Balance Sheet Items Flashcards
A retained earnings appropriation can be used to
Restrict earnings available for dividends.
The purpose of appropriations is to restrict dividends and communicate that restriction to users of the financial statements. It is merely a partitioning of retained earnings into two parts: (1) available for dividends, and (2) unavailable.
A firm need not record an appropriation in order to restrict dividends. However, it helps alert stockholders to the possibility that dividends may be curtailed, and informs them of the reason for that curtailment.
On Merf’s April 30, 2004, balance sheet, a note receivable was reported as a noncurrent asset and its accrued interest for eight months was reported as a current asset. Which of the following terms would fit Merf’s note receivable?
Incorrect: Both the principal and the interest amounts are payable on December 31, 2004 and December 31, 2005.
Principal is due only once on a simple interest note, the kind implied in the question. This answer indicates that principal is due twice
Correct:
Principal is due August 31, 2005. Interest is due August 31, 2004 and August 31, 2005.
Although the question does not indicate when the principal is due, the candidate must chose one of the answer alternatives. This answer is the only possible answer.
Accrued interest for eight months at April 30 indicates that the end of the twelfth month is August 31. Under this answer alternative, interest is payable at least once per year, thus interest is due August 31, 2004, four months after the balance sheet date, and again in one year.
Generally, the principal amount of a note is due when the last interest payment is due. Therefore, because the note is classified noncurrent, the principal would be due on an August 31 at least one year after April 30, 2004, the date of the current balance sheet. Thus, this answer is a possible answer. None of the other answers are possible.
ssume a creditor releases a debtor from being primarily responsible for a liability because an unrelated third-party legally assumes the liability, with the original debtor becoming secondarily liable for the obligation. Which of the following statements is correct?
I. The original debtor’s liability has been extinguished.
II. The original debtor became a guarantor of the liability.
III. The original debtor may recognize a gain or loss on its release from the obligation.
D. I, II, and III.
The original debtor’s liability has been extinguished, the debtor has become a guarantor of the liability now held by a third-party, and the original debtor may recognize a gain or loss on its release from the obligation.
Zenk Co. wrote off obsolete inventory of $100,000 during 2005. What was the effect of this write-off on Zenk’s ratio analysis?
Decrease in current ratio but not in quick ratio.
The write-off of inventory reduces current assets but not quick assets.
Quick assets are those current assets, which are considered very liquid and which can be turned into cash relatively quickly. Inventory is not a quick asset. The denominator of the current and quick ratios is the same: current liabilities. The denominator of neither ratio is affected by this write-off. Only current assets decrease; thus the current ratio decreases but the quick ratio is unaffected.
In a Statement of Cash Flows, if used equipment is sold at a gain, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment:
Plus the gain.
The carrying amount plus the gain equals the cash proceeds received. The proper disclosure is something along the lines of the following journal entry:
Proceeds from sale of equipment $xxxxxx.
Gain xxxxx
Equipment (book value) xxxxx
The following trial balance of Trey Co. at December 31, 20x5 has been adjusted, except for income tax expense.
Dr. Cr.
__________ __________
Cash $550,000
Accounts receivable, net 1,650,000
Prepaid taxes 300,000
Accounts payable $ 120,000
Common stock 500,000
Additional paid-in capital 680,000
Retained earnings 630,000
Foreign currency translation adjustment 430,000
Revenues 3.6mn
Expenses 2.6mn
__________ __________
$5.53mn $5.53mn
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Additional information:
During 20x5, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between financial statement and income tax income, and Trey’s tax rate is 30%.
Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer require payment in equal semi-annual installments of $125,000 every April 1 and October 1.
In Trey’s December 31, 20x5 balance sheet, what amount should be reported as total retained earnings?
$1.33mn
Retained earnings at December 31, 20x5 would be the sum of the beginning retained earnings of $630,000 and the net income. Net income is revenue ($3.6mn) - expense ($2.6mn) or $1mn.
However, this did not include taxes. Taxes on $1mn (at the 30% tax rate) are $300,000. This is exactly the same as the pre-paid taxes, so no additional liability exists. The pre-paid just need to be transferred to an expense category.
This makes income $700,000 and ending retained earnings $1.33mn. No adjustment need be made for the accounts receivable, unless Trey is handling this transaction differently for tax (installment method) than for book purposes, which is contrary to the facts presented in the
Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?
$6,000
Interim income tax expense equals the difference between (1) the total income tax through the end of the interim period at the estimated annual tax rate, and (2) the income tax expense recognized in previous interim periods of the same year. For the second quarter, income tax expense therefore is computed as ($10,000 + $20,000)(.25) - $1,500 = $6,000.
The controller of Peabody, Inc. has been asked to present an analysis of accounts receivable collections at the upcoming staff meeting. The following information is used:
12/31, Year 2 12/31, Year 1
Accounts receivable $100,000 $130,000
Allowance, doubtful account (20,000) (40,000)
Sales 400,000 200,000
Cost of goods sold 350,000 170,000
What is the receivables turnover ratio as of December 31, Year 2?
4.7
The receivables turnover ratio = net sales/average net accounts receivables. This would be: 400,000/85,000. The denominator is calculated as: (100,000 - 20,000 + 130,000 - 40,000)/2
Black Co., organized on January 2, 20x4, had pre-tax financial statement income of $500,000 and taxable income of $800,000 for the year ended December 31, 20x4.
The only temporary differences are accrued product-warranty costs, which Black expects to pay as follows:
20x5 $100,000 20x6 $50,000 20x7 $50,000 20x8 $100,000 The enacted income tax rates are 25% for 20x4, 30% for 20x5 through 20x7, and 35% for 20x8. Black believes that future years' operations will produce profits. In its December 31, 20x4 balance sheet, what amount should Black report as deferred tax asset?
$95,000
Black will recognize a deferred tax asset, rather than a deferred liability, because its current taxable income is greater than its current pre-tax financial income.
This occurs because Black cannot deduct product warranty cost for tax purposes until the costs are incurred (paid), but, for financial reporting, it must recognize those estimated costs as an expense in the period of the related sales.
The result is an amount that will be deductible in the future for tax purposes: a deferred tax asset. Because it is deductible now for financial reporting and will be deductible in the future for tax purposes, it is a temporary difference.
The amount of deferred tax asset (or, in another case, deferred tax liability) on temporary differences is calculated by multiplying the amount of the temporary differences by the enacted tax rate for the period(s) during which the deferred asset (or liability) is expected to be realized.
Therefore, Black’s deferred tax asset would be calculated as:
20x5 $100,000 x .30 = $30,000 20x6 $50,000 x .30 = $15,000 20x7 $50,000 x .30 = $15,000 20x8 $100,000 x .35 = $35,000 Total deferred tax asset = $95,000 Please note: This was the first year of operation for Black. Therefore, there was no previously recorded tax asset or liability. Since Black expects operating profits in future years, it implicitly expects to realize the benefit of the deferred tax asset and no valuation allowance is necessary. A, B, and C are incorrect. The tax benefit (asset) is the amount to be recognized as deductible in each future year times (multiplied by) the enacted tax rate applicable to each future year.
Park Co.’s wholly-owned subsidiary, Schnell Corp., maintains its accounting records in pounds sterling. Because all of Schnell’s branch offices are in Germany, its functional currency is the Euro. Remeasurement of Schnell’s 20X8 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain. What amount should Park report as a foreign exchange gain in its income statement for the year ended December 31, 20X8?
$7,600
Gains and losses from remeasurement enter into the determination of net income in the period in which the gains and losses occur. Gains and losses from translation do not enter into the determination of net income, but are recognized in other comprehensive income (outside of net income) in the period in which the gains and losses occur. Therefore, the correct answer is $7,600, the gain from remeasurement.
FOB Shipping
Buyer takes responsibility once it leaves the sellers dock
Garson Co. recorded goods in transit purchased FOB shipping point at year-end as purchases. The goods were excluded from the ending inventory. What effect does the omission have on Garson’s assets and retained earnings at year end?
Assets Retained earnings
Understated Understated
Can trademarks be renewed?
Yes- makes them an infinite intangible asset
If an intangible asset will generate income indefinitely but has a valid life of 40 years, do you amortize it?
NO! because intangible assets that generate income indefinitely do not get amortized but they do get impaired if they loose their value.
If a Plan Benefit Pension Plan has a change due to the actuaries estimate, does that change the asset value?
NO, it just changes the amount that will be recorded for the benefit going forward but does not act retroactively.
