11.13.18 Flashcards
A nongovernmental not-for-profit entity discovered that a $600,000 rent payment on January 1, Year 1, was expensed instead of recorded as prepaid rent. The prepaid rent is to be amortized over a 3-year rental period. What is the adjustment, if any, to prepaid rent on the cash flow statement (indirect method) dated December 31, Year 3?
$200,000 decrease.
Any error related to a prior period discovered after the statements are available to be used must be reported as an error correction by restating the prior period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) net assets at the beginning of the first period reported are adjusted for the cumulative effect of the error on the prior periods. Corrections of prior period errors must not be included in the change in net assets from operations for the current year. Thus, rent expense should not be adjusted for prior-period errors. The correction is to restate the prior-period statements or beginning net assets. The amount of $200,000 is the annual rent expense. This noncash expense is included in the change in net assets for Year 3 net income. It is therefore added in the reconciliation to net cash flow from operating activities.
In a periodic inventory system that uses the weighted-average cost flow method, the beginning inventory is the
Total goods available for sale minus the net purchases.
In a periodic inventory system, the beginning inventory is equal to the total goods available for sale minus the net purchases, regardless of the cost flow method used.
On July 1, Year 4, Pell Co. purchased Green Corp. 10-year, 8% bonds with a face amount of $500,000 for $420,000. The bonds are classified as held-to-maturity, mature on June 30, Year 14, and pay interest semiannually on June 30 and December 31. Using the interest method, Pell recorded bond discount amortization of $1,800 for the 6 months ended December 31, Year 4. From this long-term investment, Pell should report Year 4 revenue of
$21,800.
Interest income for a bond issued at a discount is equal to the sum of the periodic cash flows and the amount of bond discount amortized during the interest period. The periodic cash flows are equal to $20,000 ($500,000 face amount × 8% coupon rate × 1/2 year). The discount amortization is given as $1,800. Thus, revenue for the 6-month period from July 1 to December 31, Year 4, is $21,800 ($20,000 + $1,800).
Primor, a manufacturer, owns 75% of the voting interests of Sublette, an investment firm. Sublette owns 60% of the voting interests of Minos, an insurer. In Primor’s consolidated financial statements, should consolidation accounting or equity method accounting be used for Sublette and Minos?
Consolidation used for both Sublette and Minos.
All entities in which a parent has a controlling financial interest through direct or indirect ownership of a majority voting interest ordinarily must be consolidated. However, a subsidiary is not consolidated when control does not rest with the majority owner. Primor has direct control of Sublette and indirect control of Minos and should consolidate both.
A nongovernmental not-for-profit entity discovered that a $300,000 rent payment on January 1, Year 1, was expensed instead of recorded as prepaid rent. The prepaid rent is to be amortized over the 3-year rental period. What is the adjustment, if any, to rent expense at January 1, Year 2, when the error was discovered?
$0
Any error related to a prior period discovered after the statements are available to be used must be reported as an error correction by restating the prior period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) net assets at the beginning of the first period reported are restated for the cumulative effect of the error on the prior periods. Corrections of prior period errors must not be included in the change in net assets from operations for the current year. Thus, no change in rent expense should be made for the prior period errors. The correction is made by restating the prior period statements or beginning net assets.
A local governmental unit could issue financial statements using which of the following accounting bases?
Accrual Basis:
Modified Accrual Basis:
Yes
Yes
The modified accrual basis is used in the presentation of governmental fund financial statements. The accrual method is used to prepare the government-wide statements, the proprietary fund statements, and the fiduciary fund statements.
Ward Distribution Company has determined its December 31 inventory on a LIFO basis at $200,000. Information pertaining to that inventory follows: Estimated selling price: $204,000 Estimated cost of disposal: 10,000 Normal profit margin: 30,000 Current replacement cost: 180,000
Ward records losses that result from applying the lower-of-cost-or-market rule. At December 31, the loss that Ward should recognize is
$20,000.
Inventory accounted for using LIFO or the retail inventory method is measured at the lower of cost or market. As indicated below, the $180,000 replacement cost falls between the $194,000 ceiling and the $164,000 floor. Thus, it will be used as market in the LCM determination. Because the $180,000 market value is $20,000 lower than the $200,000 historical cost, the inventory should be valued at $180,000 and a $20,000 loss recognized.
NRV ($204,000 – $10,000): 194,000
Replacement cost: $180,000
NRV – Normal profit ($194,000 – $30,000): $164,000
Lake Co. issued 3,000 of its 9%, $1,000 face amount bonds at 101 1/2. In connection with the sale of these bonds, Lake paid the following expenses:
Promotion costs: $20,000
Engraving and printing: 25,000
Underwriters’ commissions; 200,000
What amount should Lake record as bond issue costs to be amortized over the term of the bonds?
$245,000.
Debt issue costs include (1) printing costs, (2) underwriters’ commissions, (3) attorney’s fees, and (4) promotion costs (including preparation of a prospectus). The issue costs to be amortized equal $245,000 ($20,000 promotion costs + $25,000 printing costs + $200,000 underwriters’ commissions). Debt issue costs are presented as a direct deduction from the related debt liability.
In Year 2, Fogg, Inc., issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, Year 4, when Fogg acquired some of the issued shares for $20 per share and retired them. Which of the following statements accurately states an effect of this acquisition and retirement?
Additional paid-in capital is decreased.
When shares of common stock are reacquired and retired, contributed capital should be debited for the amount that was credited upon the issuance of the securities. In addition, because the acquisition of a company’s own shares is an equity transaction, no gain or loss should be reflected in the determination of income. The entry is to debit common stock at par (number of shares × $10) and additional paid-in capital [number of shares × ($25 – $10)], and to credit additional paid-in capital from retirement of common stock [number of shares × ($25 – $20)] and cash (number of shares × $20). The net effect is to decrease total additional paid-in capital.
A large account receivable from Taylor Industries was considered fully collectible at September 30, Year 5, the balance sheet date. Taylor suffered a plant explosion on October 25, Year 5. Because Taylor was uninsured, it is unlikely that the account will be paid. How should this event be presented in the entity’s financial statements?
Disclosure in a note to the financial statements.
A customer’s major casualty subsequent to year end rendering a major receivable uncollectible is not indicative of conditions existing at the balance sheet date, so adjustment of the financial statements is not appropriate. Because the event could influence the users of the financial statements, disclosure in a note should be made.
Lys City reports a general long-term compensated absences liability in its financial statements. The salary rate used to calculate the liability should normally be the rate in effect
At the balance sheet date.
The compensated absences liability should be calculated based on the pay or salary rates in effect at the balance sheet date. However, the employer might pay employees for their compensated absences at other than their pay or salary rates. For example, payment might be at a lower amount established by contract, regulation, or policy. That other rate determined at the balance sheet date should be used to calculate the liability.
West, Inc., made the following expenditures relating to Product Y:
- Legal costs to file a patent on Product Y – $10,000. Production of the finished product would not have been undertaken without the patent.
- Special equipment to be used solely for development of Product Y – $60,000. The equipment has no other use and has an estimated useful life of 4 years.
- Labor and material costs incurred in producing a prototype model – $200,000.
- Cost of testing the prototype – $80,000.
What is the total amount of costs that will be expensed when incurred?
$340,000.
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. The legal costs of filing a patent should be capitalized. West’s R&D costs include those incurred for the design, construction, and testing of preproduction prototypes. Moreover, the cost of equipment used solely for a specific project is also expensed immediately. Thus, the total amount of costs that will be expensed when incurred is $340,000.
On December 31, Year 4, Largo, Inc., had a $750,000 note payable outstanding due July 31, Year 5. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing noncurrent bonds. Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, Year 5. In February Year 5, Largo completed a $1.5 million bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during Year 5. On March 3, Year 5, Largo issued its Year 4 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, Year 4, balance sheet?
$250,000.
The portion of debt scheduled to mature in the following fiscal year ordinarily should be classified as a current liability. However, if an entity intends to refinance current obligations on a noncurrent basis and demonstrates an ability to consummate the refinancing, the obligation should be excluded from current liabilities and classified as noncurrent. One method of demonstrating the ability to refinance is to issue noncurrent obligations or equity securities after the balance sheet date but before the financial statements are issued. Largo demonstrated an intention to refinance $500,000 of the note payable. Thus, the portion prepaid ($250,000) is a current liability, and the remaining $500,000 should be classified as noncurrent.
The following information pertains to a computer properly classified as a general capital asset that Pine Township leased from Karl Supply Co. on July 1:
Karl’s cost: $5,000
Fair value at July 1: $5,000
Estimated economic life: 5 years
Fixed noncancelable term: 30 months
Rental at beginning of each month: $135
Guaranteed residual value: $2,000
Present value of minimum lease payments at July 1, using Pine’s incremental borrowing rate of 10.5%: $5,120
Karl’s implicit interest rate of 12.04%: $5,000
On July 1, what amount should Pine capitalize for this leased computer?
$5,000.
Leased capital assets are initially measured in accordance with GAAP regardless of which funds account for the lease transaction. Thus, the capital asset could be accounted for in the proprietary or fiduciary funds or as a general capital asset reported only in the government-wide statement of net position. This lease qualifies for capitalization as a capital lease by the lessee because the present value of the minimum lease payments calculated using the lower of the lessee’s incremental borrowing rate or the lessor’s rate implicit in the terms of the lease is at least 90% of the computer’s fair value ($5,000) at the inception of the lease. Consequently, the leased computer should be capitalized as a general capital asset at the lesser of (1) the present value of the minimum lease payments ($5,120 based on the lessee’s incremental borrowing rate, which is less than the rate implicit in the lease) or (2) the fair value of the leased property ($5,000) at the inception of the lease.
Fact Pattern: On December 21, Year 1, the board of directors of Oak Corporation approved a plan to award 600,000 share options to 20 key employees as additional compensation. Effective January 1, Year 2, each employee was granted the right to purchase 30,000 shares of the company’s $2 par-value stock at an exercise price of $36 per share. The market price on that date was $32 per share. All share options vest at December 31, Year 4, the end of the 3-year requisite service period. They expire on December 31, Year 11. Based on an appropriate option-pricing formula, the fair value of the options on the grant date was estimated at $12 per option.
On January 1, Year 3, five key employees left Oak Corporation. During the period from January 1, Year 5, through December 31, Year 11, 400,000 of the share options that vested were exercised. The remaining options were not exercised. What amount of the previously recognized compensation expense should be adjusted upon expiration of the share options?
$0.
Total compensation expense for the requisite service period is not adjusted for expired options.
