11.14.18 Flashcards
Fact Pattern: Karr, Inc. reported net income of $300,000 for the current year. Changes occurred in several balance sheet accounts as follows:
Equipment: $25,000 increase
Accumulated depreciation: 40,000 increase
Note payable: 30,000 increase
Additional information:
During the current year, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.
In December of the current year, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.
Depreciation expense for the year was $52,000.
In Karr’s current-year statement of cash flows, net cash used in investing activities should be
$2,000.
The cash flows from investing activities include the cash effects of the sale of equipment and the purchase of equipment. The issuance of a note payable as part of the acquisition price of equipment does not involve cash but should be classified as a noncash financing activity. The cash inflow from the sale of equipment (carrying amount + gain) is $18,000 [($25,000 – $12,000) + $5,000]. The cash outflow from the purchase of equipment is $20,000 cash. The $30,000 note payable is included elsewhere. Thus, net cash used is $2,000 ($20,000 – $18,000).
A state or local government has the following funds: Special revenue fund Permanent fund Internal service fund Pension trust fund Debt service fund Capital projects fund Investment trust fund Agency fund Enterprise fund
How many fiduciary funds does this entity have?
3.
Three of the four fiduciary funds are listed: pension trust fund, investment trust fund, and agency fund. Four of the five governmental funds are listed: special revenue fund, permanent fund, debt service fund, and capital projects fund. Both proprietary funds (enterprise and internal service) are listed.
On December 30, Chang Co. sold a machine to Door Co. in exchange for a noninterest-bearing note requiring 10 annual payments of $10,000. Door made the first payment on December 30. The market interest rate for similar notes at date of issuance was 8%. Information on present value factors is as follows:
Period 9:
Present value of $1 at 8%: .50
Present Value of Ordinary Annuity of $1 at 8%: 6.25
Period 10:
Present value of $1 at 8%: .46
Present Value of Ordinary Annuity of $1 at 8%: 6.71
In its December 31 balance sheet, what amount should Chang report as note receivable?
$62,500.
The purchase agreement calls for a $10,000 initial payment and equal payments of $10,000 to be received at the end of each of the next 9 years. The amount reported for the receivable should consist of the present value of the nine future payments. The present value factor to be used is the present value of an ordinary annuity for nine periods at 8%, or 6.25. The note receivable should be recorded at $62,500 ($10,000 × 6.25).
Fact Pattern: On January 1, Evangel Company issued 9% bonds in the face amount of $100,000, which mature in 5 years. The bonds were issued for $96,207 to yield 10%, resulting in a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond discount. Interest is payable annually on December 31.
What is the amount of Evangel’s unamortized bond discount at the end of the first year?
$3,172.
Total interest expense for the year equals the carrying amount of the bonds times the effective rate (yield), or $96,207 × 10% = $9,621. Subtracting the cash interest payment from this leaves the amount of discount amortized ($9,621 – $9,000 = $621). Subtracting this amount from the previous unamortized discount ($3,793) leaves a remaining unamortized discount at the end of Year 1 of $3,172.
Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?
Depreciation Expense:
Composition:
Yes
No
Disclosure of significant accounting policies is required when (1) a selection has been made from existing acceptable alternatives; (2) a policy is unique to the industry in which the entity operates, even if the policy is predominantly followed in that industry; and (3) GAAP have been applied in an unusual or innovative way. A depreciation method is a selection from existing acceptable alternatives and should be included in the summary of significant accounting policies. Financial statement disclosure of accounting policies should not duplicate details presented elsewhere in the financial statements, such as composition of plant assets.
Sable Co., organized on January 2, Year 1, had pretax accounting income of $300,000 and taxable income of $800,000 for the year ended December 31, Year 1. Sable expected to maintain this level of taxable income in future years. The only temporary difference is for accrued product warranty costs expected to be paid as follows: Year 2: $100,000 Year 3: 150,000 Year 4: 150,000 Year 5: 100,000
The applicable enacted income tax rate is 30%. In Sable’s December 31, Year 1, balance sheet, the deferred income tax asset and related valuation allowance should be
Deferred Tax Asset:
Valuation Allowance:
$150,000
$0
Sable should report an accrued product warranty liability of $500,000. The result is a deductible temporary difference of $500,000 because the liability will be settled and related amounts will be tax deductible when the warranty costs are incurred. A deferred tax asset should be measured for deductible temporary differences using the applicable tax rate. Hence, Sable should record a $150,000 ($500,000 × 30%) deferred tax asset. A valuation allowance should be used to reduce a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion will not be realized. In this case, Sable had taxable income of $800,000 for Year 1 and expects to maintain that level of taxable income in future years. The positive evidence therefore indicates that sufficient taxable income will be available for the future realization of the tax benefit of the existing deductible temporary differences. Given no negative evidence, a valuation allowance is not necessary.
A nongovernmental, not-for-profit organization had the following investments:
Bonds
Cost: $9,900
FV 1/1: $10,000
fv 12/31: $9,950
Stock A (100 shares)
Cost:$50 per share
FV 1/1: $45
FV 12/31: $51
Stock B (200 shares)
Cost: $40 per share
FV 1/1: $41
FV 12/31: $49
What amount should be the total value of investments reported in the year-end statement of financial position?
$24,850.
Purchased investments initially are recorded at acquisition cost. Subsequent measurement is at fair value. Thus, the total value of investments should be reported as $24,850 [$9,950 + ($51 × 100) + ($49 × 200)].
The guidance for reporting the financial statements of nongovernmental not-for-profit entities focuses on
Basic information for the entity as a whole.
This guidance is intended to promote the relevance, understandability, and comparability of financial statements issued by NFPs by requiring that certain basic information be reported. The focus of the required financial statements is on the entity as a whole. It is also on (1) reporting assets, liabilities, and net assets; (2) changes in net assets; (3) flows of economic resources; (4) cash flows, borrowing and repayment of borrowing, and other factors affecting liquidity; and (5) service efforts.
Robb Company requires advance payments with special orders from customers for machinery constructed to their specifications. Information for the current year is as follows:
Customer advances – balance 1/1: $295,000
Advances received with orders during the year: 460,000
Advances applied to orders shipped during the year: 410,000
Advances applicable to orders canceled during the year: 125,000
At December 31, what amount should Robb report as a current liability for customer deposits?
$220,000.
The contract liability for advance payments is current because the obligation will be satisfied using current assets (goods manufactured to customer’s specifications). Robb Company designates this account as customer advances. When orders are shipped or when orders are canceled, they should be recorded as decreases in the customer advances balance. As indicated below, the amount that should be reported at year end as the current liability for customer deposits is $220,000.
Wood City, which is legally obligated to maintain a debt service fund, issued the following general obligation bonds on July 1: Term of bonds: 10 years Face amount: $1,000,000 Issue price: 101 Stated interest rate: 6%
Interest is payable January 1 and July 1. What amount of bond issuance premium should be amortized in Wood’s debt service fund for the year ended December 31?
$0.
The debt service fund of a governmental unit is a governmental fund used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest. Bond issuance premium is accounted for as an other financing source in the fund out of which the proceeds are spent. Thus, bond issuance premium is not amortized.
Fact Pattern: Selected financial information for Kristina Company for the year just ended is shown below.
Net income: $2,000,000
Increase in net accounts receivable: 300,000
Decrease in inventory: 100,000
Increase in accounts payable: 200,000
Depreciation expense: 400,000
Gain on the sale of available-for-sale securities: 700,000
Cash receivable from the issue of common stock: 800,000
Cash paid for dividends: 80,000
Cash paid for the acquisition of land: 1,500,000
Cash received from the sale of available-for-sale securities: 2,800,000
Assuming the indirect method is used, Kristina’s cash flow from operating activities for the year is
$1,700,000.
The following is the net cash flow from operating activities calculated using the indirect method:
Net income: $2,000,000
Add: Decrease in inventory: 100,000
Add: Increase in accounts payable: 200,000
Add: Depreciation expense: 400,000
Minus: Increase in net accounts receivable: (300,000)
Minus: Gain on sale of securities: (700,000)
Net cash provided by operating activities: $1,700,000
The adjustment from cost of goods sold (an accrual accounting amount used to calculate net income) to cash paid to suppliers requires two steps: (1) from cost of goods sold to purchases and (2) from purchases to cash paid to suppliers. The $100,000 decrease in inventory is added to net income. It indicates that purchases were $100,000 less than cost of goods sold. The $200,000 increase in accounts payable is added to net income. It indicates that cash paid to suppliers was $200,000 less than purchases. Thus, the net effect of the changes in inventory and accounts payable is that cash paid to suppliers was $300,000 ($100,000 + $200,000) less than the accrual basis cost of goods sold. Depreciation expense ($400,000) is a noncash item included in net income. Hence, it is subtracted from net income. The net accounts receivable balance increased by $300,000, implying that cash collections were less than sales. If sales, collections, write-offs, and recognition of bad debt expense were the only relevant transactions, $300,000 should be subtracted from net income. Use of the change in net accounts receivable as a reconciliation adjustment is a short-cut method. It yields the same net adjustment to net income as separately including the effects of the change in gross accounts receivable, bad debt expense (a noncash item resulting in an addition), and bad debt write-offs (a subtraction to reflect that write-offs did not result in collections). The sale of securities is an investing activity. It also is subtracted from net income.
The following information pertains to Ash Co., which prepares its statement of cash flows using the indirect method:
Interest payable at beginning of year: $15,000
Interest expense during the year: 20,000
Interest payable at end of year: 5,000
What amount of interest should Ash report as a supplemental disclosure of cash flow information?
$30,000.
Under the indirect method, an entity must provide a supplemental disclosure of the amount of interest paid during the period. The amount of interest paid during the period can be calculated from the following equation that reconciles the beginning and ending balance of interest payable:
Beginning interest payable: $15,000
Interest expense recognized during the period: 20,000
Interest paid during the period: (30,000)
Ending interest payable: $5,000
The estimated revenues control account of a governmental unit is debited when
The budget is recorded.
A derivative financial instrument is best described as
A contract that has its settlement value tied to an underlying notional amount.
A derivative is a bet on whether the value of something (underlying notional amount) will go up or down. A derivative has at least one underlying (interest rate, currency exchange rate, price of a specific financial instrument, etc.) and at least one notional amount (number of units specified in the contract) or payment provision, or both. No initial net investment, or one smaller than that necessary for contracts with similar responses to the market, is required. Furthermore, a derivative’s terms require or permit net settlement or provide for the equivalent. Net settlement means that the derivative can be readily settled with only a net delivery of assets. Thus, neither party must deliver (1) an asset associated with its underlying or (2) an asset that has a principal, stated amount, etc., equal to the notional amount.
A newly acquired plant asset is to be depreciated over its useful life. What is the basis for this accounting method?
Going-concern assumption.
A basic feature of financial accounting is that the business entity is assumed to be a going concern in the absence of evidence to the contrary. The going-concern concept is based on the empirical observation that many entities have indefinite lives. The reporting entity is assumed to have a life long enough to fulfill its objectives and commitments and therefore to depreciate wasting assets over their useful lives.
