11.14.18 Flashcards
Water Co. owns 80% of the outstanding common stock of Fire Co. On December 31, Year 3, Fire sold equipment to Water at a price in excess of Fire’s carrying amount but less than its original cost. On a consolidated balance sheet at December 31, Year 3, the carrying amount of the equipment should be reported at
Water’s original cost minus Fire’s recorded gain.
In consolidated financial statements, the effects of intraentity transactions should be eliminated. The original amount recorded for the acquisition by Water Co. of the equipment from Fire Co. was the carrying amount on Fire’s balance sheet plus the gain on the sale. In the consolidated financial statements, the equipment should be reported at the amount previously recorded on Fire’s balance sheet. This amount is the original cost recorded by Water minus the gain recognized by Fire when the transaction took place.
Certain costs of internal-use software not qualifying as R&D costs should be capitalized in which stage(s), if any, of software development?
Preliminary Project Storage:
Application Development State:
Post Implementation/Operational Stage:
No
Yes
No
Certain internal and external development costs of internal-use software not qualifying as R&D costs should be expensed during the preliminary project and post-implementation/operation stages. However, they should be capitalized during the application development stage. Costs capitalizable include external direct costs of materials and services consumed, payroll and payroll-related costs for employees to the extent they spend time directly on the project, and interest costs. Furthermore, costs to develop or obtain software allowing for access or conversion of old data by a new system are also capitalized.
Governmental fund financial statements are prepared using the
Economic Resources Measurement Focus:
Current Financial Resources Measurement Focus:
Accrual Basis:
Modified Accrual:
No
Yes
No
Yes
The current financial resources measurement focus and the modified accrual basis of accounting are required in the financial statements of governmental funds. The emphasis is on determination of financial position and changes in it (sources, uses, and balances of financial resources). Revenues should be recognized when they become available and measurable. Expenditures should be recognized when the fund liability is incurred, if measurable. However, unmatured interest on general long-term liabilities is recognized when due.
Rock Co.’s financial statements had the following balances at December 31:
Infrequently occurring gain: $50,000
Foreign currency translation gain; 100,000
Net income; 400,000
Unrealized gain on available-for-sale debt securities: 20,000
What amount should Rock report as comprehensive income for the year ended December 31?
$520,000.
Comprehensive income includes all changes in equity of a business entity except those changes resulting from investments by owners and distributions to owners. Comprehensive income includes two major categories: net income and other comprehensive income (OCI). Net income includes the results of continuing and discontinued operations. Components of comprehensive income not included in the determination of net income are included in OCI, for example, unrealized gains and losses on available-for-sale debt securities and certain foreign currency items, such as a translation adjustment. The infrequently occurring gain of $50,000 has already been included in the determination of net income. Thus, comprehensive income equals $520,000 ($400,000 net income + $100,000 translation gain + $20,000 unrealized gain on available-for-sale securities).
Lakeside Electric purchased a truck for $38,600 to transport equipment to various job sites. For this purpose, storage bins were welded to the truck bed at a cost of $1,700. Doug Lombardi, controller of Lakeside, estimates the useful life of the truck to be 5 years and the residual value to be $1,000. Using the double-declining balance method, the depreciation expense on the truck for its second year of use is
$9,672.
Under the double-declining balance method, the full cost of the asset, or $40,300 ($38,600 + $1,700), is depreciated, but not below salvage value. Because the straight-line rate for a 5-year asset is 20% (100% ÷ 5), the double-declining balance rate is 40% (20% × 2). The first year’s depreciation is $16,120 ($40,300 × 40%), leaving a carrying amount for the second year of $24,180 ($40,300 – $16,120). The second year’s depreciation is thus $9,672 ($24,180 × 40%).
The following information is available from Sand Corp.’s accounting records for the year ended December 31, Year 6:
Cash received from customers: $870,000
Rent received; 10,000
Cash paid to suppliers and employees: 510,000
Taxes paid: 110,000
Cash dividends paid: 30,000
Net cash flow provided by operations for Year 6 was
$260,000.
Payment of dividends is a financing activity. All other transactions listed are cash flows from operating activities. Accordingly, the net cash flow provided by operations is $260,000 ($870,000 + $10,000 – $510,000 – $110,000).
The following costs were incurred by Griff Co., a manufacturer, during the current year: Accounting and legal fees: $25,000 Freight-in: 175,000 Freight-out; 160,000 Officers’ salaries: 150,000 Insurance: 85,000 Sales representatives’ salaries: 215,000
What amount of these costs should be reported as general and administrative expenses?
$260,000.
General and administrative expenses are incurred for the direction of the entity as a whole and are not related entirely to a specific function, e.g., selling or manufacturing. They include accounting, legal, and other fees for professional services; officers’ salaries; insurance; wages of office staff; miscellaneous supplies; utilities costs; and office occupancy costs. Thus, the general and administrative expenses for Griff equaled $260,000 ($25,000 + $150,000 + $85,000).
At December 31, Year 2, Taos Co. estimates that its employees have earned vacation pay of $100,000. Employees will receive their vacation pay in Year 3. Should Taos accrue a liability at December 31, Year 2, if the rights to this compensation accumulated over time or if the rights are vested?
Accumulated:
Vested:
Yes
Yes
GAAP require an accrual for compensated services when the compensation relates to services previously provided, the benefits either vest or accumulate, and payment is both probable and reasonably estimable. The single exception is for sick pay benefits, which must be accrued only if the rights vest.
Meen County approved an annual budget for the general fund with estimated revenues of $2,000,000,000, appropriations of $1,850,000,000, and approved transfers of $100,000,000. Which amount is required to reconcile the governmental fund financial statements to the government-wide financial statements?
$0.
One step in preparing government-wide financial statements is to convert the modified accrual data in the governmental fund financial statements. Thus, reconciliation adjustments are necessary to convert the data to the full accrual basis. The conversion is performed at the total governmental fund summary level, not at the individual fund level. However, a government-wide journal entry is not required because budget entries are not reported.
When the double-extension approach to the dollar-value LIFO inventory method is used, the inventory layer added in the current year is multiplied by an index number. Which of the following correctly states how components are used in the calculation of this index number?
In the numerator, the ending inventory at base-year cost and in the denominator, the ending inventory at current-year cost.
The numerator is the current-year cost and the denominator is the base-year cost.
The following revenues were among those reported by Ariba Township in the current year:
Net rental revenue (after depreciation) from a parking garage owned by Ariba: $40,000
Interest earned on investments held for employees’ retirement benefits: 100,000
Property taxes: 6,000,000
What amount of the foregoing items should be accounted for in Ariba’s governmental funds?
$6,000,000.
The parking garage is accounted for in an enterprise fund, which is a proprietary fund. Investments held for employees’ retirement benefits are accounted for in a pension (or other employee benefit) trust fund, which is a fiduciary fund. Thus, only the property taxes should be recorded in the governmental funds.
A nongovernmental not-for-profit entity discovered that equipment purchased on January 1, Year 1, for $650,000 was incorrectly expensed instead of capitalized. The equipment should have been depreciated (straight-line method) over 5 years with no salvage value. What amount should be recorded as equipment at January 1, Year 5, when the error was discovered?
$650,000.
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. Equipment should be debited and unrestricted net assets should be credited for $650,000 for the purchase of the equipment. Also, accumulated depreciation should be credited and net assets without donor restrictions should be debited for $520,000 [($650,000 ÷ 5 years) × 4 years], the total accumulated depreciation that should have been recorded for Years 1 through 4.
Which of the following statements regarding foreign exchange gains and losses is true (where the exchange rate is the ratio of units of the functional currency to units of the foreign currency)?
An exchange gain occurs when the exchange rate increases between the date a receivable is recorded and the date of cash receipt.
A foreign currency transaction gain or loss (commonly known as a foreign exchange gain or loss) is recorded in earnings. When the amount of the functional currency exchangeable for a unit of the currency in which the transaction is fixed increases, a transaction gain or loss is recognized on a receivable or payable, respectively. The opposite occurs when the exchange rate (functional currency to foreign currency) decreases.
What is the purpose of information presented in notes to the financial statements?
`To provide disclosures required by generally accepted accounting principles.
Notes are an integral part of the basic financial statements. Notes provide information essential to understanding the financial statements, including disclosures required by GAAP.
Which of the following lead(s) to the use of fund accounting by a governmental organization?
Financial Control:
Legal Restrictions:
Yes
Yes
The diversity of governmental activities and the need for legal compliance preclude the use of a single accounting entity. Thus, independent, distinct fiscal and accounting entities called funds are established to provide not only financial control but also to ensure compliance with finance-related legal provisions.
