11.13.18

Question 1

Which of the following amount(s) is(are) included in a general fund’s encumbrances account?

I. Outstanding vouchers payable amounts
II. Outstanding purchase order amounts
III. Excess of the amount of a purchase order over the actual expenditure for that order

Answer 1

II only.

When a purchase order is approved, an encumbrance is recognized. When the goods are delivered or the services are performed, the entry is reversed, effectively eliminating the purchase order amount. Thus, encumbrances include only outstanding purchase orders.

Question 2

On December 30, Year 4, Fort, Inc., issued 1,000 of its 8%, 10-year, $1,000 face value bonds with detachable stock warrants at par. Each bond carried a detachable warrant for one share of Fort’s common stock at a specified option price of $25 per share. Immediately after issuance, the market value of the bonds without the warrants was $1,080,000, and the market value of the warrants was $120,000. In its December 31, Year 4, balance sheet, what amount should Fort report as bonds payable?

Answer 2

$900,000.

The issue price of the bonds is allocated between the bonds and the detachable stock warrants based on their relative fair values. The market price of bonds without the warrants is $1,080,000, which is 90% [$1,080,000 ÷ ($1,080,000 + $120,000)] of the total fair value. Consequently, 90% of the issue price should be allocated to the bonds, and they should be reported at $900,000 ($1,000,000 × 90%) in the balance sheet.

Question 3

During the current year ended December 31, Metal, Inc., incurred the following costs:
Laboratory research aimed at discovery of new knowledge: $75,000
Design of tools, jigs, molds, and dies involving new technology: 22,000
Quality control during commercial production, including routine testing: 35,000
Equipment acquired 2 years ago, having an estimated useful life of 5 years with no salvage value, used in various R&D projects: 150,000
Research and development services performed by Stone Co. for Metal, Inc.; 23,000
Research and development services performed by Metal, Inc., for Clay Co.: 32,000

What amount of research and development expenses should Metal report in its current-year income statement?

Answer 3

$150,000.

Question 4

Which of the following most likely are not identified by the GASB as users of financial reporting for state and local governmental-type activities?

Answer 4

Portfolio analysts.

Analysts of investment portfolios are users of financial information primarily related to nongovernmental activities. The FASB is the standards setter for nongovernmental entities.

Question 5

Metro, Inc., reported net income of $150,000 for the current year. Changes occurred in several balance sheet accounts during the current year as follows:

Investment in Videogold, Inc., stock, all of which was acquired in the previous year, carried on the equity basis: $5,500 increase
Accumulated depreciation, caused by major repair to projection equipment: 2,100 decrease
Premium on bonds payable: 1,400 decrease
Deferred income tax liability (long-term): 1,800 increase

In Metro’s current-year cash flow statement, the reported net cash provided by operating activities should be

Answer 5

$144,900.

The increase in the equity-based investment reflects the investor’s share of the investee’s net income after adjustment for dividends received. Thus, it is a noncash revenue and should be subtracted in the reconciliation of net income to net operating cash inflow. A major repair provides benefits to more than one period and therefore should not be expensed. One method of accounting for a major repair is to charge accumulated depreciation if the useful life of the asset has been extended, with the offsetting credit to cash, a payable, etc. However, the cash outflow, if any, is from an investing activity. The item has no effect on net income and no adjustment is necessary. Amortization of bond premium is a noncash income statement item that reduces accrual-basis expenses and therefore must be subtracted from net income to arrive at net cash flow from operating activities. The increase in the deferred tax liability is a noncash item that reduces net income and should be added in the reconciliation. Accordingly, net cash provided by operations is $144,900 ($150,000 – $5,500 – $1,400 + $1,800).

Question 6

For which of the following assets held by a religious entity should depreciation be recognized in the entity’s general purpose external financial statements?

Answer 6

The house of worship.

Not-for-profit entities recognize the cost of using up long-lived tangible assets (depreciation) in their general purpose external financial statements. Thus, a building used for religious activity is ordinarily depreciable.

Question 7

Which of the following components must be included in the calculation of pension expense recognized for a period by an employer sponsoring a defined benefit pension plan?

Interest expense:
Expected Return on plan assets:

Answer 7

Yes

Yes

Question 8

A retail store received cash and issued a gift certificate that is redeemable in merchandise. When the gift certificate was issued, a

Answer 8

Deferred revenue should be increased.

Revenue should be recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service (merchandise) to a customer. The good or service is transferred when the customer obtains control of that good or service. Consequently, when a gift certificate is issued, the entity receiving cash should record the issuance as a contract liability (deferred or unearned revenue).

Question 9

When should a conditional pledge to a nongovernmental not-for-profit organization be recognized as revenue?

Answer 9

When the pledge conditions are met.

A contribution is one entity’s (1) unconditional, (2) voluntary, and (3) nonreciprocal transfer of assets to another entity (or a settlement of its liabilities). Assets include donations of services. Assets also include unconditional promises to give those items in the future. A donor-imposed condition specifies a future and uncertain event. Its occurrence or nonoccurence gives the donor a right of return or releases the donor from an obligation. Thus, a conditional promise to give is not recognized until the condition is substantially met. If the condition is not substantially met, a receipt of assets is accounted for as refundable.

Question 10

A company has the following items on its year-end trial balance:
Net sales: $500‚000
Common stock: 100,000
Insurance expense: 75,000
Wages: 50,000
Cost of goods sold: 100,000
Cash: 40,000
Accounts payable: 25,000
Interest payable: 25,000

What is the company’s gross profit?

Answer 10

$400,000.

Gross profit equals net sales minus cost of goods sold. Thus, the gross profit is $400,000 ($500,000 net sales – $100,000 cost of goods sold).

Question 11

Which of the following is a governmental fund that uses the current financial resources measurement focus?

Answer 11

Special revenue fund.

Governmental funds include the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds.

Question 12

Which of the following is presented on the proprietary funds statement of revenues, expenses, and changes in fund net position of a state or local government?

Answer 12

Transfers.

The statement of revenues, expenses, and changes in fund net position of proprietary funds reports (1) operating revenues, expenses, and income (loss); (2) nonoperating revenues and expenses; (3) revenues from capital contributions and additions to endowments; (4) special and extraordinary items; (5) transfers; (6) change in net position; and (7) ending net position.

Question 13

Clay City levied property taxes of $600,000 for the current year and estimated that $25,000 would be uncollectible. Which of the following is the correct general fund journal entry to record the property tax levy?

Answer 13

Property taxes receivable – current $600,000
Property tax revenue $575,000
Allowance for uncollectible property taxes – current 25,000

On the date that the assessment is legally enforceable, the city recognizes a receivable (reduced by an allowance for uncollectible taxes) and a liability (deferred revenue).

Question 14

On January 31, Year 4, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, Year 3, and mature on December 31, Year 13. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, Year 4, balance sheet?

Answer 14

$9,000.

Because interest is paid semiannually on June 30 and December 31, the amount of each payment is $18,000 [($300,000 face amount × 12% stated rate) × (6 ÷ 12)]. On June 30, $18,000 was paid (because the bonds were issued at par, periodic interest expense consists entirely of the cash interest payment). From July 1 to September 30, Year 4 (3 months), interest accrued for the December 31, Year 4, payment. Thus, $9,000 [$18,000 × (3 ÷ 6)] of accrued interest payable should be reported.

Question 15

According to the FASB’s conceptual framework, which of the following attributes should not be used to measure inventory?

Answer 15

Present value of future cash flows.

The present value of future cash flows is not an acceptable measure of inventory. Present value is typically used for long-term receivables and payables.

Question 16

In computing diluted earnings per share (DEPS), the equivalent number of shares of convertible preferred stock is added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is preferred as to dividends, which amount should be added as an adjustment to the numerator (earnings available to common shareholders)?

Answer 16

Annual preferred dividends.

If a capital structure has convertible preferred stock with a dilutive effect on DEPS, the “if-converted” method is used. This method assumes the conversion of the preferred stock occurred at the beginning of the accounting period or at issuance, if later. The annual preferred dividend is accordingly added back to earnings available to common shareholders (the numerator of the DEPS ratio).

Question 17

When using the indirect method to prepare a statement of cash flows, which one of the following should be subtracted from net income when determining net cash flows from operating activities?

Answer 17

Amortization of premiums on bonds payable.

The indirect method reconciles the net income of a business with the net operating cash flow. The indirect method removes the effects of (1) all deferrals of past operating cash receipts and payments, (2) all accruals of estimated future operating cash receipts and payments, and (3) all items not affecting operating cash flows to arrive at the net cash flow from operating activities. Thus, the amortization of the premium on bonds payable is subtracted from net income in the reconciliation because it represents a noncash decrease in interest expense (an increase in net income).

Question 18

An entity declared a cash dividend on its common stock on December 15, Year 1, payable on January 12, Year 2. How would this dividend affect equity on the following dates?

12/15/1:
12/31/1:
01/12/2:

Answer 18

Decrease
no effect
no effect

When cash dividends are declared, a liability to the shareholders is created because the dividends must be paid once they are declared. At the declaration date, retained earnings must be debited, resulting in a decrease in retained earnings. The effect is to decrease total equity (assets – liabilities) because liabilities are increased with no corresponding increase in assets. At the balance sheet date, no entry is made, and there is no effect on equity. When the cash dividends are subsequently paid, dividends payable is debited and cash is credited. Thus, at the payment date, equity is also not affected.

Question 19

Debt securities held primarily for sale in the near term to generate income on short-term price differences are known as

Answer 19

Trade Securities.

Trading debt securities are bought and held primarily for sale in the near term. They are purchased and sold frequently. They are initially recorded at cost but are remeasured at fair value at each balance sheet date, with the unrealized holding gains or losses recognized in earnings.