CPA FAR 2_TLR Flashcards
When a full set of general purpose financial statements are presented, comprehensive income and its components should:
be displayed in a financial statement that has the same prominence as other financial statements. FASB ASC 220-10 requires that all items that are recognized as components of comprehensive income be reported in a financial statement that has the same prominence as other financial statements. However, FASB ASC 220-10-45-7 does not prescribe a specific format for the display of such information.
Note that the concept of “extraordinary” items has been eliminated from GAAP; the presentation for items that are unusual in nature or occur infrequently will be expanded to include items that are both unusual in nature and infrequently occurring.
List the order of items presented in the comprehensive annual financial report (CAFR) which is prepared by every governmental entity.
1 Management’s discussion and analysis
2 Government-wide statement of net position
3 Government-wide statement of activities
4 Balance sheet - governmental funds
5 Reconciliation of the balance sheet of governmental funds to the statement of net assets, governmental activities
6 Statement of revenues, expenditures, and changes in fund balances - governmental funds
7 Reconciliation of the statement of revenues, expenditures, and changes in fund balance to the statement of activities, governmental activities
8 Statement of net position - proprietary funds
9 Statement of revenues, expenses, and changes in net position - proprietary fund
10 Statement of cash flows
11 Notes to financial statements
12 Required supplementary information (other than MD and A)
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?
Dilutive securities reduce earnings per share. To determine dilution, a conversion basis must be stated. Each 7% bond yields $70 ($1,000 × 7%) of interest; the net-of-tax interest is $49 ($70 × (1 − .30)). The conversion increases the number of shares by 40. The earning per share on the converted bonds is only $1.225 (49/40) thus diluting the basic earnings per share of $1.29.
Which of the following are required as part of the filing of the Form 10-Q?
Financial statements
A discussion from the management
A list of “material events” that have occurred with the company
All of the answer choices are correct.
Answer = ALL.
Form 10-Q is the quarterly report required to be filed with the SEC by all publicly traded companies. The Form 10-Q contains financial statements, a discussion from the management, and a list of “material events” that have occurred with the company.
Disclosure is required by publicly held companies if 10% or more of total revenues are derived from:
FASB ASC 280-10-50-12 requires that public companies disclose if 10% or more of total revenues come from sales to single customers or from export sales.
How is inventory measured?
FIFO or average cost is measured at the lower of cost and net realizable value (NRV).
Inventory measured using LIFO or the retail inventory method must be valued at lower of cost or market.
On June 5, Year 2, Quonset declared a property dividend of inventory. The inventory had a $65,000 carrying value and a $55,000 fair market value.
Property dividends distributed:A property dividend is accounted for on the basis of the fair market value of the assets transferred (FASB ASC 505-10; section 2260 in the Financial Accounting and Reporting Reference Volume).
What’s the difference between a small and large stock dividend?
A small stock dividend is a dividend of less than 20%-25% of the outstanding stock. A small stock dividend is accounted for based on the fair value of the share issued.
A large dividend of more than 25% of the outstanding stock is accounted for based on the par value of the stock
For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that will not be recorded in its accounting records until next year. There were no other differences between its taxable and financial statement income. Cable’s effective tax rate for the current year is 45%, but a 40% rate has already been passed into law for next year. In its year-end balance sheet, what amount should Cable report as a deferred tax asset (liability)?
$40,000 liability. The current-year tax expense is not paid in the current year, but will be paid in the future. (Next year the company will have to pay tax on $100,000 more income than earned per GAAP.) Therefore, the amount is a deferred tax liability.
Because the 40% rate has been enacted into law by year-end, it will be used to measure the deferred tax liability. This makes the balance a $40,000 liability ($100,000 × 40%).
For purposes of consolidating financial interests, a majority voting interest is deemed to be:
greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.
Which of the following would be added back to net income when reporting operating activities’ cash flows by the indirect method?
Excess of treasury stock acquisition cost over sales proceeds (cost method)
Bond discount amortization
Both excess of treasury stock acquisition cost over sales proceeds (cost method) and bond discount amortization
Neither excess of treasury stock acquisition cost over sales proceeds (cost method) nor bond discount amortization
Bond discount amortization.
bond discount amortization would be deducted from interest expense to compute the amount of cash paid for bond interest. The net effect would be to add this amortization amount to net income (as a noncash expense).
The excess of treasury stock acquisition cost over sales proceeds is not an income item; rather, the excess is an equity item debited to contributed capital from treasury stock transactions.
The FASB’s due process for setting accounting standards includes which of the following procedures?
The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft.
The FASB delegates topics to the Financial Accounting Foundation (FAF) for research and reporting.
The FASB’s Emerging Issues Task Force ratifies amendments to the Accounting Standards Codification.
The FASB obtains approval from the International Accounting Standards Board (IASB) in setting its agenda.
The FASB has established the following procedures for developing accounting standards:
Identify a financial reporting issue
Deliberate the identified issue at public meetings
Issue an Exposure Draft (ED)
Hold a public roundtable/forum on issues identified via the ED
Revise the ED if necessary
Issue an Accounting Standard Update
Topics are not delegated to the FAF for research; the Emerging Issues Task Force does not ratify amendments; and the IASB does not approve agenda items.
A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company’s annual financial statements?
The names and ownership percentages of the other stockholders in the investee company
The reason for the company’s decision to invest in the investee company
The company’s accounting policy for the investment
Whether the investee company is involved in any litigation
The company’s accounting policy for the investment. Accounting policy disclosure includes the selection of accounting principles from existing acceptable methods. This would include the company’s use of the equity method. The equity method must be used if the company has significant influence over the company whose stock has been acquired. Generally, 20% ownership is evidence of significant influence, but it is possible that other factors would indicate otherwise. Consequently, the use of the equity is the selection of an accounting principle from existing alternatives (equity method or cost method).
For governmental fund types, which of the following does not identify the primary characteristics of the structure?
The relationship of taxpayers to services received
Flows and balances of financial resources
The representative form of government and the separation of powers
The federal system of government and the prevalence of intergovernmental revenues
answer = Flows and balances of financial resources.
According to the summary of GASB Concept Statement 1, the primary characteristics of governmental structure are as follows:
“(1) The representative form of government and the separation of powers
“(2) The federal system of government and the prevalence of intergovernmental revenues
“(3) The relationship of taxpayers to services received
“These are the primary characteristics that affect financial reporting of governmental-type activities and must be considered in establishing financial reporting objectives.”
Assuming no outstanding encumbrances at year-end and a budgetary entry not using a separate budgetary fund balance account, closing entries for which of the following situations would increase the unassigned fund balance at year-end?
Actual revenues were less than estimated revenues.
Estimated revenues exceed actual appropriations.
Actual expenditures exceed appropriations.
Appropriations exceed actual expenditures.
Appropriations exceed actual expenditures.
Two general approaches to recording budgetary information are used. One approach uses a budgetary fund balance account, which does not impact the unassigned fund balance amount. The other approach debits or credits the budgeted decrease or budgeted increase for the year to unassigned fund balance. The question presumes use of the latter approach. Thus, appropriations recorded using this approach would decrease unassigned fund balance.
At the end of the year, the budgetary accounts are removed from the books, removing their impact on the fund balance totals. At the same time, the closing of the temporary accounts impacts fund balance. In the case of appropriations exceeding expenditures, the decrease to unassigned fund balance from closing expenditures would be less than the increase to fund balance from removing appropriations from the books.
With respect to the categories of assets, liabilities, and stockholders’ equity presented on the balance sheet (statement of financial position), what are U.S. GAAP and IFRS differences?
IFRS does not require a separation of current assets and noncurrent assets.
IFRS does not present minority interests as a separate category.
IFRS statements may present property, plant, and equipment first in the balance sheet.
With convergence of U.S. GAAP and IFRS, the balance sheet categories for both are exactly the same.
Answer = IFRS statements may present property, plant, and equipment first in the balance sheet.
The categories of assets, liabilities, and stockholders’ equity are quite similar within U.S. GAAP and IFRS (International Financial Reporting Standards). However, IFRS statements may present property, plant, and equipment first in the balance sheet.
The measurement focus of governmental-type funds is the determination of:
flow of financial resources.
financial position.
both flow of financial resources and financial position.
neither flow of financial resources nor financial position.
Answer is both
The measurement focus of governmental type funds is on both:
the changes in financial position and financial position.
The flow of financial resources refers to the changes in financial position from the sources and uses of financial resources (GASB 1300.102).
By contrast, the measurement focus of a proprietary fund is on determining “operating income, changes in net position (or cost recovery), financial position, and cash flows”—similar to a commercial entity.
Town City has one capital projects fund with assets of $3,000,000, liabilities of $400,000, and outstanding encumbrances of $2,000,000. On the balance sheet prepared at the end of the year, the fund balance would be displayed as:
Fund balance—restricted, $2,000,000; Fund balance—unrestricted, $600,000.
Fund balance—nonspendable, $2,000,000; Fund balance—unreserved, $600,000.
Fund balance—committed, $2,000,000; Fund balance—unassigned, $600,000.
Fund balance—committed, $2,000,000; Fund balance—assigned, $600,000.
Fund balance—committed, $2,000,000; Fund balance—assigned, $600,000.
The outstanding encumbrance would be reflected as either committed or assigned fund balance for $2,000,000, depending on the level of government that entered into the agreement with the vendor.
As the vendor in this case is probably a large construction company, it is likely the city council approved the major contract.
Non-spendable fund balance would reflect resources such as inventories that cannot be spent, and restricted fund balance would reflect external constraints such as those imposed by creditors or grantors. Only the general fund can have an unassigned fund balance. Any fund balance in excess of the amount of the encumbrance would be considered assigned by being accounted for in a separate governmental fund—a capital projects fund.
Child Care Centers, Inc., a not-for-profit entity, receives revenue from various sources during the year to support its day care centers. The following cash amounts weininre received during 20X1:
$2,000 restricted by the donor to be used for meals for the children
$1,500 received for subscriptions to a monthly child care magazine with a fair market value to subscribers of $1,000
$10,000 to be used only upon completion of a new playroom that was 75% complete at December 31, 20X1
What amount should Child Care Centers record as contribution revenue in its 20X1 Statement of Activities?
$2,500.
Restricted contributions are recognized as revenue when received or promised. The $2,000 restricted for meals is recognized as temporarily restricted revenue. Conditional promises to give are not recognized as revenue until all conditions are met. The $10,000 represents a conditional promise since it may not be used until completion of a new playroom. Therefore, none of the $10,000 is recognized as revenue currently.
Exchange transactions represent actions that involve a reciprocal transfer between the organization and the donor. In these situations, the amount given by the donor that is recognized as contribution revenue is reduced by the fair market value of the consideration given by the organization to the donor. The $1,500 received for subscriptions represents a $1,000 payment for the subscription and a $500 unrestricted contribution. Total contribution revenue is:
Restricted $2,000
Unrestricted 500
——
Total revenue $2,500
What is the purpose of SFAC 4 as stated in that concepts statement?
To provide a basis for establishing detailed accounting and reporting standards for nonbusiness entities
Which of the following statements concerning the acquisition of assets is false?
Donated assets should be recorded at book value along with any incidental costs incurred.
When an asset is received from a governmental entity, no income is recognized, and the offsetting credit is to an owners’ equity account, “Additional Paid-In Capital: Donated Assets.”
Assets donated by entities other than governmental units are included in revenue in the period of receipt.
If several dissimilar assets are purchased for a lump sum, the total amount paid should be allocated to each individual asset on the basis of its relative fair value.
According to FASB ASC 845-10-30-1, donated assets should be valued at fair value, not book value, so “donated assets should be recorded at book value along with any incidental costs incurred” is false.
The other three answer choices are acceptable ways to account for donated assets.
When the direct method of preparing a statement of cash flows is used, an enterprise should provide a reconciliation of net income to net cash flows from which activity?
Operating. business enterprise that provides a set of financial statements intended to report financial position and results of operations must provide a statement of cash flows (SCF) for each period for which results of operations are presented. The primary purpose of the SCF is to provide information about the cash receipts and cash payments of an enterprise during a period of time. The SCF is presented in three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities (in that order). The SCF can be prepared using the direct or indirect method. If the direct method is used, net income and net cash flows from operating activities must be reconciled.
A company has available-for-sale investments that cost $50,000 and were valued at $45,000 at the beginning of the current period during which the investments were sold for $48,000. Which of the following best reflects the impact of these events on the elements of comprehensive income of the current year?
Impact on net income: $2,000 loss; Other comprehensive income (reclassification): $5,000 gain; Comprehensive income: $3,000 gain.
Netincome:
Realizedloss($48,000-$50,000)$(2,000)
Othercomprehensiveincome:
Reclassificationadjustmentgain5,000
——–
Comprehensiveincome$3,000
Remember NI + OCI = CI
A realized loss of $2,000 is recognized because investments costing $50,000 were sold for $48,000. That realized loss is included in net income. The $5,000 reclassification gain is required to offset the previously recognized unrealized loss ($50,000 - $45,000).
FASB ASC 220-10-20 defines “other comprehensive income” as “all revenues, expenses, gains, and losses that under generally accepted accounting principles (GAAP) are included in comprehensive income but excluded from net income.” Currently, existing GAAP specifies that unrealized holding gains and losses on available-for-sale securities should be reported as direct charges or credits to equity. Thus, these gains and losses constitute other comprehensive income.
To prevent including certain items in the determination of comprehensive income twice, reclassification adjustments are required for a transaction or event that has been included as a component of other comprehensive income and later becomes a component of net income.
How is inventory measured for FIFO or average cost?
measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs.
How is inventory measured using LIFO or the retail inventory?
Inventory measured using LIFO or the retail inventory method must be valued at lower of cost or market when the utility of the inventory is no longer as great as cost. Market is replacement cost unless: Market Cost is more than celing or less than FLOOR.
At year-end, a company has a defined benefit pension plan with a projected benefit obligation of $350,000; a net gain of $140,000 that was not previously recognized in net periodic pension cost; and prior service cost of $210,000 that was not previously recognized in net periodic pension cost. What amount should be reported in accumulated other comprehensive income related to the company’s defined benefit pension plan at year-end?
A debit balance of $70,000
Changes in the plan assets and/or projected benefit obligation (PBO) fall into three categories: (1) changes due to unrecognized gains and losses, (2) changes due to prior service cost, and (3) changes associated with a transition asset or obligation. In all three categories, the initial event or occurrence is reflected as a change in the plan asset/PBO with an offsetting change in other comprehensive income; that is, it is not initially included in the determination of pension expense. The amount to be reported in accumulated other comprehensive income is the net gain of $140,000 and the prior service cost of $210,000, for a net debit balance of $70,000.
Which of the following statements is correct regarding valuation allowances in accounting for income taxes?
The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.
Both deferred tax assets and deferred tax liabilities can be reduced by a valuation allowance.
Only negative evidence, not positive evidence, should be considered when determining whether a valuation allowance is needed.
A valuation allowance is necessary when the realistic probability standard of evidence is satisfied.
The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.
GAAP provides that only deferred tax assets (not deferred tax liabilities) be reduced by a valuation allowance, but only if it is more likely than not (i.e., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance should reduce the deferred tax asset to the amount that is more likely than not to be realized, considering both positive and negative evidence.
The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.
A company enters into a 3-year operating lease agreement effective January 1, Year 1. The amounts due on the first day of each year are $25,000 in Year 1, $30,000 in Year 2, and $35,000 in Year 3. What amount, if any, is the related liability on the first day of Year 2?
Answer = $5,000
Non-level lease payments must be expensed on a straight-line basis.
Year1$25,000 Year230,000 Year335,000 ------- Totalrentpayments$90,000 Leaseterm3years Yearlyrent$30,000
The entry for the first payment would be:
Rentexpense$30,000
Cash $25,000
Leaseliability5,000
The following information was extracted from Gil Co.’s December 31, year-end balance sheet:
Noncurrent assets:
Investments in available-for-sale marketable equity securities
(carried at market) $ 96,450
Accumulated other comprehensive income:
Net unrealized loss on investments in marketable equity securities (19,800)
Historical cost of the long-term investments in marketable equity securities was:
The original historical cost can be inferred from the balances of the two accounts above. Taking the current market value and adding back the unrealized losses results in the original cost of the securities:
$96,450 + $19,800 = $116,250
For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring?
The total future cash payments
The present value of the debt at the original interest rate
The present value of the debt at the modified interest rate
The amount of future cash payments designated as principal repayments
Answer: The total future cash payments
This question relates to the debtor’s gain on troubled debt restructuring. FASB ASC 310-40-40-1 has changed the treatment of creditor’s losses on a restructuring to include the use of present values. Debtor’s gains, however, continue to follow FASB ASC 470-60-35-6. Debtor’s gains are calculated based on undiscounted amounts. The total future cash payments, including interest, are used to compute the gain on troubled debt restructuring.
All of the following statements regarding notes to the basic financial statements of governmental entities are true except:
the notes contain disclosures related only to required supplementary information.
some notes presented by governments are identical to notes presented in business financial statements.
notes that are considered essential to the basic financial statements need to be presented.
it is acceptable to present notes in a very extensive format.
Answer = the notes contain disclosures related only to required supplementary information.
In the notes to the financial statements, both businesses and governments should include a note that summarizes the accounting policies related to the specific statements presented. The notes are considered an integral part of the statements. Although unnecessary and immaterial items should not be included, the extensive list of items a government should address in the notes of its financial statements covers material additional to “required supplementary information.” Therefore, only “the notes contain disclosures related only to required supplementary information” is not true; GASB 2200.104 states that both notes and required supplementary information are required.
Band Co. uses the equity method to account for its investment in Guard, Inc., common stock. How should Band record a 2% stock dividend received from Guard?
As a dividend revenue at Guard’s carrying value of the stock
As dividend revenue at the market value of the stock
As a reduction in the total cost of Guard stock owned
As a memorandum entry reducing the unit cost of all Guard stock owned
A company using the equity method to account for an investment does not recognize dividends received as revenue. When a cash dividend is received, the receipt of cash is treated as a liquidation of the investment and the carrying amount of the investment is reduced by the amount of the dividend. However, when additional stock shares are received in lieu of cash, no liquidation of the investment has occurred. Instead, the investment carrying value now applies to a larger number of shares held by the investor. Therefore, the investor needs only to note that the value per share of its investment has decreased and the number of shares has increased.
On April 1, 20X2, Hill Corp. issued 200 of its $1,000 face value bonds at 101 plus accrued interest. The bonds were dated November 1, 20X1, and bear interest at an annual rate of 9% payable semiannually on November 1 and May 1. What amount did Hill receive from the bond issuance?
Sales price of bonds = 1.01 x 200 x $1,000 = $202,000
Accrued interest = (5/12) (.09 x 200 x $1,000) = 7,500
Total received from bond issuance $209,500
Note: Bonds were issued at 101% plus accrued interest. Therefore, the answer must be higher than $202,000.
• 101% × (200 bonds × $1,000 per bond) = $202,000
Cash $209,500
Premium $2,000
Bond Payable $200,000
Interest Payable $7,500
Which of the following best describes a situation in which an unconditional contribution should be recognized as revenue by a private not-for-profit organization?
In the period when cash or other assets are received at the carrying value on the books of the donor
In the period received at fair value
In the period in which the donor states its unconditional promise to make the contribution and at the carrying value on the books of the donor
In the period in which the donor states its intention to make the contribution and at fair value
In the period received at fair value
Unconditional contributions, whether promised or received as cash, are recognized as revenue in the period received. Contributions revenue should be measured at fair value, not donor’s book value. Donor intentions to give, rather than unconditional promises, are not considered revenue.
Which of the following statements is required to be presented for special-purpose governments engaged only in business-type activities (such as utilities)?
Statement of net position only
Management’s discussion and analysis (MD&A) and required supplementary information (RSI) only
The financial statements required for governmental funds, including MD&A
The financial statements required for proprietary funds such as enterprise funds, including MD&A and RSI
The financial statements required for proprietary funds such as enterprise funds, including MD&A and RSI
Special-purpose governments engaged only in business-type activities are required to report by presenting the financial statements required for proprietary funds (enterprise funds and internal service funds) including notes, MD&A, and RSI.
On June 1, year 1, ABC Co. issued a 200,000 euro purchase order for equipment to be supplied by a German company. ABC’s functional currency is the U.S. dollar. The equipment was delivered to ABC on November 1, year 1, and ABC recorded a payable due to the German company. ABC paid for the equipment on January 31, year 2. The following are the exchange rates in effect:
June 1, year 1 1 euro = 1.40 U.S. dollars
November 1, year 1 1 euro = 1.50 U.S. dollars
December 31, year 1 1 euro = 1.35 U.S. dollars
January 31, year 2 1 euro = 1.30 U.S. dollars
Under IFRS, what is the foreign currency gain or loss that ABC should record for the year ended December 31, year 1?
A gain of $30,000
Under IFRS (International Financial Reporting Standards), a foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction. At each subsequent balance sheet date, and at settlement, the transaction should be adjusted for the current amount, with differences being reported in profit or loss in the period incurred. At 11/1, the liability was $300,000 (€200,000 × 1.5), and on 12/31, the liability had decreased to $270,000 (€200,000 × 1.35), for a gain of $30,000.
All of the following statements regarding notes to the basic financial statements of governmental entities are true except:
the notes contain disclosures related only to required supplementary information.
some notes presented by governments are identical to notes presented in business financial statements.
notes that are considered essential to the basic financial statements need to be presented.
it is acceptable to present notes in a very extensive format.
Answer = the notes contain disclosures related only to required supplementary information.
In the notes to the financial statements, both businesses and governments should include a note that summarizes the accounting policies related to the specific statements presented. The notes are considered an integral part of the statements. Although unnecessary and immaterial items should not be included, the extensive list of items a government should address in the notes of its financial statements covers material additional to “required supplementary information.” Therefore, only “the notes contain disclosures related only to required supplementary information” is not true; GASB 2200.104 states that both notes and required supplementary information are required.
Chase City uses an internal service fund for its central motor pool. The assets and liabilities account balances for this fund that are not eliminated normally should be reported in the government-wide statement of net position as
governmental activities.
business-type activities.
fiduciary activities.
note disclosures only.
governmental activities.
The governmental activity which is the predominant user of the internal service funds absorbs and reports the assets and liabilities of an internal service fund that are not eliminated.
In most situations, this will be the governmental activities. (GASB 2200.147–.150)
On August 1, 20X1, Vann Corp.’s $500,000, 1-year, noninterest-bearing note due July 31, 20X2, was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing discount. What amount should Vann report for notes payable in its December 31, 20X1, balance sheet?
$468,500. Determine the discount amount (the amount of interest on the note). The face amount of the note less the discount is the initial proceeds, the initial carrying value of the note. The discount is interest, accrued equally (straight-line) over 12 months, and added to the carrying value of the note for the five months to the end of the year.
Discount on note = 10.8% x $500,000 = $54,000
Monthly amortization = $54,000 / 12 months = $ 4,500/month
Face amount of note $500,000
Less discount at issuance 54,000
——–
Carrying value of note at issuance $446,000
Add discount amortization Aug. 1 - Dec. 31
(5 months x $4,500) 22,500
——–
Carrying value of note on December 31, 20X1 $468,500
Which event(s) should be included in a statement of cash flows for a governmental entity? Cash inflow from issuing bonds to finance city hall construction Cash outflow from a city utility representing payments in lieu of property taxes
II only
The basic government-wide financial statements include the statement of net position and the statement of activities, but not a cash flow statement.
The fund financial statements include statements of cash flows for proprietary funds but not for governmental funds.
The proprietary funds, except for the internal service funds, make up the business-type operations of a government. A city-owned utility is a prototypical example of a business-type activity that would be recorded in a proprietary fund.
In contrast, construction of a city hall building is a general government operation that would be recorded in a governmental fund
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.
The correct answer is the definition of fair value as it appears in the glossary of the FASB Accounting Standards Codification:”Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (FASB ASC 820-10-20)
State and local governments must report budgetary comparisons showing both the original and final appropriated budgets for the reporting period as well as actual inflows, outflows, and balances stated on the government’s budgetary basis. If the budgetary perspective does not significantly differ from the fund reporting perspective, this budgetary comparison statement:
may be included in the basic financial statements or in the required supplementary information (RSI).
Governments with significant budgetary perspective differences that preclude providing budgetary comparisons for the general fund and each major specific revenue fund are required to present budgetary comparison schedules as required supplementary information (RSI). Other governments are encouraged to provide the budgetary comparison statement as RSI but may include it as part of the basic financial statements. Budgetary comparison statements are not listed among the items to be included in management’s discussion and analysis (MD&A).
The measurement focus of governmental-type funds is the determination of:
both flow of financial resources and financial position.
The measurement focus of governmental type funds is on both:
the changes in financial position and
financial position.
The flow of financial resources refers to the changes in financial position from the sources and uses of financial resources (GASB 1300.102). By contrast, the measurement focus of a proprietary fund is on determining “operating income, changes in net position (or cost recovery), financial position, and cash flows”—similar to a commercial entity.
Zinc Co.’s adjusted trial balance on December 31, 20X1, includes the following account balances:
Commonstock($3par)$600,000
Additionalpaid-incapital800,000
Treasurystock(atcost)50,000
Netunrealizedlossonmarketableequity
securitiesavailable-for-sale20,000
Netunrealizedlossonmarketable
equitytradingsecurities15,000
Retainedearningsappropriated
foruninsuredearthquakelosses150,000
Retainedearnings(unappropriated)200,000
What amount should Zinc report as total stockholders’ equity in its December 31, 20X1, balance sheet?
$1,680,000
CAPITAL:
Commonstock$600,000
Additionalpaid-incapital800,000
Totalcontributedcapital$1,400,00
Retainedearnings($150,000appropriated)
350,000
Subtotal$1,750,000
Lessaccumulatedcomprehensiveincome
(unrealizedlossonavailable-for-sale
marketableequitysecurities)$20,000
LessTreasurystockatcost50,000
70,000
Totalstockholders’equity$1,680,000
==========
Note: Only the unrealized loss from the marketable securities classified as available-for-sale is included in shareholder’s equity as a component of accumulated comprehensive income. The net unrealized loss on marketable trading securities is included in income.
Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?
A patent
Goodwill
R&D costs for a patent
A trademark with indefinite useful life
The FASB requires that non-goodwill intangible assets with finite lives be amortized, whereas similar assets with indefinite lives are not amortized. Both classifications of non-goodwill intangibles are required to be reviewed for impairment. Intangible assets with finite lives are tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets that have indefinite lives are not amortized and therefore are not tested for recoverability. However, they are reviewed for impairment at least annually.
Patents fall into the first group, and are tested for recoverability. Goodwill and the trademark have infinite lives and fall into the second group; they are reviewed at least annually for impairment. Research and development (R&D) costs are expensed, not capitalized.
In assessing the “more likely than not” criterion, which of the following is required?
It shall be presumed that the tax position will be examined by the relevant taxing authority that has all access only to published knowledge concerning the entity.
The tax position must be based on its technical merits and not on whether or not the taxing authority is likely to examine that tax position.
Each tax position must be evaluated with consideration of the possibility of offset or aggregation with other positions.
None of the answer choices are required by the FASB.
Answer = The tax position must be based on its technical merits and not on whether or not the taxing authority is likely to examine that tax position.
FASB ASC 740-10-25-7 requires the presumption that the taxing authority has full knowledge of all relevant information even if not published. Each tax position must be evaluated without consideration of the possibility of offset or aggregation:
The market price of a bond issued at a premium is equal to the present value of its principal amount:
and the present value of all future interest payments, at the market (effective) interest rate.
FASB ASC 835-30-25-10 requires all long-term receivables and payables to be recorded at present value. Additionally, the present value of all the cash flows (principal and interest) at the beginning of any bond arrangement represents the amount of cash the issuer will receive from the purchaser (i.e., the market price of the bond).
The market rate is the true rate of interest in the arrangement and is used to determine the present value of all the cash flows.
Accumulated other comprehensive income is reported in which of the following financial statements?
The income statement
The statement of comprehensive income
The statement of cash flows
The statement of financial position
Answer = The statement of financial position
Other comprehensive is transferred to accumulated other comprehensive income each period.
Accumulated other comprehensive income is reported as part of equity on the balance sheet/statement of financial position.
FASB ASC 270-10-45-1 concluded that interim financial reporting should be viewed primarily in which of the following ways?
As useful only if activity is spread evenly throughout the year
As if the interim period were an annual accounting period
As reporting for an integral part of an annual period
As reporting under a comprehensive basis of accounting other than GAAP
Answer = As reporting for an integral part of an annual period
The Financial Accounting Standards Board in FASB ASC 270-10-45-1 noted that “each interim period should be viewed primarily as an integral part of an annual period.”
Savor Co. had $100,000 in cash-basis pretax income for 20X2. At December 31, 20X2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 20X1, balances. Compared to the accrual basis method of accounting, Savor’s cash pretax income is:
lower by $16,000.
In increase in accounts receivable means that sales revenue has been included in net income but not yet received.
A decrease in accounts payable means that cash has been paid for expenses but these cash payments have been deducted in arriving at net income.
Net income $116,000
Increase in accounts receivable (10,000)
Decrease in accounts payable (6,000)
———
Cash-basis/taxable income $100,000
Under IFRS, which of the following measurements is allowed to estimate and report the liability for the cost of settling a lawsuit?
Estimate only the smallest item in the estimated range of losses
Estimate only the best estimate to settle
Discount amounts of estimated loss to present value
Estimate only the best estimate to settle and discount amounts of estimated loss to present value
Answer=
Estimate only the best estimate to settle and discount amounts of estimated loss to present value
When a range of amounts that may be lost in a lawsuit are established, the best number in the range must be chosen to accrue. The chosen amount must always be discounted to present value.
A combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). Which of the following would be considered part of the acquisition cost of an acquired entity in a business combination?
I. Costs incurred by the acquiring entity that are directly related to the acquisition
II. Costs incurred by the acquired entity that are directly related to the acquisition
III. Indirect acquisition costs incurred by the acquiring entity
Answer = None of these items would be part of the acquisition cost.
FASB ASC 805-10-25-21 requires that acquisition-related costs be charged to expense.
All of these costs are acquisition-related costs and should be expensed in the period incurred.
FASB ASC 805-10-25-23 states the following: “Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.”
In financial reporting of segment data, which of the following must be considered in determining if an industry segment is a reportable segment?
Both sales to unaffiliated customers and intersegment sales
Sales to unaffiliated customers
Intersegment sales
Neither sales to unaffiliated customers nor intersegment sales
Both sales to unaffiliated customers and intersegment sales.
After an enterprise has identified its operating segments (including those that represent an aggregation of two or more separate segments), it must report separately information about each operating segment that meets any one or more of the following tests. Those segments that meet at least one of the tests represent reportable segments for which specified information must be reported.
- Revenue test: If its revenue is 10% or more of the combined revenue of all operating segments (for purposes of this test, revenue includes both sales to external customers and intersegmental sales or transfers)
- Profitability test: If the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of:
o the combined reported profit of all operating segments that did not report a loss or
o the combined reported loss of all operating segments that did report a loss
• Asset test: If its assets are 10% or more of the combined assets of all operating segments
Which of the following sub-objectives of accountability is “inter-period equity”?
Financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services.
Financial reporting should demonstrate whether resources were obtained and used in accordance with the entity’s legally adopted budget.
Financial reporting should provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity.
None of the answer choices are correct.
The GASB has established “accountability” as the cornerstone of financial reporting for governmental entities. Under GASB Concepts Statement 1, accountability consists of the following sub-objectives:
- Interperiod equity: Financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services.
- Budgetary and fiscal compliance: Financial reporting should demonstrate whether resources were obtained and used in accordance with the entity’s legally adopted budget; it should also demonstrate compliance with other finance-related legal or contractual requirements.
- Service efforts costs and accomplishments: Financial reporting should provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity.
Clark Co. had the following transactions with affiliated parties during 20X1:
Sales of $60,000 to Dean, Inc., with $20,000 gross profit. Dean had $15,000 of this inventory on hand at year-end. Clark owns a 15% interest in Dean and does not exert significant influence.
Purchases of raw materials totaling $240,000 from Kent Corp., a wholly owned subsidiary. Kent’s gross profit on the sale was $48,000. Clark had $60,000 of this inventory remaining on December 31, 20X1.
Before eliminating entries, Clark had consolidated current assets of $320,000. What amount should Clark report in its December 31, 20X1, consolidated balance sheet for current assets?
Consolidatedcurrentassetsbeforeeliminations$320,000
Lessintercompanyprofitonremaininginventory
purchasedfromKent(Note1)12,000
——–
Adjustedconsolidatedcurrentassets$308,000
========
Note1:Computationofintercompanyprofit:
Grossprofitrate=$48,000/$240,000=20%
Grossprofitininventory=20%x$60,000=$12,000
Note also that since Clark owns less than 20% of Dean, Inc., and does not exert significant influence, the gross profit from the sale to Dean does not require elimination.
On December 31, 20X1, Bit Co. had capitalized costs for a new computer software product with an economic life of 5 years. Sales for 20X2 were 30% of expected total sales of the software. On December 31, 20X2, the software had a net realizable value equal to 90% of the capitalized cost. What percentage of the original capitalized cost should be reported as the net amount on Bit’s December 31, 20X2, balance sheet?
70%
FASB ASC 985-20-35-1 provides: “The annual amortization shall be the greater of the amount computed using (a) The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) The straight-line method over the remaining estimated economic life of the product including the period being reported on.”
Ratio of current to total revenues (given) = 30%
Straight-line rate = 1/5 = 20%
The greater of these, 30%, would be used in computing 20X2 amortization, leaving a net amount of 70% (100% − 30%) to be shown on Bit’s December 31, 20X2, balance sheet.
For governmental fund types, which of the following does not identify the primary characteristics of the structure?
The relationship of taxpayers to services received
Flows and balances of financial resources
The representative form of government and the separation of powers
The federal system of government and the prevalence of intergovernmental revenues
Flows and balances of financial resources
According to the summary of GASB Concept Statement 1, the primary characteristics of governmental structure are as follows:
“(1) The representative form of government and the separation of powers
“(2) The federal system of government and the prevalence of intergovernmental revenues
“(3) The relationship of taxpayers to services received
“These are the primary characteristics that affect financial reporting of governmental-type activities and must be considered in establishing financial reporting objectives.”
During the current year, the Finn Foundation, a nongovernmental not-for-profit entity, received a $1,000,000 permanent endowment from Chris. Chris stipulated that the income must be used to provide recreational activities for the elderly. The endowment reported income of $80,000 in the current year. What amount of permanently restricted contribution revenue should Finn report at the end of the current year?
$1,000,000
Donor wishes require that the $1,000,000 contribution be held permanently, thus increasing permanently restricted net assets in the period of the contribution. The endowment income is restricted by the donor only until it is used according to the donor’s wishes, so it would be reported as an increase in temporarily restricted net assets. If the donor’s wishes are fulfilled within the accounting period, the endowment income could be accounted for as an increase in unrestricted net assets.
A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the date of the discounting transaction, the notes receivable discounted account should be:
increased by the face amount of the note.
A note sold with recourse is a promise to pay the financial institution if the maker dishonors the note. When receivables are sold with recourse, the entity has a contingent liability. A contingent liability is an obligation that has to be paid in the future. Therefore, the notes receivable discounted account must be increased by the face amount of the note
On December 30, Devlin Co. sold goods to Jensen Co. for $10,000, under an arrangement in which (1) Jensen has an unlimited right of return and (2) Jensen’s obligation to pay Devlin is contingent upon Jensen’s reselling the goods. Past experience has shown that Jensen ordinarily resells 60% of goods and returns the other 40%. What amount should Devlin include in sales revenue for this transaction on its December 31 income statement?
$0
This arrangement is not substantially different from a consignment. Devlin does not meet the requirements for a sale until Jensen has sold the goods.
During 20X1, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows:
FIFO Weighted-Average
------- ---------------- January 1, 20X1 $71,000 $77,000 December 31, 20X1 79,000 83,000
Orca’s income tax rate is 30%.
In its 20X1 financial statements, what amount should Orca report as the cumulative effect of this accounting change to be included in 20X1 net income?
$0
Change in Accounting Principal
PPA - Restrospective
SHOW as RETAINED EARNINGS ADJUSTMENT - NOT INCOME STATEMENT
FASB ASC 250-10-45-5 mandates that voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented.
The only exception is when the FASB issues a new pronouncement and mandates in that pronouncement that a change in accounting principle made to comply with that pronouncement should be made by including the cumulative effect in net income of the year of change.
Under IFRS, which of the following measurements is allowed to estimate and report the liability for the cost of settling a lawsuit?
Estimate only the best estimate to settle and discount amounts of estimated loss to present value
When a range of amounts that may be lost in a lawsuit are established, the best number in the range must be chosen to accrue. The chosen amount must always be discounted to present value.
Conn Co. reported a retained earnings balance of $400,000 at December 31 of the previous year. In August of the current year, Conn determined that insurance premiums of $60,000 for the 3-year period beginning January 1 of the previous year had been paid and fully expensed in that year. Conn has a 30% income tax rate. What amount should Conn report as adjusted beginning retained earnings in its current-year statement of retained earnings?
$428,000
Conn should report $428,000:
Beginning retained earnings as originally reported $400,000
Over expense of $40,000 – Tax of 30% ($12,000) 28,000
——–
Corrected beginning retained earnings $428,000
Which of the following items requires a prior period adjustment to retained earnings?
Purchases of inventory this year were overstated by $5 million.
Available-for-sale securities were improperly valued last year by $20 million.
Revenue of $5 million that should have been deferred was recorded in the previous year as earned.
The prior year’s foreign currency translation gain of $2 million was never recorded.
Revenue of $5 million that should have been deferred was recorded in the previous year as earned.
Prior period adjustments to retained earnings are only reported for errors in prior-year financial statements that resulted in an incorrect balance in retained earnings at the beginning of the year.
These adjustments are not required for errors that affect the current year because these errors do not affect prior-year balances, and current-year income should be corrected if current-year errors are detected before the financial statements are published.
Prior-year errors in reporting other comprehensive income do not affect the beginning balance of retained earnings. Rather, they result in erroneous balances in accumulated other comprehensive income.
Fern Co. has net income, before taxes, of $200,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers’ life insurance premiums where the company is the beneficiary. The tax rate for the current year is 30%. What is Fern’s effective tax rate?
Net income before taxes of $200,000 minus the municipal bond interest of $20,000, plus the insurance premiums $10,000 equals taxable income of $190,000:
• $200,000 - $20,000 + $10,000 = $190,000
Taxable income times the tax rate equals tax due of $57,000:
• $190,000 × 0.30 = $57,000
The effective tax rate would be the total tax due divided by the total income earned:
• $57,000 ÷ $200,000 = 0.285 (28.5%)
Which of the following circumstances would result in a deferred tax asset for the current year?
Expenses that are recognized in financial income this year and deductible next year
Expenses that are deductible this year and recognized in financial income next year
Revenues that are recognized in financial income this year and taxable next year
Revenues that are recognized in financial income this year but are not subject to taxation
Expenses that are recognized in financial income this year and deductible next year
Deferred tax assets (DFA) are created when taxes are paid or carried forward but not yet recognized in the income statement.
For example, DTAs are created when expenses (not revenues) are recognized in book income (i.e., financial income) before they are recognized in tax income, such as a loss carryover from the prior year.
DTAs also arise when an entity incurs an accounting expense such as bad-debt write-offs but does not recognize the expense for tax periods until a future period.
On October 1 of the prior year, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1 of the prior year. Fleur’s prior-year financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due for the note were paid February 1 of the current year. As a result of Fleur’s accounting treatment of the note, interest, and merchandise, which of the following items was reported CORRECTLY?
Prior-year 12/31 retained earnings, no; Prior-year 12/31 interest payable, yes
The cost of the merchandise purchased (and sold by the end of the year) should have been based on the present value of the note used to pay for them, not the face amount. Since the note paid a higher rate of interest than what was required as a yield, the note would have a premium, a higher value than face.
Thus, the note’s present value was higher than its face amount, and the higher value should have been added to purchase cost and moved to cost of goods sold. The lower value that was used for purchase cost understated the cost of goods sold. If cost of goods sold was understated, then net income was wrong and retained earnings was not correct.
Interest payable, however, is based on the face amount of the note and the stated payment rate, so it is correct.
If the payment of employee’s compensation for future absences is probable, the amount can be reasonably estimated, and the obligation relates to rights that accumulate, the compensation should be:
Four conditions are necessary for accrual of employees’ compensation for future absences according to provisions in FASB ASC 710-10-25-1. The four conditions are:
- rights to compensation vest or accumulate,
- payment of compensation is probable,
- amount of payment can be reasonably estimated, and
- the compensation is attributable to employees’ services already rendered.
A transaction was reported as a nonmonetary exchange of assets. Under which of the following circumstances should the exchange be measured based on the reported amount of the nonmonetary asset surrendered?
When the transaction lacks commercial substance
A nonmonetary exchange is generally measured based on the fair market value of the assets exchanged. If the exchange lacks commercial substance, the asset is measured at its book value before the exchange.
Concerning disclosure of reverse repurchase and fixed coupon reverse repurchase agreements, should Underlying securities owned should be reported as “Investments?
YES! GASB I55.115 states: “The assets and liabilities arising from reverse repurchase and fixed coupon reverse repurchase agreements should not be netted on the balance sheet. These agreements should be reported as a fund liability captioned ‘Obligations under reverse repurchase agreements,’ and the underlying securities should be reported as ‘investments.’” GASB I55.116 further indicates that interest cost should not be netted with interest earned on related investments. GASB I55.111 states that credit risk needs to be disclosed.
Frome City signed a 20-year office property lease for its general staff. The lease meets the criteria for a capital lease. In which financial statement should the noncurrent portion of the lease be reported?
Government-wide statement of net position
The noncurrent portion of general government capital leases are reported as a general long-term liability. General long-term liabilities should be reported in the governmental activities column of the government-wide statement of net position. They should not be reported as liabilities in governmental funds.
A county acquired equipment through a capital lease agreement dated July 31, 20X1. The lease payments are to be financed with general government resources. Where should the noncurrent portion of the lease be reported in the June 30, 20X2, financial statements?
In the government-wide statement of net position in the governmental activities column
The noncurrent portion of capital leases financed by the general government is reported as general long-term liability. General long-term liabilities should be reported in the governmental activities column in the government-wide statement of net position.
Milt Co. began operations on January 1, Year 1. On January 1, Year 3, Milt changed its inventory method from LIFO to FIFO for both financial and income tax reporting. If FIFO had been used in prior years, Milt’s inventories would have been higher by $60,000 and $40,000 at December 31, Year 3 and Year 2, respec¬tively. Milt has a 30% income tax rate. What amount should Milt report as the cumulative effect of this accounting change in its income statement for the year ended December 31, Year 3?
$0
The cumulative effect of a change in an accounting method is reflected in retained earnings, not net income.
Perez, Inc., owns 80% of Senior, Inc. During 20X1, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in 20X1. For 20X1 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted?
Sales and cost of goods sold should be reduced by the intercompany sales.
FASB ASC 810-10-45-1 states: “In the preparation of consolidated financial statements, intra-entity balances and transactions should be eliminated. This includes…sales and purchases….Any intra-entity profit…shall be eliminated.”
The income statement adjustment process is greatly simplified because the goods sold to Senior were all subsequently sold to “outside” customers. This means that inventory will not require adjustment. The only adjustment needed is reduction of sales and cost of goods by the total dollar amount of the intercompany sales. Failure to do this would overstate those two items on the consolidated income statement.
Which of the following characteristics of service efforts and accomplishments is the most difficult to report for a governmental entity?
Comparability
Timeliness
Consistency
Relevance
The service efforts and accomplishments (SEA) performance of governmental entities is primarily measured by output, outcome, and efficiency measures. These measures report what services the entity has provided, whether those services have achieved the objectives established, and what effects they have had upon the recipients and others.
SEA performance information measures should meet the characteristics of relevance, understandability, comparability, timeliness, consistency, and reliability.
All of these measures, except for understandability and relevance, can be objectively examined.
Understandability and relevance will be subject to the user’s own interpretation. As understandability is not listed in the answer choices, only relevance can be the proper answer.
The statistical section of a government’s comprehensive annual financial report is:
is always considered part of required supplementary information.
State and local governments are required to prepare a statistical section that accompanies the basic financial statements. GASB 2800.101 clearly indicates that the statistical section is supplementary information. Financial trends is one of the five categories of statistical information to be presented. Statistical information is not considered part of management’s discussion and analysis, another item of required supplementary information, or part of the notes to the financial statements.
Which of the following statements about the statistical section of the Comprehensive Annual Financial Report (CAFR) of a governmental unit is true?
The statistical section is not part of the basic financial statements. The statistical section of a CAFR is outside the financial section of the report and is considered to be supplementary information. The statistical tables present comparative data for several periods of time and may contain nonaccounting data.
On January 1, Year 1, a shipping company sells a boat and leases it from the buyer in a sale-leaseback transaction. At the end of the 10-year lease, ownership of the boat reverts to the shipping company. The fair value of the boat, at the time of the transaction, was less than its undepreciated cost. Which of the following outcomes most likely will result from the sale-leaseback transaction?
This lease is treated as a capital lease since ownership remains with the seller-lessee at the end of the lease.
Answer choice D is correct(“The shipping company will recognize in the current year a loss on the sale of the boat.”). Normally, the gain or loss on the sale of the asset would be deferred and amortized; however, there are several exceptions to the rule. When the fair value of the property, at the time of the transaction, is less than its undepreciated cost, the seller-lessee must immediately recognize the loss.
Answer choice A (“The boat will not be classified in property, plant, and equipment of the shipping company.”)and answer choice C (“The shipping company will not recognize depreciation expense for the boat in the current year.”) are false; Choice B (“The shipping company will recognize the total profit on the sale of the boat in the current year.”) is false since there is a loss, not a gain, on the sale of the boat.
On March 1, 20X1, Ila Co. modified the terms of a 4-year lease of equipment. Ila had leased the equipment on January 1, 20X1, and properly recorded it as a capital lease. Under the modified provisions, the lease would have been classified as an operating lease. How should Ila account for the modified lease?
Sale-leaseback.
FASB ASC 840-40-15-6 requires that “if a change in the provisions of a capital lease gives rise to a new agreement classified as an operating lease, the transaction shall be accounted for under the sale-leaseback requirements.”
Which of the following disclosures is not required of companies with a defined-benefit pension plan?
An overall description of the plan
The amount of pension expense by component
The weighted-average discount rate
The estimates of next year’s contributions
An overall description of the plan
FASB ASC 715-20-50-1 requires that the following items be disclosed:
A description of the plan’s key elements, such as investment policies
Components of pension expense
Reconciliation of projected benefit obligation and fair value of plan assets
Funded status
Rates used in measuring benefit amounts (discount, return on plan assets, compensation)
Best estimates of next year’s contributions to the plan
The diluting effect of options and warrants and their equivalents is reflected in diluted EPS by application of the treasury stock method, which assumes that proceeds from exercise are used to:
purchase common stock at the average market price.
Exercise of options and warrants is assumed at the beginning of the period. Proceeds are assumed used to purchase common stock at the average market price during the period. The incremental shares are included in the denominator of diluted EPS.
A. A. Corporation has a loading dock that is situated next to a local highway. Recently, a new major highway was completed nearby, which bypasses the loading dock, and has thus made the installation of questionable future value to the corporation. The carrying amount of the loading dock is $500,000. The undiscounted present value of the future cash flows related to the loading dock is $480,000. The discounted present value of the future cash flows related to the loading dock is $440,000. The loading dock could be sold for $450,000 right now, less a broker’s commission of $16,000. If A. A. Corporation applies IFRS, how much of an impairment loss does it need to recognize?
$60,000
When an asset may have sustained a loss in value, due to circumstances occurring by the end of the year, it must be tested for impairment. Under IFRS, the test for and measure of an impairment loss is the excess of carrying value ($500,000) above recoverable amount ($440,000). The recoverable amount is the higher of the value in use (present value of discounted future cash flows) or net realizable value (sales proceeds less cost to sell). The recoverable amount here is the value in use of $440,000, which is larger than the net realizable value of $450,000 - $16,000, or $434,000. Thus, a $60,000 impairment loss is recognized.
Assuming that the 10% of revenue test is met, which of the following is considered a major customer for purposes of meeting the disclosure requirements of FASB ASC 280-10-50 on segment reporting?
A local government
A state government
A foreign government
All of the answer choices are correct.
Information about the extent of reliance on major customers is required where 10% or more of the enterprise’s revenue is derived from a single customer. Required information is:
the fact that one (or more) individual customer(s) account for 10% or more of the enterprise’s revenue.
the total amount of revenue from each such customer.
identification of the segment(s) reporting the revenue.
In meeting these requirements, the identity of the customer is not necessary. A group of entities under common control are considered a single customer, as are each of the following: the federal government, a state government, a local government, and a foreign government.
How should a capital lease be depreciated
Over the LEASE TERM if 75 or 90 criteria are met
a> lease encompasses at least 75% of the useful life of the asset
b> The present value of the minimum lease payments required under the lease is at least 90% of the fair value of the asset at the inception of the lease.
Over the ECONOMIC LIFE if Transfer of Ownership (TO) or Bargain Purchase Option (BOP)
Bond Interest Terms
If the bond is issued at PAR, record at Face Value - Stated / Face Rate = Market / Effective Rate
If issued BELOW par, record with discount
Stated rate < effective rate
Bond rate is worse than market rate = discount
If issued above part, record with premium
Stated Rate > effective rate
Bond rate is better than market rate = premium
Accumulated Other Comprehensive Income = AOCI includes:
1) Unrealized holding gains/ losses on AFS investments
2) Foreign currency translations gains/losses
3) Pension plans gains /losses
4) Pension Prior Service Cost/ Credits
Sig City Used the following funds for Financial Reporting Purposes:
General Fund, Internal Service Funds, Airport Enterprise Funds, Pension Trust Fund, Capital Project Funds, Special Revenue Fund, and Debt Service FUnd. How many of these funds use the accrual basis of accounting?
Three - pension trust (fiduciary fund), enterprise and internal service fund also use accrual accounting.
The economic resources measurement focus and the accrual basis of accounting are used for proprietary funds and fiduciary funds.
The current financial resources measurement focus and the modified accrual basis of accounting are used for governmental funds.
Which basis of accounting is required for a city’s government-wide financial statement?
The government-wide financial statement reports governmental activities, business-type activities, the primary government totals, and discretely presented component data. All the data in the governmental wide statement are presented on the accrual basis even for governmental activities.
ARO Settlement
FASB requires that the initial liability be increased to the expected cash flow adjusted for market risk and inflation
ARO Asset Retirement Obligation
A liability/legal obligation associated with the retirement of a tangible long-lived asset
An asset is set up for the initial liability and is capitalized over the useful life
ARO’s incur depreciation and accretion expense yearly
Accretion expense multiple balance of recorded liability by company’s credit-adjusted discount rate
Not For Profit Organization - Net Asset Classification
Permanently restricted Net assets - donor-imposed restrictions
Temporarily Restricted - limited by donor-imposed restrictions on the timing of use of purpose of use
Unrestricted not permanently or temporarily restricted
Accounts Receivable Formula
Beginning AR + Sales - Collections = Ending AR
Net AR would be less cash discounted, sales returns, and uncollectible accounts
