is the same as that for inventory on hand. A decrease (not an increase) in the future benefits of the commitment should be recognized when it occurs. If material losses are expected to arise from firm, noncancelable, and unhedged commitments for the future purchase of inventory, they should be measured in the same way as inventory losses, and, if material, recognized and separately disclosed in the income statement. The entry is to debit unrealized holding loss-earnings and to credit liability-purchase commitment. Furthermore, certain disclosures are required for unconditional purchase obligations that are unrecorded. They include the nature and term of the obligation.
The changes in account balances of the Vel Corporation during Year 6 are presented below: Increase Assets: $356,000 Liabilities: 108,000 Capital stock; 240,000 Additional paid-in capital; 24,000
Vel has no items of other comprehensive income (OCI), and the only charge to retained earnings was for a dividend payment of $52,000. Thus, the net income for Year 6 is
$36,000.
Assets equal the sum of liabilities and equity (contributed capital, retained earnings, and accumulated OCI). To calculate net income, the dividend payment ($52,000) should be added to the increase in assets ($356,000). The excess of this sum ($408,000) over the increase in liabilities ($108,000) gives the total increase in equity ($300,000). Given no items of OCI, the excess of this amount over the combined increases in the capital accounts ($264,000) equals the increase in retained earnings ($36,000) arising from net income.
An NFP’s general-purpose financial statements include
A statement of cash flows.
For an NFP, a statement of cash flows is similar to the statement reported by for-profit entities.
Blythe Corp. is a defendant in a lawsuit. Blythe’s attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency?
Disclosed but not accrued.
A material contingent loss must be accrued when two conditions are met. Accrual is required if (1) it is probable, at the balance sheet date, that an asset has been impaired or a liability has been incurred; and (2) the amount of the loss can be reasonably estimated. If one or both conditions are not met but the probability of the loss is at least reasonably possible, the nature of the contingency must be disclosed but not accrued.
