11.13.18 Flashcards
A company recognized an intangible asset. The intangible asset is amortized over its useful life
If that life is determined to be finite.
A recognized intangible asset is amortized over its useful life if that useful life is finite, that is, unless the useful life is determined to be indefinite. The useful life of an intangible asset is indefinite if no foreseeable limit exists on the period over which it will contribute, directly or indirectly, to the reporting entity’s cash flows.
During the year, a city’s electric utility, which is operated as an enterprise fund, rendered billings for electricity supplied to the general fund. Which of the following accounts should be debited by the general fund?
Expenditures.
Enterprise funds are used to account for operations similar to those of private businesses. The services provided by the enterprise fund to the general fund are (1) most likely at prices equivalent to external exchange values and (2) classified as interfund services provided and used. The result is revenue to the seller and an expenditure to the buyer, a governmental fund. Unpaid amounts are interfund receivables or payables. The entry is to debit expenditures and credit due to enterprise fund.
The following information pertains to Park Township’s general fund at December 31:
Total assets, including $200,000 of cash: $1,000,000
Total liabilities: 600,000
Encumbrances: 100,000
Appropriations do not lapse at year end. At December 31, what amount should Park report as unassigned fund balance in its general fund balance sheet?
$300,000.
Appropriations encumbered at year end are reported in the balance sheet as committed or assigned fund balance (as appropriate). Accordingly, the amount of the unassigned fund balance in the general fund is equal to the amount of assets available to finance expenditures of the current or succeeding year. Funds that are (1) nonspendable, (2) restricted, (3) committed, or (4) assigned must be removed from the unassigned fund balance. Because $600,000 is needed to cover liabilities and $100,000 is reported in assigned or committed fund balance, the unassigned fund balance is $300,000 ($1,000,000 total assets – $600,000 liabilities – $100,000 assigned or committed).
Gem Co. determined that, due to obsolescence, equipment with an original cost of $900,000 and accumulated depreciation at January 1, Year 2, of $420,000 had suffered an impairment loss. The sum of the undiscounted cash flows expected to result from the use and disposition of this long-lived asset is less than its carrying amount, and its fair value at that date was $300,000. In addition, the remaining useful life of the equipment was reduced from 8 years to 3. Assuming that the straight-line method is used in its December 31, Year 2, balance sheet, what amount should Gem report as accumulated depreciation?
$700,000.
After the recognition of the impairment loss, the carrying amount should be the fair value of $300,000. Thus, $180,000 ($480,000 – $300,000) of additional accumulated depreciation should be recorded. In addition, the depreciation for Year 2 should be $100,000 ($300,000 ÷ 3). Hence, the accumulated depreciation in the balance sheet on 12/31/Yr 2 is $700,000 ($420,000 + $180,000 to decrease carrying amount + $100,000 depreciation for the year).
A government’s police department reports appropriations of $10,000, encumbrances of $2,000, and expenditures of $5,000. What is the amount of available appropriations for the police department?
$3,000.
An appropriation is an anticipatory liability (a credit). It records the amount authorized to be spent by the government for the fiscal period. A government commits to expend resources when a contract is signed or a purchase order is approved. The amount (an estimate of actual cost) then may be formally recorded in a budgetary account called an encumbrance. Encumbrance accounting may be used only for internal purposes in governmental funds, especially general and special revenue funds. The amount of available appropriations is $3,000 ($10,000 appropriated – $2,000 encumbrances – $5,000 expenditures).
An internal auditor is deriving cash flow data based on an incomplete set of facts. Bad debt expense was $2,000. Additional data for this period follows:
Credit sales: $100,000
Gross accounts receivable – beginning balance: 5,000
Allowance for bad debts – beginning balance: (500)
Accounts receivable written off: 1,000
Increase in net accounts receivable (after subtraction of allowance for bad debts): 30,000
How much cash was collected this period on credit sales?
$68,000.
The beginning balance of gross accounts receivable (A/R) was $5,000 (debit). Thus, net beginning A/R was $4,500 ($5,000 – $500 credit in the allowance for bad debts). The allowance was credited for the $2,000 bad debt expense. Accordingly, the ending allowance (credit) was $1,500 ($500 – $1,000 write-off + $2,000). Given a $30,000 increase in net A/R, ending net A/R must have been $34,500 ($4,500 beginning net A/R + $30,000), with ending gross A/R of $36,000 ($34,500 + $1,500). Collections were therefore $68,000 ($5,000 beginning gross A/R – $1,000 write-off + $100,000 credit sales – $36,000 ending gross A/R).
Which of the following is not a characteristic of a pension trust fund?
Prohibits participation by more than one employer in a single pension plan.
A pension trust fund reports contributions to pension plans to be held in a fiduciary capacity by a governmental entity, tracks investments in the fund, and calculates and disburses benefits due to members and beneficiaries. Typical kinds of pension plans include single-employer plans, agent multiple-employer plans, and cost-sharing multiple-employer plans. Thus, pension trust funds allow more than one employer to participate in a single pension plan.
East Corp., a company with a fiscal year-end on October 31, had sufficient retained earnings as a basis for dividends but was temporarily short of cash. East declared a dividend of $100,000 on February 1, Year 3, and issued promissory notes to its shareholders in lieu of cash. The notes, which were dated February 1, Year 3, had a maturity date of January 31, Year 4, and a 10% interest rate. How should East account for the scrip dividend and related interest?
Debit retained earnings for $100,000 on February 1, Year 3, and debit interest expense for $7,500 on October 31, Year 3.
When a scrip dividend is declared, retained earnings should be debited and scrip dividends (or notes) payable should be credited for the amount of the dividend ($100,000) excluding interest. Interest accrued on the scrip dividend is recorded as a debit to interest expense up to the balance sheet date with a corresponding credit for interest payable. Thus, interest expense will be debited and interest payable credited for $7,500 [$100,000 × 10% × (9 months ÷ 12 months)] on 10/31/Year 3.
For external reporting purposes, the not-for-profit reporting model requires information about
The entity as a whole but not about individual funds.
The not-for-profit reporting model emphasizes information about the entity as a whole, not individual funds. Consequently, fund accounting is not required for external reporting but is not precluded.
A public school district should recognize revenue from property taxes levied for its debt service fund when
Funds from the levy are measurable and available to the district.
Debt service funds apply the modified accrual basis of accounting. Thus, revenues are recognized when they are measurable and available. Property tax revenues are recognized in the period for which the taxes are levied if the availability criterion is met. For property taxes, this criterion is met if they are collected within the current period or soon enough thereafter (not exceeding 60 days) to pay current liabilities.
A storm damaged the roof of a nongovernmental, not-for-profit organization’s building. A professional roofer repaired the roof at no charge. How should the roof repairs be recognized in the statement of activities?
As an increase in expenses and an increase in contributions from donated services.
Contributions of services are recognized if they (1) create or enhance nonfinancial assets or (2)(a) require special skills, (b) are provided by those having such skills, and (c) usually would be purchased if not donated. Contributions received ordinarily are accounted for when received at fair value. Debits are to (1) assets (e.g., cash or other assets), (2) liabilities (e.g., for payment of an NFP’s debt), or (3) expenses (e.g., when the contribution is received and used at the same time). Credits are to (1) contribution revenue if the transactions are part of the NFP’s ongoing major or central operations or (2) contribution gain if the transactions are peripheral or incidental. The contribution of services is received and used at the same time, so the debit is to expenses. The credit most likely is to contribution revenue.
In its Year 3 income statement, Noll Corp. reported depreciation of $400,000. Noll reported depreciation of $550,000 on its Year 3 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next 3 years. Assume that the enacted income tax rates are 35% for Year 3, 30% for Year 4, and 25% for Year 5 and Year 6. What amount should be included in the deferred income tax liability in Noll’s December 31, Year 3, balance sheet?
$40,000.
At 12/31/Year 3, the only temporary difference is the $150,000 ($550,000 – $400,000) excess of the tax depreciation over the book depreciation. This temporary difference will give rise to a $50,000 taxable amount in each of the years Year 4 through Year 6. Given the enacted tax rates of 30% in Year 4 and 25% in Year 5 and Year 6, the total tax consequences are $40,000, which is the balance that should be reported in the deferred income tax liability at year end.
Lorraine Co. has determined its fiscal year-end inventory on a LIFO basis to be $400,000. Information pertaining to that inventory follows: Estimated selling price: $408,000 Estimated cost of disposal: 20,000 Normal profit margin: 60,000 Current replacement cost: 360,000
Lorraine records losses that result from applying the lower-of-cost-or-market (LCM) rule. At its year end, what should be the net carrying value of Lorraine’s inventory?
$360,000.
Inventory accounted for using LIFO or the retail inventory method is measured at the lower of cost or market. Under the LCM method, market is current replacement cost subject to a maximum (ceiling) equal to net realizable value and a minimum (floor) equal to net realizable value minus a normal profit. NRV equals selling price minus costs of completion and disposal. Here, original cost is $400,000 and replacement cost is $360,000. The LCM method uses the lower of the two, $360,000, to measure inventory. However, the inventory measure cannot exceed the NRV of $388,000 ($408,000 selling price – $20,000 cost of disposal). Furthermore, the inventory carrying amount cannot be lower than NRV minus normal profit, or $328,000 ($388,000 NRV – $60,000 normal profit). Because the lower of cost or market ($360,000) is between $388,000 (ceiling) and $328,000 (floor), the net carrying amount is $360,000.
The presentation of the major classes of operating cash receipts (such as receipts from customers) minus the major classes of operating cash disbursements (such as cash paid for merchandise) is best described as the
Direct method of calculating net cash provided or used by operating activities.
The direct method converts the accrual-basis amounts in the income statement to the cash basis. It then reports the separate categories of gross cash receipts and disbursements. Net cash flow from operating activities is the difference between total cash receipts and total cash disbursements.
How should a governmental unit classify the fines it assesses?
Imposed nonexchange revenues.
Imposed nonexchange revenues result from assessments imposed on nongovernmental entities, including individuals, other than assessments on exchange transactions. Examples are property taxes, fines, and forfeitures.
