2.1 Flashcards
The following items were among those that were reported on Lee Co.’s income statement for the year ended December 31, Year 1:
Legal and audit fees: $170,000
Rent for office space: 240,000
Interest on inventory floor plan: 210,000
Loss on abandoned data processing
equipment used in operations: 35,000
The office space is used equally by Lee’s sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Lee’s multiple-step income statement?
$290,000
The interest expense and the loss on the abandoned data processing equipment should be classified as other expenses. The legal and audit fees and one-half of the rent for the office space should be classified as general and administrative expenses. The total is $290,000 [$170,000 + ($240,000 × 50%)].
Clear Co.’s trial balance has the following selected accounts:
Cash (includes $10,000 in bond-sinking fund for long-term bond payable): $50,000
Accounts receivable: 20,000
Allowance for doubtful accounts: 5,000
Deposits received from customers: 3,000
Merchandise inventory: 7,000
Unearned rent: 1,000
Investment in trading debt securities: 2,000
What amount should Clear report as total current assets in its balance sheet?
$64,000.
An asset is classified as current on the statement of financial position if it is expected to be realized within the entity’s operating cycle or 1 year, whichever is longer. Current assets include (1) cash and cash equivalents; (2) certain individual trading, available-for-sale, and held-to-maturity debt securities; (3) receivables; (4) inventories; (5) prepaid expenses; and (6) certain individual investments in equity securities. Funds restricted as to withdrawal or use for other than current operations are classified as noncurrent assets. Thus, the $10,000 in a sinking fund for a long-term bond payable is classified as a noncurrent asset. Current receivables are measured at net realizable value (i.e., net of allowance for uncollectible accounts). Trading debt securities are classified as current assets because they are bought and held primarily for sale in the near term. Accordingly, the total of current assets is $64,000 ($40,000 unrestricted cash + $15,000 current receivables at NRV + $7,000 merchandise inventory + $2,000 investment in trading debt securities).
Dixon Company has the following items recorded on its financial records:
Available-for-sale debt securities: $200,000
Prepaid expenses: 400,000
Treasury stock: 100,000
The total amount of the above items to be shown as assets on Dixon’s statement of financial position is
$600,000.
Available-for-sale debt securities (an investment) and prepaid expenses are assets, but treasury stock is an equity item. The total of the assets reported is therefore $600,000 ($200,000 + $400,000).
A statement of financial position provides a basis for all of the following except
Determining profitability and assessing past performance.
The statement of financial position, also known as the balance sheet, reports an entity’s financial position at a moment in time. It is therefore not useful for assessing past performance for a period of time. A balance sheet can be used to help users assess liquidity, financial flexibility, profitability, and risk.
Gar, Inc.’s trial balance reflected the following liability account balances at December 31, Year 6: Accounts payable: $19,000 Bonds payable, due Year 7: 34,000 Deferred tax liability: 4,000 Discount on bonds payable: 2,000 Dividends payable on 2/15/Year 7: 5,000 Income tax payable: 9,000 Notes payable, due Year 8: 6,000
The deferred tax liability is based on temporary differences that will reverse in Year 8 and Year 9. In Gar’s December 31, Year 6, balance sheet, the current liabilities total was
$65,000.
Current assets are those assets reasonably expected to be realized in cash, sold, or consumed during the operating cycle of the entity or within 1 year, whichever is longer. A current liability is an obligation that will be either liquidated using a current asset or replaced by another current liability. The accounts payable ($19,000), the net bonds payable due in Year 7 ($34,000 face amount – $2,000 discount = $32,000), the dividends payable in February Year 7 ($5,000), and the current income tax payable ($9,000) are current liabilities. They total $65,000. The deferred tax liability should be classified as noncurrent.
Which of the following should be included in general and administrative expenses?
Interest expense:
Advertising expense:
No
No
General and administrative expenses are incurred for the entity as a whole and are not related entirely to a specific function, e.g., selling or manufacturing. They are included in the determination of operating income. Interest expense is a nonoperating item usually included under other expenses. Advertising expenses are operating items included in the selling expenses category.
Which of the following defines equity as it relates to a business entity?
Total assets less total liabilities.
According to the basic accounting equation, assets equal liabilities plus equity. Thus, equity of a business entity equals total assets less total liabilities.
Burns Corp. had the following items:
Sales revenue: $45‚000
Loss on early extinguishment of bonds: 36,000
Realized gain on sale of available-for-sale securities: 28,000
Unrealized holding loss on available-for-sale debt securities: 17,000
Loss on write-down of inventory: 3,100
Which of the following amounts would the statement of comprehensive income report as other comprehensive income or loss?
$17,000.
Other comprehensive income includes all items of comprehensive income not included in net income. The only item of other comprehensive income is the $17,000 unrealized holding loss on available-for-sale debt securities.
Zach Corp. pays commissions to its sales staff at the rate of 3% of net sales. Sales staff are not paid salaries but are given monthly advances of $15,000. Advances are charged to commission expense, and reconciliations against commissions are prepared quarterly. Net sales for the year ended March 31, Year 1, were $15 million. The unadjusted balance in the commissions expense account on March 31, Year 1, was $400,000. March advances were paid on April 3, Year 1. In its income statement for the year ended March 31, Year 1, what amount should Zach report as commission expense?
$450,000.
Sales commissions should be recognized as an expense when the related revenues are earned. Commission expense is thus $450,000 ($15,000,000 net sales × 3%).
Which of the following assets or transactions is an element of comprehensive income?
Sales revenue.
Comprehensive income includes all components of net income and other comprehensive income. Sales revenue is a component of net income and thus is considered a component of comprehensive income.
A gain or loss from a transaction that is unusual in nature or infrequent in occurrence should be reported separately as a component of income
Before results of continued operations.
A material event or transaction that is unusual in nature, infrequent in occurrence, or both must be reported as a separate component of income from continuing operations. Such items must not be reported net of income taxes.
The order of presentation in the income statement is
- Income from continuing operations
- Discontinued operations
Willem Co. reported the following liabilities at December 31, Year 1:
Accounts payable-trade: $750,000
Short-term borrowings: 400,000
Mortgage payable, current portion $100,000: 3,500,000
Other bank loan, matures June 30, Year 2: 1,000,000
The $1,000,000 bank loan was refinanced with a 20-year loan on January 15, Year 2, with the first principal payment due January 15, Year 3. Willem’s audited financial statements were issued February 28, Year 2. What amount should Willem report as current liabilities at December 31, Year 1?
$1,250,000.
Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing current assets or the creation of other current liabilities. Of the liabilities listed, the trade accounts payable, short-term borrowings, and current portion of the mortgage payable are current. But current liabilities do not include short-term obligations that the entity intends to refinance on a long-term basis if it has demonstrated the ability to do so. This ability has been demonstrated by securing a 20-year loan during the subsequent period. Thus, the $1,000,000 principal amount and the first principal payment (due January 15, Year 3) are not current liabilities.
Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31 included the following expenses and losses: Accounting and legal fees: $120,000 Advertising: 150,000 Freight-out: 80,000 Interest: 70,000 Loss on sale of long-term investment: 30,000 Officers’ salaries: 225,000 Rent for office space: 220,000 Sales salaries and commissions: 140,000
One-half of the rented premises is occupied by the sales department. Brock’s total selling expenses are
$480,000.
Within the categories of expenses presented, the $150,000 of advertising, the $80,000 of freight-out, 50% of the $220,000 rent for office space, and the $140,000 of sales salaries and commissions should be classified as selling expenses. Total selling expenses are therefore $480,000.
The effect of a material transaction that is infrequent in occurrence and unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a
Gain:
Loss:
Yes
Yes
A material event or transaction that is unusual in nature, infrequent in occurrence, or both must be reported as a separate component of income from continuing operations. Whether the item is a gain or loss is irrelevant to the presentation.
Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles?
Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution.
A comprehensive basis of accounting other than GAAP may be (1) a basis that the reporting entity uses to comply with the requirements or financial reporting provisions of a regulatory agency; (2) a basis used for tax purposes; (3) the cash basis, and modifications of the cash basis having substantial support, such as recording depreciation on fixed assets or accruing income taxes; or (4) a definite set of criteria having substantial support that is applied to all material items, for example, the price-level basis. However, a basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution does not qualify as governmentally mandated or as having substantial support.
