area II D. PPE Flashcards
FAR2H10036
A company issues a $50,000 bond payable at a discount of 8% for five years. What is the carrying amount of the bond at the end of the first year?
A. $49,200
B. $53,200
C. $50,800
D. $46,800
D. $46,800
The carrying amount at the end of the first year is the face value minus the unamortized discount. After one year, $800 of the discount is amortized, leaving $3,200 unamortized ($4,000 – $800). The carrying amount is $50,000 – $3,200 = $46,800.
FAR3G10008
A company’s factory is destroyed by a natural disaster a week after the balance sheet date. How should this be reported in the financial statements?
A) As a Type I subsequent event, requiring adjustment to the financial statements.
B) As a Type II subsequent event, requiring disclosure in the notes.
C) The event should be ignored as it is unrelated to the period being reported.
D) Treat it as an extraordinary item in the income statement.
B) As a Type II subsequent event, requiring disclosure in the notes.
The destruction of a factory by a natural disaster after the balance sheet date is a Type II subsequent event. It is a significant event that occurred after the balance sheet date and does not provide additional evidence about conditions existing at the balance sheet date. Therefore, it requires disclosure in the notes to the financial statements but not an adjustment.
FAR1A10043
A company recorded a land purchase of $200,000 as an expense. What adjustments are needed to correct this error?
A) Increase assets by $200,000 and decrease expenses by $200,000
B) Increase assets by $400,000
C) Decrease assets by $200,000
D) No adjustment is needed
A) Increase assets by $200,000 and decrease expenses by $200,000
Recording the land purchase as an expense is incorrect. To rectify this, increase the asset account (land) by $200,000 and decrease the expense account by the same amount.
FAR2E30018
An investor has a 35% interest in an investee and uses the equity method. If the investee’s net income is $12,000 and it pays dividends of $4,000, what is the net effect on the investor’s investment carrying amount at the end of the year?
A. Increase of $2,800
B. Increase of $1,400
C. Decrease of $1,400
D. Decrease of $4,200
A. Increase of $2,800
35% X 12000 = 4200
35% X 4000 = 1400
4200 - 1400 = 2800
FAR2H10023
What is the effect of debt issuance costs on the interest expense of a bond?
A. It increases the interest expense over the life of the bond
B. It decreases the interest expense over the life of the bond
C. It has a one-time effect on interest expense in the period of issuance
D. It does not affect the interest expense
A. It increases the interest expense over the life of the bond
Debt issuance costs are capitalized and amortized over the life of the bond, effectively increasing the interest expense. This is because the amortization of these costs is added to the interest expense.
FAR2D10064
When reconciling PPE accounts, which of the following should be considered?
A. Expected life of the assets
B. Recording of recent asset purchases
C. Market value of the assets
D. Insurance coverage of the assets
B. Recording of recent asset purchases
When reconciling PPE accounts, the recording of recent asset purchases should be carefully reviewed to ensure that they are accurately reflected in both the subledger and general ledger.
FAR1A20042
If the income statement shows higher expenses than the supporting documentation, what could be a potential reason?
A) Double-counting of expenses in the income statement.
B) Incomplete supporting documentation.
C) Errors in revenue recognition.
D) Overstated assets on the balance sheet.
A) Double-counting of expenses in the income statement.
Double-counting expenses is a common error leading to discrepancies. B) could also be a reason, but double-counting is more directly related to the income statement. C) is irrelevant to expense reporting. D) is related to the balance sheet, not the income statement.
FAR1C005n
If a non-profit organization got a loan to purchase a passenger van, what section of the cash flow statement would the transaction be reported?
A. A cash inflow and a cash outflow from operating activities
B. A cash inflow from operating activities and a cash outflow from investing activities
C. A cash inflow and a cash outflow from investing activities
D. A cash inflow from financing activities and a cash outflow from investing activities
D. A cash inflow from financing activities and a cash outflow from investing activities
Borrowing funds, or incurring debt, is a financing activity, and using the funds to acquire an asset is an investing activity.
FAR1A50019
What adjustment is required if the gain on the sale of a building is incorrectly included in cash flows from operating activities in the indirect method?
A. Add the gain to operating activities.
B. Subtract the gain from operating activities.
C. Reclassify the gain as a financing activity.
D. No adjustment is needed.
B. Subtract the gain from operating activities.
In the indirect method, gains on the sale of assets should be subtracted from net income because they are included in net income but do not represent a cash flow from operating activities. If incorrectly included, they should be subtracted from operating activities.
A is incorrect because the gain should be subtracted, not added.
C is incorrect because the gain on the sale of a building is an investing, not a financing, activity.
D is incorrect as an adjustment is needed to reflect the correct cash flow category.
FAR2H10033
A bond with a face value of $200,000 is issued at a premium of 10%. What is the carrying amount of the bond immediately after issuance?
A. $200,000
B. $180,000
C. $220,000
D. $20,000
C. $220,000
The carrying amount of a bond issued at a premium is the face value plus the premium. Here, the premium is 10% of $200,000, which is $20,000. Therefore, the carrying amount is $200,000 + $20,000 = $220,000.
FAR1C010aicpa
Which of the following financial categories are used in a nongovernmental not-for-profit organization’s statement of financial position?
A. Net assets, income, and expenses.
B. Income, expenses, and unrestricted net assets.
C. Assets, liabilities, and net assets.
D. Changes in unrestricted, temporarily restricted, and permanently restricted net assets.
C. Assets, liabilities, and net assets.
A non-profit’s statement of financial position (not balance sheet) includes 3 categories:
1. Assets
2. Liabilities
3. Net assets (not retained earnings)
FAR1F10020
If an investor wants to evaluate a company’s ability to convert its sales into net income, which profitability ratio should they look at?
A. Operating Margin
B. Gross Profit Margin
C. Net Profit Margin
D. Return on Sales
C. Net Profit Margin
Net Profit Margin is the ratio that evaluates a company’s ability to convert sales into net income. It is calculated by dividing Net Income by Revenue. A focuses on income from operations, B on cost of goods sold, and D is another term for Operating Margin.
FAR1B40006
When adjusting notes to the financial statements due to an error in inventory valuation, which accounting principle is primarily being addressed?
A) Revenue recognition.
B) Matching principle.
C) Conservatism.
D) Historical cost.
C) Conservatism.
The conservatism principle in accounting dictates that expenses and liabilities should be recognized as soon as possible, but revenues only when they are assured. Adjusting inventory valuation often involves a conservative approach to asset valuation, ensuring that assets are not overstated.
FAR2H504
For which of the following transactions is calculating the present value unnecessary?
Issuance of a noninterest-bearing note.
A. Selling of 8% bonds to yield 10%.
B. Selling of 8% bonds to yield 8%.
C. Selling of 8% bonds to yield 5%.
B. Selling of 8% bonds to yield 8%.
Selling 8% bonds to yield 8% doesn’t need the present value calculated since the calculated present value and the face amount of the bond is the same. The other responses would require a present value calculation.
FAR1E10019
A company paid $1,200 for a 12-month magazine subscription starting in January. On an accrual basis, what is the correct entry at the end of February?
A) Debit Prepaid Expense $1,200, Credit Cash $1,200
B) Debit Magazine Expense $200, Credit Prepaid Expense $200
C) Debit Prepaid Expense $1,000, Credit Magazine Expense $1,000
D) Debit Magazine Expense $100, Credit Prepaid Expense $100
B) Debit Magazine Expense $200, Credit Prepaid Expense $200
Two months of the subscription have passed, so $200 (2/12 of $1,200) is recognized as an expense. The remaining $1,000 is a prepaid expense.
FAR1B10008
Which of the following is not a primary objective of the statement of financial position for a nongovernmental, not-for-profit entity?
A) To provide information about the entity’s financial position
B) To assess the efficiency of the entity’s fund utilization
C) To predict the entity’s future cash flows
D) To report the entity’s compliance with donor restrictions
C) To predict the entity’s future cash flows
While the statement of financial position provides a snapshot of the entity’s financial status at a given moment, it is not primarily designed to predict future cash flows; this is more the role of the statement of cash flows.
FAR2B10034
If there is a discrepancy in trade receivables between the subledger and general ledger, what should be examined next?
A) Bank reconciliations
B) Individual customer account entries
C) Fixed asset records
D) Shareholder equity statements
B) Individual customer account entries
After identifying a discrepancy, the next step is to examine individual customer account entries in the subledger to find specific errors or omissions. Bank reconciliations, fixed asset records, and shareholder equity statements are not directly relevant to reconciling trade receivables.
FAR3G10023
A company finalizes the sale of a division after the balance sheet date. The sale was in progress at the balance sheet date. How should this be reported?
A) Recognize the sale in the current period’s financial statements.
B) Adjust the carrying amounts of the assets and liabilities of the division.
C) Disclose the sale in the notes to the financial statements.
D) Reclassify the division as held for sale as of the balance sheet date.
C) Disclose the sale in the notes to the financial statements.
FAR1A70002
If a company fails to disclose a contingent liability in the notes to its financial statements, which aspect of financial reporting is primarily compromised?
A. Relevance
B. Understandability
C. Completeness
D. Comparability
C. Completeness
Completeness is about ensuring all necessary information is included in the financial statements. Failing to disclose a contingent liability omits critical information that could impact the users’ understanding of the financial position.
FAR1A20041
When reconciling income statement amounts with supporting documentation, a discrepancy is found in revenue reporting. What should be the first step in investigating this discrepancy?
A) Adjust the income statement to match the supporting documentation.
B) Review the source documents related to revenue transactions.
C) Immediately inform external auditors about the discrepancy.
D) Recalculate the entire income statement.
B) Review the source documents related to revenue transactions.
The first step should always be to review the source documents (like sales invoices, contracts) to understand the nature of the discrepancy. A) is premature without understanding the discrepancy. C) might be necessary later, but it’s not the first step. D) is too broad an action without first identifying the specific error.
