ACCRUAL ACCOUNTING Flashcards
Enhancing Qualitative Characteristics
Compare & verify in time to understand
Timeliness, Understandibility, Comaprability, & verifiable
Faithful Representation
Completely Neutral is free from error
Completeness, neutrality, & freedom from error
Relevance
Passing Confirms Money
Predictive Value
Confirming Value
Materiality
Fundamental Qualitative Characteristics
Relevant & Faithfull
An analysis of Thrift Corp.’s unadjusted prepaid expense account at December 31, 2004, revealed the following:
Thrift had an opening balance of $1,500 for its comprehensive insurance policy. Thrift had paid an annual premium of $3,000 on July 1, 2003.
A $3,200 annual insurance premium payment made July 1, 2004 was unadjusted.
A $2,000 advance rental payment for a warehouse Thrift leased for one year beginning January 1, 2005 was included.
In its December 31, 2004, Balance Sheet, what amount should Thrift report as prepaid expenses?
B. $3,600
Opening balance
$1,500
less the amortization of remaining balance. The $3,000 payment on July 1, 2003 covers the period July 1, 2003 - June 30, 2004. Thus by the end of 2004, the prepayment has expired.
(1,500)
Plus the annual payment made July 1, 2004
3,200
Less 1/2 year’s amortization to December 31, 2004
(1,600)
Plus warehouse prepayment (no amortization is required for this payment because the lease term begins Jan. 1, 2005)
2,000
Equals ending 2004 prepaid expenses (prepaid asset)
3,600
For which one of the following described assets does the guidance for determining fair value as provided in ASC 820, “Fair Value Measurement,” not apply?
A. Accounts receivable.
B. Investments in debt securities to be held-to-maturity.
C. Investments in equity securities held for trading.
D. Inventory reported at lower of cost or market
Inventory valuation under lower of cost or market is specifically exempt from the fair value measurement guidance provided by ASC 820, “Fair Value Measurement.” The use of lower of cost or market valuation places upper (“ceiling”) and lower (“floor”) limits on the measurement of “market” that may not result in a true fair value measurement. Thus, the measurement of inventory at “market” is one of the few exceptions to the use of ASC 820 guidance for fair value measurement.
The fair value for an asset or liability is measured as
A. The appraised value of the asset or liability.
B. The price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants.
C. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.
D. The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.
By definition, the fair value for an asset or liability is measured as the price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants; that is, fair value is measured as an exit price.
In which of the following circumstances, if any, would an auditor likely be especially concerned as to whether or not the price paid to acquire an asset was the fair value of the asset?
I. The asset was acquired from the acquiring firm’s majority shareholder.
II. The asset was acquired in an active exchange market.
A. I only.
If an asset was acquired from the acquiring firm’s majority shareholder, an auditor likely would be especially concerned as to whether or not the price paid to acquire the asset was fair value of the asset because an entity and its majority shareholder are related parties. Related party transactions may not be at arms-length and, therefore, may require special attention of an auditor and special disclosures related thereto.
Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny’s carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should the land and building be reported on Papa’s consolidated statements prepared immediately after the transaction?
Land Building
$75,000 $35,000
$55,000 $55,000
$60,000 $50,000
$60,000 $50,000
Even though there was no profit or loss on the intercompany transaction, it resulted in amounts being redistributed between the depreciable asset office building and the non-amortizable asset land, which would result in different amounts of depreciation expense than if the transaction had not occurred. Therefore, the intercompany transaction must be “eliminated” so that the consolidated statements would show land at $60,000 and buildings at $50,000. (Sonny also would need to assess the building for possible impairment.)
Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny’s carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should Papa record the land and building on its books at the date of the transaction?
Land Building
$75,000 $35,000
$55,000 $55,000
$60,000 $50,000
$75,000 $35,000
Papa should record the land and building on its books at the appropriately determined fair value at the date of the transaction. The prior carrying values on Sonny’s books are not relevant to the amounts at which Papa should record the assets on its books, but are relevant to the amounts that should be reported in the consolidated financial statements.
Within how many days after the end of the quarter does a company need to file the 10-Q?
Forty days for large accelerated filers and accelerated filers; forty-five days for non-accelerated filers
Within how many days after the fiscal year end of a large accelerated filer does a 10-K need to be filed?
Sixty days.
On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.’s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody’s investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment?
A. $ 6,000
B. $10,000
C. $16,000
D. $18,000
C. $16,000
Since Peabody has elected to report the investment in Newman using the fair value option, it should recognize its share of cash dividends received during the period (.30 x $20,000 = $6,000) and the increase in the fair value of the investment ($400,000 > $410,000 = $10,000), or $6,000 + $10,000 = $16,000.
OPERATING CASH INFLOWS
From customers
Interest/dividend income
Sale of trading investments
OPERATING CASH OUTFLOWS
To suppliers
To Government
Purchase of trading investments
For interest or other operational expenses
