7/4

Question 1

1,200,000 note payable dated Oct 1 yr 1, 15% int. Three equal payments of 400,000.
How much accrued interest payable reported on the Dec 31, yr 2 FS

Answer 1

1,200,000 less first payment 400,000 = 800,000
800,000 x .15 = 120,000
120,000 x 3/12 = 30,000

30,000 reported as interest payable

Question 2

Adjustments for converting from cash basis to accrual basis

Answer 2

Add increases in current assets
Subtract decreases in current assets
Add decreases in current liabilities
Subtract increases in current liabilities

Question 3

How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?

Answer 3

As a component of income from continuing operations.

Overall effect is a change in estimate. reported prospectively as a component of income from continuing operations.

Question 4

Which of the following statements is correct regarding reporting comprehensive income?

• Comp inc must include all changes in stockholder equity for the period
• Comp Inc is reported in the year-end statements not interim statements
• A separate statement of comp income is required
• Accumulated other comp inc is reported in stockholder eq. on BS

Answer 4

Accumulated other comprehensive income is reported in the stockholder equity section of the bal sheet.

Question 5

For purposes of determining the period over which subsequent events must be evaluated, FS are considered to be available to be issued when

• FS are in a form and format that comply with GAAP
• All approvals necessary for the issuance of the FS have been received
• FS have been widely distributed to FS users

Answer 5

1 and 2

Question 6

A business combination is accounted for as an acquisition. Which of the following expenses related to the business combination should be included in the determination of net income of the combined corp for the period?

• Fees of finders and consultants
• Registration fees for equity securities issued

Answer 6

Yes to finder fees

No for registration

Question 7

In year 10, hail damaged several vans. Hailstorms are frequent. Toncan sold the vans in year 10 for less than carrying amount. How should the hail damage cost be reported in Toncan’s year 10 FS under GAAP?

Answer 7

Actual year 10 damage loss in continuing operations, with no separate disclosure.

Because the storms are frequent, the damage is not considered unusual. Thus damage are continuing operations. No separate disclosure since common occurrence.

Question 8

If Hutton borrowed 100 by issuing 100 LT note payable, what would be the effect on the following ratios: Current & Debt to Assets

-Increase , No effect, Decrease

Answer 8

Both would increase

Current Ratio - Current Asset/ Current Liab. Numerator increase

Debt to Assets Ratio - Total Liab / Total Assets. Numerator and Denominator Inc. Ratio would increase slightly

Question 9

Which of the following is a component of other comprehensive income?

• cumulative currency-translation adjustments
• minimum accrual of vacation pay
• charges in market value of inventory
• unrealized gain or loss on trading securities

Answer 9

cumulative currency-translation adjustments

Question 10

Chatham owned 25% of voting stock of Boyrum Co. Chatham applied the equity method to account for this investment. Boyrum reported income of 100,000 and paid 30,000 in dividends during the period. What amount should Chatham report as investment income?

Answer 10

25,000. Under the equity method, investment income is equal to the investor’s proportional share of the investee’s net income. Cash dividends are treated as a return of capital rather than investment income.

Question 11

For exchanges that have commercial substance the basis of the new machine is equal to? The gain/loss is equal to?

Answer 11

The basis is equal to the FV of the old machine plus the cash paid.

The gain/loss is equal to the difference between the FV and the book value of the asset given up.

Question 12

For exchanges that lack commercial substance the basis of the new crane is equal to? The gain/loss is equal to?

BV - 120,000
FV - 125,000
FV New Crane - 110,000
Cash received - 15,000

Answer 12

The basis is a product of the cash received, the book value of the crane given up and the gain of the transaction.

Difference between BV and FV is 5,000
Cash received 15,000
FV of new is 125,000 (110,000 plus 15,000)
15,000/125,000 = 12%; 12% x 5,000 = 600
Dr New Crane 105,600 (plug)
Dr Cash 15,000
Cr BV old Crane 120,000
Cr Gain 600

The gain/loss recognized is equal to the total gain multiplied by the portion of the FV received as cash. 600 per above calc.

Question 13

Retained earnings balance 400,000. In year 2 it is determined that insurance premiums of 60,000 for the three year period were paid and fully expensed. Tax rate is 30%. What amount should Conn report as adjusted beginning retained earnings?

Answer 13

428,000

60,000 x 2/3 = 40,000. 40,000 x .7 = 28,000

400,000 + 28,000 = 428,000

Question 14

Reportable segment “size” test is calculated using…

Reportable segment “reporting sufficiency” test is calculated using…

Answer 14

Size - total sales and revenues, 10% of them

Reporting sufficiency - 75% of the total external sales. Start with the segments reported under the size test. Add segments until you are above the 75% threshold.

Question 15

How should the acquirer recognize a bargain purchase in a business acquisition?

Answer 15

As a gain in earnings at the acquisition date.

Question 16

Property owned by Arp Co. was acquired by the city in connection with a condemnation proceeding resulting in a payment of 100,000 to Arp. The property’s BV was 70,000. Arp paid 45,000 for replacement property. What amount of gain should be reported?

Answer 16

30,000 - Payment 100,000 minus BV 70,000.

New property will have a BV of 45,000

Question 17

Construction Co. began project. Total amount spent on project during yr 3 was 250,000. To pay for construction, borrowed 200,000 at 10%. Funds not needed were temporarily invest in short term securities yielding 3,000 int rev. Other debt outstanding was 150,000, 10 yr, 7%. How much interest should be capitalized by starlight during yr 3?

Answer 17

Avoidable interest - 250,000/2 = 125,000 x .1 = 12,500

Actual interest = 200,000 x .1 + 150,000 x .07 = 30,500

The lower of the 2 can be capitalized.

Question 18

Jerry Co. purchased land 15 years ago at 125,000. The company has a contract to sell the land in January next year for 875,000.

What is the measurement basis and amount

Answer 18

Historical, 125,000

Question 19

Broccoli Co. acquired Asparagus Co. four years ago recording 900,000 of goodwill as part of the acquisition. No impairment losses were recorded in prior years.

What is the measurement basis and amount

Answer 19

Historical cost, 900,000

Question 20

Crump purchased an investment in bonds issued by Sliding Rock Inc. at 800,000. Crump decided to hold the investment for the 10 year life. The fair value of the bond on Dec 31 was 755,000.

What is the measurement basis and amount?

Answer 20

Amortized Cost, 800,000

Question 21

Company has a long-lived asset with a carrying value of 120,000. Expected future cash flows of 130,000, PV of future cash flows of 100,000. Market value 105,000. What amount of impairment loss should be reported under GAAP?

Answer 21

0

1. Compare the carrying amount to the undiscounted future cash flows

Question 22

Which of the following should be disclosed for each reportable operating segment of an enterprise under GAAP?

Profit or loss
Total Assets

Answer 22

Both. For each reportable segment, both profit and total assets should be disclosed.

Question 23

Eagle corp issued 600 of its 10% 1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, yr 1 and mature April 1, yr 11. Interest is payable semiannually on April 1 and Oct 1. What amount did Eagle receive from the bond issuance?

Answer 23

609,000

Face 600,000
Proceeds at 99 = 600,000 x .99 = 594,000
Accrued interest 600,000 x .1 = 60,000 x 3/12 = 15,000
Total 594,000 + 15,000 = 609,000

Question 24

Dallas acquired 80% of Style for 120,000. Style paid 5,000 cash dividend to stockholders. What should Dallas report as its share of the earnings from subsidiary?

Answer 24

16,000

BB 36,000
Dividends paid 5,000
YE Bal 51,000

So unadjusted RE must be 56,000 (51,000 + 5,000) So Net income must have been 20,000. 80% of 20,000 is 16,000

Question 25

What is the formula for lower of cost or market?

Answer 25

Selling Price
-Cost to dispose
=Net realizable value
-% profit margin
=Floor
Market = middle number between NRV, Floor and replacement costs

Value of inventory is the lower between cost or market

Question 26

A partnership was incorporated. They issued 1,000 $5 par value. What amount would be credited to additional paid in capital?

Total Assets 140,000
BV Liab 10,000
Eq 130,000
FV Assets 120,000
FV Liab 10,000

Answer 26

FV of assets 120,000 - 10,000 Liab = 110,000 eq

110,000 - 5,000 PV = 105,000 APIC

Question 27

Under US GAAP, a gain that is both unusual and infrequent should be reported?

Answer 27

As income from continuing operations.

Question 28

Bee uses the direct write off method for uncollectible AR. During the period Bee’s cash collections from customers equals sales adjusted for the addition or deduction of

Accounts Written Off and/or Increases in AR balance?

Answer 28

Deductions in accounts written off

Deductions in AR balance

Question 29

A company signed a five year contract with a customer on yr 1. They agreed to modify they contract in yr 2. What condition must be present in order for the contract modification to be accounted for as a separate contract?

1. price of the original contract remains the same
2. Scope of the original contract increases through the addition of distinct goods or services
3. Performance obligations of the original contract are partially satisfied
4. The original contract is terminated.

Answer 29

The scope of the original contract increases

contract modifications represent a change in price or scope or both.

Question 30

Draxler pays 988,472 to purchase a 1,000,000 bond maturing in five years and paying interest semi annually at annual rate of 2.75. Market rate is 3. With two years remaining, the manager determines the bond will pay the full 1,000,00 but will pay 3,000 less in interest. PV .9422 and annuity 3.8544.

If the bonds FV with two years remaining is 994,800 and the amortized cost is 995,182. The credit loss, assuming the bond is held to maturity is closest to

Answer 30

11,545

Annual interest 1,000,000 x 2.75% = 27,500 or 13,750 semi - 3,000 = 10,750
PV of face is 1,000,000 x .9422 = 942,200
PV of annuity is 10,750 x 3.8544 = 41,435
Total 942,200 + 41,435 = 983,635
Loss = 995,182 - 983,635 = 11,547 or 11,545 given as an answer