4 - Accrual Accounting Flashcards
General Rule to convert from Cash Net Income to Accrual Net Income?
Add: decreases in liabilities/increases in assets
Subtract: increases in liabilities/decreases in assets
T-account (equation) to analyze Accounts Payable?
Beginning AP + Accrual purchases - cash payments = Ending AP
According to IASB Framework for Preparation/Presentation of Financial Statements, the qualitative characteristic for faithful representation includes:
- Neutrality
- Completeness
- Free from error
What characteristic allows users of financial statements to generate predictions about an organization?
Relevance (relevance and predictive value)
What are the 2 components of relevance?
Predictive and confirmatory value
Accounts Receivable T-account equation
Beg. Balance + Sales - Collections (usually what question needs) - write-offs = Ending Balance
What are gains
Gains are increases in equity (net assets) from incidental or peripheral transactions affecting an entity.
what is realization?
when revenues and gains are realized when products (goods and services), are exchanged for cash or claims to cash.
What is comparability?
also includes consistency, is enhancing quality that interacts with relevance and faithful representation to contribute to the usefulness of information
What is Comprehensive Income? And what does it include? And how is it disclosed?
- All changes in net assets of an entity during a period except those resulting from investments by owners and distribution from owners.
- It includes NI plus or minus unrealized gains/losses on debt securities available for sale (rev, expenses, gains, losses, gross margin, contribution margin, IFCO, operating income).
Represented:
1) At the bottom of the IS, continue from NI and add other comprehensive income; OR
2) In a separate statement, start with NI and add other comprehensive income
What is current market?
The amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation.
What are earnings?
a performance measure concerned primarily with cash-to-cash cycles.
What is the appropriate valuation method for LT receivables or Bonds payable due in 10 years?
Present value of future cash flows
What is the appropriate valuation method for warranty obligations and accounts receivable?
Net realizable value or settlement rate
What is the appropriate valuation method for equipment or ST payables?
Historical cost
What is replacement cost?
The amount of cash, or its equivalent, that would have been paid if the same of an equivalent asset were acquired currently.
AcidTest (quick) ratio?
(Cash + Net Receivables + Marketable Securities) / Current Liabilities
Inventory Turnover
COGS / Avg. Inventory
- Ratio of COGS to average inventory.
**COGS = Beg Inv + Purchases - End Inv. **
Avg number of days to collect AR
365/AR Turnover
Inventory equation
Beg inv + puchaese = Ending Inv + COGS
Accounts Receivable Turnover?
Credit Sales / Avg. AR
Codification citation that provides a guidance classification for cash inflows associated with investing activities?
230.10.45.12
Controller of SFB, Inc asked whether or not to include cash flow per share in the company’s financial statements. Which section provides guidance to address the presentation of cash flow per share on FS?
230.10.45.3
Codification to explain the disclosure requirements for the indirect method to provide guidance on the difference in the Statement of Cash Flows using the direct vs indirect method?
230.10.50.2
Company knows that there is reasonable probability of financial impact in future so controller wants to begin accruing a general contingency reserve now for potential declines. What is the guidance codification used?
450.20.25.8
Company intends to refinance a short-term note with a long-term note due in 5 years. What codification will give the criteria to reclassify the short-term debt as long-term deb?
470.10.45.14
Working Capital
CA - CL
Operating cycle in days?
(365/AR Turnover) + (365/inventory turnover)
Times interest earned ratio?
(NI + interest expense + income tax expense) / interest expense
Return on total assets?
(net income + after-tax interest expense) / avg total assets
Return on equity?
NI / Avg Owners Equity
Profit Margin on sales?
NI / Sales
Dividend payout ratio?
Common dividends / NI
Earnings per share? Where is it represented?
(Net Income - Preferred Dividends) / Weighted Shares Outstanding
- EPS is calculated on income before discontinued operations, or net income
Capital Balance?
Beg Capital + Investments + Income - Drawings = End Capital
Book value per share?
Total OE / Shares outstanding
What are examples of items classified under operating cash flow?
- Payments to suppliers
- Interest Payments
- Trading Securities held for short period
- Dividends received from investments
- Payments to fund pension plan
What are examples of items classified under Investing cash flow?
- Down payment of equipment purchase
- Proceeds from sale of equity securities available for sale
What are examples of items classified under Financing cash flow?
- Payment to retire bonds outstanding
- Obtain loan to purchase land to be held as investment
- Purchase treasury stock
What are examples of items classified under Operating AND Financing cash flow?
- Monthly mortgage payment
- Annual lease payment on capital lease
2 components when calculating discontinued operations? Example and if it is recognized?
1) the operating income or loss for the period in which the decision is made to dispose
2) the disposal loss
Ex: carrying value is 850 and estimated selling price is 500 so estimated disposal loss is 350. AND operating loss was (195). So the recognized total loss for discontinued operations in that year is 545 (195+350).
HOWEVER, estimated disposal gains are NOT recognized. If estimated disposal is a gain 40 (book 200 fair 250 and operating loss of 10) then disposal gain is NOT recognized until it is actually sold, only estimated losses are recognized.
Provide the relevant codification citation on what amounts to include in the cost of inventory?
330.10.30.1
What kinds of expenditures are capitalized?
- to increase useful life (assuming normal maintenance)
- to increase utility (productivity and usefulness)
- Sewer lines, title search fees, land, removal of old building
Should a patent be amortized?
Yes, it should be amortized over its useful life, not to exceed its legal life of 17 years. If remaining legal life of patent is 15 years then it should be amortized over 15. whichever is shorter but max 17 years.
Examples of items under Income from continuous operations (IFCO)?
- Gain on disposal of plant asset
- Unrealized loss on investment in trading debt
- Realized gain on investment in debt
- Dividends received from Investment in debt
- Effect of change in estimates of useful life (plant asset)
- Income Tax Expense
- Restructuring charge or loss on effect of new regulation
Example of items under income other than IFCO?
- Estimated disposal loss on discontinued component
Examples of items under Owner’s equity?
- Cumulative effect of change from LIFO to FIFO, vise-versa
- Stock dividend distributed
- Accumulated other comprehensive income
Examples of items under Other comprehensive Income
- increase in unrealized pension cost
- unrealized loss on investment in debt securities available-for-sale
How is Goodwill recognized in a business combination?
How should company report it? And example?
Determined by excess investment value over fair value of subsidiary’s net assets. Investment value is sum of parent’s investment + fair value of non-controlling interest.
- Perform qualitative assessment to determine
Ex: Company A purchases 80% of B for 975mn. B carrying value is 1,000mn but plant assets are 100mn above carrying. Last, fair value is of 20% non-controlling is 200mn. Goodwill is 75mn {1,175mn (975+200mn) - 1,100mn net assets (1,000+100mn)}.
Company was awarded damages of $75mn for patent infringement suit brought on by competitor. Accrual & disclosure, disclosure, or neither?
Both Accrual and disclosure
Former employee has brought on a wrongful-dismissal suit against previous employer. Company’s lawyers believe the suit to be without merit. Accrual & disclosure, disclosure, or neither?
Neither Accrual nor disclosure
Company has outstanding purchase orders in ordinary course of business for purchase of raw materials for manufacturing process. Market price is currently higher than the purchase price and is not anticipated to change within a year. Accrual & disclosure, disclosure, or neither?
Neither Accrual nor disclosure
Government contract completed during year 2 is subject to renegotiation. Although the company estimates that it is reasonably possible that a refund of 200-300mn may be required by the gov, but it does not wish to publicize the possibility. Accrual & disclosure, disclosure, or neither?
Disclosure only
Company has been notified by a governmental agency that is will be held responsible for cleanup of toxic materials at a site company formerly conducted operations. Company estimates that its probable that its share of remedial action will be $500mn. Accrual & disclosure, disclosure, or neither?
Both Accrual and disclosure
Company redeemed its outstanding bonds and issued new bonds with lower rate of interest. The reacquisition price was in excess of the carrying value amount of the bonds. Accrual & disclosure, disclosure, or neither?
Disclosure only
Allowance for Doubtful Accounts equation? And how does it work?
Ending Balance for Allowance Doubtful Accounts = Beg Balance + Recoveries of bad debt written off in prior years + Current year’s bad debt expense - write-offs of uncollectible.
Bad Debts Expense is the loss from extending credit to customers and is usually an estimated amount based on a company’s credit sales.
What happens when parent company uses the cost method vs equity method on its books to carry its investment of its subsidiary? How are dividends on those investments recognized? Is Goodwill amortized?
1) Under the cost method:
- Investment - the parent recognizes only its share of the subsidiary’s dividends declared.
- Dividends - recorded as dividend revenue
2) Under equity method:
- Investment - investor recognizes its share of investee earnings (used when company has 30% or above ownership) ie ownership x earnings
- Dividends - common stock dividends treated as return on capital. Only preferred dividends recognized as dividend revenue.
- Only income increases the investment account
3) Goodwill is never amortized but only assessed at least annually for impairment.
* Dividends never increases investment account under either method*
Accrual basis service revenue equation?
Accrual basis service revenue = Cash fees collected + End AR - Beg AR + Beg unearned fees - End unearned fees
How to know if equipment is deemed impaired? And how do you calculate it if undiscounted expected net future cash inflows of equipment is 450, carry 500, fair value 375?
- Whether carrying value (BV) is less than its recoverable cost (sum of its estimated net cash inflows projected for remaining life).
- If undiscounted expected net future cash inflows (450) is less than carrying value of equipment (500) it is impaired. To calculate, subtract fair value from carrying value 125 (500 - 375).
How does IFRS require inventory to be reported? And how do you calculate it?
At lower of cost of net realizable value.
NOT replacement cost
NRV = estimated selling price - (estimated costs of completion and selling)
Explain how revaluation model for assets works under IFRS?
And example of asset: Acquire 100mn, Y1 fair value 90mn, Y2 fair value 105mn.
- Under IFRS, increase in assets fair value above original cost are recorded in surplus account and decreases are recorded as losses to income statement.
- Y1, 10mn decrease recorded as loss in IS. Y2, 15mn increase is recorded as 10mn gain in IS and 5mn gain in revaluation surplus (OCI).
What is the carrying value of Company A’s investment in Company B if A’s investment at the beg. of Y1 is 200mn (25% ownership) and B’s NI is 600mn and dividends 400mn?
As stated dividends never increase investment income under either method.
Beg. Investment 200mn
+ Subsidiary NI 150mn (600mn x 25%)
- Dividends 100mn (400mn x 25%)
= Carrying Amount of Investment 250mn
What is the difference between available-for-sale (AFS) and Trading Securities?
Available-for-Sale:
1) Valued at Fair Value - any unrealized gains/losses are recorded in OCI (in owners equity section of Balance Sheet).
3) Only realized gains (from sale) are recognized in Income.
4) BUT, if decline in FV is “other-than-temporary”, the unrealized loss is reclassified to earnings.
Trading Securities:
1) Unrealized gains/loss is recognized in earnings as these securities are held for short-term price appreciation.
2) Short-term marketable debt securities carried at fair value in trading portfolio .
How do you report stock option/rights in the balance sheet? Already own $80,000 (1,000 shares at $80) worth of stock, after receive stock rights of 1,000 with value of $5 each, MV of stock at the time is $95?
Total MV of stock investment is now $95,000 (95 x 1000) and rights are $5,000 ($5 x 1000). Original cost of stock is $80,000.
[(5,000) / (5,000 + 95,000)] x 80,000 = $4,000.
How to report investments in debt securities made under an entity’s business model to make and hold investment solely to receive cash from Interest and Principle? What if the entity usually does not invest in debt?
Original Cost 108, Par 100, current premium 3.5, and Fair Value 105.
If debt investment is the business model:
Amortized cost 100 + unamortized premium 3.5 = 103.5
report at amortized cost
If not:
fair value = 105
report at fair value
Under IFRS No. 9, investments in debt securities may be transferred in what 2 ways?
1) Transferred from amortized cost to fair value
2) Transferred from fair value to amortized cost
Under IFRS, how are gains/losses on changes in fair value of investments in equity are reported?
1) In profit/loss
- If equity investment is held-for-trading (intent on selling in 1 year ST) purposes then changes in fair value are reported in profit/loss
2) Other Comprehensive Income
- if equity investment is not held-for-trading purposes, changes in fair value reported in OCI
How should legal fees, registration costs, and research and development costs be captured?
- Research and Development are expensed as incurred (ASC 730)
- Only legal fees/registration costs are capitalized to the patent account
If Company A purchased all the voting stock of Company B on 12/16 and purchased 40% of outstanding stock of Company C in 1/17 and the financial statements were issued on 2/17 what should the balance sheet say?
- Company B should be consolidated
- Company C should be in the footnotes only as it has not technically occurred on balance sheet yet.
How are shipping costs included in year-end inventory?
- Only transportation-in is treated as product cost and included in inventory.
- Shipping cost TO customers is a selling expense. Only cost to bring inventory to company.
Firm A purchased Firm B for 4,000 when OE is 2,000. Assessed that goodwill impairment is likely as B had an asset worth $500 more than BV. One year after the purchase, B’s total MV dropped to 3,200 and the MV of net identifiable assets was 2,000. What amount of goodwill impairment loss is recorded?
- Impaired is when fair value < current recorded value
- Goodwill is re-estimated same way as when it was purchased, MV - MV of identifiable assets
New Goodwill = $ 1,200 (3,200 - 2,000)
Goodwill at purchase = 1,500 (4,000 - 2,000 - 500)
Goodwill Impairment loss = 300 (1,500 - 1,200)
Under the cash basis of accounting, what would Company A report in Y2 sales if they reported Y2 sales revenue of $2,300,000, uncollectible (write-off) accounts were 10,000, and Y1/Y2 AR were 500,000 and 650,000?
Use AR T Account but solve for Collections as we’re solving for the cash basis.
500,000 + 2,300,000 - Collections - 10,000 = 650,000
What should be reported in the cost of land and cost of building?
Land (any cost involved in preparing land for its ultimate use)
- Purchase price
- legal fees
- demolition of old building
- Sale of scrap
Cost of Building
- Architects’ fees
- Construction cost
What should R and D expense included and excluded in a given year?
Included in R&D Expenses:
- Salaries of laboratory employees researching how to build new car (research)
- Design, testing, and construction of a prototype
Codification specifically excludes:
- Legal fees
- Patent application
- Engineering follow up during early stages
In Q3, Company A reported $111,000 in NI for the quarter. In addition, 60,000 gain from discontinued operations realized on 4/30 which is allocated to Q2, Q3, and Q4. And they paid 48,000 for property taxes, of which, 12,000 was allocated in Q3. What should company report for NI in Q3?
$111,000
- $60,000/3
= $91,000
How would the amortization of discount on bonds payable affect the 1) carrying value of the bond and 2) Net Income?
Carrying Value of Bond
- Increase
Net Income
- Decrease
A discount on bonds payable usually carries a debit balance that reduces the carrying value of the bonds. The credit to discount account increases the carrying value of the bond, and the debit to interest expense will decrease net income.
If Company A owns 80% of Company B and B sold equipment to A at a price in excess of B’s carrying amount but less than original cost. On the consolidated BS, the carrying amount would be reported at:
A’s original cost less than B’s recorded gain.
On 10/1/2014, Company A purchased 200, $1,000 FV, 10% bonds from Company B for $220,000, included accrued interest of $5,000. Bond matures 1/1/2021 and pays interest semi-annually 1/1 & 7/1. Company uses straight-line method for amortization and recorded bonds as held-to-maturity.
On December 31, 2015, what should the bonds be reported at?
Held-to-maturity investments are reported at amortized cost. The discount/premium at purchase is amortized during the term of the bond so that carrying value is FV at maturity. Subtract accrued interest as its not included in carrying value. Bond was purchased at 15,000 premium (bc FV is $1,000) and term of the bond is 6 years and 3 months (75 months).
$220,000 - 5,000 = 215,000
215,000 - (15,000 x 15/75 = $3,000)
What is the qualitative characteristic of accounting information?
Relevance
How to identify the FV of net assets in order to determine goodwill from business combination if A purchased B for 620,000 and B’s recorded assets are:
Cash 60,000 Inventory 180,000 Property/Equipment 320,000 Goodwill 100,000 Liabilities (120,000) Net Assets 540,000
But at purchase, inventory was 150,000 and P-E had fair value of 380,000. What is goodwill from business combination?
FV of identifiable net assets are: Cash 60,000 Inventory 150,000 PE 380,000 Liabilities (120,000) = Net Assets 470,000
Then subtract net assets from purchase price in order to get Goodwill. 620,000 - 470,000 = 150,000 Goodwill.
How to calculate unamortized cost for software?
Sales were 10% of expected total sales and new software has an economic life of 4 years.
Annual amortization of capitalized software costs are the greater of:
1) Ratio of software’s current sales to its expected total sales (10%)
OR
2) straight-line method over the economic life of the product (100% - 25% = 75%)
Two single-step income statement below, as prepared by controller - what amount should be reported as total revenues?
Sales 250,000
Purchased discounts 3,000
Recovery of account write-off 10,000
= Total Revenues 263,000
Revenues are inflows from economic sources. Discounts would be netted against purchases, not sales. Recovery is not revenue, its adjustment to uncollectable accounts.
Revenue = 250,000
Compared to historical cost income from continuing operations, what increases current cost income from continuing operations?
- Current cost of goods sold is less than historical cost
Appropriate for debtor to recognize a gain when the carrying amount of debt:
EXCEEDS total future cash payments specified by new terms.
Face amount $800,000
Term 10 Years
Stated Interest Rate 6%
Yield 9%
6% 9%
PV of 1 for 10 periods 0.558 0.422
FV of 1 for 10 periods 1.791 2.367
PV of ordinary annuity 7.360 6.418
What should be the issue price of each $1,000 bond?
Issue Price = $1,000(.422) + .06(1,000)(6.418) = $807
11/1/15, A paid $3,600 to renew its insurance policy for 3 years. On 12/31/15, unadjusted trail balance showed $90 for prepaid insurance and $4,410 for insurance expense.
What should be reported in prepaid insurance and insurance expense?
Prepaid Expense
$3,400 (3,600 x 34/36)
Insurance Expense
Adjusting journal entry $3,310 ($3,400 - $90).
$4,410 - $3,310 = $ 1,100
1) Would retained earnings be affected by the declaration of Stock dividends or stock split?
Stock Split - No effect
Stock Dividend - decrease (JE below)
RE xxxx
CS dividend distributable xxx
Paid-in capital in excess of par xxx
Net cash in operating $351mn Investing $420mn, and Financing activities of $250mn. Cash balance is $27mn. During year, sale of land resulted $25mn gain and proceeds of $40 received from sale.
What is the cash balance?
Combine effects of changes in operating, investing, and financing activities and add beg. cash balance.
$351 - 420 + 250 + 27 = 208mn
In 2014, A acquired 6,000 shares of its own $1 par value stock for $36 per share. During 2015, Seda issued 3,000 of these shares at $50 per share and used the cost method to account for its treasury stock transactions. What accounts/amounts should they credit?
Under cost method, when treasury stock is reissued at a price in excess of cost, additional paid-in capital is credited for difference.
Cash 150,000
Treasury Stock 108,000
Additional paid-in capital (treasury) 42,000
What is the appropriate COST approach for determining fair value measurements?
Using current replacement cost of asset
GE had 150mn in cash-basis pretax income for the year. At current year-end, AR decreased by 20mn and AP increased by 16mn from previous year-end. Compared to accrual-basis method of accounting, cash-basis pretax income is…….
Higher by 36mn.
b/c AR decreased by $20mn, cash received was $20 more than accrual basis. Since AP increased by 16, expenses were 16 more than cash payments. Therefore, accrual-basis NI is equal to $114 (150 - 20 -16) so cash-basis pretax income is 36mn higher than accrual-basis income.
How would Retained Earnings and Additional Paid-in Capital be affected by 1) a 100% stock dividend and 2) exercising rights for additional shares greater than par value but less than both market/book?
1) Retained Earnings - decrease
1) Additional paid-in capital - no change
2) Retained Earnings - Not affected
Additional Paid-in capital - increases
5/18/2014, Sol Corp board of directors declared a 10% stock dividend. The market price of Sol’s 3,000 outstanding $2 par value CS was $9 per share. Stock was distributed on 7/21/2014, when stock was $10.
What should Sol credit to additional paid-in capital for this stock dividend?
Question is difficult as sources disagree. Use the market value on declaration date.
Retained Earnings $2,700 [(.10)(3,000)(9)]
Common Stock 600 (.10(3,000)(2)
Additional PIC 2100
In October Y1, firm purchased inventory for $26mn. The contract is irrevocable and is delivered in March Y2. At the end of Y1, inventory under contact is worth $23mn. How do you report for the year?
- A liability of $3,000 in BS.
- Firm cannot postpone the loss and liability recognition b/c reduction of firm’s earnings and net assets already occurred.
1) In a periodic inventory system that uses the weighted-average cost flow method, the beginning inventory is the:
2) What is a disadvantage to the periodic inventory?
1) = (Total goods available for sale) - (net purchases)
Beg Inventory \+ Net Purchases Cost of goods available for sale - Ending Inventory = COGS
2) That COGS amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
Firm A purchased a $20,000, 7% 5-year note that required five equal annual year-end payments of $5,009. Note was discounted to yield 9% rate at present value of $19,485. What’s the total interest revenue over the life of note?
$5,560 = 5(5,009) - 19,485
If inventory and AP increased from Y1 to Y2 - should be be added or deducted from cash payments in Y2 COGS?
Increase Inventory - Deducted from
Increase AP - Added to
T- Account Cash payments to suppliers \+ Increase in AP - Increase in Inventory = COGS
On 1/2/04, Firm issued 2,000,000 of 10-year, 8% bonds at par. The bonds, dated 1/1/04, pays interest semiannually on 1/1 and 7/1. Bonds issue costs were 250,000. What amount of bond issue costs are unamortized at June 30, Y5 assuming straight-line?
Bond term is 10 years. At 6/30/05, 8.5 years remain on bond term.
$212,500 ( 250,000(8.5) / 10 )
Gross sales 3,600
COGS 1,200
S/G expense 500
Adj. prior year amortization 59
Sales Returns 34
Gain on AFS securities 8
Gain on disposal business unit 4
Unrealized gain AFS securities 2
What is the company’s net income before tax?
Gross sales 3,600
COGS (1,200)
S/G expense (500)
Sales Returns (34)
Gain on AFS securities 8
Gain on disposal business unit 4
Net Income 1,878
After tax (30%) 1,314,600
Trade AR 93,000
Uncollectible Accounts (2,000)
Claim for Lost in transit 3,000
Consignment unsold goods 26,000
Security deposit on lease 30,000
Total 150,000
What is the current total of net receivables?
Trade AR 93,000
Uncollectible Accounts (2,000)
Claim for Lost in transit 3,000
Total 94,000
The goods on consignment should be included in Mann’s inventory cost, not in accounts receivable.
1/2/01, Firm A bought net assets of Firm B $350mn. The assets had a carry of 375mn and MV of 360mn. Firm A reported revenues in excess of expenses of 60mn and drawings were 20mn. What is their capital account balance?
Beg + Investments + Income - Drawings = Ending
350 + 60 - 20 = 390
Ignore previously recorded value (375) and estimated market value (360) are irrelevant and do not affect capital account.
Firm has assets with carrying value of 120mn, expected future cash flows of $130mn, present value of expected future $100mn, and MV of $105mn. What is the impairment loss under GAAP and IFRS?
GAAP
- Recoverable costs (expected future cash flow) EXCEEDS BV (carrying value)
- 130mn exceeds 120 book value (carry) so asset is not impaired.
IFRS
- Recoverable amount is greater of fair value less cost to sell (MV) or value in use (PV) EXCEEDS carrying cost.
- 105mn (or 100mn) is LESS than BV (120)
- Impaired by 15mn.
Asset with 5-year estimated useful life is sold Y2. How would straight-line depreciation rather than double-declining affect the gains and losses in the sale of fixed assets? (Gain/Loss - Increase/Decrease)
Gains - Decrease
Loss - Increase
A debt security is transferred from the held-for-trading portfolio to the available-for-sale portfolio. At the transfer date, the security’s cost exceeds its FV.
What amount is used to record the security in the available-for-sale portfolio at the transfer date?
Fair Value, regardless of whether the decline in fair value is below cost and it is considered permanent or temporary.
Reclassifications between the two investment categories are always recorded at FV.
Firm A contacted another firm for services to be provided over a period of time in return for 2,000 shares of Firm A’s $5 par CS when complete. At the time, Firm A’s stock was selling for $10/share.
When the service was complete, A’s stock was $12/share. Therefore, Firm A…..
Increases contributed capital in excess of par $10,000
Total OE at signing is $20,000 (2,000 x $10). Of that, CS account will receive $10,000 (2,000 x $5). Therefore, remaining ($10,000) is allocated to contributed capital in excess of par.
What is the appropriate INCOME approach for developing fair value measurements?
Using present value techniques of discount cash flows
In a nonmonetary exchange, what happens when there is not a significant difference in cash flows?
What happens when the nonmonetary exchange also includes a monetary exchange?
1) With no significant difference in cash flow then BV is used to record transaction
2) With included monetary exchange, the receiver has to realize a partial gain on the exchange.
On March 1, Firm A issued bonds at a discount and incorrectly used straight-line instead of effect interest method to amortize the discount.
How is the bonds carry amount and retained earnings affected by the error? (over/under)
Bond Carrying - Overstated
Retained Earnings - Understated
Ion had cash inflows of $25mn from the purchases, sales, maturities of held-to-maturity debt securities and $40mn inflows from purchases, sales, and maturities of available-for-sale debt securities.
What amount of net cash from investing activities should Ion report on its cash flow statement?
$65mn
- Cash flows from available-for-sale and held-to-maturity investments are both included in investing activities.
A company has outstanding accounts payable of $30mn and short-term construction loan in the amount of $100mn at year end. The loan was refinanced through issuance of long-term bonds after year-end but before issuance of financial statements.
How should these liabilities be recorded in the balance sheet?
Current Liabilities of $30mn, LT liabilities of $100mn
Purl recognized income from construction-type contracts under percentage-of-completion method for financial reporting starting Y1. However, on its income tax returns, it appropriately reports revenues under completed-contract method. Tax rate (30%) - for Y3 Purl should record increase (decrease) in deferred tax liability account of…
Year POC Completed
Y1 450mn 0
Y2 675mn 425mn
Y3 825mn 925mn
$(30 mn)
- For Financial Reporting, income is recognized using the percentage-of-completion method. For tax purposes, income is recognized using the completed-contract method.
- In Y1 and Y2, financial income exceeded taxable income resulting in deferred tax liability. In Y3, part of this temporary difference reversed; taxable income (925mn) exceeded financial income (825mn) by $100mn. Deferred tax liability must decrease by tax effect of the reversal by 30mn (100mn x 30%).
When a specific customer’s account receivable is written off as uncollectible, what will be the effect on NI under Allowance and Direct Write-Off when recognizing bad debt expense?
Allowance - NONE
Direct Write-Off - DECREASED
In 2015, Elm bought 10,000 shares of Oil Corp. at a cost of $20,000. On 1/15/`16, Elm declared a property dividend of the oil stock to shareholders of record on 2/1/16 payable 2/15/16. During 2016, the oil stock had MV of the below. What is the net effect of the foregoing transactions on RE during 2016 should a reduction of?
1/15 - $25,000
2/1 - $26,000
2/15 - $24,000
$20,000
- The property dividend is recorded at MV with a debit of $25,000 to RE at declaration. A gain of $5,000 is recognized as a gain on disposal (as if it were sold). Net effect is a decrease in RE of $20,000.
Bifurcation?
The process of separating an embedded derivative from its host contract.
Call Option?
An American call option provides the holder the right to acquire an underlying at an exercise or strike price anytime during the option term.
Embedded derivative?
A feature on a financial instrument or other contract, which if the feature stood alone, would meet the definition of a derivative.
Forward Contact?
An agreement between the two parties to buy and sell a specific quantity of a commodity, foreign currency, or financial instrument at an agreed-upon price, with delivery and/or settlement at a designated future date.
Futures Contact?
A forward-based contract to make or take delivery of a designated financial instrument, foreign currency, or commodity during a designated period, at a specified price or yield.
Notional Amount?
Referenced associated asset or liability commonly a number of units.
Swap?
A forward-based contract or agreement generally between two counterparties to exchange streams of cash flows over a specified period in the future.
Underlying?
A SPECIFIC price or rate such as a stock price, interest rate, or commodity price. Say option contract to buy a stock at $50 when stock is $40.
In general, the accounting for stock option plans and other share-based payment plans must reflect the rights provided to the recipient of the shares. Is there a difference between contract that conveys to an employee in return of note receivable with recourses to the shares and a grand of equity shares of employees? What’s the codification?
718.10.25.3
Calculate sum-of-the-years digits method of depreciation used when a machine’s estimated useful life is 5-years. What would be the fraction applied to the cost in the second year?
4/15
Solve for Working Capital in Y2 - when Y1 WC was 1,700mn, WC provided by operations 900mn, purchases on plant assets for cash is 600mn, ST borrowing 950mn, Payments on ST borrowing 500mn, and cash dividend paid on CS 250mn?
1,750mn
- ST borrowing (and their payments) have no effect on working capital because both a current asset and current liability.
Journal Entry when a county commissioners office passes a property tax levy totaling $5,100,000. But based on prior year collection rates, it is estimated that $100,000 in property taxes will be uncollectable.
Property Taxes Receivable $5,100 (D)
Revenues $5,000 (C)
Uncollectible $100 (C)
Journal Entry when a general fund of Blake County collected $405,000 in licenses and permits.
Cash 405 (D)
Revenues 405 (C)Under IFRS, what happens when a company discovered it had overstated sales in the prior year?
Restate the prior year FS for comparative purposes
What can retained earnings appropriation be used for?
To restrict earnings available for dividends
What is a quasi-endowment fund?
Established by a governing board of an organization using net assets WITHOUT donor restrictions
Lee Corporation’s checkbook balance is $4,000 on 12/31/Y1. Following items occur 1) $1,000 Check payable to lee, dated 1/2/Y2, not included in 12/31 2) $200 Check payable to Lee, deposited 12/20, and included in 12/31 but returned stamped with “NSF” then redeposited 1/2/Y2. 3) $500 Check drawn on Lee’s account, payable to vendor, dated and recorded 12/31.
$4,300
When accounting for income taxes, a temporary difference occurs when….
An item is included in the calculation of net income in one year and in taxable income in a different year
Total Revenues $80mn
Sales to external customers $30mn
External revenues reported by reportable operating segments must be at least….
$22.5mn
Must be enough segments reported so that at least 75% of unaffiliated revenues is shown by reportable segments (75% test). Sales to external customers total #30mn so external revenues reported by reportable operating segments must be at least $22.5mn (30mn x 75%)
Excel City’s Water Utility Enterprise Fund issues $10mn in 20-year serial revenue bonds to finance a major expansion of one of its water treatment plants. $500k is bonds mature each year.
As a result of this transaction, the year-end long-term liability in the governmental activities section of the government-wide FS accounts will reflect:
$0
The Water Utility Enterprise Fund uses full accrual accounting and will account for and report on the bonds in the Enterprise Fund.
Therefore, this liability appears in the business-type activity section of the government-wide financial statements and not in the governmental activity section.
On January 1, a company issued a $50,000, 8% five-year bond for $46,139 that will yield 10%. Interest is payable on June 30 and December 31. What is the bond carrying amount on December 31 of the current year?
$46,768.
- June 30th = Dr. Interest expense $2,307 (43,139 x 5%); Cr Cash $2,000 (50k x 4%) Cr. $307 Discount.
- December 31 = Dr Interest expense $2,322 ($46,139 + $307) Cr. Cash 2,000 Cr. $322 Discount
Carrying value is now $46,768 (46,139 + $307 + $322).
in Y1, Holden Company sold a building in exchange for a $400,000 loan in 3 years. The building costs $380,000 and accumulated depreciation was $160,000 at the date of sale. Interest for the loan is 12% and present value is 0.71. How much gain or loss should Holden report on the sale in Y1?
$64,000 gain
Loan $400k x .71 = $284,000
BV $380k - 160k = $220,000
Park Co. signed a 10-year operating lease for office space at $96,000 per year. Lease included provision of 5% additional rent of annual company sales in excess of $500k. Park’s sales were $600k in Y1. Also, upon execution of the lease, Park paid $24,000 as a bonus for the lease. What is Park’s rent expense for Y1?
$96,000 per year
+ 5,000 (5% x 100k (600-500)) Y1 Sales
+ 2,400 (24,000/10)
= $103,400
Does either the straight line or double declining method equal the original cost at the end of asset’s useful life?
Both NO
Can 1) expected return on plan assets or 2) Actual return on plan assets determine the discount rate fo calculate the projected benefit obligation for a defined benefit pension plan?
Both NO
Which fund should be reported as part of a local government’s governmental activity column in its government-side statements?
Agency
Debt service
Private-purpose trust
Pension Trust
Debt service
End of Y1, Lane held debt securities as trading that cost $86mn and FV of $92mn. In Y2, all securities were sold for $104.5mn. End of Y2, Lane had acquired additional trading securities that cost $73mn with FV of $71mn. What is the impact on Lane’s Y2 Income Statement?
Gain $10.5mn
Since unrealized gains and losses are recognized on trading securities on IS. Y1 (without selling) recognized a $6mn gain.
Y2
$12.5mn gain (104.5mn - 92mn)
- $2mn loss (73mn - 71mn)
= $10.5 mn Gain
What is COGS?
Decrease raw materials 15mn Increase finished goods 35mn Raw materials purchased 430mn Direct labor payroll 200mn Factor overheard 300mn Freight-out 45mn
$910mn
\+ 430 \+ 15 \+ 200 \+ 300 - (35) = COGS $910mn
Raw materials (15) is added because a decrease means it is used in production. Increased in finished goods (35) is subtracted because it was not sold.
Y1 Bice Company reported NI of $2mn. Then in Y2, changed from an accounting principle that is not generally accepted to one that is generally accepted. If generally accepted used in Y1 NI would have been decreased $1mn. Y2 Bice discovered mathematical error relating to its Y1 financial statements. If error was found in Y1 then NI would have increase $500k. What amount should be included in NI for Y2?
$0
Kenn City obtained a municipal landfill where the costs of operating is recovered with charges to customers. Which fund should Kenn City report the activities under?
Enterprise.
Grimm Company adopted new accounting method for estimating allowance for doubtful accounts. What is the bad debt expense at the end of the year?
Allowance for doubtful 1/1/Y1 $24,000
Provisions for doubtful Y1 $20,000
Bad debts written off 11/30/Y1 $19,500
Est. uncollectible $21,000
$16,500
$24,000
- ($19,500)
= $4,500
$21,000
- ($4,500)
= $16,500
What is true about IFRS accounting?
- Development costs must be expensed
- Development costs are always deferred and expensed against future revenues
- Development costs may be capitalized as an intangible asset in very restrictive situations
- Development costs are recorded in OCI
- Development costs may be capitalized as an intangible asset in very restrictive situations
in 2015, Mollat signed a 7-year lease for equipment having 10-year economic life. The PV of the monthly lease payments is 80%of the equipment’s FV. The lease agreement provides neither a transfer of title nor a bargain purchase option. What should they report on the Income Statement?
Rent expense equal to the 2015 lease payments.
What is the PV of all future retirement payments attributed by the pension benefit formula to employee services?
- Service Cost
- Interest Cost
- Projected benefit obligation
- Accumulated benefit obligation
- Accumulated benefit obligation
“PENSION COST FORMULA”
On 10/1/2014, Park Co. purchased 200 of the $1,000 FV 10% bonds from Otto, Inc for $220,000. Including accrued interest of $5,000. Bonds mature 1/1/2021, pay interest on 1/1 and 7/1. Park used straight-line method of amortization and appropriately recorded the bonds as held-to-maturity.
On Park’s December 31, 2015 Balance Sheet, the bonds should be reported at…
$212,000
- Real purchase price is $215,000 (subtract 5k interest included as interest in not included in investment carry)
- So premium is $15,000.
- Term holding the bond is 10/1/2014 to 1/1/2021. A period of 6 years and 3 months (75 months = 12*6 + 3). Period from purchase is 10/1/2014 to 12/31/2015 so 15 months.
- Investment carry of bond is $215,000 - $3,000($15,000 x (15/75)).
Fern Co’s Net Income, before taxes, of $200,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officer’s life insurance premiums. Current tax rate is 30%. What is Fern’s effective tax rate?
Taxable Income $190,000
$200,000
- $20,000
+$10,000
Income tax liability (tax expense) is $57,000 (.30 x $190,000). The effective tax rate is .285 ($57,000/$200,000)
An auditor is performing test work for a not-for-profit hospital. Below is statement of operations - what is total revenues, gains, and other support?
Revenue from charity 100mn
Bad debt provisions 70mn
Net assets released from restriction 50mn
Other revenue 80mn
Net patient service revenue (includes charity care) 500mn
460mn
- 500 - 100 - 70 + 50 + 80 = 460
- Includes hospital revenue less charity care and bad debt provisions, plus net asset released from restrictions and other revenue.
Alfisol, Inc offers sales discounts of 2% on all credit sales paid within 15 days. For year 1, gross credit sales totaled 150k and 75% of customers took advantage of the discount. Under the net method….
- Each sale should not be recorded until payment is received and it is known whether the discount is taken
- Allowance for sales discounts must be credit fro 2,250
- For cash receipts within the discount period, sales discounts must be debited for 2,250
- For cash receipts after the discount period, discounts not taken must be credit for 750
For cash receipts after the discount period, discounts not taken must be credit for 750
** under net method, sales are initially recorded net of discounts.**
Cash 37,500 (150k x 25%)
AR 36,750
Discount NOT taken 750 (37,500 x 2%)
In which of the following funds would it be appropriate to record depreciation of fixed assets?
- Capital Projects
- General
- Internal Service
- Special Revenue
- Internal Service
Internal service funds provide services on a cost basis to other governments funds (central data processing, motor pools etc). Thus, to recoup the costs - depreciation must be taken and computed in services charges of other funds similar to that of business enterprise to determine adequate fees.
A 6-year capital lease entered into on 12/31/15 specified equal minimum annual lease payments due on 12/31 each year. The first minimum lease payment paid on 12/31/15 consist of which of the following (T/F)?
- Interest Expense and/or lease liability
Interest expense - NO
Lease liability - YES
* at inception - the 1st payment is a principal payment because no time has taken place during the lease term to accrue any interest so NO*
Reed Co. Y2 statement of cash flows reported cash provided from operating activities of $400mn. For Y2, depreciation of equipment was $190mn amortization of patent was $5mn and dividends paid on common stock were $100mn. In the statement of cash flows, what amount was reported as net income?
$205mn = (400mn - 190mn - 5mn)
Dividend paid on CS NOT included in net income. Only considered cash outflow from financing activities.
Young and Jamison’s modified cash-basis FS indicated cash paid for operating expenses of 150mn, end of year prepaid expenses of 15mn, and accrued liabilities of 25mn. At beginning of year, YJ had prepaid expenses of 10mn while accrued liabilities were 5mn. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?
165mn = 150 - 5 + 20
- *subtract yearly change in prepaid expenses because amount is not included in accrual expenses**
- *And add accrued liabilities increase as it was incurred and not yet paid**
Hines leased a new machine from Ashwood on 12/31/Y1. The machine reverts to Ashwood at lease expiration and has FV of 280,000 at inception. Hines uses straight-line method of depreciation. For the year ended 12/31/Y2, how much depreciation (amortization) should Hines recorded for the capitalized leased machine?
Lease Term - 8 Years
Annual rental payable - 50,000
Useful Life - 10 Years
PV of the 8 Lease Payments 12/31/Y1 258,000
* Lessee records the asset as lower of 1) PV of minimum lease payments or 2) FMV of the leased asset.*
- PV $258,000 is less than FMV $280,000 so we capitalize it and since lessee is giving the asset back then they should depreciate it over 8 years.
258,000 / 8 years = $32,250
Bake’s current trail balance:
AP $80k
Bonds Payable, due Y2 $300k
Discount on BP $15k
Deferred Income Tax Liability $25k
The deferred income tax liability is not related to asset for financial accounting purposes and is expected to reverse in Y2. What should be included in current liability section?
$365,000 = 300 + 80 - 15
Huff mining purchase a mineral mine for $3.6mn with removable ore estimated at 2.16mn tons. Property’s estimated value is $360 after ore extraction. Huff incurred $1.08mn of development costs preparing the property for extraction. In Y1, 270,000 tons were removed and 240,000 tons were sold. Huff should include what amount of depletion in it cost of goods sold?
Cost of mine 3,600,000
Development costs 1,080,000
Residual value (360,000)
Net Cost 4,320,000
- Depletion per ton $2.00 (4,320,000 / 2.16 mn tons)
- COGS $480,000 (240,000 x 2)
The Present Value of the minimum lease payments should be used by the lessee in the determination of Capital Lease Liability and/or Operating Lease Liability(T/F) ?
Capital Lease Liability - YES
Operating Lease Liability - NO
- PV of the minimum lease payments should be used to determine the liability under a capital lease
- Under operating lease, a liability arises when rent expense is recorded but has not been paid.
When a temporary difference will result in taxable amounts in 5 years…
- A deferred tax asset is recognized in current year
- A deferred tax asset may be recognized in the current year if certain conditions are met
- A deferred tax liability is recognized in current year
- A deferred tax liability may be recognized in the current year if certain conditions are met
- A deferred tax liability is recognized in current year
…because a past event has resulted in a present obligation which will require a probable future sacrifice
In current year, Onal Co. purchased 10,000 shares of its own stock at $7. Originally issued at $6 then sold 5,000 treasury shares for $10. The firm uses the cost method to account for treasury stock. What should ONal report in the income statement?
$0
- No gain or loss is recognized on IS for treasury stock transactions.
Ajax Corp has effective tax rate of 30%. On January 1, Y2 Ajax purchased equipment for $100,000. The equipment has useful life of 10 years. What amount of current tax benefit will Ajax realize during Y2 using 150% declining balance method of depreciation instead of straight-line method?
$1,500 (5,000 x 30%)
- (100,000 / 10 years) x 1.5 = 15,000
- (100,000 / 10 years) = 10,000
Taxes collected and held by Eldorado County for a school district would be accounted for in which of the following funds?
(Trust, Agency, Special Revenue, and Internal Service)
Agency
- They’re used to account for assets held by a governmental unit as a agent for individuals, private organizations, other governmental units, and other funds. Since Eldorado County would hold taxes for a school district in an Agency Fund.
Kemp provides a defined benefit postretirement plan for its employees on Y1. At the end of Y1, Kemp makes a benefit payment of $10,000 to employees. What should BS record accrued postretirement benefit cost on December 31, Y1?
Service Cost - 28,000
Interest on accumulated postretirement obligation - 5,000
Amortization of the unrecognized transition - 8,000
31,000
Postretirement Benefit Cost 41,000
Cash 10,0000
Accrued PR benefit Cost 31,000
An issuer of bonds uses a sinking fund for the retirement of bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund:
I. Increases by revenue earned on the investments
II. Is not affected by revenue earned on the investments
III. Decreases when the investments are purchased.
Increases by revenue earned on the investments. Only I.
Using the indirect method, which cash flow statement does the amortization of a bond discount show up on?
Operating
A company issued rights to its existing shareholders to purchase for par unissued shares of common stock with a par value of $10 per share. When the market value of the common stock was $12 per share, the rights were exercised. Common stock should be credited at $10 per share and ……
- Appropriation for stock retirement credited at $2 per share.
- No credit made to additional paid-in capital or retained earnings
- Additional paid-in capital credit at $2 per share
- Retained earnings credited at $2 per share
Cash 10
Common Stock 10
No credit made to additional paid-in capital or retained earnings*
Lease Y contains a bargain purchase option and the lease term is equal to 75% of the estimated economic life of the leased property.
Lease Z contains a bargain purchase and lease term is equal to less than 75% of the estimated economic life of the leased property. How should the lessee classify these leases?
Both as Capital Lease!
If 1 of the criteria are met then it is a Capital Lease:
1) Lease transfers ownership to the lessee during lease term
2) Lease contains a bargain purchase option
3) Lease Term is 75% or more of the economic useful life
4) PV of the minimum lease payment equals 90% or more of FV
Seco was forced into bankruptcy and is liquidating assets and paying claims at 40 cents on the dollar. Hale holds a $30,000 non-interesting bearing note from Seco, collateralized by an asset with BV of 35,000 and liquidation value of $5,000. What’s the amount to be realized by Hale on this note?
$15,000
30,000
- 5,000
= 25,000
25,000 x 40% = 10,000
Liquidation value is guaranteed (5,000) so add it to the 10,000
The term chief operating decision maker…
- Refers to a manager with a specific title
- Refers to a function
- Must be disclosed by title in the financial reporting for segments
- Must be described in the disclosures for the financial reporting for segments
Refers to a function
What is factoring? Company A factors $200,000 without recourse on July 1, Y1 to Rich. Rich assessed a fee of 3% and retains a holdback equal to 5% of the AR. In addition, Rich charges 15% interest computed on a weighted average time to maturity of the receivables of 41 days.
1) What is the Company A’s cost of factoring? 2) What will A receive and record a cash of? Lastly, how does A account for factoring?
Cost incurred:
200,000
x 3%
= 6.000
200,000
x 15%
x 41/365
= 3,370
1) (Cost of Factoring) 9,370 = 6,000 + 3,370
Holdback = 10,000 (200k x 5%)
2) Receive = $200,000 - $9,370 - $10,000 = $180,630
Note: when items are factored - A should removed all of the receivables from the books by crediting AR by $200,000
Whitestone, a nongovernmental not-for-profit organization, received a contribution in December Y1. The donor restricted use of the contribution until March Y2. How should they record it?
- Footnote the contribution in Y1 and record as income when it becomes available in Y2
- Report as Net Income in Y1
- Report as deferred income in Y1
Report as Net Income in Y1
Total Asset Turnover?
Sales / Avg Total Assets
Factoring. 4/1, Aloe factored $80k of its AR without recourse. The factor retained 10% as allowance for sales returns and charged 5% commission on gross amount. What amount of cash did Aloe receive from the factored receivables?
80,000
x (100% - 10% - 5%)
= 68,000
3 different kinds of depreciation and example. Straight line, double declining, and sum-of-the-years? Assuming Y2 for sum-of-the-years.
Useful life - 5 years
Salvage Value - $5,000
Cost - 100,000
Straight line
(100 - 5) / 5
Double Declining
2x Straight line Expense
Sum of the years
(100 - 5) / (4 / 15)
3 different kinds of depreciation and example. Straight line, double declining, and sum-of-the-years? Assuming Y2 for sum-of-the-years.
Useful life - 5 years
Salvage Value - $5,000
Cost - 100,000
Straight line
(100 - 5) / 5
Double Declining
2x Straight line Expense (salvage value doesn’t matter)
Sum of the years
(100 - 5) / (4 / 15)
1/1/Y2, Carpet lent $100mn to supplier payable in 5 years. Interest 5% payable annually with 1st payment 12/31/Y3. Going rate for this type of loan is 10%. Assume PV (at going rate) of $100mn note is $81mn on 1/1/Y2. What amount of interest income should be included in Y2 income statement?
$81mn (carrying value)
x 10% (implied)
= $8,100
Ande estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of ….
- Consistency
- Going Concern
- Matching
- Substance over form
- Matching
Which of the following is true of start-up costs?
- Costs of start-up activities, including organizations costs, should be expensed as incurred.
- Cost of start-up activities, including org costs, should be capitalized and expensed only if an impairment exists
- Costs of start-up activities, including organizations costs, should be capitalized and amortized on a straight-line basis over the lesser of the estimated economic life of the company or 60 months.
- Costs of start-up activities, including organizations costs, should be expensed as incurred.
What is the Y2 net cash for financing activities?
Payment for early retirement of LT bonds - 750mn
Distribution of Y2 cash dividend declared in Y1 to preferred shareholders - 62mn
Carrying Value of convertible preferred stock, converted into CS - 120mn
Proceeds from sale of Treasury stock (Carrying value 85mn) - 95mn
Cash paid to retire bonds (750mn)
+ Payment of cash dividend (62mn)
+ Sale of treasury stock 95mn
= ($717mn)
12/31/Y1, company reduced inventory cost from $100 to its NRV of $80. 12/31/Y2, inventory was still on hand, and its NRV increased to $150. Under IFRS, what journal entry should be the company record for Y2 to properly record inventory value?
- Debit inventory 20 and credit expense 20
- Debit inventory 70 and credit expense 70
- Debit inventory 70, credit RE 50 and expense 20
- Debit inventory 20 and expense 30, credit RE 50
- Debit inventory 20 and credit expense 20
- IFRS, inventory is carried at lower of cost of NRV.
Which of the following are reported as interest expense?
- Pension cost interest
- Postretirement healthcare benefits interest
- Imputed interest on noninterest-bearing note
- Interest incurred to finance construction of machinery for own use
- Imputed interest on noninterest-bearing note
Which of the following funds should be reported as part of the local government’s governmental activities column in its government-wide statements?
- Debt service
- Agency
- Private-purpose trust
- Pension trust
- Debt service
Which of the following would be reported as an investing activity in a company’s statement of cash flows?
- Collection of proceeds from a note payable
- Collection of a note receivable from a related party
- Collection of an overdue AR from a customer
- Collection of tax refund from the government
- Collection of a note receivable from a related party
Which of the following statements correctly describes the proper accounting of nonmonetary exchanges that are deemed to have commercial substance?
- It defers any gains and losses
- It defers losses to the extent of any gains
- It recognizes gains and losses immediately
- It defers gains and recognizes losses immediately
- It recognizes gains and losses immediately
Gains and losses from nonmonetary exchanges that have commercial substance are recognized immediately
Which of the following should be disclosed in a summary of significant accounting polices?
- Basis of profit recognition on long-term construction contracts.
- Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.
- Depreciation expense
- Composition of sales by segment
- Basis of profit recognition on long-term construction contracts.
Summary of significant accounting policies footnotes present info that helps users understand the recognition, measurement, and disclosure decision made by the firm
Office supplies were ordered by Dwyer from Orcutt on December 15, Y1. Terms of sale were FOB destination. Orcutt shipped the office supplies on December 28, Y1, and Dwyer received them on January 3, Y2. When should Dwyer record the accounts payable?
- December 15
- December 28
- January 3
- January 3.
** Reason is that when items are shipped FOB Destination, title does not pass to the buyer until it is delivered. **
Jonn City entered into a capital lease for equipment during the year. How should the asset obtained through the lease be reported in Jonn City’s government-wide Statement of Net Position?
- General Capital Asset
- Other Financing Use
- Expenditure
- Not reported
- General Capital Asset
If options or rights are exercised, how does that affect Retained Earnings/Net Income and Additional paid-in Capital?
Retained Earnings/Net Income - Not affected
Additional paid-in Capital - Increased
Which of the following information about threatened litigation should NOT be considered to determine whether an accrual is appropriate prior to an issuance of a company’s financial statements?
- The period in which the underlying cause of the threatened litigation occurred
- The degree of probability of an unfavorable outcome
- The ability to make a reasonable estimate of the amount of loss
- The period in which the threatened litigation became known to management
- The period in which the threatened litigation became known to management
everything else is a MUST
Tott City’s serial bonds are serviced through a Debt Service Fund with cash provided by the General Fund. In a Debt Service Fund’s statements, how are cash receipts and cash payments reported? (Revenues, Expenditures, or Operating Transfers)
Cash Receipts:
- Operating Transfers
Cash Payments
- Expenditures
On 12/31/14, Largo had a $750mn note payable outstanding due 7/31/15. They had excess cash in prepaid $250mn of the note in 1/12/15. In 2.15, Large completed $1,500mn bond offering which proceeds use to repay the note payable and construction costs. On 3/3/15, Largo issued its 2014 FS. What amount of note payable should be included in current liabilities?
$250mn
***reason is that even though proceeds from issue replenished these funds. the
On 12/31/14, Largo had a $750mn note payable outstanding due 7/31/15. They had excess cash in prepaid $250mn of the note in 1/12/15. In 2.15, Large completed $1,500mn bond offering which proceeds use to repay the note payable and construction costs. On 3/3/15, Largo issued its 2014 FS. What amount of note payable should be included in current liabilities?
$250mn
***reason is that even though proceeds from issue replenished these funds, the $250mn will reduce current assets. SO the remainder of note (500) is classified as noncurrent because firm intends to refinance (which they have ability as they issued 1500mn).
Regarding transfer of investments between categories under IFRS No. 9 - which are correct?
- Only investments in debt securities may be transferred between categories
- When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must not be restated
- Only investments in debt securities may be transferred between categories
Other is incorrect
Pine Corp’s books showed pretax income of $800mn. What is their current income tax liability 12/31/Y3 on BS?
Gain on involuntary conversion - $350mn
Depreciation deducted for tax purposes - $50mn
Federal est. tax payment, Y3 - $70mn
Federal tax rate, Y3 - 30%
Accounting Income 800mn - Nontaxable gain (350mn ) - excess tax depreciation (50mn) = Taxable Income $400mn x Federal Tax Rate 30% = Est. Tax Payments $120mn - Already made tax payments ($70mn) = Income Tax Liability $50mn
According to the IASB Framework, the two criteria required for incorporating items into the income statement or statement of financial position are that…
- It meets the definition of relevance and reliability
- It satisfies the criteria of capital maintenance
- It meets the definition of an element and can be measured reliably
- It meets the requirements of comparability and consistency
- It meets the definition of an element and can be measured reliably
Which is a concern in preparing consolidated FS at the end of operating period following a business combination that would NOT be a concern in preparing financial statements immediately following the combination?
- Whether or not there are intercompany accounts receivable/accounts payable
- Whether or not goodwill resulted from the business combination
- Whether the parent carries its investment in the subsidiary using the cost method or equity method
- Whether or not there is a controlling interest in the subsidiary
- Whether the parent carries its investment in the subsidiary using the cost method or equity method
It is not a concern at the beginning of operating period but is a concern at the end.
Reason it is NOT intercompany is because that is an issue at BOTH beginning and ending.
A lease contains a bargain purchase option. In determining the lessee’s capitalizable cost at the beginning of the lease term, the payment called for by the bargain purchase option would:
- Not be capitalized
- Be subtracted at its present value
- Be added at its exercise price
- Be added at its present value
Be added at its present value
Minimum lease payments include the rental payments plus amount of bargain purchase. Amount capitalized is Present value of minimum lease payments
Encumbrances would NOT appear in which fund?
- Capital Projects
- Special Revenue
- General
- Enterprise
Enterprise.
In October Y1, US company sold merchandise to British Company for 2,000 pounds (exchange $1.43). In December 31, exchange rate is $1.45. On collection in January, exchange rate is $1.50.
What is the gain (loss) from foreign currency translation when the receivable is collected?
$100.
The reason it that in the Y1 statement, there is a gain of $40. And then in Y2 (what were asked) it is the other $100. So there is a $140 gain but it is split based on timing.
An estimated loss from a loss contingency that is probable and for which the amount of the loss can be reasonably estimated should:
- Not be accrued but should be disclosed in the notes to the financial statements
- Be accrued by debiting an appropriated retained earnings account and crediting a liability account or an asset account
- Be accrued by debiting an expense account and crediting appropriated retained earnings account
- Be accrued by debiting an expense account and crediting a liability account or an asset account.
- Be accrued by debiting an expense account and crediting a liability account or an asset account.
Which of the following is a recognized liability for both international accounting standards and US Standards:
- Regular warranty liability, 60% probability of occurring
- Obligation to provide rebates to customers, 90% probability of occurring
- Possible loss due to lawsuit, 60% probability
- Possible loss due to lawsuit, 40% probability
- Obligation to provide rebates to customers, 90% probability of occurring
Under IFRS, a provision is:
- An event which is not recognized because it is not probable or cannot be measured reliably.
- An event which is probable and measurable
- An event which is probable, but not measurable
- An event which is probable, possible, or remote and measurable
- An event which is probable and measurable
Band Co uses the equity method to account for its investment in Guard, Inc common stock. How should Band record a 2% stock dividend received from Guard?
- As dividend revenue at Guard’s carrying value of the stock
- As dividend revenue at the market value of the stock
- As a reduction in the total cost of Guard stock owned
- As a memorandum entry, reducing the unit cost of all Guard stock owned.
- As a memorandum entry, reducing the unit cost of all Guard stock owned.
Eagle Inc, is a US manufactures/distributer of consumer products and owns a subsidiary, El Rio, which sells Eagles products in Mexico. El Rio receives all its products from Eagle and sells those products. El Rio also maintains its books and FS in the Peso. Which methods will Eagle most likely use to convert El Rio’s financial statements to dollar-based statement?
- Translation
- Remeasurement
- Translation and then remeasurement
- Remeasurement and then translation
- Remeasurement
Funded ratio of a pension plan compares:
- Actual employer contributions to the unfunded actuarial pension liability
- The fair value of plan assets to the actuarial value of plan assets
- Actual employer contributions to the accumulated required employer contributions
- The plan’s fiduciary net position as a percentage of the actuarially determined total pension liability
- The plan’s fiduciary net position as a percentage of the actuarially determined total pension liability
governmental employer must report as required supplemental information*
Garson Co. recorded goods in transit purchased FOB shipped point at year-end as purchases. The goods were excluded from ending inventory. What effect does the omission have on Garson’s assets and retained earnings at year-end? (under/overstated)
Assets - Understated
Retained Earnings - Understated
**Goods shipped FOB shipping point should be included ending inventory. SO, if ending inventory is understated then COGS is understated then NI is understated. **
Marmol corporation uses the allowance method for bad debts. During Y1, Marmol charged $30,000 to bad debt expense, and wrote off $25,200 of uncollectible accounts receivable. These transactions resulted in a decrease in working capital of….
- $0
- $4,800
- $25,200
- $30,000
- $30,000
Changes in the FV of contingent transferred in a business combination resulting from occurrences after the acquisition date should be recognized as a gain or loss in the current income when the contingent consideration is classified as… (Asset or Liability/An Equity Item = Yes/No)
Asset/Liability - Yes
An Equity Item - No
Which of the following is correct accounting measurement and treatment under IFRS for assets classified as “Loans and Receivables”?
- Amortized cost, with interest and amortization recognized in current income
- Amortized cost, with interest and amortization recognized in other comprehensive income
- Fair value, with changes in fair value recognized in current income
- Fair value, with changes in fair value recognized in other comprehensive income.
- Amortized cost, with interest and amortization recognized in current income
this treatment is the same under US GAAP for investment held to maturity
Which of the following statements concerning the fair value hierarchy used in ascertaining fair value is/are correct?
I. Quoted market prices should be adjusted for a “blockage factor” when a firm holds a sizable portion of the asset being valued
II. Quoted market prices in markets that are not active because there are few relevant transactions cannot be used
Neither
Pane Co. had the following borrowing on its books at the end of the current year:
- $100k, 12% interest payable 3/31 and 9/30
- $75k, 10% paid 4/1, 7/1, 10/1, and 1/1.
- $200k noninterest bearing not, proceeds $178k
What is interest payable on 12/31 balance sheet?
(100k x 12% x (3/12)) = $3,000
(75k x 10% x (3/12)) = $1,875
Total interest payable = $4,875
Finished goods inventory 1/1 - $120mn
Finished goods inventory 12/31 - $110mn
Cost of Goods manufactured - $520mn
Loss of sale of plant equipment - $50mn
The cost of goods sold for this year is?
$530mn = $520 + $10
$120 - $110 = $10mn
Lobo Corp. reported for financial-statement purposes the following revenue/expenses were not included in taxable income:
- Premiums on offices life insurance $5k
- Interest revenue on muni bonds $10k
- Est. future warranty costs in Y2/Y3 $6k
Lobo’s tax rate is 30% and has paid income taxes of $170k for the 3 year period. What is deferred tax benefit applied against current income tax expense?
- $18,000 = $60,000 x 30%
Carlson Hospital, a nonprofit affiliated with Carlson College had these cash receipts:
- Collection of Health care receivables - $850mn
- Contribution from donor for endowment - $150mn
- Tuition from nursing school - $50mn
- Dividend received from investments - $75mn
Dividends are restricted by donor hospital building improvements. What amount would be reported as net cash provided by operating activities?
- 900mn = 850mn + 50mn
Forward contracts entered into for speculative purposes, which of the following exchange rates would be used to measure the contracts prior to maturity?
(Spot rate and/or Forward rate)
Spot rate - No
Forward rate - Yes
Which one of the following hedges using a forward contract will require the recognition of a new asset or liability if a gain or loss occurs on the hedging instrument?
- Forecasted transaction
- Firm commitment hedge
- Recognized asset or liability hedge
- Net investment in foreign operations hedge
- Firm commitment hedge
Mend purchased a three-month U.S. treasury bill and its policy is to treat all highly liquid investments with an original maturity of 3 months or less as a cash equivalent. What should this purchase be reported in the statement of cash flows?
- Outflow from operating activities
- Outflow from investing activities
- Outflow from financing activities
- Not reported
Not Reported.
* the reason is that it has no effect on total cash and cash equivalents because such purchases increase cash equivalents and decrease cash by the same amount*
Dee’s inventory and accounts payable balances at 12/31/Y2, increased over their December 31, Y1 balances. Should these increases be added to or deducted from cash payments to suppliers to arrive at Y2 Cost of goods sold? (Increase in inventory/Increase in accounts payable = added to or deducted from)
Increase in Inventory - Deducted from
Increase in AP - Added to
Cash payments to suppliers
+ increase in AP
- increase in inventory
= COGS
Young purchased equipment by making a down payment of $4k and issuing a note payable for $18k. A payment of $6k is to be made at the end of each year for 3 years. The applicable rate of interest is 8%. the PV of an ordinary annuity factor for 3 year 8% is 2.58, and PV for future amounts of a single sum of one dollar for 3 years at 8% is .735. Shipping charges for the equipment were $2k and installation charges were $3.5k. What is the capitalized cost of the equipment?
FV of equipment is $4,000 + 15,480 (2.58 x $6k) = $19,480
$19,480 + $2k + $3.5k = $24,980
shipping and installation charges are included in a capitalized
Which of the following accounts of a governmental unit is credited to close it out at the end of the fiscal year?
- Appropriations
- Revenues
- Fund Balanced-assigned
- Encumbrances
- Encumbrances
Under IFRS for SMEs, which of the following cost flow assumptions can be used for inventory valuation purposes? (FIFO, LIFO, Weighted Average Cost = Yes/no)
FIFO - Yes
LIFO - NO
Weighted Avg Cost - Yes
On 1/1/Y2 Ritt Corp acquired 50,000 shares of Shaw Corp which represents 80% of Shaw’s $10 par CS for $19.50. On the date of acquisition, the fair value of the 12,500 shares representing the noncontrolling interest in Shaw was $18 per share. On this date, the carrying value of Shaw’s net assets was $1,000,000. The fair values of Shaw’s identifiable assets and liabilities were the same as their carrying values. For the year ended 12/13/Y2, Shaw had net income of $190,000 and paid cash dividends totaling $125,000. In the December 31,Y2, consolidated balance sheet, noncontrolling interest should be reported at:
- $200,000
- $225,000
- $233,000
- $238,000
$238,000
225,000
Y2 Net Income (20% x 190k) 38,000
Y2 Dividends (20% x 125k) (25,000)
Noncontrolling interest = $238,000
** subtract dividends because they decrease investment account under the equity method**
Bay has an asset with a cost of $200mn and acc. depreciation of $120mn. Driftwood has an asset of $250mn and acc. depreciation of $160mn. Both have fair values of $100mn and find it mutually advantageous to exchange assets, and the exchange results in improved future cash flows for both companies. What amount, if any, is Bay’s gain on the exchange?
$20mn.
**The gain on the exchange would be the difference between the carrying value of the asset exchanged and the fair value of that asset. Bayberry’s carrying value is $80,000 and the fair value is $100,000; therefore, the gain to Bayberry is $20,000.”
Adam Co. reported sales revenue of $2,300,000 in its income statement December 31, Y2. Using the info below, uncollectible accounts totaling $10,000 were written off in Y2. Under the cash basis of the accounting, Adam would have reported Y2 sales of…
- $2,140,000
- $2,150,000
- $2,175,000
- $2,450,000
- $2,140,000
**AR T account**
12/31/Y1 500k
Sales 2,300k 10k write off
? collections
12/31/Y2 650k
Beg, AR + Credit Sales - Collections - Write offs = Ending AR
Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a four-year useful life. Yellow has a policy of taking a full-year’s amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program. What amount should Yellow report as an expense for the current year?
Software costs of $4,000,000 are at the preliminary project stage and should be expensed as incurred in the current year. The remaining $8,000,000 is capitalized and amortized over its four-year life ($8,000,000/4 years = $2,000,000 per year). And 50,000 spent on training employees is expensed during the current year.
4mn + 2mn + 50k
=6,050,000
On January 1, 20X5, Blaugh Co. signed a long-term lease for an office building.
The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, 20X5 and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, 20X5, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease.
In Blaugh’s December 31, 20X5 balance sheet, the capital lease liability should be:
- $102,500
- $111,500
- $112,500
- $290,000
- $111,500
Entry on Dec 31, 2015:
Interest expense (112,500 x .08)
Lease liability 1,000
Cash 10,000
SO lease liability is $112,500 - $1,000 = $111,500
Ott acquired rights to a patent from Grey under a licensing agreement that required an advance royalty payment. Ott remits royalties earned and due under the agreement on Oct 31 each year. Additionally, on same day, Ott pays in advance the estimated royalties for the next year.
1/1/Y1 Prepaid Royalties - 65,000
13/31/Y1 Royalty Payment - 110,000
12/31/Y2 Year-end Credit Adjustment Royalty Expense - 25,000
On December 31, Y2 Balance Sheet - Ott should report prepaid royalties of:
- $25,000
- $40,000
- $85,000
- $90,000
- $90,000 (65,000 + 25,000)
Black Corp.’s accounts payable at December 31, year 1, totaled $900,000 before any necessary year-end adjustments relating to the following transactions:
- On December 27, year 1, Black wrote and recorded checks to creditors totaling $400,000 causing an overdraft of $100,000 in Black’s bank account at December 31, year 1. The checks were mailed out on January 10, year 2.
- On December 28, year 1, Black purchased and received goods for $153,061, terms 2/10, n/30. Black records purchases and accounts payable at net amounts. The invoice was recorded and paid January 3, year 2.
- Goods shipped FOB destination on December 20, year 1, from a vendor to Black were received January 2, year 2. The invoice cost was $65,000.
At December 31, year 1, what amount should Black report as total accounts payable?
- $1,515,000
- $1,450,000
- $1,153,061
- $1,153,061
- $1,450,000
THe reason $65,000 isnt added is because it is shipped FOB destination SO it it not included until it arrives which is January
On January Y1, Ball Inc purchased a $1,000,000 ordinary life insurance policy on its president. Ball, Inc. is the beneficiary under the life insurance policy. Using the information below, how much should Ball report as life insurance expense for year 3?
Cash surrender value, 1/1/Y3 - $43,500
Cash surrender value, 12/31/Y3 - $54,000
Annual advance premium paid 1/1/Y3 - $20,000
Dividend received 7/1/Y3 - $3,000
2) What if the question said that the dividends were applied to increase the cash surrender value?
$6,500 (9,500 - 3,000)
** cash surrender value increased by $10,500 (54,000 - 43,500).
Cash Surrender value $10,500
Insurance expense $9,500
Cash $20,000
Since dividend received from policy (3,000) is not a dividend earned from a separate account investment. Since the company owns the insurance policy it is offset against the insurance expense. (9,500 - 3,000)
2) if so, then you would NOT subtract the dividends (3k) from the insurance expense as it was applied to surrender value
