11.14.18 Flashcards
The following financial resources were among those held by Seco City:
For acquisition of major capital facilities: $6,000,000
To create a public-purpose expendable trust: 2,000,000
What amount should be accounted for in Seco’s special revenue funds?
$2,000,000.
A capital projects fund is used to account for financial resources restricted, committed, or assigned to expenditures for capital outlays, including the acquisition or construction of capital facilities and other capital assets. Given that the $6 million amount is to be used for the acquisition of major capital facilities, it should be accounted for in a capital projects fund. A special revenue fund is used to account for the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. Thus, the $2 million amount to be used to create a public-purpose expendable trust should be accounted for in a special revenue fund.
On a statement of financial position, all of the following should be classified as current liabilities except
Deferred income taxes for differences based on depreciation methods.
On the statement of financial position, deferred tax liabilities and assets are classified as noncurrent amounts.
Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared with the accrual-basis method of accounting, Sanni’s cash-basis pretax income is
Higher by $36,000.
The $20,000 decrease in accounts receivable was included in accrual-basis pretax income for a prior period. Thus, it must be subtracted from the $150,000 of cash-basis pretax income to determine accrual basis pretax income. The increase in accounts payable is not included in cash-basis income because this expense has not been paid. It is included in accrual-basis pretax income as an expense and must be subtracted to determine accrual basis pretax income. The cash-basis pretax income therefore exceeds accrual-basis pretax income by $36,000 ($150,000 cash basis – $20,000 – $16,000 = $114,000 accrual basis).
A company granted its employees 100,000 stock options on January 1, Year 1. The stock options had a grant date fair value of $15 per option and a three-year vesting period. On January 1, Year 2, the company estimated the fair value of the stock options to be $18 per option. Assuming that the company did not grant any additional options or modify the terms of any existing option grants during Year 2, what amount of share-based compensation expense should the company report for the year ended December 31, Year 2?
$500,000.
The cost of employee services performed in exchange for awards of share-based compensation is measured at the grant-date fair value of the equity instruments issued. Total compensation cost at the end of the requisite service period is based on the number of equity instruments for which the requisite service was completed. Thus, the total compensation costs over the three-year vesting period are $1,500,000 (100,000 share options × $15 grant date fair value per share option). Employee compensation cost for an award classified as equity is recognized over the requisite service period. Thus, $500,000 ($1,500,000 total compensation costs over the vesting period ÷ 3 years of vesting period) of compensation expense should be recognized each year.
The following information pertains to a nongovernmental not-for-profit entity’s statement of activities for the 12 months just ended:
Income from continuing operations: $110,000
Error in the previous year’s statement of activities discovered during the current period: (20,000)
Cumulative effect of change in accounting principle: 30,000
The change in net assets from operations for the year is
$110,000.
The cumulative effect of a change in accounting principle and prior period errors has no effect on current period income. They must be accounted for retrospectively. Retrospective application requires the beginning balance of net assets to be adjusted for the cumulative effect of (1) applying a new principle and (2) errors on the prior period statement of activities. The change in net assets includes only income from continuing operations of $110,000.
Which of the following does not result in recognition of a deferred tax asset?
Receipt of municipal bond interest.
Municipal bond interest is nontaxable, so it results in a permanent, not a temporary, difference. A permanent difference is an event that is recognized either in pretax financial income or in taxable income but never in the other. It does not result in a deferred tax asset or liability. Examples of items recognized in pretax financial income but not in taxable income are municipal bond interest, premiums paid by a beneficiary entity on insurance policies for its key executives, and the proceeds from such policies. Examples of items recognized in taxable income but not in financial income are the dividends received deduction and percentage depletion.
On November 1, Year 4, Davis Co. discounted with recourse at 10% a 1-year, noninterest-bearing, $20,500 note receivable maturing on January 31, Year 5. What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, Year 4?
$20,500.
When a note receivable is discounted, the receivable is removed from the accounts, a gain or loss is recognized, and a contingent liability is disclosed in a note. If the receivables are not paid, Davis Co. may be responsible for the full amount of the note $(20,500). Consequently, this amount should be disclosed in the notes.
Which of the following is reported as interest expense?
Amortization of discount of a note.
Discount or premium, loan origination fees, etc., are amortized in accordance with the effective-interest method to arrive at a periodic interest expense that reflects a constant rate of interest when applied to the beginning balance.
Dixon Co. incurred costs of $3,300 when it issued, on August 31, Year 1, 5-year debenture bonds dated April 1, Year 1. What amount of issue expense should Dixon report in its income statement for the year ended December 31, Year 1?
$240.
Debt issue costs are reported as a direct deduction from the face amount of the debt. Subsequent to their initial recognition, debt issue costs are amortized over the term of the debt. The bonds will be outstanding for 55 months (5 years – the period from April 1, Year 1, to August 31, Year 1). Hence, straight-line amortization is $240 [$3,300 × ( 4 ÷ 55 months)]. The interest method is theoretically superior, but the straight-line method may be applied if the results are not materially different.
How should the effect of a change in accounting estimate be accounted for?
By prospectively applying the change to current and future periods.
The effect of a change in accounting estimate is accounted for in the period of change, if the change affects that period only, or in the period of change and future periods, if the change affects both. For a change in accounting estimate, the entity may not (1) restate or retrospectively adjust prior-period statements or (2) report pro forma amounts for prior periods.
A voluntary health and welfare entity received a $700,000 perpetual endowment during the year. The donor stipulated that the income and investment appreciation be used to maintain its senior center. The endowment fund reported a net investment appreciation of $80,000 and investment income of $50,000. The entity spent $60,000 to maintain its senior center during the year. What amount of change in net assets with donor restrictions should the entity report?
$770,000.
The $700,000 contribution to a perpetual endowment is an increase in net assets with donor restrictions. Income or appreciation from donor-restricted perpetual endowments is an increase in donor-restricted support if the donor restricts its use. However, if the restriction expires in the period the income and appreciation are recognized, it may be reported as net assets without donor restrictions if the entity (1) has a similar policy for reporting contributions received, (2) reports consistently, and (3) discloses its accounting policy. Assuming these criteria were satisfied, the donor-imposed restriction on the income and gains is deemed to have expired but only to the extent it was expended during the year. Accordingly, the change in net assets with donor restrictions was $70,000 ($80,000 gain + $50,000 income – $60,000 spent). The total change in net assets with donor restrictions is $770,000 ($700,000 contribution to a permanent endowment + $70,000 unexpended gain and income).
Green Co. had the following transactions at December 31:
Cash proceeds from sale of investment in bonds of Blue Co. classified as available-for-sale (carrying amount = $60,000): $75,000
Dividends received on Grey Co. stock: 10,500
Common stock purchased from Brown Co.: 38,000
What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31?
$37,000.
The sale proceeds of available-for-sale debt securities ($75,000) are a cash inflow from an investing activity. Cash outflows from acquiring equity instruments ($38,000) also are from an investing activity. But cash inflows from operating activities include cash receipts in the form of dividends ($10,500). Thus, the net cash flow from investing activities is $37,000 ($75,000 – $38,000).
Fact Pattern: At December 31, Year 4, Curry Co. had the following balances in selected asset accounts as shown below. Curry also had current liabilities of $1,000 at December 31, Year 4, and net credit sales of $7,200 for the year then ended.
Year 4:
Cash: $300
A/R: $1,200
What is Curry’s acid-test ratio at December 31, Year 4?
1.5.
The quick assets are cash ($300), marketable securities ($0), and net accounts receivable ($1,200). The quick ratio equals quick assets ($1,500) divided by current liabilities ($1,000), or 1.5.
Fact Pattern: On November 1, Year 1, Iba Co. entered into a contract with a customer to sell 150 machines for $75 each. The customer obtains control of the machines at contract inception. Iba’s cost of each machine is $45. Iba allows the customer to return any unused machine within 1 year from the sale date and receive a full refund. Iba uses the expected value method to estimate the variable consideration. Based on Iba’s experience and other relevant factors, it reasonably estimates that a total of 20 machines (12 machines in Year 1 and 8 machines in Year 2) will be returned. Iba estimates that (1) the machines are expected to be returned in salable condition and (2) the costs of recovering the machines will be immaterial. During Year 1, 10 machines were returned. At the end of Year 1, Iba continues to estimate that a total of 20 machines will be returned within 1 year from the sale date.
What amount of refund liability, if any, will be reported in Iba’s December 31, Year 1, balance sheet?
$750.
A refund liability is reported at a gross amount separately from the revenue account. This liability is the amount of cash expected to be refunded to the customer given a right of return. At the end of Year 1, Iba estimates that 10 machines (20 total machines expected to be returned – 10 machines actually returned in Year 1) will be returned in Year 2. Accordingly, a refund liability of $750 ($75 × 10) is reported in Iba’s December 31, Year 1, balance sheet.
Which of the following is not disclosed on the statement of cash flows when prepared under the direct method, either on the face of the statement or in a separate schedule?
A reconciliation of ending retained earnings to net cash flow from operations.
A reconciliation of net income, not ending retained earnings, to net cash flow from operations is reported in a separate schedule if the direct method is used. This reconciliation may be reported within the statement or provided in a separate schedule if the indirect method is used.
