11.9.18 Flashcards

1
Q

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction?

A

$70,000.

The gain on a bargain purchase arising from a business combination equals the excess of 1. over 2.:
The net of the acquisition-date fair value of
The identifiable assets acquired and
Liabilities assumed

The sum of the acquisition-date fair value of
The consideration transferred
Any noncontrolling interest
Any previously held equity interest in the acquiree

The net of the acquisition-date fair value of the identifiable assets acquired and the liabilities assumed was $280,000 ($350,000 FV of assets – $70,000 FV of liabilities). The acquisition-date fair value of the consideration transferred was $210,000 [(20,000 shares × $10 FV per share) + $10,000 FV of contingent consideration]. Contingent consideration given in exchange for the acquiree is usually an obligation to transfer something to the former owners if a specified condition is met. Because the acquirer received 100% of the voting interests of the acquiree, no controlling interest or previously held equity interest in the acquiree existed. Consequently, the acquiree recognizes an ordinary gain in earnings of $70,000 ($280,000 FV net identifiable assets – $210,000 FV consideration transferred).

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2
Q

Fact Pattern: Early in Year 2, a nongovernmental not-for-profit entity (NFP) received a $2,000,000 gift. The donor specified that the gift be invested in a perpetual endowment, with income restricted to provide speaker fees for a lecture series named for the benefactor. The NFP is responsible for all other costs associated with initiating and administering this series. The donor’s stipulation does not address gains and losses on this perpetual endowment, and the NFP reports only the minimum required classes of net assets. In Year 2, the investments purchased with the gift earned $50,000 in dividend income. The fair value of the investments increased by $120,000. The applicable state law is based on the Uniform Prudent Management of Institutional Funds Act (UPMIFA).

The $2 million gift from the benefactor should be recorded in the Year 2 statement of activities as an increase in

A

Net assets with donor restrictions.

A donor-imposed restriction limits the use of contributed assets. This gift is unconditional in the sense that no condition is imposed on the transfer, but it includes a perpetual restriction on the use of the assets. Because the NFP reports only the minimum required classes of net assets (net assets without donor restrictions and net assets with donor restrictions), the gift therefore should be classified as an increase in net assets with donor restrictions.

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3
Q

The primary authoritative body for determining the measurement focus and basis of accounting standards for governmental fund operating statements is the

A

GASB

The GASB is the primary body that establishes authoritative accounting and reporting standards, including those on measurement focus and basis of accounting, for state and local governments. However, pronouncements in effect when the GASB was created remain in force until changed by a subsequent GASB pronouncement.

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4
Q

In governmental accounting, a fund is
I. The basic accounting unit
II. Used to assist in ensuring fiscal compliance

A

Both I & II.

Although government-wide financial statements also are reported, the diversity of governmental activities and the need for legal compliance preclude the use of a single accounting entity. Thus, independent, distinct entities called funds are established. A fund is a fiscal and accounting entity with a self-balancing set of accounts. It records (1) financial resources (including cash), (2) related liabilities, (3) residual equities or balances, and (4) changes in them. These items are recognized separately because they relate to specific activities or certain objectives that are subject to special regulations or limitations. A fund accounting system of a governmental reporting entity must be able to present fairly in conformity with GAAP and with full disclosure the financial position and results of operations of the funds. Moreover, it must determine and demonstrate compliance with finance-related legal and contractual provisions.

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5
Q
An entity that prepares its financial statements using IFRS reported the following selected per-unit data relating to work-in-process:
Selling price:  $100
Completion costs: 10
Historical cost: 91
Replacement cost: 108
Normal gross profit; 20
Selling cost: 5

In comparison with historical cost, what will be the per-unit effect on gross profit of measuring ending inventory?

A

Reduction of $6.

Under IFRS, inventories are measured subsequent to acquisition at the lower of cost or net realizable value (NRV). NRV equals selling price minus estimated completion and selling costs. Given that historical cost is $91 and NRV is $85 ($100 selling price – $10 completion cost – $5 selling cost), the effect on per-unit gross profit is a reduction of $6. This amount is expensed and presented as a component of cost of goods sold.

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6
Q

Effective January 1, Year 1, Flood Co. established a defined benefit pension plan with no retroactive benefits. The first of the required equal annual contributions was paid on December 31, Year 1. A 10% discount rate was used to calculate service cost, and a 10% rate of return was assumed for plan assets. All information on covered employees for Year 1 and Year 2 is the same. How should the service cost component of pension expense for Year 2 compare with Year 1, and should the Year 1 balance sheet report a pension asset or liability?

Service cost for year 2 compared to year 1:
Pension amount reported on the year 1 balance sheet:

A

Greater than
Asset

Service cost equals the actuarial present value of benefits attributed by the benefit formula to services rendered by employees during the period. Service cost is unaffected by the funded status of the plan. The minimum pension expense for Year 1 will be equal to the service cost. Any gain or loss arising in Year 1 will be amortized in the minimum pension expense in subsequent periods. No prior service cost is amortized because no retroactive benefits were granted at the inception of the plan. No interest cost is included because the PBO on 1/1/Year 1 was $0 (no benefits had been earned at that date). No expected return on plan assets is recognized because no plan assets existed during the period (the first contribution was on 12/31/Year 1). Because the information on the covered employees for both Year 1 and Year 2 is the same, the actual benefits to be paid attributable to each of these years also will be the same. Thus, service cost for Year 1 will be less than for Year 2 because the present value of the same future benefits will be based on a discount period that is 1 year longer. It is given that the company makes required equal annual contributions to the plan. Accordingly, the contribution in Year 1 will exceed pension expense in Year 1 (the plan will be overfunded). A pension asset should be reported in Year 1 on the balance sheet to recognize the funded status of the plan.

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7
Q

Estimates of price-level changes for specific inventories are required for which of the following inventory methods?

A

Dollar-value LIFO.

Dollar-value LIFO accumulates inventoriable costs of similar (not identical) items. These items should be similar in the sense of being interchangeable, having similar uses, belonging to the same product line, or constituting the raw materials for a given product. Dollar value LIFO determines changes in ending inventory in terms of dollars of constant purchasing power rather than units of physical inventory. This calculation uses a specific price index for each year.

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8
Q

An employer’s obligation for postretirement health benefits that are expected to be fully provided to or for an employee must be fully accrued by the date the

A

The employee is fully eligible for benefits.

Costs are expensed over the attribution period. It begins on the date of hire unless the plan’s benefit formula states otherwise. It ends on the full eligibility date of the employee. This rule applies even if the employee is expected to render additional service. The full eligibility date is reached when the employee has rendered all the services necessary to earn all of the expected benefits.

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9
Q

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 provided by operating activities should be

A

$347,000.

Under the indirect approach to calculating cash flows from operating activities, net income is adjusted for the effects of items included in the determination of net income that had no effect on cash. Depreciation is included in the determination of net income but has no cash effect. The increase in equipment resulted in a gain included in the determination of net income, but the cash effect is classified as an inflow from an investing activity. Thus, the gain should be subtracted from net income. The cash outflow for the purchase of equipment is from an investing activity and has no effect on net income. Hence, it requires no adjustment. Thus, the net cash provided by operating activities is $347,000 ($300,000 NI + $52,000 depreciation – $5,000 gain).

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10
Q

An investor uses the equity method to account for an investment in common stock. After the date of acquisition, the investment account of the investor is

A

Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the investee.

After the date of acquisition, an equity-based investment in common stock account of an investor is increased by its share of the earnings of the investee, decreased by its share of the losses of the investee, and decreased by its share of cash dividends received from the investee.

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11
Q
A voluntary health and welfare entity (VHWE) included the following costs in its statement of activities for the year:
Fundraising: $250,000
Administrative: 50,000
Research: 120,000
Medicine: 230,000
Biomedical services: 90,000

The total of functional expenses for program services is
A.

A

$440,000.

A VHWE is an NFP. All NFPs report expenses for program services and supporting activities. An analysis also must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, interest, rent, and depreciation). Program services distribute goods and services to beneficiaries, customers, or members to fulfill the purposes of the entity. Support activities are all other activities. Thus, the amount of expenses for program services is $440,000 ($120,000 research + $230,000 medicine + $90,000 biomedical services).

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12
Q

The statement of shareholders’ equity shows a

A

Reconciliation of the beginning and ending balances in shareholders’ equity accounts.

The statement of shareholders’ equity (changes in equity) presents a reconciliation in columnar format of the beginning and ending balances in the various shareholders’ equity accounts. A statement of changes in equity may include, for example, columns for (1) totals, (2) comprehensive income, (3) retained earnings, (4) accumulated OCI (but the components of OCI are presented in another statement), (5) common stock, and (6) additional paid-in capital.

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13
Q

Which of the following funds of a local government would report transfers to other funds as an other financing use?

A

General.

Interfund transfers are one-way asset flows with no repayment required. They must be reported in the basic financial statements separately from revenues and expenditures or expenses. In a governmental fund (e.g., the general fund), a transfer is an other financing use (source) in the transferor (transferee) fund. It is reported after excess (deficiency) of revenues over expenditures in the statement of revenues, expenditures, and changes in fund balances. The general fund reports transfers to other funds as an other financing use.

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14
Q

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the

A

Face value of the bonds at the beginning of the period by the contractual interest rate.

Interest payable does not vary with the issue price of bonds. It equals their face amount times the stated (contractual) rate at the beginning of the period.

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15
Q

On January 1, Year 1, Frost Co. entered into a 2-year lease agreement with Ananz Co. to lease 10 new computers. The lease term begins on January 1, Year 1, and ends on December 31, Year 2. The lease agreement requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the minimum lease payments is $13,000. Which of the following circumstances would require Frost to classify and account for the arrangement as a capital lease?

A

The fair value of the computers on January 1, Year 1, is $14,000.

A lease is classified as a capital lease by the lessee if, at its inception, any of the following four criteria is satisfied: (1) the lease provides for the transfer of ownership of the leased property, (2) the lease contains a bargain purchase option, (3) the lease term is 75% or more of the estimated economic life of the leased property, or (4) the present value of the minimum lease payments (excluding executory costs) is at least 90% of the fair value of the leased property to the lessor. This criterion is inapplicable if the beginning of the lease term falls within the last 25% of the total estimated economic life. Consequently, if the fair value of the computers on January 1, Year 1, is $14,000, the lease must be capitalized. The present value of the minimum lease payments is 92.86% ($13,000 ÷ $14,000) of the fair value at the lease’s inception.

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16
Q

Neron Co. has two derivatives related to two different financial instruments, instrument A and instrument B, both of which are debt instruments. The derivative related to instrument A is a fair value hedge, and the derivative related to instrument B is a cash flow hedge. Neron experienced gains in the value of instruments A and B due to a change in interest rates. Which of the gains should be reported by Neron in its income statement?

Gain in value of debt instrument A:
Gain in value of debt instrument B:

A

Yes
No

In a fair value hedge, the change in fair value of the hedged item (instrument A) is an adjustment to the carrying amount that is recognized currently in earnings. The same treatment applies to the change in fair value of the hedging instrument. The earnings effect of (gain on) the hedged item (instrument B) in this cash flow hedge occurs in a future reporting period.

17
Q

When revenue from contracts with customers is recognized over time, the progress toward complete satisfaction of a performance obligation may be measured using the

A

Input method.

When revenue is recognized over time, the progress toward complete satisfaction of a performance obligation must be measured. This progress must be measured either by the output method or the input method. To determine the appropriate method, an entity must consider the nature of the good or service that it promised to transfer to the customer. The chosen method should measure the entity’s performance in transferring control of the promised asset to the customer. The input method recognizes revenue on the basis of (1) the entity’s inputs to the satisfaction of the performance obligation relative to (2) the total expected inputs to the satisfaction of that performance obligation. Examples of input methods include (1) resources consumed, (2) labor hours expended, (3) costs incurred, (4) time elapsed, or (5) machine hours used. When an entity’s inputs are incurred evenly over time, recognition of revenue on a straight-line basis may be appropriate.

18
Q

According to authoritative GAAP issued by the FASB, an entity that presents a full set of financial statements

A

Must report comprehensive income if it has items of other comprehensive income (OCI).

If an entity has no items of OCI for any period presented, it need not report OCI or comprehensive income. Otherwise, it must report comprehensive income either (1) in one continuous statement of comprehensive income (with sections for net income and OCI) or (2) in two separate but consecutive statements (a statement of net income and a statement of OCI).

19
Q

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.

A/R
Year 4: $1,200
Increase over Year 4: $400

What was the average number of days to collect accounts receivable during Year 4?

A

50.7

The average number of days to collect receivables equals the number of days in the year divided by the accounts receivable turnover ratio (net credit sales ÷ average accounts receivable). The average accounts receivable equals $1,000 {[$1,200 + ($1,200 – $400)] ÷ 2}, and the accounts receivable turnover ratio is 7.2 ($7,200 net credit sales ÷ $1,000). Thus, the average collection period is 50.7 days (365 days ÷ 7.2).

20
Q

The following information for the year ended June 30 pertains to a proprietary fund established by Burwood Village in connection with Burwood’s public parking facilities:
Receipts from users of parking facilities: $400,000
Cash outlays:
Parking meters: 210,000
Salaries and utilities expenses: 90,000
Depreciation of parking meters: 70,000

For the year ended June 30, the proprietary funds statement of revenues, expenses, and changes in fund net position should report operating income for the parking facilities of

A

$240,000.

Proprietary funds (enterprise and internal service funds) account for their operations on the accrual basis. Operating income (loss) is reported as a separate subtotal equal to the difference between total operating revenues and total operating expenses. A government should consistently follow appropriate definitions of operating items. One consideration in defining these items is the principal purpose of the fund. A second consideration is their presentation in a cash flows statement. For example, cash flows from operating activities ordinarily are those that enter into the determination of operating income. With regard to the parking facilities, the outlay for parking meters involves a capital and related financing activity (e.g., acquisition of capital assets to provide services or produce goods), not an operating activity. However, capital assets should be depreciated, and depreciation expense for the parking meters is an operating item because it is specifically identifiable with the parking function. The salaries and utilities expenses are also typical operating items for this function. The charges for services (receipts from users) are operating revenues. Accordingly, operating income is $240,000 ($400,000 – $90,000 – $70,000).