55 SURGENT MCQ Flashcards
Question #300083
A company has the following liabilities at year-end:
Mortgage note payable; $16,000 due within 12 months $355,000
Short-term debt that the company is refinancing
with long-term debt 175,000
Deferred tax liability arising from depreciation 25,000
What amount should the company include in the current liability section of the balance sheet (statement of financial position)?
$0
$41,000
$191,000
$16,000
Relevant Terms
Current Liability
Deferred Income Tax
Depreciation
Reference
2271.01
2271.03
2271.04
2271.05
2271.06
Authorities
FASB ASC 210-10-45-8
FASB ASC 470-10-45-13, 45-14
FASB ASC 740-10-45-4
SFAC 6.35
$16,000
Only the current portion of the mortgage is included in current liabilities.
All deferred tax liabilities and deferred tax assets are classified as noncurrent. The refinanced loan is not included in current liabilities. The FASB states that a short-term obligation should be excluded from current liabilities if the entity intends to refinance the obligation on a long-term basis, and that intent is supported by an ability to consummate the refinancing.
Relevant Terms
Current Liability
Deferred Income Tax
Depreciation
Reference
2271.01
2271.03
2271.04
2271.05
2271.06
Authorities
FASB ASC 210-10-45-8
FASB ASC 470-10-45-13, 45-14
FASB ASC 740-10-45-4
SFAC 6.35
302726
A company issued a financial instrument that unconditionally requires the company to settle the obligation by issuing common stock with a value of $500,000 on the settlement date. How should the company report this instrument in its financial statements?
As an equity instrument in the balance sheet
By only disclosing an equity instrument in the notes
By only disclosing a liability in the notes
As a liability in the balance sheet
*Question #302726
Relevant Terms
Liability
Unconditional
Reference
2111.04
As a liability in the balance sheet
An unconditional promise to pay a debt at a fixed point in time matches the definition of a liability. The company owes for a benefit and must pay. The method of payment is not relevant to the existence of the liability.
Note disclosure would be insufficient for a liability with a known dollar value ($500,000) but may be necessary in addition to the balance sheet recognition. An equity instrument would be an asset, not a liability.
Term: Unconditional
“Unconditional” is said of the promise or order on commercial paper. It is not subject to, or limited by, any modifying circumstance or prerequisite. A promise or order is conditional if the instrument states that it is “subject to” or “governed by” another agreement or is to be paid “only” out of a particular fund or source (for a nongovernmental unit).
An order or promise is not conditional although the instrument:
- states its consideration.
- refers to the transaction out of which it arose.
- states that it is secured by a mortgage or other security device.
- indicates a particular account, fund, or source from which payment may be drawn.
- states that it is to be paid “only” out of a particular fund or source (for a governmental unit).
- is payable only out of the entire assets of a partnership, trust, estate, or unincorporated association.
- states that it is drawn under a letter of credit.
UCC 3-106
Relevant Terms
Liability
Unconditional
Reference
2111.04
A company’s year-end comparative statement of financial position reflects the following changes from the prior year: cash increased by $40,000, total liabilities increased by $32,000, and all other assets decreased by $65,000. Which of the following statements is correct regarding the current-year change in the company’s stockholders’ equity?
It decreased by $32,000.
It increased by $25,000.
It increased by $105,000.
It decreased by $57,000.
Relevant Terms
Comparative Financial Statements
Statement of Financial Position
Stockholders’ Equity
It decreased by $57,000.
A statement of financial position (i.e., balance sheet) provides information about an enterprise’s assets, liabilities, and equity and their relationships to one another at a point in time. The statement delineates the enterprise’s resource structure (major classes and amounts of assets) and its financing structure (major classes and amounts of liabilities and equity).
For the statement, Assets = Liabilities + Equity; therefore, a net decrease of $25,000 ($40,000 – $65,000) in assets must equal a net decrease of $25,000 in liabilities and equity. If liabilities increased by $32,000, equity must have decreased by $57,000 ($32,000 + $25,000).
Relevant Terms
Comparative Financial Statements
Statement of Financial Position
Stockholders’ Equity
301723
A partial listing of a company’s accounts is presented below:
Revenues $80,000
Operating expenses 50,000
Foreign currency translation adjustment gain, net of tax 4,000
Income tax expense 10,000
What amount should the company report as net income?
$24,000
$34,000
$30,000
$20,000
Question #301723
Relevant Terms
Earnings
Expense
Net Income
Other Comprehensive Income
Revenues
Reference
2112.05
2113.03
Authorities
SFAC 6.78-.88
Revenues $80,000
Less: Operating expenses (50,000)
Less: Income tax expense (10,000)
Net income $20,000
Net income or loss for an accounting period is determined by matching realized revenues with those expenses and expired costs necessary to generate the related revenue. Revenues are inflows of assets or settlements of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
Expenses are outflows of assets or incurrences of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations, and include Operating Expenses and Income Tax Expense. Net income is $20,000 ($80,000 − $50,000 − $10,000).
Foreign currency translation adjustment gain is an item of Other Comprehensive Income (OCI), and is included in comprehensive income but not net income; OCI is reported as a direct charge or credit to equity.
Relevant Terms
Earnings
Expense
Net Income
Other Comprehensive Income
Revenues
Reference
2112.05
2113.03
Authorities
SFAC 6.78-.88
Question #300036
Articulation means that financial statements are:
unaffected by each other.
separate and self-balancing.
totally dependent on each other.
fundamentally interrelated.
Question #300036
Relevant Terms
Articulation
Financial Statements
Statement of Cash Flows
Statement of Earnings and Comprehensive Income
Statement of Financial Position
Reference
2111.01
Authorities
SFAC 6.20-.21
Articulation means that the elements of financial statements are fundamentally interrelated in two ways: (1) beginning balance + changes = ending balance, and (2) assets = liabilities + equity. The concept of double-entry accounting (i.e., debits = credits) incorporates these relationships. In this way, financial statements show different aspects of the same transaction or event affecting the entity.
Financial statements are not separate and self-balancing—the balance sheet is dependent upon the current period income or loss from the income statement to be balanced. Similarly, financial statements are affected by the other financial statements—changes in balance sheet elements (assets and liabilities) are reflected in the statement of cash flows.
Term: Articulation
Articulation is the circular interrelation of financial statements, and the elements comprising them, such that statements that show elements describing levels or amounts at a moment in time depend on the information showing the effects of transactions, events, and circumstances during intervals of time in other statements, and vice versa (i.e., the statements show an algebraic relationship):
Assets = Liabilities + Equity, and
Balance at beginning of period + Changes during period = Balance at end of period
The statement of income ties directly to the statement of financial position through the statement of retained earnings.
Relevant Terms
Articulation
Financial Statements
Statement of Cash Flows
Statement of Earnings and Comprehensive Income
Statement of Financial Position
Reference
2111.01
Authorities
SFAC 6.20-.21
*Question #302056
Babcock Company owes $50,000 to Mendenhall Corporation. Babcock also has an account receivable from Mendenhall of $45,000. Babcock wants to offset these items and report a net payable of $5,000 in their balance sheet. Which of the following is not required for Babcock to report these items in this manner?
Babcock has the right to set off the amount owed with the amount owed by the other party.
Babcock’s right to offset the items is enforceable by law.
The amounts owed by Babcock and Mendenhall to each other are clearly determinable.
Babcock must have a signed agreement from Mendenhall to report the items in an offsetting manner.
*Question #302056
Relevant Terms
Accounts Receivable
Criteria
Reference
2111.04
Babcock must have a signed agreement from Mendenhall to report the items in an offsetting manner.
Generally, the offsetting of assets and liabilities in the balance sheet is improper unless a right of setoff exists.
The four criteria to establish a right of setoff that permits a firm to report items in an offsetting manner are:
- each of the two parties owes the other determinable amounts,
- the reporting party has the right to set off the amount owed with the amount owed by the other party,
- the reporting entity intends to set off, and
- the right of setoff is enforceable by law.
A signed agreement is the only answer choice that is not one of the four criteria.
Relevant Terms
Accounts Receivable
Criteria
Reference
2111.04
*Question #300075
Bake Co.’s trial balance included the following at December 31, 20X1:
Accounts payable $ 80,000
Bonds payable, due 20X2 300,000
Discount on bonds payable 15,000
Deferred income tax liability 25,000
The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in 20X2. What amount should be included in the current liability section of Bake’s December 31, 20X1, balance sheet (statement of financial position)?
$420,000
$390,000
$395,000
$365,000
*Question #300075
Relevant Terms
Current Assets
Long-Term Obligation
Reference
2111.01
2111.02
2111.03
2111.04
Authorities
FASB ASC 740-10-05-5
FASB ASC 740-10-05-7
$365,000
All deferred tax liabilities (and deferred tax assets) are classified as noncurrent.
All of the remaining items listed are considered current as they are due and payable within the next year.
Accounts payable $ 80,000
Bonds payable 300,000
Discount on bonds payable (15,000)
Total $365,000
Term: Long-Term Obligation
Long-term obligations are those obligations whose liquidation is reasonably not expected to require the use of existing resources properly classified as current assets, or the creation of another current liability. The maturity exceeds one year. Long-term obligations include long-term notes payable, bonds, and other obligations (e.g., under finance leases). Short-term obligations that are expected to be refinanced (and which meet specific conditions) are also classified as long term.
FASB ASC Glossary
Relevant Terms
Current Assets
Long-Term Obligation
Reference
2111.01
2111.02
2111.03
2111.04
Authorities
FASB ASC 740-10-05-5
FASB ASC 740-10-05-7
*Question #301691
Clear Co.’s trial balance has the following selected accounts:
Cash (includes $10,000 in bond-sinking fund for long-term bond payable) $50,000
Accounts receivable 20,000
Allowance for doubtful accounts 5,000
Deposits received from customers 3,000
Merchandise inventory 7,000
Unearned rent 1,000
Prepaid expenses 2,000
What amount should Clear report as total current assets in its balance sheet?
$74,000
$67,000
$72,000
$64,000
*Question #301691
Reference
2111.01
2111.02
2111.03
2111.04
Authorities
FASB ASC 210-10-45
A current asset is any asset expected to be sold, consumed, or exhausted through normal operations within one fiscal year or one operating cycle (whichever is greater). Current assets typically include cash and cash equivalents, receivables, inventory, and prepaid expenses. The allowance for doubtful accounts is a contra-current asset. Deposits received from customers and unearned rent are both liabilities; Clear should report the remaining $64,000 as total current assets.
Reference
2111.01
2111.02
2111.03
2111.04
Authorities
FASB ASC 210-10-45
*Question #300005
Financial statements serve as:
a “snapshot” in time of the financial condition of the entity.
the principal tool for managing the entity.
the only source of financial information for those outside the entity.
the primary source for financial information about the entity to the primary users since information cannot be provided directly to these users.
*Question #300005
Relevant Terms
Financial Statements
Statement of Cash Flows
Statement of Earnings and Comprehensive Income
Statement of Financial Position
Reference
2110.05
Authorities
SFAC 8.1 OB3
the primary source for financial information about the entity to the primary users since information cannot be provided directly to these users.
Financial statements serve as the primary, not the only, means for communicating financial information to those outside the entity. For example, press releases also can communicate information to users.
Only the balance sheet is a “snapshot” in time of the financial condition of the entity. The other financial statements serve as a “motion picture” showing the impact of various activities occurring throughout the year.
Since financial statements are designed for external reporting, they are not the principal tool for managing the entity. To manage an entity, managers require other types of information that are usually provided by internal managerial accounting reports.
Relevant Terms
Financial Statements
Statement of Cash Flows
Statement of Earnings and Comprehensive Income
Statement of Financial Position
Reference
2110.05
Authorities
SFAC 8.1 OB3
Question #301441
For a company to obtain a retail business license in a particular state, the company is required to pay the state the equivalent of three months of sales taxes on its projected retail sales. This amount is fully refundable after five years, provided the company has filed all required sales tax returns and paid all sales taxes due. Initially the company should report the payment related to this licensing requirement as:
a noncurrent liability.
a current asset.
an expense.
a noncurrent asset.
Question #301441
Relevant Terms
Current Assets
Current Liability
Expense
Reference
2220.02
Authorities
FASB ASC 210-10-45-1
Current assets include cash or other assets expected to be turned into cash or consumed within the year. This deposit of sales taxes will not be returned within the year.
Relevant Terms
Current Assets
Current Liability
Expense
Reference
2220.02
Authorities
FASB ASC 210-10-45-1
Question #301748
General purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users?
The management of the corporation
The board of directors of the corporation
Regulatory and taxing authorities
Investors and creditors and their advisors
Question #301748
Relevant Terms
Equity
Financial Reporting
General Purpose Financial Statements (GPFS)
Authorities
FASB ASC 205-10
General purpose financial statements are designed to provide information to the primary users since information cannot be provided directly to these users. The primary users are existing and potential investors, lenders, and other creditors. These users make decisions about buying, selling, or holding equity and debt instruments or providing credit by evaluating the expected returns from their investment. These parties need information about the prospects of future net cash inflows to the entity. They also need information about the entity’s resources, claims against those resources, and how efficiently the entity’s management and governing board have used the entity’s resources.
Regulatory and taxing authorities, the board of directors, and management of the corporation are also users of general purpose financial statements; however, they are not the primary users.
Relevant Terms
Equity
Financial Reporting
General Purpose Financial Statements (GPFS)
Authorities
FASB ASC 205-10
In analyzing a company’s financial statements, which financial statement would a potential investor primarily use to assess the company’s liquidity and financial flexibility?
Income statement
Statement of cash flows
Statement of retained earnings
Balance sheet
Question #300035
Balance sheet
Evaluation of a company’s liquidity would necessitate computation of liquidity ratios such as the current ratio and acid-test ratio. Financial flexibility would be evaluated using debt and equity ratios.
The data used in computation of each of the above-mentioned ratios would be obtained from the balance sheet.
Lino Co.’s worksheet for the preparation of its statement of cash flows included the following:
December 31 January 1
Accounts receivable
$29,000 $23,000
Allowance for uncollectible accounts
1,000 800
Prepaid rent expense
8,200 12,400
Accounts payable
22,400 19,400
Lino’s net income is $150,000. What amount should Lino include as net cash provided by operating activities in the statement of cash flows?
$145,400
$148,600
$151,000
$151,400
Question #301630
$151,400
The $151,400 amount is calculated as follows:
Net income
$150,000
Increase in accounts receivable
($23,000 – $29,000)
(6,000)
Increase in allowance for uncollectible accounts ($800 – $1,000)
200
Decrease in prepaid rent expense
($12,400 – $8,200)
4,200
Increase in accounts payable
($22,400 – $19,400)
3,000
Cash provided by operating activities $151,400
Relevant Terms
Indirect Method for Statement of Cash Flows
Statement of Cash Flows
Reference
2115.09
Authorities
FASB ASC 230-10-45-16
Mirr, Inc., was incorporated on January 1, 20X0, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, 20X0, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, 20X1. No additional activities affected owners’ equity in 20X0. Mirr’s liabilities increased to $120,000 by December 31, 20X0. On Mirr’s December 31, 20X0, balance sheet (statement of financial position), total assets should be reported at:
$882,000.
$875,000.
$878,000.
$885,000.
Question #300066
$885,000.
Since (1) assets equals liabilities plus equity and (2) the $120,000 amount of liabilities is a given, the key is to compute the December 31, 20X0, balance of equity. The transactions described affected equity as follows:
Issuance of stock on 1/1/X0 $750,000
Revenues 82,000
Expenses (64,000)
Declaration of cash dividend (3,000)
Equity 12/31/X0 $765,000
=========
Therefore, total assets must be $885,000, as shown below:
Assets = Liabilities + Equity
Assets = $120,000 + $765,000
Assets = $885,000
Relevant Terms
Accrued
Assets
Cash Dividend
Date of Declaration
Dividend Declared
Equity
Expense
Liabilities
Retained Earnings
Revenues
Statement of Financial Position
Reference
2111.01
2111.02
2111.03
2111.04
Note section disclosures in the financial statements for pensions do not require inclusion of which of the following?
The company’s best estimate of contributions expected to be paid into the plan in the next fiscal year
The components of net period pension costs
The amount of net prior service cost or credit in accumulated other comprehensive income
A detailed description of the plan, including employee groups covered
Question #300645
A detailed description of the plan, including employee groups covered
The FASB requires extensive disclosures regarding pensions. Among these are the components of net periodic pension cost and the estimated plan contributions for the year following the latest year reported in the statement of financial position.
The FASB requires, for each annual statement of financial position presented, “the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost, showing separately the net gain or loss, net prior service cost or credit, and net transition asset or obligation” (FASB ASC 715-20-50-1). Note that service cost is presented along with compensation expense, while the remaining items of net periodic pension cost are presented on a separate line item.
Relevant Terms
Contributions
Pension
Reference
2117.18
Authorities
FASB ASC 715-20-50-1
Quill, Inc., was incorporated on January 1, 20X3, with proceeds from the issuance of $1,500,000 in stock and borrowed funds of $350,000. Quill’s liabilities decreased to $290,000 by December 31, 20X3. During the first year of operations, revenues from sales and consulting amounted to $373,000, and operating costs and expenses totaled $219,000. On December 15, 20X3, Quill declared a $47,000 cash dividend, payable to stockholders on January 15, 20X4. No additional activities affected owners’ equity in 20X3. On Quill’s December 31, 20X3, balance sheet (statement of financial position), total assets should be reported at:
$1,991,000.
$1,957,000.
$1,944,000.
$1,897,000.
Question #302274
$1,897,000.
Since (1) assets equal liabilities plus equity and (2) the $290,000 amount of liabilities is a given, the key is to compute the December 31, 20X3, balance of equity. The transactions described affected equity as follows:
Issuance of stock on 1/1/X3 $1,500,000
Revenues 373,000
Expenses (219,000)
Declaration of cash dividend (47,000)
Equity 12/31/X3 $1,607,000
==========
Therefore, total assets must be $1,897,000, as shown below:
Assets = Liabilities + Equity
= $290,000 + $1,607,000
= $1,897,000
Rice Co. was incorporated on January 1, 20X1, with $500,000 from the issuance of stock and borrowed funds of $75,000. During the first year of operations, net income was $25,000. On December 15, 20X1, Rice paid a $2,000 cash dividend. No additional activities affected owner’s equity in 20X1. On December 31, 20X1, Rice’s liabilities had increased to $94,000. In Rice’s December 31, 20X1, balance sheet (statement of financial position), total assets should be reported at:
$598,000.
$692,000.
$600,000.
$617,000.
Question #300076
$617,000
Total assets should be reported at $617,000:
Stockholders’ equity (January 1, 20X1) $500,000
Add net income
25,000
Deduct dividends
(2,000)
Stockholders’ equity (December 31, 20X1) $523,000
========
Total assets = Total liabilities + Stockholders’ equity
= $94,000 + $523,000
= $617,000
Relevant Terms
Accounting Profit
Dividends
Stockholders’ Equity
Reference
2111.01
2111.02
2111.03
2111.04
Roro, Inc., paid $7,200 to renew its only insurance policy for three years on March 1, 20X1, the effective date of the policy. On March 31, 20X1, Roro’s unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro’s financial statements for the 3 months ending March 31, 20X1?
Prepaid insurance: $7,300; Insurance expense: $200
Prepaid insurance: $7,000; Insurance expense: $500
Prepaid insurance: $7,200; Insurance expense: $300
Prepaid insurance: $7,000; Insurance expense: $300
*Question #300408
This question indicates that on Roro’s unadjusted trial balance the full 3-year premium of $7,200 for the renewal of the policy has been expensed. The prepaid insurance account still contains $300 of unamortized premiums from the old policy. The accountant must make adjusting entries to achieve the following:
Expense the remaining premium of the old policy (DR Insurance Expense 300; CR Prepaid Insurance 300).
Transfer the premium for the new policy to the prepaid insurance account (DR Prepaid Insurance 7,200; CR Insurance Expense 7,200).
Amortize one month of expense on the new policy (DR Insurance Expense 200; CR Prepaid Insurance 200).
Calculation of account balances:
Monthly amortization = Policy cost / 36 months
= $7,200 / 36
= $200 / month
Prepaid insurance Policy 1-month
balance on 3/31/X1 = cost - amortization
= $7,200 - $200
= $7,000
======
Insurance expense on 3/31/X1:
Amortization of prior policy $300
March amortization of renewal 200
Total expense on 3/31/X1 $500
====
Relevant Terms
Prepaid Asset
Reference
2211.03
The following changes in Vel Corp.’s account balances occurred during 20X1:
Increase:
Assets $89,000
Liabilities 27,000
Capital stock 60,000
Additional paid-in capital 6,000
Except for a $13,000 dividend payment and the year’s earnings, there were no changes in retained earnings for 20X1. What was Vel’s net income for 20X1?
$17,000
$4,000
$13,000
$9,000
*Question #300525
$9,000
Increases in assets must equal increases in liabilities and equity (specifically increase in retained earnings in equity): Assets = Liabilities + Equity.
Increase in Assets $89,000
Increase in Liabilities (27,000)
Increase in stockholder’s equity $62,000
Add back: Dividend Payment 13,000
Increase in stockholders’ equity
BEFORE dividends $75,000
Less increase-new capital stock issued:
Capital Stock $60,000
Additional Paid-in Capital 6,000 66,000
20X1 Net Income $ 9,000
=======
My calculations: 27,000 +60,000 + 6,000 - 13,000 = 80,000
89,000 - 80,000 = 9,000
Relevant Terms
Accounting Profit
Additional Paid-in Capital
Capital Stock
Dividends
Retained Earnings
Stockholders’ Equity
Reference
2112.01
2112.02
2112.03
2112.04
2112.05
2112.06
2112.07
The following
$6,150,000
$5,000,000
$5,450,000
$5,700,000
Question #300067
$5,700,000
Mint Corp.’s current assets on December 31, 20X1:
Cash $ 600,000
Accounts receivable (net) 3,500,000
Costs in excess of billings
on long-term contracts 1,600,000
Total current assets $5,700,000
Current assets consist of cash and other assets reasonably expected to be realized in cash or sold or consumed in operations within one year or an operating cycle, whichever is longer. It is important to note that Mint’s trial balance has not been adjusted for income taxes. Since there are no temporary or permanent differences, Mint’s taxable income (for tax purposes) and income before income taxes (for financial reporting purposes) is $1,500,000 (earnings from long-term contracts of $6,680,000 less costs and expenses of $5,180,000). Mint’s income tax expense for 20X1 is $450,000 ($1,500,000 × 30%).
Therefore, Mint will have no “prepaid taxes” once the trial balance is adjusted for income taxes. The balance in the unadjusted Prepaid Taxes account will be transferred to the Income Tax Expense account.
Relevant Terms
Billings
Current Assets
Long-Term Contracts
Reference
2111.01
2111.02
2111.03
2111.04
Authorities
FASB ASC 210-10-45-1
The following is Gold Corp.’s June 30, 20X1, trial balance:
Additional information:
Checks amounting to $30,000 were written to vendors and recorded on June 29, 20X1, resulting in a cash overdraft of $10,000. The checks were mailed on July 9, 20X1.
Land held for resale was sold for cash on July 15, 20X1.
Gold issued its financial statements on July 31, 20X1.
In its June 30, 20X1, balance sheet (statement of financial position), what amount should Gold report as current assets?
$205,000
$195,000
$125,000
$225,000
*Question #300068
$225,000
Since the land was held for resale and was indeed sold before issuance of the financial statements, the land should be classified as a current asset.
The overdraft shown in the trial balance is assumed to be the overdraft related to checks mailed in July.
The $30,000 in checks should not have been recorded (deducted from cash) in June since they weren’t issued until well into July. The $30,000 clearly remained in cash on June 30 and must be added back.
What amount should Zinc report as total stockholders’ equity in its December 31, 20X1, balance sheet?
$1,650,000
$1,685,000
$1,780,000
$1,665,000
Question #300113
$1,665,000
Relevant Terms
Additional Paid-in Capital
Common Stock
Contributed Capital
Holding Gain or Loss
Retained Earnings
Stockholders’ Equity
Reference
2114.01
2114.02
Authorities
FASB ASC 220-10-55-2
FASB ASC 320-10-45-8A
When preparing a draft of its 20X1 balance sheet (statement of financial position), Mont, Inc., reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following:
Treasury stock of Mont, Inc., at cost, which approximates market value on December 31, 20X1 $24,000
Idle machinery 11,200
Cash surrender value of life insurance on corporate executives 13,700
Investments in equity securities 8,400
At what amount should Mont’s net assets be reported in the December 31, 20X1, balance sheet (statement of financial position)?
$842,600
$850,100
$834,500
$851,000
Question #300065
$851,000
Idle machinery, cash surrender value of life insurance on corporate executives, and investments in equity securities should appear in the asset section of the balance sheet (statement of financial position). Treasury stock should be presented as a reduction of stockholder’s equity, not as an asset.
Total net assets $875,000
Less Treasury stock 24,000
Net assets reported on balance sheet $851,000
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Term: Treasury Stock
Treasury stock is shares of the issuing corporation’s own stock (common or preferred) that were issued and were later reacquired in the open market by the issuing corporation and are still held by the issuing corporation. Treasury stock is considered issued but not outstanding. It may be obtained through purchase, settlement of an obligation, or donation, and it may be retired or resold. Treasury stock does not carry voting, dividend, preemptive, or liquidation rights.
Treasury stock may be accounted for under the par value or the cost method of accounting. Both methods are considered GAAP.
Treasury stock is not an asset and does not affect income.
It is a contra (negative) element of stockholders’ equity—it decreases total equity.
Treasury stock may increase or decrease contributed capital and may also decrease (but rarely increases) retained earnings.
FASB ASC 505-30
Relevant Terms
Equity
Fair Value
Net Assets
Statement of Financial Position
Treasury Stock
Valuation Allowance
Reference
2111.01
Authorities
FASB ASC 210-10-45
FASB ASC 505-30-05
