3G - Nonreciprocal Transfers Flashcards
In Year 6, Stuckey Corporation determined that the 6-year estimated useful life of a machine purchased for $198,000 in January of Year 3 should be extended by 2 years. The machine is being depreciated using the straight-line method and has no salvage value. In addition to the extension of the useful life, Stuckey also determines the asset will have a salvage value of $12,000 at the end of its useful life. What amount of depreciation expense should Stuckey report in its financial statements for the year ending December 31, Year 6?
$19,800
$17,400
$33,000
$34,800
Koby Co. entered into a finance lease with a vendor for equipment on January 2 for seven years. The equipment has no guaranteed residual value. The lease required Koby to pay $500,000 annually on January 2, beginning with the current year. The present value of an annuity due factor for seven years was 5.35 at the commencement of the lease. What amount should Koby capitalize as leased equipment?
$825,000
$500,000
$2,675,000
$3,500,000
Malay Corporation is a 100%-owned subsidiary of a U.S. parent company. Malay is located in Singapore and reports its financial statements in local currency, the Singapore dollar. The following exchange rates were available at the time the U.S. parent company was preparing consolidated financial statements:
Current rate $0.79
Historical rate (acquisition) 0.90
Weighted-average rate 0.85
Beginning of current year 0.88
Malay reported revenue of 4,570,000 Singapore dollars for the current period. When converting Malay’s revenue account to U.S. dollars at year-end, how much should be reported in U.S. dollars?
$3,884,500
$3,610,300
$4,021,600
$4,113,000
A company that wishes to disclose information about the effect of changing prices should report this information in:
the notes to the financial statements.
management’s report to shareholders.
the body of the financial statements.
supplementary information to the financial statements.
Which of the following is a characteristic of a finance lease?
The present value of the lease payments at the beginning of the lease term is 75% or more of the fair value of the property at the commencement of the lease.
The lease term is substantially less than the estimated economic life of the leased property.
The lease contains a purchase option that is reasonably certain to be exercised.
The future obligation does not appear in the balance sheet of the lessee.
Daniel Company is embroiled in a lawsuit with an individual investor. If the probability of loss from the lawsuit is remote, a loss contingency should be:
neither accrued as a liability nor disclosed.
accrued as a liability but not disclosed.
disclosed and accrued as a liability.
disclosed but not accrued as a liability.
A company owns land and a building that houses its manufacturing operations. When the company purchased the manufacturing facility 10 years ago, the purchase price allocated to the land account was $120,000. The manufacturing facility is located in an area that was once the site of many factories. The owners of many of the neighboring factories have recently sold their facilities to residential real estate developers. The company’s land is also suitable for residential development. The estimated current value of the land as part of the manufacturing facility is $150,000. The estimated current value of the land as an undeveloped investment is $130,000, and the current value of the land as part of a residential development would be $180,000. What is the fair value of the land?
$150,000
$120,000
$130,000
$180,000
For an operating lease or finance lease, the amount recorded initially by the lessee as a liability should normally:
exceed the present value of the lease payments at the beginning of the lease.
equal the present value of the lease payments at the beginning of the lease.
equal the total of the lease payments.
exceed the total of the lease payments.
equal the total of the lease payments.
FASB ASC 842-20-30-1, in a discussion of accounting and reporting by lessees, notes that at commencement the lessee shall measure a lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement and the right-of-use asset.
For a sales-type lease with selling profit, initial direct costs incurred by the lessor are:
capitalized as a contra asset and recognized over the term of the lease.
expensed when the first lease payment is made.
deferred (recorded as an asset) and expensed over the term of the lease.
expensed at the beginning of the lease.
expensed at the beginning of the lease.
Costs incurred by the lessor that are associated directly with originating a lease, that are essential to acquire that lease, and would not have been incurred had the lease agreement not occurred are called initial direct costs (IDC). The method of accounting for IDC depends on the nature of the lease. For a sales-type lease with selling profit, initial direct costs are expensed in the period of “sale”—that is, at the beginning of the lease. For an operating lease, direct financing lease, and sales-type lease without selling profit, initial direct costs are deferred (recorded as an asset) and expensed over the term of the lease. Initial direct costs are not contra assets.
Which of the following is not an eligible item for the fair value measurement option under FASB ASC 825-10-15-4?
A recognized financial asset and financial liability, except any listed below in exceptions
An interest in a variable interest entity that the entity is required to consolidate
A firm commitment that would otherwise not be recognized at commencement and that involves only financial instruments (An example is a forward purchase contract for a loan that is not readily convertible to cash. That commitment involves only financial instruments—a loan and cash—and would not otherwise be recognized because it is not a derivative instrument.)
A written loan commitment
A written loan commitment
On June 30 of the current year, Lang Co. sold equipment with an estimated useful life of 11 years and immediately leased it back for 10 years. The equipment’s carrying amount was $450,000; the sales price was $430,000; and the present value of the lease payments, which is equal to the fair value of the equipment, was $465,000. In its June 30 current-year balance sheet, what amount should Lang report as deferred loss?
$35,000
$15,000
$0
$20,000
$0
The first step is to determine if this transaction qualifies as a sale. Per FASB ASC 842-40-25-2, a sale has not occurred if the leaseback could be classified as a finance lease or a sales-type lease. Since the lease term is 10/11 = 90.1% of the asset’s economic life, this does not qualify for sale/leaseback treatment. Lang will not derecognize the asset and will recognize the consideration received as a financial liability.
$47,910
When a lessor is recognizing a lease transaction as a sales-type lease, the lessor creates an account for the net investment in the lease which is comprised of the lease receivable and any unguaranteed residual value. This account keeps track of the lease rental payments to be received by the lessor. Here the net investment in the lease balance at the beginning of the lease is all six payments of $10,000 multiplied by 4.791, or $47,910
Which of the following costs should not be included in research and development?
Administrative costs
Indirect costs
Personnel costs
Facility costs
“Research” is defined by the FASB as a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, developing a new process or technique, or bringing about a significant improvement to an existing product or process. “Development” is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
Administrative costs are not considered to be research and development (R&D) costs. R&D costs can be classified into five categories:
Materials, equipment, and facilities used in R&D activities
Personnel engaged in R&D activities
Intangibles purchased or developed for use in R&D activities
Contract services acquired and used in conjunction with R&D activities
Indirect costs reasonably allocable to R&D activities
For operating leases, which of the following statements is incorrect?
Rights and responsibilities of ownership are retained by the lessor
An operating lease does not meet any of the criteria for a finance lease.
An operating lease is considered a “non-debt” liability.
The lessor records a lease receivable.
The lessor does not record a receivable; rather, the lessor treats operating leases as a rental arrangement and records rent revenue on a straight-line basis over the lease term. The lessor does not derecognize the leased asset.
Operating leases are considered “non-debt” liabilities to separate them from traditional liabilities, and are therefore excluded from debt ratios. Operating leases cannot meet any of the finance lease criteria, and the rights and responsibilities do not transfer to the lessee but are retained by the lessor.
Which of the following statements related to the residual value guarantee is incorrect?
The residual value guarantee may be provided by the lessee or a third party.
Only the amount probable of being paid is included in determining the lease liability and the ROU asset.
The residual value guarantee is made to the lessor by the lessee that the value of an underlying asset returned at the end of the lease will be at least a specified amount.
The residual value guarantee generally results in operating classification by lessees.
The residual value guarantee generally results in operating classification by lessees.
Why:
Residual value guarantees generally result in finance classification by lessees.
The other answer choices are correct:
The residual value guarantee may be provided by the lessee or a third party.
Only the amount probable of being paid is included in determining the lease liability and the right-of-use (ROU) asset.
The residual value guarantee is made to the lessor by the lessee that the value of an underlying asset returned at the end of the lease will be at least a specified amount.
The $10,000 patent cost will be capitalized as an intangible asset in accordance with the provisions of FASB ASC 350-30-25-1.
The remaining costs are considered to be research and development costs, as defined in FASB ASC 730-10-55-1.
Special developmental equipment and prototypes are addressed in FASB ASC 730-10-55-1. They are considered to be research and development costs which “shall be charged to expense when incurred.”
Thus the entire $340,000 ($60,000 + $200,000 + $80,000) would be expensed.
Research is defined as a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, a new process or technique, or in bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
R&D (research and development) should be expensed if doubt exists as to whether any future benefits will be received, so both projects should be expensed. Miley should report $150,000 ($100,000 + $50,000) as R&D expense in its income statement for the year.
Which of the following statements related to FASB Topic 842 is correct?
Full convergence was achieved with the applicable international lease accounting standard.
The income statement treatment for all leases is identical for lessees.
For lessees, applying Topic 842 results in the recognition of a right-to-use asset and lease liability for all leases, except those specifically scoped out of the standard.
Topic 842 results in significant changes in lessor accounting for leases.
The income statement treatment for all leases is identical for lessees.
Why:
Per FASB ASU 2016-02, the main difference between previous GAAP and FASB Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.
FASB ASC 842 primarily focused on changes to lessee accounting, not lessor accounting. The income statement treatment is different depending on the lease classification. Lastly, full convergence with international standards was not achieved.
Loss on tax settlement Debit 55,000
Tax liability Credit 55,000
The event occurring on February 14, 20X8, provided new information about a financial statement item that existed at the end of 20X7. Therefore, the effect of this event needs to be recorded in the financial statements to be issued in March of 20X8.
Because the amount of tax Ballard must pay increased, an additional loss of $55,000 ($535,000 − $480,000) needs to be recorded along with an additional liability of $55,000. Additional information about this event should also be disclosed in the notes to the financial statements.
On December 30, 20X1, Ames Co. leased equipment under a finance lease for 10 years. It contracted to pay $40,000 annual rent on December 31, 20X1, and on December 31 of each of the next nine years. The finance lease liability was recorded at $270,000 on December 30, 20X1, before the first payment. The equipment’s useful life is 12 years, and the interest rate implicit in the lease is 10%. Ames uses the straight-line method to depreciate all equipment. In recording the December 31, 20X2, payment, by what amount should Ames reduce the finance lease liability?
$17,000
$27,000
$23,000
$22,500
Which of the following is an example of a transaction involving a market participant?
A company sells land to a local government to satisfy an outstanding tax lien.
A company purchases real estate zoned for recreational use
A company purchases a commercial rental property from a company that is owned by the same shareholders.
A judge orders a company to sell machinery during a bankruptcy proceeding.
Market participants refer to buyers and sellers in the principal market for an asset or liability. Market participants must be independent from the buyer/seller (e.g., companies owned by the same shareholders are not market participants). Market participants must be willing participants and must not be forced into the transaction (e.g., satisfying a lean or mandated by a judge).
Therefore, the only option that meets this definition is a company purchasing real estate. No information disqualifies the company from being recognized as a market participant
The lease term:
excludes any rent-free periods.
begins at the commencement date.
is never modified once determined at commencement of the lease.
includes all optional renewal periods.
The lease term includes any rent-free periods, begins at commencement, can change or be revised under certain lease modifications, and only includes optional renewal periods if there is “reasonable certainty” that the lessee has a significant economic incentive to exercise the option.
Steam Co. acquired equipment under a finance lease for six years. Lease payments were $60,000 payable annually at year-end. The interest rate was 5% with an annuity factor for six years of 5.0757. The present value of the payments was equal to the fair market value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease?
$0
$15,227
$18,000
$3,000
The initial obligation would be capitalized at $60,000 × 5.0757 = $304,542.
Initial obligation $304,542
Interest rate (5%) x .05
Interest expense $ 15,227
Lease payments can fluctuate during the lease term, often based on the occurrence of a specified event. Which of the following is not an example of such an event?
Contingencies related to revenues
Contingencies related to asset usage
Contingencies related to technological advances
Contingencies related to an external market rate
Contingencies related to technological advances
Technological advances are generally not considered events which could trigger a change in lease payments. The remaining answer choices (contingencies related to revenues, asset usage, and external market rates) are examples that could trigger a change in a year’s particular payment but not a change in the original measurement of the liability or receivable since these would be considered variable payments.
Which of the following common characteristics of derivative financial instruments distinguishes them from other types of financial instruments?
Most financial instruments are valued on the balance sheet at fair value, but derivatives are valued on the balance sheet at cost.
They have a notional amount or payment provision that is based on the changes in one or more underlying variables
They are financial investments in stocks, bonds, or other securities that are marketable.
They impose a contractual obligation by one entity to deliver cash to a second entity to convey a contractual right.
They have a notional amount or payment provision that is based on the changes in one or more underlying variables.
On January 2, 20X1, Cole Co. signed an 8-year noncancelable lease for a new machine, requiring $15,000 annual payments at the beginning of each year. The machine has a useful life of 12 years, with no salvage value. Title passes to Cole at the lease expiration date. Cole uses straight-line depreciation for all of its plant assets. Aggregate lease payments have a present value on January 2, 20X1, of $108,000, based on an appropriate rate of interest. For 20X1, Cole should record depreciation (amortization) expense for the leased machine at:
$15,000.
$13,500.
$0.
$9,000.
Cott, Inc., prepared an interest amortization table for a 5-year lease payable with a purchase option of $2,000 that is reasonably certain to be exercised, exercisable at the end of the lease. At the end of the 5 years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error?
Cott subtracted the annual interest amount from the lease payable balance instead of adding it.
The beginning present value of the lease did not include the present value of the purchase option.
Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period.
The present value of the purchase option was subtracted from the present value of the annual payments.
The beginning present value of the lease did not include the present value of the purchase option.
The liability under a finance lease obligation should be equal to the discounted present value of the lease payments, which includes a purchase option reasonably certain to be exercised. If the calculated liability includes only the discounted present value of the periodic payments to be made over the 5-year lease term, the liability will be shown as paid in full with the last periodic payment. Therefore, it appears Cott did not include the amount of its purchase option in the lease payments when calculating its lease liability.
In year 1, a corporation incurred $3,500,000 of costs related to the development of a new software product. Of these costs, $1,000,000 was incurred after technological feasibility was established. The product development was completed and the product was available for sale to customers early in year 2. The corporation estimated that revenues from the sale of the new product would be $1,200,000 over five years. What amount of expense should the company report for year 1?
$700,000
$500,000
$3,500,000
$2,500,000
$2,500,000
Once feasibility is established, internally developed software costs can be capitalized. Therefore, of the $3.5 million in costs incurred in year 1, the first $2.5 million ($3.5 million total − $1 million post-feasibility) would be expensed as incurred in year 1 and the remaining $1 million would be capitalized and amortized beginning once the product was ready for sale in year 2.
FASB ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value measurement assumes that the transaction occurs in the principal market for the asset or liability.
If there is no principal market for that type of asset or liability, the entity should use the most advantageous market for that asset or liability; therefore, the fair value of the financial asset is $35,000.
The value of the machine from the lease is the present value of the lease payments (using the annuity due factor) and the present value of the guaranteed residual value, over the five-year lease term, as follows: ($100,000 × 4.4651) + ($20,000 × 0.7473) = $461,456.
Lease Liability = $76,840; Interest Expense = $7,807
Which of the following statements related to a lease modification is incorrect?
All lease modifications are accounted for as a separate new contract.
A lease modification is defined as any change to the contractual terms that was not part of the original terms of the lease.
Extension of the lease term is not a lease modification.
If the lease modification is not accounted for as a new contract, the lessee must remeasure and reallocate the contract consideration.
All lease modifications are accounted for as a separate new contract.
$688,500
$140,000
U.S. GAAP defines research and development costs as costs that will be useful in developing a new product or service and the translation of research into a plan or design for a new product. The costs relate to activities identified with the period prior to the beginning of commercial production.
Labor and materials developing a prototype and the cost of testing the prototype before commercial feasibility would represent research and development costs and would be expensed as incurred in their full amounts of $140,000 ($100,000 + $40,000). The legal costs to file the successful patent would be capitalized as an intangible asset subject to amortization.
Tableau Company manufactures hot water heater systems that carry a 2-year warranty against defects. Based on past experience, warranty costs are estimated at 2.5% of sales for the warranty period. During 20X9, hot water heater system sales totaled $2,600,000, and warranty costs of $31,300 were incurred. In its income statement for the year ending December 31, 20X9, Tableau should report warranty expense of:
$33,700.
$65,000.
$31,300.
$60,000.
$65,000.
The answer choice “1,070,000” is correct: $450,000 + $600,000 + $20,000 = $1,070,000.
Both the $450,000 in cash contributions from parents and alumni given on February 1 and $20,000 in cash contributions given by alumni on March 1 would be considered unconditional cash donations, therefore recognized in the current period. The $600,000 in unconditional promises is also recognized as a contribution as gifts, grants, bequests, etc. are reported in the period they are unconditionally promised or received, whichever is earlier. The $50,000 intention to give is not recognized because the money is contingent (or conditional) upon another individual matching the donation within the year.
$1,090,000 is incorrect. The $50,000 March 1 donation is a conditional promise to give and cannot be recognized in the current period.
$1,050,000 is incorrect. This answer choice excludes $20,000 in cash contributions received on June 30.
$770,000 is incorrect. While this answer choice correctly incorporates $600,000 in unconditional promises and $20,000 in cash contributions, the $50,000 March 1 donation is a conditional promise to give and cannot be recognized in the current period. Furthermore, the answer appears to inappropriately account for an additional $100,000 in matching contributions that have not yet been realized.
During 20X8, Detrusions Corporation incurred research costs of $178,000 and development costs of $256,000 in creating a new process for taking biopsies for cancer testing. The patent was granted on June 21, 20X8, and the patent was officially registered on July 1, 20X8. The costs to register the patent equaled $45,500. The patent’s legal life is 20 years, and its estimated economic life is 7 years. In its December 31, 20X9, balance sheet, what amount should Detrusions report as patent, net of accumulated amortization, assuming no impairment?
$45,500
$35,750
$42,250
$39,000
Research is defined as a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, a new process or technique, or in bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
R&D (research and development) should be expensed if doubt exists as to whether any future benefits will be received, so both projects should be expensed. Miley should report $150,000 ($100,000 + $50,000) as R&D expense in its income statement for the year.
FASB ASC 730-10-20 defines research and development as the planned search and critical investigation aimed at the discovery of new knowledge and ultimately a new product. Computer software costs follow this definition. Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. After feasibility has been established, all software costs are capitalized. Based on the definition, research and development expense includes planning, design and testing of $275,000 ($50,000 + 150,000 + 75,000).
U.S. GAAP defines research and development costs as costs that will be useful in developing a new product or service and the translation of research into a plan or design for a new product. The costs relate to activities identified with the period prior to the beginning of commercial production.
Labor and materials developing a prototype and the cost of testing the prototype before commercial feasibility would represent research and development costs and would be expensed as incurred in their full amounts of $140,000 ($100,000 + $40,000). The legal costs to file the successful patent would be capitalized as an intangible asset subject to amortization.
Research and development is defined as a planned search aimed at discovery of new knowledge and translation of the research findings into a plan or design. The research and development costs are incurred prior to commercial production of the product. R&D costs are reported as an expense, not an asset.
Salaries $250,000 + Design $400,000 = Total $650,000
Each of the costs incurred by Orr Co. is cited in FASB ASC 730-10-55-1 as examples of items that would be considered research and development expenses.
Orr’s 20X1 research and development expense
= $150,000 + $200,000 + $175,000
= $525,000
Ongoing efforts to improve an existing product already in production, troubleshooting during commercial production, and routine testing during commercial production are all activities that have occurred after the production phase has begun and therefore would not quality as research and development expenses. The company would report $0 in research and development as none of its activities relate to the preproduction period.
Only the equipment that has an alternative use is capitalized and depreciated. The depreciation is $100,000 ÷ 5 = $20,000. The other expenditures should be expensed immediately.
FASB ASC 730-10-25-2 states: “Elements of costs shall be identified with research and development activities as follows (see [FASB ASC] 350-50 for guidance related to website development):
“Materials, equipment, and facilities. The costs of materials (whether from the entity’s normal inventory or acquired specially for research and development activities) and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs. However, the costs of materials, equipment, or facilities that are acquired or constructed for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred.”
