11.9.18 Flashcards
Expenditures of a government for insurance extending over more than one accounting period
May be allocated among periods or accounted for as expenditures when acquired.
In the governmental fund financial statements, prepaid insurance may be reported under either (1) the purchases method, in which an expenditure is reported when the policy is purchased, or (2) the consumption method, in which an expenditure is reported when the asset is consumed.
In the government-wide statement of activities, depreciation of
Capital assets shared by all of the government’s functions is not required to be included in the direct expenses of those functions.
Depreciation of shared capital assets, such as a structure that houses offices for the tax assessor, election supervisor, and building inspector, should be apportioned to, and included in the direct expenses of, the sharing functions. However, if a capital asset, such as a city hall, serves all of the government’s functions, depreciation of that asset need not be reported as a direct expense of the various functions. It may be displayed as a separate line item or as part of the general government function and may or may not be allocated.
Derby Co. incurred costs to modify its building and to rearrange its production line. As a result, an overall reduction in production costs is expected. However, the modifications did not increase the building’s market value, and the rearrangement did not extend the production line’s life. Should the building modification costs and the production line rearrangement costs be capitalized?
Building Modification Costs:
Production Cost Rearrangement Costs:
Yes
Yes
A rearrangement is the movement of existing assets to provide greater efficiency or to reduce production costs. If the rearrangement expenditure benefits future periods, it should be capitalized. If the building modification costs likewise improve future service potential, they too should be capitalized.
Blue Co. issued preferred stock with detachable common stock warrants at a price that exceeded both the par value and the fair value of the preferred stock. At the time the warrants are exercised, Blue’s total equity is increased by the
Cash Received Upon Exercise of Warrants:
Carrying Amounts of Warrants:
Yes
No
When shares of preferred stock with detachable common stock warrants are issued at a price that exceeds both the par value and the fair value of the preferred stock, the consideration received must be allocated between the preferred stock and the detachable warrants. The amount allocated to the stock warrants outstanding should be recorded in the equity section as contributed capital. At the time the warrants are exercised, contributed capital will reflect both the cash received upon the exercise of the warrants and the carrying amount of the warrants. Total equity, however, will be increased only by the amount of cash received because the carrying amount of the warrants is already included in total equity.
On January 1, Year 1, Purl Corp. purchased as a long-term investment $500,000 face amount of Shaw, Inc.’s 8% bonds for $456,200. The bonds were purchased to yield 10% interest. The bonds mature on January 1, Year 6, and pay interest annually on January 1. Purl uses the effective interest method of amortization. What amount (rounded to nearest $100) should Purl report on its December 31, Year 2, balance sheet for these held-to-maturity bonds?
$468,000.
Under the effective interest method, interest income is equal to the carrying amount of an investment at the beginning of an interest period multiplied by the effective (yield) rate of interest. The carrying amount of the bonds was $456,200 at January 1, Year 1. Hence, interest income for Year 1 was $45,620. The $5,620 difference between interest income and the $40,000 periodic cash flow was the discount to be amortized for Year 1. Accordingly, the carrying amount of the bond investment was $461,820 ($456,200 + $5,620) at the beginning of Year 2. For Year 2, interest income was $46,180, periodic cash flow was $40,000, and the discount amortization was $6,180. The carrying amount of the bonds at December 31, Year 2, thus equals $468,000 ($461,820 + $6,180).
In one of a company’s reporting units, both an asset group and the goodwill are being tested for impairment. Which of the following statements is correct regarding impairment testing and impairment losses?
The other asset group should be tested for an impairment loss before goodwill is tested.
If goodwill and another asset group of a reporting unit are tested for impairment simultaneously, the other asset group must be tested for impairment before goodwill. If the asset group was impaired, the impairment loss would be recognized prior to goodwill being tested for impairment.
A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts was decreased by the
Cash proceeds received.
Because both composite and group methods use weighted averages of useful lives and depreciation rates, early and late retirements are expected to offset each other. Consequently, gains and losses on retirements of single assets are treated as adjustments of accumulated depreciation. The entry is to credit the asset at cost, debit cash for any proceeds received, and debit accumulated depreciation for the difference. Thus, the net carrying amount of the composite asset accounts is decreased by the amount of cash received. The net carrying amount of total assets is unchanged.
A government-wide statement of net position must include which of the following?
A distinction between governmental and business-type activities.
Government-wide financial statements report information about the government as a whole. Thus, they do not display funds or fund types. The governmental activities and business-type activities of the primary government are separately presented. Governmental activities normally are financed by nonexchange revenues (taxes, etc.). They are reported in governmental and internal service funds. Business-type activities are financed at least in part by fees charged to external parties for goods and services. They are reported in enterprise funds.
A state or local government’s reporting includes required supplementary information (RSI) (other than management’s discussion and analysis). Which of the following is not RSI other than MD&A?
Statement of Net Position.
RSI other than MD&A is presented in a separate section of the comprehensive annual financial report following the notes to the basic financial statements. RSI other than MD&A includes (1) schedules, (2) statistical data, (3) budgetary comparison schedules, and (4) other information that is an essential part of financial reporting. It should be presented with, but not as a part of, the basic financial statements of a governmental entity. But the government-wide statement of net position (or the proprietary funds statement of net position) is a basic financial statement, not RSI.
Net assets is an element of the financial statements of nongovernmental not-for-profit entities (NFPs). It
Is the residual interest in the assets of an NFP after subtracting its liabilities.
Net assets equals the residual interest in the assets of an entity that remains after subtracting its liabilities. In an NFP, which has no ownership interest in the same sense as a business, net assets is classified at a minimum as net assets without donor restrictions and net assets with donor restrictions.
During Year 1, Fleet Co.’s trademark was licensed to Hitch Corp. for royalties of 10% of net sales of the trademarked items. Returns were estimated to be 1% of gross sales. On signing the licensing agreement, Hitch paid Fleet $75,000 as an advance against future royalty earnings. Gross sales of the trademarked items during the year were $600,000. What amount should Fleet report as royalty income for Year 1?
$59,400.
Revenue for sales-based royalties from licensed intellectual property, such as a trademark, is recognized as the subsequent sales occur. Net sales for Year 1 equal $594,000 [$600,000 gross sales × (100% – 1%)]. Thus, royalty income is $59,400 ($594,000 × 10%). The remainder of the $75,000 advance is reported as deferred revenue. The entry is to debit cash ($75,000), credit earnings ($59,400), and credit deferred revenue ($15,600).
The prepaid rent of a nongovernmental not-for-profit entity was $80,000 at December 31, Year 2, and $60,000 at December 31, Year 1. Rent expense was $60,000 for Year 2 and $40,000 for Year 1. What amount of cash payments for rent is reported in the Year 2 net cash flows from operating activities presented using the direct method?
$80,000.
The amount of cash payments for rent equals $80,000 ($80,000 Year 2 ending balance of prepaid rent + $60,000 Year 2 expense – $60,000 Year 2 beginning balance of prepaid rent).
On September 30, Year 1, a component that represents a major line of an entity’s business was properly classified as held for sale. This transaction is probable and is expected to qualify for recognition as a completed sale within 1 year. The component’s operating loss for the period October 1 through December 31, Year 1, should be included in the Year 1 income statement as part of
Operating gain or loss of the discontinued component.
A component of an entity, e.g., an operating segment, reporting unit, subsidiary, or asset group, may be disposed of or classified as held for sale. In these circumstances, the component’s results of operations are reported in discontinued operations if the component has a major effect on an entity’s operations and financial results (e.g., major line of business, major geographical area, major equity method investment, or other major part of an entity). The income statement reports the component’s results of operations, including (1) any gain or loss from measuring the component at fair value minus cost to sell or (2) any gain or loss on disposal in discontinued operations in the period(s) when they occur. Accordingly, the operating loss of the component for the last quarter of Year 1 should be included in the operating gain or loss of the discontinued component reported in the discontinued operations section of the income statement.
Murray is planning a project that will cost $22,000. The annual cash inflow, net of income taxes, will be $5,000 a year for 7 years. The present value of $1 at 12% is as follows:
Period 1 Present Value of $1 at 12%: .893 Period 2 Present Value of $1 at 12%: .797 Period 3 Present Value of $1 at 12%: .712 Period 4 Present Value of $1 at 12%: .636 Period 5 Present Value of $1 at 12%: .567 Period 6 Present Value of $1 at 12%: .507 Period 7 Present Value of $1 at 12%: .452
Using a rate of return of 12%, what is the present value of the cash flow generated by this project?
If the cash inflow, net of taxes, at the end of each of 7 years is $5,000, and if the discount rate is 12%, the present value of this series of cash flows will be equal to the present value of an ordinary annuity of $5,000 for 7 years at 12%. The interest factor for the present value of an ordinary annuity is equal to the sum of the interest factors for the present value of $1 for the same period. The interest factor for an ordinary annuity of $5,000 for 7 periods is 4.564. The present value is $22,820 ($5,000 × 4.564).
The alternative is to calculate the present value of each $5,000 cash flow using the interest factor for the present value of $1 at 12% for each of the periods 1 through 7. The sum of these products is equal to the present value of an ordinary annuity of $5,000 for 7 periods at 12%.
5,000 × .893 = $4,465 5,000 × .797 = 3,985 5,000 × .712 = 3,560 5,000 × .636 = 3,180 5,000 × .567 = 2,835 5,000 × .507 = 2,535 5,000 × .452 = 2,260 5,000 × 4.564 = $22,820
On January 1, Year 2, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, Year 1, to January 1, Year 2, amounted to $8,000. On January 1, Year 2, what amount should Oak report as bonds payable, net of discount?
$388,000.
A bond issued “at 97” is issued at a price equal to 97% of its face amount (400 bonds × $1,000 face amount × .97 = $388,000). At the issue date, no time has passed, so no amortization has occurred, and the accrued interest is credited to either interest payable or interest expense. The reported amount is therefore $388,000 ($400,000 – $12,000).
