CPA FAR_TLR Flashcards
The budget for the City of Goodville for the year ending December 31 was adopted and recorded on January 2 of the same year. After recording the budget, the accounting records showed a debit balance of $50,000 in the Budgetary Fund Balance account. What does this indicate?
mo
Appropriations are $50,000 greater than estimated revenues. Below is a typical entry where expenditures exceed revenue.
Estimated Revenue Control 40,000
Budgetary Fund Balance 50,000
Appropriations Control 90,000
Roy City received a gift, the principal of which is to be invested in perpetuity with the income to be used to support the local library. In which type of fund should this gift be recorded?
Permanent fund
GASB Codification directs that resources that must be held as investment principal with earnings restricted to support the reporting government’s programs for a specific purpose must be accounted for in a permanent fund.
In its 20X1 income statement, Kilm Co. reported cost of goods sold of $450,000. Changes occurred in several balance sheet accounts as follows:
Inventory $160,000 decrease
Accounts payable-suppliers 40,000 decrease
What amount should Kilm report as cash paid to suppliers in its 20X1 cash flow statement, prepared under the direct method?
Cost of Goods Sold $450,000
Inventory decrease (160,000)
———
Purchases $290,000
=========
Purchases $290,000
Accounts Payable decrease 40,000
———
Cash paid to suppliers $330,000
=========
A decrease in accounts payable during the current period indicates that suppliers were paid an amount of cash greater than a number of the current period’s purchases. Therefore, adding the decrease in accounts payable to purchases of the period yields the cash paid to suppliers in the current period.
Which of the following lead(s) to the use of fund accounting by a governmental organization?
Financial Control?
Legal Restriction?
Financial control: Yes; Legal restrictions: Yes
Louisiana Designer Yarn, Inc., applies IFRS and does substantial research and development work in designing new processes to produce its products. One yarn-producing machine design, which is in an advanced stage of development, and which the company thinks its present prototype model should be both technologically feasible and affordable to produce, is still going to be developed, internally, for 18 months prior to being finished. Can the corporation recognize and capitalize any of the costs of developing the new machine design?
Yes, as long as the design is likely to be feasible and marketable or profitable to use internally for future production.
Once a development project reaches the stage of a working model or prototype, and is found to be technologically feasible and financially affordable to complete, then it can be capitalized, and additional development costs added to its cost on the company books. The asset can be intended for sale or internal use, so long as it is expected to be valuable for that purpose.
A non-governmental not-for-profit entity received the following donations of corporate stock during the year:
Donation 1 Donation 2
---------- ---------- Number of shares 2,000 3,000
Adjusted basis $ 8,000 $5,500
Fair market value at time of donation
8,500 6,000
Fair market value at year-end 10,000 4,000
What net value of investments will the organization report at the end of the year?
The FASB guidance provides that investments in equity securities (stock) with readily determinable market value are reported at market value. The question asks specifically for the end-of-year amount.
With respect to the income statement, what are U.S. GAAP and IFRS differences?
There are very few differences between International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP) income statements. Some of the differences follow:
Under IFRS, companies may classify expenses by either nature (salaries, rent, etc.) or function (cost of goods sold, sales, etc.).
Under IFRS, if a company uses the functional method, it must disclose expenses by nature in the notes to the financial statement.
Under IFRS, net income or loss is simply “income” or “loss.”
The IFRS definition of discontinued operations is narrower than that of U.S. GAAP.
True or False - FASB ASC 815-10-25-1 (Derivatives and Hedging—Recognition) provides that derivatives should be reported at cost?
FALSE: FASB ASC 815-10 is the authority for accounting for derivatives and hedging activities. FASB ASC 815-10-30-1 requires derivatives to be recognized as assets or liabilities on the balance sheet at fair value. The accounting for any gains or losses from hedge transactions depends, in part at least, on whether the hedge is designated as a hedge and qualifies for hedge accounting.
Marta City’s school district is a legally separate entity, but two of its seven board members are also city council members and the district is financially dependent upon the city. The school district’s financial activity should be reported in the city’s financial statements by:
discrete presentation. Because only two of the seven school board seats are occupied by council members, the governing body of the school board is not “substantially the same” as the city council. Thus, the blending method is not required. Discrete presentation should be used unless the financial activities of the two entities are so intertwined as to make them substantially the same entity.
GASB I60, Investments—Securities Lending, states that a government that (1) loans securities to a broker-dealer and (2) receives collateral in the form of other securities that the government cannot pledge or sell without borrower default should report:
the securities lent as assets.
the collateral received as assets.
a liability for the government’s obligation to return the collateral securities.
I only
The GASB Codification (Section I60.103) states: “Governmental entities should report securities lent (the underlying securities) as assets in their balance sheets.” Further, GASB I60.105 states that “securities lending transactions collateralized by letters of credit or by securities that the governmental entity does not have the ability to pledge or sell unless the borrower defaults should not be reported as assets and liabilities in the balance sheet.”
Basic earnings per share for income from continuing operations and for net income are reported:
Basic EPS is reported on the face of the income statement.
Anchor Co. owns 40% of Main Co.’s common stock outstanding, 75% of Main’s noncumulative preferred stock outstanding. Anchor exercises significant influence over Main’s operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main?
$75,000 An entity that exerts significant influence over another company in which it owns stock must use the equity method to account for its investment. Under this method, dividends received from an investee reduce the carrying amount of the investment but are not included in the income of the investor. But an investment in preferred stock does result in dividend income. Consequently, Anchor will report dividend income of $100,000 × 0.75 ($75,000).
When a loan receivable is impaired but foreclosure is not probable, which of the following may the creditor use to measure the impairment?
The loan’s observable market price
The fair value of the collateral if the loan is collateral dependent
Answer either I or II. Simply, there are three ways to measure the present fair value of an impaired loan and they are listed in FASB ASC 310-10-35-22:
- Present value of the expected future cash flows from the loan discounted at the loan’s original effective rate
- The amount the loan could be sold for
- The net realizable value of the available loan collateral
Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell’s truck originally cost $23,000, its accumulated depreciation was $20,000, fair value was $5,000. Highway’s truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?
Generally, a nonmonetary exchange should be based on the fair values of the assets exchanged—resulting in the immediate recognition of a gain or loss.
Exceptions to this treatment include the following:
*Fair value is not determinable
*Exchange transaction to facilitate sales to customers
*Exchange transaction that lacks commercial substance
Under these exceptions, no gains or losses are recognized. So it will be BOOK VALUE $3K + $700 Cash paid
Should Treasury Stock be shown as a net asset be reported in the balance sheet (statement of financial position)?
No. Treasury stock should be presented as a reduction of stockholder’s equity, not as an asset.
An investor uses the cost method to account for an investment in common stock classified as an available-for-sale security. Dividends received this year exceeded the investor’s share of investee’s undistributed earnings since the date of investment. The amount of dividend revenue that should be reported in the investor’s income statement for this year would be:
Under the cost method, an investor reports only dividends received as revenue. Only distributions from undistributed earnings are considered dividends.
What items are included in OCI?
Accumulated other comprehensive income (AOCI) is a component of equity on the balance sheet, presented separately from retained earnings and additional paid-in-capital.
FASB defines OCI as “revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income”
Foreign currency translation gains or losses
Gains and losses (effective portion only) on derivative instruments that qualify as cash flow hedges
Unrealized holding gains and losses on available-for-sale securities
Unrealized holding gains and losses that result from a debt security being transferred into the available-for-sale category from the held-to-maturity category
Pension or post-retirement gains or losses (not recognized immediately as a component of net periodic benefit cost)
Prior service costs or credits
At the inception of a capital lease, the guaranteed residual value should be?
included as part of minimum lease payments at present value. Capital lease accounting for a lessee involves:
1) determining the amounts and timing of all cash flows not considered executory costs. This would include minimum lease payments as well as guaranteed residual value(s).
2) computing the present value of the amounts in item 1 shown above. The sum of these present value amounts is capitalized as an asset.
Should unrealized gains and losses from the ineffective portion of a derivative properly designated as a cash flow hedge be included in OCI?
No, Unrealized gains and losses from the ineffective portion of a derivative properly designated as a cash flow hedge are recognized immediately in income.
Should unrealized holding gains or losses on securities classified as trading securities be included in OCI?
No, unrealized holding gains or losses on trading securities are recognized immediately in income.
The net asset reclassifications of a nongovernmental not-for-profit organization would be reported on which financial statement?
Statement of activities
An overfunded single-employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a:
An overfunded plan is recognized as an asset, but only in the noncurrent assets section. The asset is measured as the amount that plan asset fair value exceeds the projected benefit obligation.
When NFP accept unconditional promises should they recognized, an expense for estimated uncollectible promises should be recorded?
NO, NFPs should not record an expense for estimated uncollectible promises when promises to give are initially recognized. When NFPs recognize promises to give, they create an Allowance for Uncollectible Promises (or Contributions) but do not recognize Bad Debt Expense as a business does. Instead, the NFP recognizes the net realizable value of the contribution revenue (FASB ASC 958-605-30-4).
Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years. The market rate for a note of this type is 10%. On issuing the note, Jole should record:
Discount on note receivable: Yes; Prepaid asset: Yes
On March 31st, Child Care Centers, Inc., a not-for-profit entity, receives $10,000 to be used only upon completion of a new playroom that was 75% complete at December 31, 20X1. Would that amount be reported as contributions revenue in its 20X1 Statement of Activities?
NO, Conditional promises to give are not recognized as revenue until all conditions are met.
The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale?
Purchase returns. When applying the retail inventory method, one must compute the total cost and total retail amounts for goods available for sale. Some items are only included in one of these totals, sales returns and markups only go into the retail column, and freight in only goes into the cost column. Purchase returns are an adjustment to both columns.
Texas A&M University, a publicly held institution, is required to report under the standards of which of the following bodies?
Primarily GASB. The GASB is to establish accounting and reporting standards for activities and transactions of state and local governmental entities—which include states, counties, cities, and towns; independent school districts; state and local government educational institutions (colleges and universities); hospitals and other health care organizations; and charitable and other not-for-profit organizations that are government organizations. FASB establishes standards for all other entities.
Assuming constant inventory quantities, which of the following inventory costing methods will produce a lower inventory turnover ratio in an inflationary economy?
In an inflationary period, rising prices will cause LIFO cost of goods sold to be highest (from recent purchases) and LIFO ending inventory to be lowest (earliest purchases). FIFO will give opposite results, with the lowest cost of goods sold (from earliest purchases) and highest ending inventory (from recent purchases). Average costing will be in the middle of the other two on both measures.
Inventory turnover is the division of cost of goods sold by average inventory.
Since FIFO gives the lowest cost of goods sold and a relatively high ending inventory amount going into the denominator average, FIFO will produce the lowest inventory turnover ratio.
Lower numerators and higher denominators yield lower ratios.
Regarding valuation allowances in accounting for income taxes, the effect of a change in the opening balance is normally included in income from operations. True or False.
TRUE - 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.
What are the three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:
FASB ASC 845-10-30-3 provides three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:
Fair value is not determinable.
Exchange transaction is to facilitate sales for customers.
Exchange transaction lacks commercial substance.
In determining if a nonmonetary exchange has commercial substance, the key issue is to determine if the exchange is expected to significantly change the entity’s future cash flows.
What items should be reported as the net investment in capital assets in the government-wide statement of net assets position?
Governmental activities typically include (1) all governmental fund assets and liabilities, (2) general capital assets (including infrastructure such as streets, roads, and bridges), (3) general long-term liabilities, and (4) the assets and liabilities of internal service activities. Short term assets and short term liabilities are NOT included.
Restrictions of net position should be displayed on the face of the financial statements for debt covenants requiring resources to be set aside and enabling legislation identifying certain resources to be used for specific purposes. True or False?
TRUE Per GASB 2200.119, net position should be reported as restricted if use is constrained either by externally imposed conditions such as from creditors or grantors, or by legislation. The council’s actions do not constitute external constraints or enabling legislation.
The provisions of FASB ASC 718-10-25-2, “Recognition Principle for Share-Based Payment Transactions,” apply to all of the following transactions except those related to:
employee stock ownership plan instruments. FASB ASC 718-10-25-2 applies to all transactions in which an entity grants shares of its common stock, stock options, or other equity instruments to its employees, except for equity instruments held by an employee stock ownership plan (as per FASB ASC 718-10-15-7).
Pine Corp. is required to contribute, to an employee stock ownership plan (ESOP), 10% of its income after deduction for this contribution but before income tax. Pine’s income before charges for the contribution and income tax was $75,000. The income tax rate is 30%. What amount should be accrued as a contribution to the ESOP?
The contribution has to be 10% of the income after deducting the contribution amount. The income prior to the contribution is $75,000. Thus, the contribution amount, C, is:
0.1 (10%) × $75,000 – C
Solving the equation for C:
C = $7,500 - 0.1C 1.1C = $7,500 C = $7,500 ÷ 1.1 = $6,818
Name the components of other comprehensive income?
Comprehensive income comprises both of the following:
“All components of net income
“All components of other comprehensive income.”
FASB ASC 220-10-20
Some items included in comprehensive income include (FASB ASC 220-10-45-10A):
Foreign currency translation adjustments
Unrealized holding gains and losses that result from a debt security
Prior service costs or credits associated with pension or other postretirement benefits
The basic financial statements of a general purpose government should include:
government-wide financial statements, fund financial statements, and the notes to the financial statements.
A private not-for-profit hospital’s performance indicator, which reports the results of operations, includes additional classifications. What types of revenues are normally included in the other operating revenues classification?
For a hospital’s performance indicator, revenues other than patient service revenues, such as revenues from educational programs, would be considered “other revenues.” Gifts and contributions would not be considered operating revenues.
FASB ASC 360-10-15-4 requires testing for impairment loss for certain long-lived assets. Which of the following types of leases is tested for impairment?
Both I and II
FASB ASC 360-10-15-4 lists the following types of leases that are tested for impairment:
“Capital leases or lessees
“Long-lived assets of lessors subject to operating leases
“Proved oil and gas properties that are being accounted for using the successful-efforts method of accounting
“Long-term prepaid assets.”
A state government had the following activities:
I. State-operated lottery $10,000,000
II. State-operated hospital 3,000,000
Which of these activities should be accounted for in an enterprise fund?
BOTH!
GASB 1300.109.c states that enterprise funds should be employed when the pricing policies of the activity establish fees and charges to external users designed to cover its costs, including capital costs.
Covering costs is an important objective of a lottery operation, so a lottery should be accounted for in an enterprise fund.
GASB Ho5.102 notes that accounting for government-operated hospitals financed in whole or in part by fees charged is usually reported in an enterprise fund. Note: Governmental hospitals may also be component units.
Which of the following is reported as interest expense?
Pension cost interest
Amortization of discount of a note
Deferred compensation plan interest
Interest incurred to finance software development for internal use
Only the discount amortization is reported as interest expense. Pension cost interest is not directly reported but causes a change in pension expense. Deferred compensation plan interest is not directly reported but causes an increase in the plan. Software production costs are capitalized and eventually amortized or expensed.
What is the difference between discrete presentation and blending?
The discrete presentation is for affiliated entities whose resources are entirely for the benefit of the primary government.
The blending of financial results is allowed in cases such in cases where the public school system and the city are not separate legal entities. IF the city is responsible for the finances of the school system (the school board has no authority to levy taxes or issue bonds).
The circumstances when blending is required
The circumstances requiring blending are ANY of the following:
(1) The primary gov’t and component unit governing bodies are substantively the same and either there is a financial benefit/burden relationship present or the management of the primary gov’t has operational responsibility for the component unit at the level of management below the governing body.
(a) A primary gov’t and a component unit have substantively the same governing body if a voting majority of the PG governing body serves on and constitutes a voting majority of the component unit ‘s governing body.
(b) Operational responsibility means that the primary gov’t manages the CU essentially the same way it does its departments and agencies.
(2) The component unit serves or benefits solely the primary gov’t.
(3) The primary gov’t is expected to repay the total liabilities of the CU.
(4) The component unit is incorporated as a not-for-profit corporation in which the primary gov’t is the sole corporate member.
With regard to infrastructure, how should a change from depreciation to the modified approach be reported?
According to GASB 1400.107, footnote 9, a change from depreciation to the modified approach should be reported as a change in an accounting estimate, and this change would not require a restatement of prior periods.
Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values. Assuming that the exchange does not meet the criteria for commercial substance, Slate should recognize:
a gain in an amount determined by the ratio of cash received to total consideration.
In Year 1, Gamma, a not-for-profit organization, deposited at a bank $1,000,000 given by a donor to purchase endowment securities. The securities were purchased January 2, Year 2. At December 31, Year 1, the bank recorded $2,000 interest on the deposit. In accordance with the bequest, this $2,000 was used to finance ongoing program expenses in March of Year 2. At December 31, Year 1, what amount of the bank balance should be included as current assets in Gamma’s statement of financial position?
In this situation, the income from the endowment is available to fund current program expenses (those incurred within the year).
Since the principal of the endowment is now in security investments (which are not current assets), only the income related to the investment is current, since it is intended to be expended within the coming year.
Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil. On the date of the exchange, cost and market values of the oil were as follows:
Yola Co. Zaro Co. Cost $100,000 $126,000 Market values 120,000 150,000
In Zaro’s income statement, what amount of gain should be reported from the exchange of the oil?
This is a non-monetary transaction without commercial substance, and thus full gain is not recognized yet, but is instead deferred. Some cash is received, though, so some gain is recognized.
$30,000 cash out of a market value of the exchange of $150,000 is 20% of the transaction being in cash, so 20% of the gain is recognized now.
Zaro’s gain is $150,000 – $126,000, or $24,000, and 20% of $24,000 is $4,800, the gain recognized now.
The City of Mullins considers derived tax receivables collected within 60 days after the close of the fiscal year to be “available.” Furthermore, the City wrote off $30,000 of receivables as uncollectible during the year.
What effect would the write-off of the receivables during the year ultimately have on equity?
No effect. Receivables usually are reported at the same time that revenue is recognized. For reporting purposes, revenues should be reduced by an appropriate allowance for amounts estimated to be uncollectible when revenue is recognized, thus affecting equity at the time of recognition. To the extent of the allowance made ($50,000), the actual write-off of the receivable against the allowance would have no effect on equity.
West Co. paid $50,000 for an intangible asset other than goodwill. Fair value of the asset is $55,000. West signed a contract to sell the asset for $10,000 in 10 years. What amount of amortization expense should West record each year?
The amount of an intangible asset to be amortized is the amount initially assigned to that asset less any residual value. The residual value is the estimated fair value of the intangible asset at the end of its useful life to the reporting entity less any disposal costs. The residual value should be assumed to be zero unless at the end of its useful life the asset is expected to continue to have a useful life to another entity and the reporting entity has a commitment from a third party to purchase the asset at the end of its useful life.
In this case, the amount to be amortized is $40,000 ($50,000 – $10,000) over 10 years, or $4,000 a year.
What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization?
Residual interest
Ownership interest
Donor’s interest
Equity interest
Net assets of a nongovernment not-for-profit are defined to be the residual interest in the assets of the entity that remains after deducting its liabilities. In a business enterprise, its equity represents the ownership interest, but not for a nongovernmental not-for-profit.
New Town’s review of payroll records indicates that employees providing governmental services have accrued $250,000 of vacation pay and employees of the proprietary funds have accrued $100,000 of vacation pay. It is anticipated that 5% of the accrued vacation pay will be claimed by employees within the first 60 days of 20X1. How would the vacation pay liability be recognized on the financial statements issued at December 31, 20X0?
Governmental fund liability: $12,500; Proprietary fund liability: $100,000; Governmental activities liability: $250,000; Business-like activities liability: $100,000
As employees earn the right to claim vacation pay, a compensated absence, the liability is accrued and reported in full in the proprietary fund and government-wide financial statements (governmental activities and business-like activities). The portion reported in the government-wide financial statements as governmental activities is a general long-term liability. The governmental funds, using the modified accrual method, report only the portion of the liability expected to be claimed by employees in the first 60 days of the new fiscal year.
Orange Township has two general obligation bond issues outstanding. One is for $2,000,000 and the other is for $3,000,000. Cash of $62,500 has been set aside in debt service funds, per the annual budget, to pay the interest due on these issues January 1, 20X2. What is the net liability that must be shown in the fund-based statements prepared as of December 31, 20X1?
$0. The debt is a long-term liability and would not appear on the balance sheets of the governmental funds, although it would be reported in the governmental activities section of the government-wide statement of net position. The interest that is due very early in the following year has been deposited in the debt service funds. The expenditure for debt service would usually be recognized in the year of payment. The expenditure and related liability could be recognized in the debt service fund but is not required in the December 31, 20X1, statements. Therefore, the correct answer is $0.
Civic Town’s basic financial statements included information for the nonmajor governmental funds in combined form. The aggregated data included expenditures summarized by major functional classifications. Narrative explanations are needed to accompany the combining statements of revenues, expenditures, and changes in fund balances to provide greater detail and assure the reader’s understanding of the statements. The narrative should appear:
Narrative explanations of combining and individual fund statements should be presented on divider pages, directly on the statements and schedules, or in a separate section according to GASB 2200.211. Notes to the financial statements, RSI, or MD&A are not options for locating these narratives.
A summary reconciliation between fund financial statements and government-wide financial statements is required at the bottom of the fund statements or in an accompanying schedule. For the governmental activities portion of the government-wide statement of net position, the reconciliation should tie with the fund balance(s) of:
all governmental and internal service funds that provide services to the governmental functions. The governmental activities portion of the government-wide statements reports the functions also reported in the general and other governmental funds. Internal service funds providing services for governmental functions are also included. Fiduciary fund information is not shown within the government-wide financial statements.
Forkin Manor, a nongovernmental not-for-profit, is interested in having its financial statements reformatted using terminology that is more readily associated with for-profit entities. The director believes that the term “operating profit” and the practice of segregating recurring and nonrecurring items more accurately depict the organization’s activities. Under what condition will Forkin be allowed to use “operating profit” and to segregate its recurring items from its non-recurring item in its statement of activities?
The organization reports the change in unrestricted net assets for the period.
FASB ASC 958-225-45-9 allows a great deal of flexibility in presentation format for the statement of activities. Amounts required are changes in net assets for each of the three classes (unrestricted, temporarily restricted, and permanently restricted) and totals for revenues, expenses, gains, losses and the amounts of assets released from restriction (see FASB ASC 958-225-45-1 and 45-10).
Which of the following information about threatened litigation should not be considered to determine whether an accrual is appropriate prior to an issuance of a company’s financial statements?
Proper accounting for loss contingencies (including pending or threatened litigation) requires an assessment of the probability that a future event or events will confirm a loss or asset impairment or the incurrence of a liability as of the date of the financial statements (not when management becomes aware of the event). Loss contingencies are only accrued if both (1) it is probable that there will be an unfavorable (i.e., loss) outcome and (2) the amount can be reasonably estimated.
How to determine the payable to the parent for an intercompany sale (when reporting a consolidated financial format)?
Total separate accounts receivable = $52,000 + $38,000 = $90,000
Less consolidated accounts receivable $78,000
Accounts receivable eliminated in consolidation $12,000
Intercompany receivables and payables are always eliminated in the consolidation process. Therefore, the $12,000 eliminated must represent the amount Shel owed to Pare for intercompany sales.
Rye Co. purchased a machine with a 4-year estimated useful life and an estimated 10% salvage value for $80,000 on January 1, 20X0. In its income statement, what would Rye report as the depreciation expense for 20X2 using the double-declining-balance method?
Double-declining-balance rate = 2 (1/4 years) = .50/year
20X0 DDB depre. = .50 ($80,000) = $40,000
20X1 DDB depre. = .50 ($80,000-$40,000) = $20,000
20X2 DDB depre. = .50 ($80,000-$40,000-$20,000) = $10,000. Notice that salvage value is not used in the depreciation formula, but the plant asset cannot be depreciated below its salvage value.
Valley Town’s public school system is administered by a separately elected board of education. The board of education is not organized as a separate legal entity and does not have the power to levy taxes or issue bonds. Valley’s city council approves the school system’s budget. How should Valley report the public school system’s annual financial results?
Discrete presentation, no; Blended, yes.
The blending of financial results is allowed as the public school system and the city is not separate legal entities. The city is responsible for the finances of the school system (the school board has no authority to levy taxes or issue bonds).
The discrete presentation is for affiliated entities whose resources are entirely for the benefit of the primary government. The school system does not operate for the sole benefit of the town.
The following information is relevant to one of the City of Mullins’ General Fund’s derived tax revenues:
Fiscal year-end June 30
Beginning receivables $450,000
Beginning deferred revenues 100,000
Beginning allowance for doubtful accounts 50,000
Receipts 1,250,000
Ending receivables 600,000
Receivables collected 6/30 - 8/30 125,000
Ending allowance for doubtful accounts 60,000
The City of Mullins considers derived tax receivables collected within 60 days after the close of the fiscal year to be “available.” Furthermore, the City wrote off $30,000 of receivables as uncollectible during the year.
What would be the amount of deferred revenues reported at the fund level for year-end?
At the fund level, derived tax revenues are reported using the modified accrual method. Using modified accrual, that portion of the ending receivable which is measurable but not available, or accounted for as an allowance, is accounted for as deferred revenue.
Deferred Revenues
Ending receivable $600,000
Less collections June 30 through August 30 (125,000)
Less ending allowance for doubtful accounts (60,000)
$415,000
Steam Co. acquired equipment under a capital lease for six years. Minimum lease payments were $60,000 payable annually at year-end. The interest rate was 5% with an annuity factor for six years of 5.0757. The present value of the payments was equal to the fair market value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease?
The initial obligation would be capitalized at $60,000 × 5.0757 = $304,542.
Initial obligation $304,542
Interest rate (5%) x .05
——–
Interest expense $ 15,227
An entity purchased new machinery from a supplier before the entity’s year-end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. Under IFRS, what is the proper accounting treatment for the freight and interest costs related to the machinery purchase?
The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.
The costs to buy equipment, along with the costs to bring it to its location for use and make it ready for use, are capitalized into the cost of the equipment. Any interest costs in financing the purchase of equipment (which is otherwise ready to use) are finance (interest) costs and are expensed.
What is the major difference between an exchange transaction and a nonexchange transaction for governmental units?
For governmental units, an exchange transaction involves giving and receiving equal value in a transaction. A nonexchange transaction (such as property tax collected or grant provided) means the government receives value from another party without directly providing value or provides value to another party without directly receiving value.
A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized?
$200,000 The three stages for internally developed software are the preliminary project stage, the application development stage, and the post-implementation-operation stage. All costs in this stage, including the investigation the feasibility of developing its own software, should be expensed. Costs incurred in the application development stage, including writing the code, are usually capitalized, except for training costs, which are expensed. The company should only capitalize the $200,000 paid to the developers.
True or False - Fair value is a market-based measurement?
True. FASB ASC 820-10-20 defines fair value as “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.” Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability; it is a market-based measurement.
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 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).
What are the three groups of primary users of a government’s external financial reports:
There are three groups of primary users of a government’s external financial reports: (1) the citizenry to whom the government is primarily accountable, including taxpayers, voters, service recipients, media, advocate groups, and public finance researchers; (2) legislative and oversight bodies, including members of state legislatures, county commissions, city councils, boards of trustees and school boards, and executive branch officials with oversight responsibility over other levels of government; and (3) investors and creditors, including individual and institutional investors and creditors, municipal security underwriters, bond rating agencies, bond insurers, and financial institutions.
To determine the accounting treatment for a transaction, a governmental entity must first refer to:
GASB has now codified all of its standards in the Codification of Governmental Accounting and Financial Reporting Standards.
A business combination is accounted for properly as an acquisition (initiated in a fiscal year beginning after December 15, 2008). Direct costs of combination, other than registration and issuance costs of equity securities, should be:
Deducted in determining the net income of the combined corporation for the period in which the costs were incurred.
Business combinations accounted for as an acquisition should treat expenses related to the combination as follows: (1) Out-of-pocket costs such as fees of finders and consultants are expensed. (2) Issuance costs such as SEC filing fees are charged to the paid-in-capital account.
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.”
Pal Corp.’s 20X1 dividend income included only part of the dividend received from its Ima Corp. investment. The balance of the dividend reduced Pal’s carrying amount for its Ima investment. This reflects that Pal accounts for its Ima investment by the:
Pal Corp. recorded the receipt of the dividends received as follows:
Debit Credit Cash XXX Dividend Income XX Investment in Ima Corp. XX
This is in accord with the discussion in FASB ASC 325-20-35-1 describing application of the cost method: “Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment.”
Indicators of an investor’s ability to exercise significant influence over the operating and financial policies of an investee?
As a general rule, ownership of less than 20% (direct or indirect) of the voting stock of the investee leads to the presumption that an investor does not have the ability to exercise significant influence. This presumption can be overcome, however, if the ability to exercise significant influence can be demonstrated in other ways. Examples of such circumstances include the following:
Representation on the investee’s board of directors
Participation in the investee’s policy-making processes
Material intercompany transactions with the investee
Interchange of managerial personnel
Technological dependency of the investee on the investor
The statement of changes in net assets must include:
- The change in fair value of each significant type of investment
- Investment income
- Contributions from employers
- Contributions from participants
5.Contributions from other identified sources
6.Benefits paid to participants - Payments to insurance entities to purchase contracts
- Administrative expenses
Only the net change in the actuarial present value of accumulated plan benefits is not included in this list.
The fair value option established by FASB ASC 825-10 contains what requirements?
Answer = The statement permits election of fair value measurement on a contract-by-contract basis.
FASB ASC 825-10-25-1 permits the fair value election but does not require it. Unrealized gains and losses on these items are reported in earnings, not directly to retained earnings: “This Subtopic permits all entities to choose, at specified election dates, to measure eligible items at fair value (the ‘fair value option’).”
FASB ASC 825-10-25-2 requires that the fair value option be applied contract by contract: “The decision about whether to elect the fair value option:
“Shall be applied instrument by instrument, except as discussed in [FASB ASC] 825-10-25-7
“Shall be irrevocable (unless a new election date occurs, as discussed in [FASB ASC] 825-10-25-4)
“Shall be applied only to an entire instrument and not to only specified risks, specific cash flows, or portions of that instrument.”
During the current year, Xan, Inc., had the following activities related to its financial operations:
Payment for the early retirement of long-term bonds
payable (carrying amount $370,000) $375,000
Distribution of cash dividend declared in previous
year to preferred shareholders 31,000
Carrying amount of convertible preferred stock
in Xan, converted into common shares 60,000
Proceeds from sale of treasury stock (carrying
amount at cost, $43,000) 50,000
In Xan’s current-year statement of cash flows, net cash used in financing operations should be:
The net cash used in financing operations is $356,000, calculated as follows:
Payment for early retirement of long-term bonds
$375,000
Dividend paid 31,000
Proceeds for sale of treasury stock (50,000)
Net cash used $356,000
There is no cash involved in the conversion of stock. Only converting stock from one type to another. Treasury Stock is subtracted because assuming the company uses cash to purchase these shares, the total amount of cash the company has decreases as a result of financing operations.
According to the FASB’s conceptual framework, asset valuation accounts are:
neither assets nor liabilities. A valuation account is “a separate item that reduces or increases the carrying amount of an asset is sometimes found in financial statements. For example, an estimate of uncollectible amounts reduces receivables to the amount expected to be collected, or a premium on a bond receivable increases the receivable to its cost or present value. Those “valuation accounts” are part of the related assets and are neither assets in their own right nor liabilities.”
The criterion for classifying a lease as a capital lease by a lessee?
The FASB established four basic lease capitalization criteria to be used by both the lessor and lessee; only one must be met to consider the lease a capital lease. The four criteria are:
the lease transfers ownership of the property to the lessee by the end of the lease term;
the lease contains a bargain purchase option;
the lease term is 75% or more of the estimated economic life of the leased asset; or
the present value of the minimum lease payments is 90% or more of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor.
For exchanges of assets lacking in commercial substance, what approach should be used?
According to FASB ASC 360-10-40-4, an impairment loss is recognized on an exchange of similar productive assets if the carrying amount of the asset exceeds its fair value on the date of exchange. Exchanges should be based upon FV unless the exchange lacks commercial substance.
For exchanges of assets lacking in commercial substance, use the Book Value approach.
• Record new asset at the adjusted book value of the old
• Normally, defer/ignore gains; recognize losses
If cash (i.e., boot) is received as part of an exchange lacking commercial substance, how do you handle the gain?
If cash (i.e., boot) is received as part of an exchange lacking commercial substance, a portion of the gain must be recognized.
Cash divided by
FV of New Asset Received x Realized Gain
*Realized gain = Cash + FV received – Old BV
NOTE: you only do this when you RECEIVE the money not when you pay it!
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?
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.
Under the installment sales method when and how is revenue recognized?
Under the installment sales method of recognizing revenue, recognition is deferred beyond the point of sale and is associated with the subsequent collection of payments. one must compute the annual gross profit percentage on sales for the year. As the installment receivables are received in cash, the gross profit is recognized as the gross profit percentage multiplied by the cash collections for the period.
Example:
Gross profit on sale = $1,500,000 - $1,000,000 = $500,000
Gross profit rate = $500,000 / $1,500,000 = 33-1/3%
Cash collected in 20X1 ($300,000 + $444,000) $744,000
Less interest collected ($444,000 - $300,000) 144,000
———
Cash collected from sales 600,000
Times gross profit rate x 33-1/3%
———
Gross profit reported in 20X1 $200,000
=========
A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts would be decreased by the:
cash proceeds received. When applying group or composite depreciation methods, when one sells an asset, the cost of the asset is removed, and the accumulated depreciation is assumed to be equal to the difference between cash received and cost.
When the asset cost and this accumulated depreciation amount are both removed, the carrying amount of the asset accounts is decreased by the cash proceeds exactly.
How should unconditional promises to give received by a nongovernmental not-for-profit entity that will be collected over more than one year be reported?
Answer = Contributions receivable, valued at their present values.
Unconditional contributions receivable expected to be collected over more than one year should be valued using present discounted value techniques and appropriate assumptions.
The contributions receivable are valued at present values, not future values. The contributions should be recognized as revenue in the period they are made and not deferred.
Tam Co. reported the following items in its year-end financial statements:
Capital expenditures $1,000,000
Capital lease payments 125,000
Income taxes paid 325,000
Dividends paid 200,000
Net interest payments 220,000
What amount should Tam report as supplemental disclosures in its statement of cash flows prepared using the indirect method?
Regardless of whether the direct or indirect method is used to determine cash flows from operating activities, the following items are required to be disclosed:
Amount of income taxes paid during the period ($325,000)
Amount of interest paid during the period ($220,000)
$325,000 + $220,000 = $545,000
During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma’s basic earnings per share for the current year?
$7.36. Convertible bonds do not affect basic earnings per share. They are used in computing diluted earnings per share. When the preferred stock dividend preference is cumulative, the current-year dividend on preferred stock must be deducted each year in computing the numerator for basic earnings per share, regardless of the amount of preferred dividends actually declared and/or paid.
Comma’s basic earnings per share for the current year is:
($200,000 - $16,000) ÷ 25,000 weighted-average shares outstanding
$184,000 ÷ 25,000 shares = $7.36 per common share
Restorations of carrying value for long-lived assets are permitted if an asset’s fair value increases subsequent to recording an impairment loss for which of the following?
A long-lived asset classified as held for sale (disposal) must be measured at the lower of its carrying amount or fair value less cost to sell.
A loss should be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain should be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized for a write-down to fair value less cost to sell.
At which of the following amounts should a nongovernmental not-for-profit entity report investments in debt securities?
Quoted market prices. Investments in debt securities should be reported at market prices because that is the source of readily available fair value information. Discounted expected future cash flows are required to value financial assets for which there is no market that can provide fair value information. Historical cost is used to value acquisitions of property, plant, and equipment. Liquidation values generally are used when liquidation of an entity is imminent.
Which of the following are required as part of the filing of the Form 10-Q?
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.
If a premium on a bonds payable transaction is not amortized, what are the effects on interest expense and total stockholders’ equity?
Interest expense: overstated; Total stockholders’ equity: understated. When a bond is issued for a premium, then the issuer receives more than the face amount of the debt upon issuance. Thus, the issuer will pay back (the face amount) less than the amount received. The additional receipts lower the interest expense over the course of the repayment, since the overall net repaid amount is less. As the bonds are repaid, the premium is amortized and lowers the interest expense taken over the term of the bond. If the amortization is not taken, then the interest expense is overstated, and the net income understated. (Thus, retained earnings and stockholder’s equity are also too low.)
With regard to infrastructure, how should a change from depreciation to the modified approach be reported?
According to GASB 1400.107, footnote 9, a change from depreciation to the modified approach should be reported as a change in an accounting estimate, and this change would not require a restatement of prior periods.
In addition to the most recent quarter-end, for which of the following periods is the company required to present balance sheets on Form 10-Q?
Form 10-Q is used to file quarterly reports with the SEC. Required financial statements include a quarterly and end of the preceding fiscal year balance sheet. If the company is subject to seasonal fluctuations, a balance sheet for the corresponding quarter of the prior fiscal year is required.
When remeasuring foreign currency financial statements into the functional currency, should inventories carried at cost be remeasured using historical exchange rates?
YES! FASB ASC 830-10-45-18 provides guidance for the remeasurement (i.e., translation) of the books of record into the functional currency. Specifically, a listing of accounts to be remeasured using historical exchange rates is provided and inventories carried at cost appears in that listing.
Note: Remeasurement using historical rates is the exception to the general guidance of using the current exchange rate for all assets and liabilities. Only those items on this listing are remeasured using historical rates.
What are the two types of Translation Methods?
Current rate method: used when the subsidiary functions in the local (foreign) currency
Remeasurement method: used when the subsidiary functions in U.S. dollars
Current rate method
Current Rate Method
- Assets/Liabilities: Convert at current exchange rate
- Revenues/Expenses: Convert at weighted-average rate for the period
- Retained Earnings: not actually converted, back into 4. C/S (common stock) and APIC (additional paid-in capital): Convert at historical rate
- Dividends: Convert Using rate on DOD (date on distribution)
- Translation Gains/Losses NOT on the income statement; go to OCI (other comprehensive income)
Remeasurement method
Remeasurement Method
- Monetary Items: convert at current rate
- Nonmonetary: convert at historical rate
- Revenues/Expenses: convert at weighted-average rate for the period
- Retained Earnings: not actually converted, back into 5. C/S and APIC: convert at historical rate
- Dividends: convert using rate on DOD
- Depreciation use historical rate (treat as non-monetary)
- Remeasurement Gains/Loss do go to the income statement
Monetary Versus Nonmonetary Items
1. Monetary Items: items whose amounts are fixed in terms of currency by contracts or otherwise
Cash, Accounts Receivable, Held to Maturity securities, Accounts Payable, Notes Receivable, Notes Payable, Bonds Payable
- Nonmonetary Items: items not fixed in terms of carrying value, but values change Fixed Assets, Inventory, Intangibles, Available for Sale Securities, and Trading Securities
FRS (International Financial Reporting Standards) defines currencies as three types:
IFRS (International Financial Reporting Standards) defines currencies as
a. Functional: the currency of the primary economic environment in which the entity operates
b. Foreign: currency other than functional
c. Presentation: currency in which the financial statements are presented
2. If functional currency = presentation currency, gains/losses on translation are recognized as profit or loss in the period
3. If functional currency ≠ presentation currency, translation gains/losses are recorded in OCI
When should a company recognize a liability for dividends even if they are related to cumulative preferred stock?
The company does not have a liability for dividends payable until (and unless) the board declares the dividend. Prior to that date, the company has no legal obligation to pay the dividend to its stockholders.
During the current year, a voluntary health and welfare entity receives $300,000 in unconditional promises to give expected to be collected in less than one year. Of this amount, $100,000 has been designated by donors for use next year to support operations. If 15% of the unrestricted promises are expected to be uncollectible, what amount of unrestricted support should the entity recognize in its current-year financial statements?
The contributions that donors intend to be used to finance the next year’s operations are temporarily restricted support. Promises that donors intend to be used to finance current-year operations are reported as unrestricted support after deducting the uncollectible portion of the receivables.
$300,000 - $100,000 = $200,000
$200,000 × 0.15 = $30,000
$200,000 - $30,000 = $170,000
On January 2, 20X1, Smith purchased the net assets of Jones’s Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy’s cash-basis financial statements for the year ending December 31, 20X1, Spiffy reported revenues in excess of expenses of $60,000. Smith’s drawings during 20X1 were $20,000. In Spiffy’s financial statements, what amount should be reported as Capital-Smith?
Under the cash method of accounting, revenue is recognized when received in the form of cash, and expenses are recognized when paid in cash. The owner’s capital account maintains a record of the owner’s investment and the earnings for the owner, and is lowered by drawings.
Capital-Smith balance January 2, 20X1 $350,000
Add: Net income 60,000
———
Subtotal $410,000
Deduct: Withdrawals (20,000)
———
Capital-Smith balance December 31, 20X1
On January 1, a company enters into an operating lease for office space and receives control of the property to make leasehold improvements. The company begins alterations to the property on March 1 and the company’s staff moves into the property on May 1. The monthly rental payments begin on July 1. The recognition of rental expense for the new offices should begin in which of the following months?
The inception of a lease is the date of the lease agreement. Rental expense should begin as of that date.
In a sale-leaseback transaction, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized when:
the seller-lessee has transferred substantially all the risks of ownership.
the seller-lessee retains the right to substantially all of the remaining use of the property.
FASB ASC 840-40-25-4 provides that if the lease meets one of the criteria for capital lease treatment (it does—the lease transfers title to the seller-lessee at end of lease term), then any gain on the sale should be deferred and amortized.
Again, the key element is the retention of the right to all remaining use of the property.
Transfer of risks of ownership is not one of the four criteria for capital lease treatment.
On January 1, 20X1, Mollat Co. signed a 7-year lease for equipment having a 10-year economic life. The present value of the monthly lease payments equaled 80% of the equipment’s fair value. The lease agreement provides for neither a transfer of title to Mollat nor a bargain purchase option. In its 20X1 income statement, Mollat should report:
In addition to transfer of title and bargain purchase option, FASB ASC 840-10-25-1 provides two additional criteria for determining whether a lease is a capital lease:
Lease term is 75% or more of economic life of leased asset.
Present value of minimum lease payments is 90% or greater of the fair value of the leased property.
In Mollat’s case the lease term is only 70% of economic life and the present value is only 80% of the equipment’s fair value. The lease is, therefore, an operating lease and the lease payments should be reported as rent expense.
A company has the following accrual-basis balances at the end of its first year of operation:
Unearned consulting fees $ 2,000
Consulting fees receivable 3,500
Consulting fee revenue 25,000
The company’s cash-basis consulting revenue is what amount?
The company’s cash-basis consulting revenue is $23,500:
Accrual basis consulting fee revenue $25,000
Unearned consulting fee–
cash received with no revenue 2,000
Consulting fees receivable–
revenue with no cash received (3,500)
——–
Cash basis revenue $23,500
Ajax Corp. has an effective tax rate of 30%. On January 1 of the current year, Ajax purchased equipment for $100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will Ajax realize during the year by using the 150%-declining-balance method of depreciation for tax purposes instead of the straight-line method?
Ajax will realize $1,500 of current tax benefit using the 150%-declining-balance method:
Tax benefit of 150%-declining-balance
($100,000 x .15 = $15,000;
$15,000 x .30) $4,500
Tax benefit of straight-line
($100,000 / 10 = $10,000;
$10,000 x .30) 3,000
——
Benefit of using 150%-declining-balance $1,500
Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During 20X1, 100,000 shares of common stock were outstanding. On April 1, 20X2, 20,000 shares of treasury stock were sold. Net income was $410,000 in 20X2 and $350,000 in 20X1. What amounts should Strauch report as basic earnings per share in its 20X2 and 20X1 comparative income statements?
Net income - Dividend to preferred stock
Basic EPS = ————————————————-
Weighted-average no. of common shares outstanding
20X2: Weighted-average no. shares =
((Beginning shares x Time) + (Treasury shares x Time))
= ((100,000 x 12/12) + (20,000 x 9/12))
= (100,000 + 15,000)
= 115,000 shares
Basic EPS = $410,000 / 115,000 shares = $3.56/share
20X1: Weighted-average no. shares =
(100,000 x 12/12) = 100,000 shares
EPS = $350,000 / 100,000 shares = $3.50/share
Reed Co.’s 20X1 statement of cash flows reported cash provided from operating activities of $400,000. For 20X1, depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed’s 20X1 statement of cash flows, what amount was reported as net income?
Dividends paid are reported as financing activities.
The reconciliation of net income and cash provided by operating activities would reflect both of the other items as they are noncash expenses and losses.
Net income + Depreciation expense + Goodwill impairment loss = Cash provided by operating activities
X + $190,000 + $5,000 = $400,000
X = $205,000
An investor uses the cost method to account for an investment in common stock classified as an available-for-sale security. Dividends received this year exceeded the investor’s share of investee’s undistributed earnings since the date of investment. The amount of dividend revenue that should be reported in the investor’s income statement for this year would be:
the portion of the dividends received this year that was not in excess of the investor’s share of investee’s undistributed earnings since the date of investment.
Under the cost method, an investor reports only dividends received as revenue. Only distributions from undistributed earnings are considered dividends.
An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than:
neither the cash paid to the seller nor the face amount of the bond. If the investor buys a bond at a discount, then the bond will be carried at the discount price initially, which is below the face amount of the bond.
IF the investor buys a bond between interest payment dates, the investor will pay (in part) for the already accrued interest that the investor will soon receive back.
Thus, the carrying amount of the bond will actually be less than the total the investor pays to acquire the bond, both its discount price plus the amount paid for the interest receivable.
When property other than cash is invested in a partnership, at what amount should the non-cash property be credited to the contributing partner’s capital account?
Fair value at the date of contribution. Noncash assets invested in a partnership should be recorded at their fair value at time of investment. Failure to record those asset investments at fair value would cause the difference (between recorded value and fair value) to be subject to allocation to all partners in the profit and loss ratio as these assets are used or sold.
The FASB amends the Accounting Standards Codification through the issuance of:
Accounting Standards Updates. The Financial Accounting Standards Board (FASB) is currently the body responsible for developing accounting standards in the United States. The FASB’s primary functions are to study current issues and generate new accounting standards, which are maintained in the Accounting Standards Codification.
What defines equity as it relates to a business entity?
Total assets less total liabilities. Total assets less total liabilities defines equity.
Equity (or net assets) is the residual interest in the assets of a business entity that remains after deducting its liabilities; equity represents the ownership interest.
Revenues less expenses make up net income (loss) and will increase (decrease) equity, but these accounts do not define equity.
Polk County’s solid waste landfill operation is accounted for in a governmental fund. Polk used available cash to purchase equipment that is included in the estimated current cost of closure and postclosure care of this operation. How would this purchase affect the long-term asset and the long-term liability amounts in Polk’s general fund?
Asset amount, no effect; Liability amount, no effect. Certain costs, which result in disbursements near or after the date that the landfill stops accepting solid waste and during the postclosure period, should be included in the estimated total current cost of closure and postclosure care, regardless of their capital or operating nature.
Since the equipment would not be capitalized under this guideline, there would not be any effect on assets. No liabilities are created because available cash was used.
Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on January 31 for the oil sold between the previous June 1 and November 30, and on July 31 for oil sold between the previous December 1 and May 31. Production reports show the following oil sales:
June 1, 20X1 - November 30, 20X1 $300,000
December 1, 20X1 - December 31, 20X1 50,000
December 1, 20X1 - May 31, 20X2 400,000
June 1, 20X2 - November 30, 20X2 325,000
December 1, 20X2 - December 31, 20X2 70,000
What amount should Rill report as royalty revenue for 20X2?
In this question, one needs to convert from cash receipts to accrual earnings. Compute the amount of earnings properly allocable to 20X2, and then compute the percentage.
Revenue for January 1-May 31 =
$400,000 - $50,000 = $350,000
Revenue for June 1-November 30 325,000
Revenue for December 1-31 70,000
——–
Total 20X2 revenue $745,000
times 20% x 0.20
——–
Equals Rill’s 20X2 royalty revenue $149,000
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Ball Corp. had the following foreign currency transactions during the current year:
Goods purchased from a foreign supplier on January 20 for the U.S. dollar equivalent of $90,000. The invoice was paid on March 20, at the U.S. dollar equivalent of $96,000.
On July 1, Ball borrowed the U.S. dollar equivalent of $500,000 evidenced by a note that was payable in the lender’s local currency on July 1, in two years. On December 31, the U.S. dollar equivalents of the principal amount and accrued interest were $520,000 and $26,000, respectively. Interest on the note is 10% per annum.
In Ball’s year-end income statement, what amount should be included as foreign exchange loss?
Ball’s year-end income statement should include $27,000 as foreign exchange loss, calculated as follows:
Foreign currency loss on goods purchased ($90,000 - $96,000) $ 6,000
Loan principal foreign currency loss ($500,000 - $520,000) 20,000
Loan interest foreign currency loss ($25,000* - $26,000) 1,000
Total loss $27,000
* Interest in U.S. dollars: $500,000 × 0.10 × 1/2 year = $25,000
The initial test in FASB ASC 360-10-35 for determining whether an impairment of the carrying amount of a long-lived asset is indicated is:
carrying amount exceeds undiscounted future cash flows. FASB ASC 360-10-35-17 indicates that an impairment loss exists when the asset’s carrying amount exceeds its undiscounted future cash flows. Carrying amount exceeding the fair value is used to measure the amount of the impairment loss, not to identify the existence of such a loss. Assets subject to assessment for impairment under FASB ASC 805-20-55-4 are also subject to the same undiscounted cash flow recoverability test.
In analyzing a company’s financial statements, which financial statement would a potential investor primarily use to assess the company’s liquidity and financial flexibility?
Balance sheet. Evaluation of a company’s liquidity would necessitate computation of liquidity ratios such as the current ratio and acid-test ratio. Financial flexibility would be evaluated using debt and equity ratios. The data used in computation of each of the above-mentioned ratios would be obtained from the balance sheet.
Palm City uses the modified approach for reporting eligible infrastructure assets. In which of the following components of its basic financial statements, if any, would Palm report this information?
Required supplementary information. GASB Statement 34 requires governments that use the modified approach for reporting eligible infrastructure assets to present the following in the required supplementary information (RSI) section: the assessed condition for the three most recent condition assessments (with the assessment dates), and the estimated annual amount at the beginning of the fiscal year to maintain and preserve the target condition level established versus amounts actually expensed for each of the past five reporting periods.
A company has experienced operating losses from its appliances division for the past five years. The division is the lowest level of identifiable cash flows. Having determined the division is the lowest level of identifiable cash flows, the company’s next step in performing its impairment test is to:
perform a recoverability test on the carrying amount of the division’s assets. The company’s next step in performing its impairment test is to determine if the sum of the estimated future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset. The impairment loss, if any, to be recognized is any excess of the asset’s carrying amount over its fair value. Remember that no impairment loss is to be recognized unless the asset’s estimated future cash flows (ECF) are less than its carrying amount, even if the asset’s carrying amount (CA) exceeds its fair value (FV).
Orleans Co., a cash-basis taxpayer, prepares accrual-basis financial statements. In its current-year balance sheet, Orleans’ deferred income tax liabilities increased compared to the previous year. Which of the following changes would cause this increase in deferred income tax liabilities?
An increase in prepaid insurance
An increase in rent receivable
An increase in warranty obligations
I and II. Deferred income tax liabilities are caused by items that defer payment of taxes, which cause more taxes to be paid in later years than the income tax expense taken currently. An increase in prepaid insurance can lower taxes now by adding to the expenses deductible, and cause deferral of taxes to the future, so it would qualify a change that would increase deferred tax liabilities.
An increase in rent receivable, a pushing forward of the receipt of the rent in cash (when it will be taxed), can also defer taxes to the future and add to later taxes due, so it would also increase deferred tax liabilities.
An increase in warranty obligations means one is pushing forward the paying of the expense in cash (which allows the deduction), and this would lower taxes in the future, not add to the future liabilities.
Pine City owned a vacant plot of land zoned for industrial use. Pine gave this land to Medi Corp. solely as an incentive for Medi to build a factory on the site. The land had a fair value of $300,000 at the date of the gift. This nonmonetary transaction should be reported by Medi as:
Only additional paid-in capital is an acceptable way to account for this donated land. The land has to be added to the assets, so a memo entry is not sufficient. 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.
The initial test in FASB ASC 360-10-35 for determining whether an impairment of the carrying amount of a long-lived asset is indicated is:
carrying amount exceeds undiscounted future cash flows.
FASB ASC 360-10-35-17 indicates that an impairment loss exists when the asset’s carrying amount exceeds its undiscounted future cash flows. Carrying amount exceeding the fair value is used to measure the amount of the impairment loss, not to identify the existence of such a loss.
Assets subject to assessment for impairment under FASB ASC 805-20-55-4 are also subject to the same undiscounted cash flow recoverability test.
Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values. Assuming that the exchange does not meet the criteria for commercial substance, Slate should recognize:
a gain in an amount determined by the ratio of cash received to total consideration.
FASB ASC 845-10-30-1 specifies that the accounting for nonmonetary exchanges generally should be accounted for based on fair values, which is the same basis as that used for monetary transactions. But there are three exceptions in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:
Fair value is not determinable.
Exchange transaction is to facilitate sales for customers.
Exchange transaction lacks commercial substance.
In Slate’s case, one of the “givens” is that the exchange does not meet the criteria for commercial substance. Therefore, the exchange should be accounted for based on the recorded amounts of the assets surrendered, except that Slate, as the recipient of cash, must recognize “partial” gain. The gain to be recognized by Slate is an amount determined by the ratio of cash received to the fair value of the total consideration received. The “partial” gain would be computed by multiplying this ratio times the total implied gain, which is the difference between the carrying amount and the fair value of the land surrendered.
During a period when an enterprise is under the direction of a particular management, its financial statements will directly provide information about:
enterprise performance but not directly provide information about management performance. Financial statements provide direct information about enterprise performance because the primary focus of the statements is to provide information about the financial performance of that enterprise by providing information about earnings.
The same cannot be said, however, in regard to management performance. The financial statements depict only indirect information concerning management performance. (Direct information related to management performance would be provided in internal managerial performance reports but not in the external financial statements.)
On January 1, year 1, a company capitalized $100,000 of costs for software that is to be sold. The company amortizes the software costs on a straight-line basis over five years. The carrying value of the software costs on January 1, year 3, was $60,000. As of December 31, year 3, the estimated future gross revenue to be generated from the sale of the software is $23,000, and the estimated future cost of disposing of the software is $8,000. What amount should the company expense related to the software costs for the year ended December 31, year 3?
$45,000. Software production costs are capitalized and reported at the lower of unamortized cost or net realizable value (NRV) once technological feasibility has been met.
The unamortized cost is $60,000 and the NRV is $15,000 ($23,000 − $8,000); therefore, the software should be written down by $45,000 (i.e., expensed) to the NRV of $15,000.
On November 2, 20X1, Platt Co. entered into a 90-day futures contract to purchase 50,000 Swiss francs when the contract quote was $0.70. The purchase was for speculation in price movement. The following exchange rates existed during the contract period:
30-Day Futures Spot Rate
-------------- --------- November 2, 20X1 $.62 $.63 December 31, 20X1 .65 .64 January 30, 20X2 .65 .68 What amount should Platt report as foreign currency exchange loss in its income statement for the year ended December 31, 20X1?
Futures contracts are a selected type of derivative instrument. All derivatives must be recognized on the balance sheet at fair value. Fair value is $0.70 on November 2, 20X1. Accounting for the changes in fair value depends on whether it has been designated as and qualifies for hedge accounting. Platt Co. has not hedged the risk of the futures contract and FASB ASC 815-20-35-1 specifies that gains and losses must be included in income for these contracts. Since this is a futures contract, the future 30-day rate ($0.65) is used to measure the gain or loss for the year ended December 31, 20X1. The foreign currency exchange loss for 20X1 is ($.70 - $.65) × 50,000 = $2,500.
Which of the following does not affect an internal service fund’s net income?
Depreciation expense on its fixed assets
Operating transfer sources
Residual equity transfers
Temporary transfers
Temporary transfers.
Internal service funds are used to account for in-house business enterprise activities (i.e., to account for the financing of goods or services provided by one government department or agency to other departments or agencies of the government and perhaps to other governments also) on a cost-reimbursement basis.
By the very nature of “temporary,” the implication is to undo the transfer at some point in time, and it should not impact the net income of the fund.
On January 1 of the current year, Lundy Corp. purchased 40% of the voting common stock of Glen, Inc., and appropriately accounts for its investment by the equity method. During the year, Glen reported earnings of $225,000 and paid dividends of $75,000. Lundy assumes that all of Glen’s undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividends-received deduction. Lundy’s current enacted income tax rate is 25%. Lundy uses the liability method to account for temporary differences and expects to have taxable income in all future periods. The increase in Lundy’s deferred income tax liability for this temporary difference is:
$18,000. When applying the equity method to an investment for financial accounting purposes, the income earned by the company partially owned is recognized by the owning investing company on its own books.
Lundy has financial accounting income of $90,000 ($225,000 × 0.40) and this income is not recognized for tax purposes until received in dividends later on.
Of course, Lundy did receive some dividends already, $30,000 ($75,000 × 0.40). Thus, $60,000 of deferred income for tax purposes will generate a future tax due, a deferred tax liability now of $18,000 ($60,000 × the future tax rate of 0.30).
Oak County incurred the following expenditures in issuing long-term bonds:
Issue cost $400,000
Debt insurance 90,000
When Oak establishes the accounting for operating debt service, what amount should be deferred and amortized over the life of the bonds?
$0. The GASB evaluated these debt issuance costs and concluded that, with the exception of PREPAID insurance, the costs relate to services provided in the current period and thus they should be expensed in the current period.
Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 20X1, financial statements. In addition, a change from straight-line to accelerated depreciation made at the beginning of 20X2 resulted in a cumulative effect of $30,000 on Foy’s retained earnings. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in 20X2?
FASB ASC 250-10-45-22 notes, “Any error in the financial statements of a prior period discovered after the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) shall be reported as an error correction, by restating the prior-period financial statements.”
Foy Corp.’s failure to accrue $50,000 of warranty cost in 20X1 is an error which should be reported in 20X2 as a prior period adjustment.
(The change in depreciation is a change in accounting principle, shown on the income statement.)
Frame Co. has an 8% note receivable dated June 30, 20X0, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, 20X1, 20X2, and 20X3. In its June 30, 20X2, balance sheet, what amount should Frame report as a current asset for interest on the note receivable?
The balance sheet needs to include the amount of unpaid interest accrued on the outstanding principal up until the balance sheet date. After the first installment on the principal was made, there was still $100,000 of the debt outstanding for a full year.
Note receivable balance on June 30, 20X0 $150,000
Principal plus accrued payments collected
in 20X1 - 50,000
——–
Note receivable balance on July 1, 20X1 $100,000
Times interest rate x .08
——–
Interest receivable June 30, 20X2 $ 8,000
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Cash collection is a critical event for income recognition in which method? The cost recovery method or the installment method?
Under both the installment and cost recovery methods of revenue recognition, the collectibility of receivables is genuinely in doubt. Since it is hard to estimate bad debts, a bad debt estimate is considered insufficient, and the actual gross profits are deferred until cash collections occur. Profit is recognized as cash is collected.
Which of the following is a pair of values that are compared to determine the amount of a possible impairment loss on an intangible asset, with an indefinite life, other than goodwill?
Fair value, carrying value. The useful life of the asset should be evaluated annually to determine whether it should be revised. If the asset should be determined to no longer have an indefinite life, it should be amortized from that point on a prospective basis. An impairment loss must be recognized for the amount that the carrying value exceeds the fair value.
During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000 and its effective income tax rate was 15%. Worth’s effective annual income tax rate for the previous year was 30%. Worth expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%. In its first-quarter interim income statement, what amount of income tax expense should Worth report?
An estimate of the effective tax rate expected for the annual period is made at the end of each interim period. This rate is used in providing for income taxes on a current year-to-date basis.
Worth should use its expected rate of 25%: $100,000 × 0.25 = $25,000.
A donor provided a $10 million gift for a specific program to a nongovernmental, not-for-profit organization. The organization cannot spend the $10 million, but it may use the income on the gift for the donor-specified program. In the organization’s statement of activities, the gift should be reported as part of the change in:
Permanently restricted net assets. Only restrictions imposed by donors or grantors are considered restrictions in accounting for not-for-profit organizations. Restrictions that can be satisfied by the passage of time or by using the resources for a certain purpose (e.g., to finance expenses of a specific program or to construct a building) are called temporary restrictions. Restrictions that cannot be fulfilled by either the passage of time or actions of the organization are known as permanent restrictions. Unrestricted net assets are the portion of net assets not temporarily or permanently restricted by donors.
Revenues are classified in the same categories that net assets are classified into: those that contribute to permanently restricted net assets, those that contribute to temporarily restricted net assets, and those that increase unrestricted net assets. Expenses are always reported as changes in unrestricted net assets.
The donation is this question is an example of a permanent restriction because the donor requires that the $10 million principal be maintained intact in perpetuity (i.e., cannot be spent). Therefore, the revenue related to these net assets would be reported as part of the change in permanently restricted net assets.
At December 31, 20X2, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31, 20X1, $300,000 of which were to be written off in 20X2 and the remainder in 20X3. Off-Line’s income tax rate is 30%. In its 20X2 income statement, what amount should Off-Line report as cumulative effect of change in accounting principle?
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. Thus, the cumulative effect of Off-Line’s change in accounting principle would not be included in its 20X2 income statement.
A city has a number of open purchases remaining at year-end. These purchase orders are represented in the general fund records as both Encumbrances (debit balance) and Fund balance—reserved for encumbrances (credit balance). Encumbrances outstanding at year-end represent:
budgetary control for the general fund. Encumbrance accounting is a method of budgetary control for governmental funds, including the general fund.
Encumbrances do not represent expenditures as they are a memorandum of commitments that will eventually lead to expenditures.
They do not represent liabilities as the goods and services are yet to be delivered.
Governmental intent to commit resources for specific uses in the future is indicated by an assignment of fund balance.
Perk, Inc., issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk calculate the net proceeds to be received from the issuance?
To determine the issue price for a bond, the cash flows from the bond should be discounted at the yield, or market, rate. The cash flows include the principal repayment and interest payments calculated at the stated rate. The net proceeds are the issue price less the cost to issue the bonds.
Note: Be aware that ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts; the recognition and measurement guidance for debt issuance costs were not affected by the amendments.
Amortization of debt issuance costs also shall be reported as interest expense; issue costs will no longer be reported in the balance sheet as deferred charges.
House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, 20X1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, 20X1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, 20X2.
In its December 31, 20X1, balance sheet, what amount should House report as note payable to contest winner, net of current portion?
The noncurrent portion of the note payable to contest winner should be reported on the balance sheet net of discount. This means that the present value of the 19 future payments of $50,000 is the correct amount to be disclosed. This amount is the $418,250 cost of the annuity.
Perk, Inc., issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk calculate the net proceeds to be received from the issuance?
Discount the bonds at the market rate of interest and deduct bond issuance costs.
To determine the issue price for a bond, the cash flows from the bond should be discounted at the yield, or market, rate. The cash flows include the principal repayment and interest payments calculated at the stated rate. The net proceeds are the issue price less the cost to issue the bonds.
Which of the following factors would not be an indicator of an investor’s ability to exercise significant influence over the operating and financial policies of an investee?
Investor recommendation for the investee to hire a specific executive
Interchange of managerial personnel between investor and investee
Investor representation on the investee board of directors
Dependence by the investee on the investor’s proprietary technology
Investor recommendation for the investee to hire a specific executive. As a general rule, ownership of less than 20% (direct or indirect) of the voting stock of the investee leads to the presumption that an investor does not have the ability to exercise significant influence. This presumption can be overcome, however, if the ability to exercise significant influence can be demonstrated in other ways. Examples of such circumstances include the following:
Representation on the investee’s board of directors
Participation in the investee’s policy-making processes
Material intercompany transactions with the investee
Interchange of managerial personnel
Technological dependency of the investee on the investor
Investor recommendation for the investee to hire a specific executive is not one of the listed circumstances.
Which of the following is a Level 3 input to valuation techniques used to measure the fair value of an asset?
Quoted prices in active markets for identical assets
Quoted prices for similar assets in active markets
Unobservable inputs for the asset
Inputs other than quoted prices that are observable for the asset
A fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into three broad levels, as follows:
(1) Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
(2) Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
(3) Level 3 inputs are unobservable inputs for the asset or liability.
Which of the following financial statements would provide information about the ongoing revenues and expenses associated with a voluntary health and welfare organization?
The statement of activities. The primary nongovernment VHWO/ONPO (voluntary health and welfare organization/other not-for-profit organization) operating statement is the statement of activities (basically an income statement). The statement is presented in three major sections; each section presents the changes in one of the net asset classes. Revenues, gains, and losses are classified according to the net asset class affected.
The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of an entity during a period of time. The statement of financial position is essentially a balance sheet, with assets and liabilities. The statement of functional expenses provides additional information to users regarding expenses, which are broken down into either program service expenses or supporting service expenses.
What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization?
Residual interest. Net assets of a nongovernment not-for-profit are defined to be the residual interest in the assets of the entity that remains after deducting its liabilities. In a business enterprise, its equity represents the ownership interest, but not for a nongovernmental not-for-profit.
The term “tax position” as used by the FASB refers to which of the following?
A decision not to file a tax return
An allocation or a shift of income between jurisdictions
The characterization of income or a decision to exclude reporting taxable income in a tax return
All of the answer choices are correct.
All of the listed choices are contained in the FASB ASC 740-10-20 definition:
“A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. The term tax position also encompasses, but is not limited to:
“A decision not to file a tax return
“An allocation or a shift of income between jurisdictions
“The characterization of income or a decision to exclude reporting taxable income in a tax return
“A decision to classify a transaction, entity, or other position in a tax return as tax exempt
“An entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity.”
Which of the following items is not subject to the application of intra period income tax allocation?
Discontinued operations
Income from continuing operations
Prior-period adjustments
Operating income
Operating income.
Operating income is a subtotal well before income tax expense.
Income tax expenses during the period are specifically allocated to the other three answer choices (discontinued operations, income from continuing operations, and prior-period adjustments).
The following items are subject to the application of Intra period income tax allocation: Discontinued operations Cumulative effects of accounting changes Prior-period adjustments Direct adjustments to capital accounts
FASB ASC 505-50-15-2 establishes a fair value approach for stock-based employee compensation plans. The fair value methodology is also extended to cover issuance of:
equity instruments for goods and services. FASB ASC 505-50-15-2 applies to “all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments or by incurring liabilities to a goods or service provider that is not an employee in amounts based, at least in part, on the price of the entity’s shares or other equity instruments or that require or may require settlement by issuing the entity’s equity shares or other equity instruments.”
Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders’ equity and the book value per common share?
Decrease in total stockholders’ equity and increase in book value per share.
Treasury stock is a deduction from total stockholders’ equity; therefore total stockholders’ equity decreases.
The reacquisition of outstanding shares at a price less than their book value per share causes the book value per share of the remaining outstanding shares to increase.
When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as:
additional paid-in capital when the subscription is recorded.
Journal entry to record subscription for no par common stock with stated value:
Dr. Cr. Stock subscriptions receivable XXX Common stock subscribed (for shares subscribed x stated value per share) XX Additional paid-in capital XX
Note: Additional paid-in capital is recorded when the subscription is recorded.
A corporation issuing stock should charge retained earnings for the market value of the shares issued in:
an employee stock bonus.
a purchase of a subsidiary.
a 10% stock dividend.
a 2-for-1 stock split.
FASB ASC 505-20-30-3 provides that for issuances of additional shares less than 20% or 25%, the issuing corporation should transfer from earned surplus (retained earnings) “an amount equal to the fair value of the additional shares issued.”
Thus, retained earnings should be charged for an amount equal to the market value of the shares issued in a 10% stock dividend.
On incorporation, Dee, Inc., issued common stock at a price in excess of its par value. No other stock transactions occurred, except treasury stock was acquired for an amount exceeding this issue price.
If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?
Net common stock: Decrease;
Additional paid-in capital: Decrease;
Retained earnings: Decrease
Journal entry for acquisition of treasury stock using par value method:
Dr. Cr. Treasury stock (common stock) XXX Additional paid-in capital XX Retained earnings X Cash XXXX
The debit to Retained Earnings is for the excess of reacquisition cost over original issue price.
Note:
Common stock outstanding decreases.
Additional paid-in capital decreases.
Retained earnings decreases.
On July 31, 2015, Dome Co. issued $1,000,000 of 10%, 15-year bonds at par and used a portion of the proceeds to call its 600 outstanding 11%, $1,000 face value bonds, due on July 31, 2024, at 102. On that date, unamortized bond premium relating to the 11% bonds was $65,000. In its 2015 income statement, what amount should Dome report as gain or loss, before income taxes, from the retirement of bonds?
$53,000 gain.
Upon the retirement of a bond, the difference between the reacquisition price (what you pay) and the carrying amount of the bond is a gain or loss.
Carrying value of 11% bonds
$600,000 + $65,000 = $665,000
Less: Call price
$600,000 x 102% = 612,000
Pretax gain from retirement of bonds $ 53,000
What is a primary objective of accounting for income taxes?
To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences.
A balance arising from the translation or remeasurement of a subsidiary’s foreign currency financial statements is reported in the consolidated income statement when the subsidiary’s functional currency is:
the U.S. dollar. The objective of translation or remeasurement is to report the subsidiary’s income statement results in the U.S. parent’s currency—which is the U.S. dollar.
In 20X1, Lee Co. acquired Enfield, Inc., 10-year bonds at a premium as a long-term investment. On December 31, 20X2, Enfield’s bonds were quoted at a small discount. Which of the following situations is the most likely cause of the decline in the bonds’ market value?
Interest rates have increased since Lee purchased the bonds. Bonds sell at a premium when the stated rate of interest paid by the bonds exceeds the market rate. The opposite is true if bonds sell at a discount.
In the Lee Co. situation, Lee paid a premium price in 20X1 because Enfield, Inc.’s, interest rate was greater than the market rate. By December 31, 20X2, the situation had changed. The market rate was higher than Enfield’s rate.
Since Enfield’s stated bond interest rate did not change during this period, the only explanation for the change in bond price from premium to discount was that market interest rates increased since Lee purchased the bonds.
An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception:
An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception (FASB ASC 480-10-25-8):
1) embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation and
2) requires or may require the issuer to settle the obligation by transferring assets.
Examples of these financial instruments include forward purchase contracts or written put options on the issuer’s equity shares that are to be physically settled or net cash settled.
Kale Co. has adopted FASB ASC 320-10 (Investments—Debt and Equity Securities). Kale purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Kale should account for these bonds at:
amortized cost.
A company recorded a decommissioning liability and recognized the amount recorded as part of the cost of the related property. After the property was fully depreciated, the decommissioning liability was reviewed and adjusted. How should this change in the decommissioning liability be recognized under IFRS?
The change in the liability is recognized in profit or loss.
Giaconda, Inc., acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?
Income
The valuation techniques discussed in FASB ASC 820-10-35-24A include the:
market approach,
income approach, and
cost approach.
The income approach uses valuation techniques to determine a discounted present value. This is the approach described in this problem.
A private not-for-profit hospital’s performance indicator, which reports the results of operations, includes additional classifications. Which of the following normally would be included in the other operating revenues classification?
Revenues from educational programs
Revenues from unrestricted gifts
Revenues from both educational programs and unrestricted gifts
None of the answer choices are correct.
Revenues from educational programs.
The statement of operations for not-for-profit entities includes a performance indicator such as operating results.
Operating results are reported among the total changes in unrestricted net assets. This indicator is analogous to income from continuing operations of a for-profit enterprise.
Additional classifications such as operating/nonoperating may be included within the performance indicator. For a hospital’s performance indicator, revenues other than patient service revenues, such as revenues from educational programs, would be considered “other revenues.” Gifts and contributions would not be considered operating revenues.
A company’s activities for Year 2 included the following:
Gross sales $3,600,000
Cost of goods sold 1,200,000
Selling and administrative expense 500,000
Adjustment for a prior-year understatement of
amortization expense 59,000
Sales returns 34,000
Gain on sale of available-for-sale securities
8,000
Gain on disposal of a discontinued business segment
4,000
Unrealized gain on available-for-sale securities
2,000
The company has a 30% effective income tax rate. What is the company’s net income for Year 2?
$1,314,600
How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord’s financial statements?
Current liability. Unearned rent is classified as a current liability because the landlord has received cash for the rent prior to the period in which the rent is earned (i.e., rental income is earned over the eight-month period that the tenant occupies the rented property). It is all current since the rent will be earned within the next year.
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.
GAAP requires that consolidated financial statements be prepared when one of the entities in the group directly or indirectly has a controlling financial interest in the other entities. FASB ASC 810 specifies that, in general, the usual condition for consolidated financial statements is ownership (direct or indirect) of a majority voting interest (i.e., at least one share in excess of 50%).
With respect to the footnote disclosure, what are U.S. GAAP and IFRS differences?
IFRS requires more footnote disclosure than U.S. GAAP.
IFRS (International Financial Reporting Standards) is principle-based, with fewer rules and standards than GAAP. Consequently, disclosure of the reasoning behind the information on the financial statements requires a great deal of footnote disclosure, including a footnote for accounting policies.
Baker Co. uses the calendar year as its accounting year. During 20X1, Congress enacted new tax legislation that changed the tax rate for 20X2 from 30% to 40%. The tax rate for 20X3 and following years remained at 30%. Baker has only one type of temporary difference or carryforward—a taxable temporary difference. Accordingly, Baker had a deferred tax liability at the beginning of 20X1 and will have a deferred tax liability at the end of 20X2. With regard to the change in tax rates, Baker should:
include the effect of the change on the January 1, 20X1, deferred tax liability in income from continuing operations of 20X1.
The effect of the change on the deferred tax asset or liability at the beginning of the year of change should be included in income from continuing operations for the period that includes the enactment date.
At the end of Year 1, Cody Co. reported a profit on a partially completed construction contract by applying the percentage of completion method. By the end of Year 2, the total estimated profit on the contract at completion in Year 3 had been drastically reduced from the amount estimated at the end of Year 1. Consequently, in Year 2, a loss equal to one-half of the previous year profit was recognized. Cody used the completed contract method for income tax purposes and had no other contracts. The Year 2 balance sheet should include a deferred tax:
liability.
For financial accounting income, the company uses the percentage-of-completion method, and since they are partway done with an overall profitable contract, they have recognized some income on the contract for financial accounting purposes. Thus, they have generated an income tax expense, but since the company uses the completed-contract method to recognize income for tax purposes, they have not recognized any income on the contract for tax purposes.
Thus, the company has a deferred tax liability yet to be paid (when the income is recognized for tax purposes and taxed). All deferred tax liabilities are classified on the balance sheet as noncurrent.
Larkin Co. reported a taxable loss of $10,000 in 20X1, its first year of operations, and taxable income of $0 in 20X2. Larkin had no temporary or permanent differences in either 20X1 or 20X2. At the end of 20X1 Larkin believed that 30% of the operating loss carryforward would not be realized; therefore, a valuation allowance of $1,200 (30% of $10,000 NOL × 40% tax rate) was necessary. At the end of 20X2, Larkin believes that the valuation allowance is no longer necessary. Assuming a tax rate of 40%, Larkin should report total income tax expense (benefit) in 20X1 and 20X2 of:
$(2,800) in 20X1 and $(1,200) in 20X2.
in 20X1 Larkin should recognize a net tax expense (benefit) of $(4,000) + $1,200 = $(2,800).
Note that the recognition of the valuation allowance reduces the net tax benefit recognized in 20X1.
The decision in 20X2 that the valuation allowance is no longer necessary means that the valuation allowance should be eliminated.
Tax expense (benefit) in 20X2 has a credit balance of $(1,200), indicating a deferred tax benefit. This $(1,200) tax benefit recognized in 20X2 is the change in deferred tax expense/benefit arising from changed circumstances causing a change in judgment as to the amount of valuation.
On December 1, 20X1, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, 20X2. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its 20X1 income statement?
Net proceeds of the loan were $194,000 and the effective interest rate was 12.4%. The journal entry to record the December 31, 20X1, accrual of interest would be:
Debit Accrued Interest Receivable 2,005
Credit Interest Income 2,005
(12.4% x $194,000 x 1/12)
The interest income reflects the effective interest rate applied to the net proceeds received. This is an application of the “effective interest” method.
On July 1, Year 1, Kay Corp. sold equipment to Mando Co. for $100,000.
Kay accepted a 10% note receivable for the entire sales price.
This note is payable in two equal installments of $50,000 plus accrued interest on December 31, Year 1 and Year 2.
On July 1, Year 2, Kay discounted the note at a bank at an interest rate of 12%.
Kay’s proceeds from the discounted note were:
$51,700. First, find the maturity value of the note, which is what will be received by the holder of the note when it comes due. By the time of the discounting, some of the principal has already been paid. Only the second installment, the final $50,000 principal plus interest, will be paid to the bank when due.
At the end of December, Year 2, the $50,000 will be received by the bank along with 10% interest (since the principal will have been outstanding for a whole year). On December 31, Year 2, a total of $55,000 maturity value will be due:
$50,000 + ($50,000 × 0.1) = $55,000
The discounted proceeds will be based on this amount, the discount rate (0.12), and the discounting period (from July to December of Year 2, 6 months). The discount amount is thus:
$55,000 × 0.12 × 6/12 = $3,300
The cash proceeds are the maturity value less the discount:
$55,000 – $3,300 = $51,700
On December 30, 20X1, Chang Co. sold a machine to Door Co. in exchange for a non-interest-bearing note requiring 10 annual payments of $10,000. Door made the first payment on December 30, 20X1. The market interest rate for similar notes on the date of issuance was 8%. Information on present value factors is as follows:
Present value
of ordinary
Present value annuity of
Period of $1 at 8% $1 at 8%
------ ------------- ------------
9 0.5002 6.2469
10 0.4632 6.7101
On its December 31, 20X1, balance sheet, what amount should Chang report as note receivable?
Since one of the 10 payments had been collected on December 31, 20X1, the carrying amount of the note receivable would be the present value of a nine year annuity of $10,000 discounted at 8%.
The computation:
Carrying value of note receivable
= Annual payment x Present value of ordinary annuity factor = $10,000 x 6.2469 = $62,469 or $62,500 rounded
A troubled debt restructuring is normally accomplished by which of the following?
Modification of terms of the debt
Issuance of an equity interest to the creditor by the debtor to satisfy fully or partially the debt
Transfer from the debtor to the creditor of assets (e.g., real estate, receivables) to satisfy fully or partially the
Answer - of the answer choices are methods to achieve a troubled debt restructuring.
A troubled debt restructuring is normally accomplished by one or a combination of the following:
Transfer from the debtor to the creditor of assets (e.g., real estate, receivables) to satisfy fully or partially the debt
Issuance of an equity interest to the creditor by the debtor to satisfy fully or partially the debt
Modification of terms of the debt, such as:
reduction in the interest rate for the remainder of the life of the debt
extension of maturity date(s) at an interest rate less than the current rate for new debt
reduction of the face amount or maturity amount of the debt
reduction of accrued interest
The City of Curtain had the following inter-fund transactions during the month of May:
Billing by the internal service fund to a department financed by the general fund, for services rendered in the amount of $5,000
Transfer of $200,000 from the general fund to establish a new enterprise fund
Routine transfer of $50,000 from the general fund to the debt service fund
What was the total reciprocal inter-fund activity for Curtain during May?
Reciprocal inter-fund activities are activities that affect two funds resulting from loans or services provided and received.
Nonreciprocal inter-fund activities consist of flows of assets without equivalent flows in return. The transfer of $200,000 from the general fund to establish a new enterprise fund and the routing transfer of $50,000 from the general fund to the debt service fund are of this type.
Only the billing by the internal service fund represents a symmetrical transaction between two funds.
Dannon Co. mistakenly reported its expenses of $35,200 on the cash basis. Corporate records revealed the following information: Beginning prepaid expense $1,300 Beginning accrued expense 1,650 Ending prepaid expense 1,800 Ending accrued expense 1,200
What amount of expense should the Dannon report on its books under the accrual basis?
$34,250. Under the cash basis of accounting, revenue is recognized when cash is received and expenses are recognized when cash is disbursed; no income or expense is accrued. The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method.
One way to solve this question is use the journal entry required to book the net difference between beginning and ending balances. Prepaid expenses increased $500, so debit Prepaid and credit Cash for $500. That $500 represents excessive recognition of expense under the cash basis. Accrued expenses decreased $450, so debit Accrued Expenses and credit Cash $500. The credit to cash represents excessive expensive recognition under the cash basis, for a total excess expense recognition of $950. Dannon should report accrued expenses of $34,250 ($35,200 − $950).
Falltown provides combining financial statements in its comprehensive financial report, detailing fiduciary funds aggregated in the basic financial statements. The combining financial statements for agency funds would include:
a combining statement of fiduciary net position—fiduciary funds. Fiduciary fund information should cover all fiduciary funds of a government with a separate column for each fiduciary fund type: pension trust funds, investment trust funds, private-purpose trust funds, and agency funds.
A combining statement including all fiduciary funds would not be used.
Further, the agency fund does not report a statement of changes in fiduciary net position. It consists only of assets and liabilities that are reported on the financial statement date in the statement of fiduciary net position.
On December 30, 20X1, Rafferty Corp. leased equipment under a capital lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 10%. The capital lease obligation was recorded on December 30, 20X1, at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this capital lease in its December 31, 20X1, balance sheet?
$8,500
InitialleaseobligationonDecember31,20X1$135,000
LesspaymentmadeonDecember31,20X1-20,000
——–
Leaseobligationduring20X2$115,000
========
PortionofDecember31,20X2,paymentthatisinterest=
ratexobligationxtime=10%x$115,000x1=$11,500
PortionofDecember31,20X2,paymentthatisrelated
toleaseobligation=payment-interestportion=
$20,000-$11,500=$8,500
This amount is a current liability since it is payable within the current period. The remaining lease obligation is noncurrent.
How should operating expenses for a nongovernmental not-for-profit entity be reported?
Change in unrestricted net assets.
A company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods. This type of commitment is:
not reported on the balance sheet but disclosed in the notes to the financial statements.
Long-term debt often has covenants in the debt contract. Debt covenants are standards for the financial strength and performance of the borrower. These covenants are intended to protect the interest of the:
lending institution.
On July 1, Year 1, Kay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10% note receivable for the entire sales price. This note is payable in two equal installments of $50,000 plus accrued interest on December 31, Year 1 and Year 2. On July 1, Year 2, Kay discounted the note at a bank at an interest rate of 12%. Kay’s proceeds from the discounted note were:
At the end of December, Year 2, the $50,000 will be received by the bank along with 10% interest (since the principal will have been outstanding for a whole year). On December 31, Year 2, a total of $55,000 maturity value will be due:
$50,000 + ($50,000 × 0.1) = $55,000
The discounted proceeds will be based on this amount, the discount rate (0.12), and the discounting period (from July to December of Year 2, 6 months). The discount amount is thus:
$55,000 × 0.12 × 6/12 = $3,300
The cash proceeds are the maturity value less the discount: $55,000 – $3,300 = $51,700
During the year, Hauser Co. wrote off a customer’s account receivable. Hauser used the allowance method for uncollectable accounts. What impact would the write-off have on net income and total assets?
Net income: No effect; Total assets: No effect
When the allowance method of accounting for bad debts is applied, the accounts that will be eventually written off are in both the accounts receivable and the allowance account balances.
When the account is written off, it is taken out of both at the same time, and the bad debt expense had already been taken as an estimated expense when the sale was made.
The write-off lowers accounts receivable with a credit, and the allowance account with a debit of the same amount.
The write-off entry does not affect expenses, and leaves the net realizable amount of accounts receivable the same.
A company has the following items on its year-end trial balance:
Net sales $500,000
Common stock 100,000
Insurance expense 75,000
Wages 50,000
Cost of goods sold 100,000
Cash 40,000
Accounts payable 25,000
Interest payable 20,000
What is the company’s gross profit?
As presented on a multiple-step income statement, gross profit (or gross margin) is net sales less cost of goods sold. In this problem, gross profit is:
Net sales $500,000
Cost of goods sold (100,000)
———
Gross profit $400,000
Yellow Co. received a large worker’s compensation claim of $90,000 in the third quarter for an injury occurring in the third quarter. How should Yellow account for the transaction in its interim financial report?
Recognize $90,000 in the third quarter.
In general, interim financial reports should be based on the principles, practices, and policies used in the preparation of the last annual report.
Deferrals, accruals, and estimations at the end of each interim period are determined on the same basis as the same judgments would be made for an annual period; hence Yellow would recognize the entire $90,000 in the third quarter.
Rory Co.’s prepaid insurance was $50,000 at December 31, Year 2, and $25,000 at December 31, Year 1. Insurance expense was $20,000 for Year 2 and $15,000 for Year 1. What amount of cash disbursements for insurance would be reported in Rory’s Year 2 net cash flows from operating activities presented on a direct basis?
The $45,000 amount is calculated as follows:
Insurance expense – Year 2 $20,000
Increase in prepaid insurance
($50,000 – $25,000) 25,000
——-
Total $45,000
Under IFRS, how should an adjustment be recognized in the company’s consolidated financial statements when the CGU recoverable amount is not equal to the total carrying value?
Under IFRS, impairment is measured at the level of the cash generating unit.
Total carrying amount $45,000
Recoverable amount 32,000
——-
Impairment $13,000
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?
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.
Ace Corp. entered into a troubled debt restructuring (TDR) agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in payment and cancellation of a note (from Ace) with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain from the restructuring in its income statement?
In a transfer of assets to satisfy debt in a TDR, the debtor:
recognizes a gain or loss on the transfer of assets (equal to the difference between the fair value of $100,000 and recorded value of $75,000 of the asset transferred), or $25,000, and
recognizes a gain on the restructuring of a debt (equal to the difference between the $100,000 fair value of the asset and the $150,000 carrying value of the debt), or $50,000.
Even though a total gain of $75,000 is recognized on the income statement, the portion attributable to the restructuring is $50,000.
A government-wide statement of net position must include which of the following?
A distinction between governmental and business-type activities. The government-wide financial statements report governmental activities, business-type activities, the primary government totals, and discretely presented component units. All data in the government-wide statements are presented on the accrual (revenue and expense) basis and use the economic resources measurement focus. Fiduciary funds and fiduciary component units are not included in these statements. Governmental activities and business-type activities are reported separately.
Which of the following accounts should Moon City close at the end of its fiscal year?
Expenditures is a nominal (operating statement) account used in periodically measuring outflows of financial resources, and as such is closed at the end of the fiscal year. Vouchers Payable, Fund Balance, and Fund Balance—Reserved for Encumbrances are all balance sheet (real) accounts. Balance sheet accounts are not closed at fiscal year-end.
Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?
The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
In determining basic earnings per share, cumulative preferred dividends reduce the amount available for common shareholders. Consequently, net income should be reduced or net loss increased for the amount of the cumulative dividend
A 15-year bond was issued in Year 1 at a discount. During Year 11, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the Year 11 bond transactions was to increase long-term liabilities by the excess of the 10-year bond’s face amount over the 15-year bond’s:
carrying amount.
Disclosure is required by publicly held companies if 10% or more of total revenues are derived from:
both sales to a single customer and export sales. 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.
On January 2, Judd Co. bought a trademark from Krug Co. for $500,000. Judd retained an independent consultant, who estimated the trademark’s remaining life to be 50 years. Its unamortized cost on Krug’s accounting records was $380,000. In Judd’s December 31 balance sheet, what amount should be reported as accumulated amortization?
If one purchases a trademark, one carries that intangible at purchase cost. If the trademark has a finite life, one amortizes the purchase cost over the useful life.
The annual amortization cost of the trademark is thus the $500,000 cost divided equally by the 50 years, or $10,000 each year. After the first year, the accumulated amortization will only be 1 × $10,000, or $10,000.
A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date?
An interest expense that is GREATER than the cash payment made to bondholders.
Interest expense is Carrying amount × Effective interest rate.
Cash payment amount is Face amount × Stated interest rate.
In this example, the stated rate is less than the effective rate, so the cash payment is less than the interest expense.
Noting that interest rates are declining, Blue Township opted to retire an existing, callable general obligation bond and replace it with a new bond issue with lower interest. A $4,000,000, 5% bond originally issued at par value with 15 years remaining was retired for $4,100,000. A new $4,000,000, 2%, 30-year bond was issued. The new bond issue was sold at 104 and printing, legal, and administrative costs for the transactions amounted to $5,000. On the government-wide financial statements, this refunding would result in:
$4,000,000 liability due at maturity in 30 years plus a $105,000 contra liability to be amortized as a component of interest over 15 years, and a $160,000 additional liability to be amortized as a component of interest over 30 years.
This “current” refunding used the proceeds of the new debt to repay the old debt in its entirety. For current refundings reported in the government-wide statements, GASB D20.108 states that the difference between the reacquisition price of the old debt and the net carrying amount of the new be amortized over the shorter of the remaining life of the old debt or the life of the new debt, and debt issue costs be deferred. Cash flows for the refunding included outflows of $100,000 for call premium and $5,000 for issuance costs to be amortized over the remaining life of the old bonds, and a $160,000 premium on the new bonds to be amortized for the life of the new bonds. Therefore, for the 15-year remaining life of the retired bond, the difference between the reacquisition price of the old debt and the carrying value of the new debt is being amortized as a component of interest.
Noting that interest rates are declining, Blue Township opted to retire an existing, callable general obligation bond and replace it with a new bond issue with lower interest. A $4,000,000, 5% bond originally issued at par value with 15 years remaining was retired for $4,100,000. A new $4,000,000, 2%, 30-year bond was issued. The new bond issue was sold at 104 and printing, legal, and administrative costs for the transactions were paid in an amount of $5,000. On the fund financial statements, this refunding would result in:
$4,100,000 of other financing uses, $5,000 of expenditures, and $4,160,000 of other financing sources to the debt service fund.
This transaction is recognizable as a “current” refunding in that the proceeds of new debt are used to repay old debt in its entirety. Usually, the debt service fund is used for refunding transactions.
The proceeds of the new debt are not considered revenues and payment of the old debt is not considered expenditures.
If underwriter fees or attorney costs had been paid out of the proceeds, the smaller net proceeds would have been recognized as other financing sources.
Payne Co. prepares its statement of cash flows using the indirect method. Payne’s unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in unamortized bond discount in its statement of cash flows?
As an addition to net income in the operating activities section. The amortization of a bond discount is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Amortization of a discount on bonds payable results in interest expense greater than cash interest. Because more expense has been deducted in computing income than the amount of cash paid for interest, the difference (captured in the change in the bond discount account) must be added to income to reconcile to the cash provided or used for operating activities.
Arena Corp. leased equipment from Bolton Corp. and correctly classified the lease as a capital lease. The present value of the minimum lease payments at lease inception was $1,000,000. The executory costs to be paid by Bolton were $50,000, and the fair value of the equipment at lease inception was $900,000. What amount should Arena report as the capital lease obligation at the lease’s inception?
The lease receivable is recorded at the lower of the present value of the minimum lease payments ($1,000,000) or the fair value ($900,000) of the asset. Executory costs are not included in the amount capitalized as minimum lease payments receivable by the lessor or obligation under capital lease by the lessee. Arena should report the capital lease obligation at $900,000.
Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 20X1, financial statements. In addition, a change from straight-line to accelerated depreciation made at the beginning of 20X2 resulted in a cumulative effect of $30,000 on Foy’s retained earnings. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in 20X2?
$50,000. FASB ASC 250-10-45-22 notes, “Any error in the financial statements of a prior period discovered after the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) shall be reported as an error correction, by restating the prior-period financial statements.”
Foy Corp.’s failure to accrue $50,000 of warranty cost in 20X1 is an error which should be reported in 20X2 as a prior period adjustment. (The change in depreciation is a change in accounting principle, shown on the income statement.)
How are dividends per share for common stock used in the calculation of the following?
Dividend per share payout ratio as numerator and earnings per share not used.
Somar Co. has regularly issued bonds and frequently retires them early. On March 1, 20X1, Somar Co. issued 20-year bonds at a discount. By September 1, 20X6, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. How should Somar report the bond retirement on its 20X6 income statement?
A loss in continuing operations
The bonds were sold at a discount, so their carrying value (bond face amount less unamortized discount) was less than 100. When Somar Co. retired the bonds at 105, a loss was incurred.
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.
Alpha Hospital, a large not-for-profit entity, has adopted an accounting policy that does not imply a time restriction on gifts of long-lived assets. Alpha received investments subject to the donor’s requirement that investment income be used to pay for outpatient services. Indicate the manner in which this transaction affects Alpha’s financial statements.
Increase in permanently restricted net assets.
When investments are donated and the principal of those funds cannot be expended, those investments are permanently restricted. Therefore, Alpha must record an increase in its permanently restricted net assets.
A foreign subsidiary of a U.S. parent company should measure its assets, liabilities, and operations using the:
The FASB requires that an asset, liability, revenue, expense, gain, or loss arising from a transaction should be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect on the transaction date.
The functional currency is determined by the primary economic environment in which the entity operates and is often determined by the parent company.
Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability’s fair value, except:
quoted prices for identical assets and liabilities in markets that are not active.
quoted prices for similar assets and liabilities in markets that are active.
internally generated cash flow projections for a related asset or liability.
interest rates that are observable at commonly quoted intervals.
internally generated cash flow projections for a related asset or liability.
Based on the following definition, “internally generated cash flow projections for a related asset or liability” is the only answer choice not included in Level 2 observable inputs.
“If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following:
“Quoted prices for similar assets or liabilities in active markets
“Quoted prices for identical or similar assets or liabilities in markets that are not active
“Inputs other than quoted prices that are observable for the asset or liability, for example:
“Interest rates and yield curves observable at commonly quoted intervals
“Implied volatilities
“Subparagraph superseded by Accounting Standards Update No. 2011-04
“Subparagraph superseded by Accounting Standards Update No. 2011-04
“Credit spreads
“Subparagraph superseded by Accounting Standards Update No. 2011-04
“Market-corroborated inputs.
The FASB has jurisdiction over entities with which of the following characteristics?
A = Exempt from federal taxation. The joint FASB/GASB definition of governmental organizations that is included in several AICPA Audit and Accounting Guides, including State and Local Governments (paragraph 1.01), indicates that bodies corporate and politic and entities with the power to enact and enforce a tax levy are governments. Not-for-profit organizations that are not governmental are exempt from federal taxation.
How would a municipality that uses modified accrual and encumbrance accounting record the condition of an excess of estimated inflows over estimated outflows?
Credit budgetary fund balance.
Adoption of the operating budget is recorded by debiting appropriate budgetary accounts for estimated inflows (“estimated revenues”) and crediting the appropriate budgetary accounts for estimated and approved outflows (“appropriations”). “Budgetary fund balance” is debited or credited for the difference.
In this problem, since estimated inflows exceed estimated outflows, the budgetary fund balance is credited for the difference. (Note: This budgetary entry is reversed at the end of the period as the first closing entry.)
Sun Corp. had investments in equity securities classified as trading costing $650,000. On June 30 of the current year, Sun decided to hold the investments indefinitely and accordingly reclassified them from trading to available-for-sale on that date. The investment’s fair value was $575,000 at December 31 of the previous year; $530,000 at this June 30; and $490,000 at December 31 of the current year.
What amount of loss from investments should Sun report in its current-year income statement?
Answer = $45,000 The losses on the investment previous to this year have already been recognized in earnings. The losses from this year up until the reclassification from trading to available for sale (from $575,000 at the end of last year down to $530,000 when the reclassification was made) of $45,000 are recognized as a loss in earnings this year. Any loss after that goes into other comprehensive income.
Beach Co. determined that the decline in the fair market value (FMV) of an investment was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach’s books. The controller would properly record the decrease in FMV by including it in which of the following?
Earnings section of the income statement and writing down the cost basis to FMV.
Available-for-sale securities are recognized on the balance sheet at fair value. Any related unrealized holding gains and losses are excluded from net income and reported as other comprehensive income. However, if a decline in value is not temporary, the cost basis of the individual security should be written down to fair value and the amount of the write-down is included in earnings.
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.
XYZ Corporation pays an insurance premium of $5,000 on a $100,000 whole life policy on the life of its president. The cash surrender value of the policy increases from $22,000 to $25,000 during the period covered. The insured officer dies at the end of the period of coverage. Which of the following would be included in the entry to receipt of the proceeds of the death benefit?
Gain of Life Insurance Coverage is credited for $75,000.
At the time of death of an insured officer or employee, a gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time. In this case, the entry would be:
Cash $100,000
Cash Surrender Value $25,000
Gain from Proceeds of Life Insurance $75,000
Bee Co. uses the direct write-off method to account for uncollectible accounts receivable. During an accounting period, Bee’s cash collections from customers equal sales adjusted for the addition or deduction of the following amounts:
Accounts written off: deduction; Increase in accounts receivable balance: deduction.
This question is asking to convert from sales during the period to cash collections. Since the company uses the direct write-off method, there is no need to consider any allowance account balance. Thus, the sales for the period only have to be adjusted downwards for any accounts written off, and also downwards for any increases in deferred receipts (in the form of additions to accounts receivables).
Nongovernmental not-for-profit entities (either voluntary health and welfare organizations or other not-for-profit organizations) are required to provide which of the following external financial statements?
Statement of financial position, statement of activities, statement of cash flows.
The “statement of comprehensive income” is the term for the change in the net equity of a business entity and would not relate to a not-for-profit organization.
The correct listing of required statements is:
statement of financial position,
statement of activities, and
statement of cash flows.
FASB ASC 958-205-45-4 goes on to state: “In addition, a voluntary health and welfare entity shall provide a statement of functional expenses.”
Posy Corp. acquired treasury shares at an amount greater than their par value, but less than their original issue price. Compared to the cost method of accounting for treasury stock, the par value method reports a greater amount for:
additional paid-in capital.
retained earnings.
both additional paid-in capital and retained earnings.
neither additional paid-in capital nor retained earnings.
Par value of shares = $1,000
Original issue price = $1,200 ($1,000 par, $200 additional paid-in capital)
Reacquisition price = $1,100
(1) Reacquisition using cost method:
Dr. Cr. Treasury shares $1,100 Cash $1,100
(2) Reacquisition using par value method:
Dr. Cr. Treasury shares $1,000 Additional paid-in capital 100 Cash $1,100
The entry under the par value method reduces additional paid-in capital (i.e., the amount is not “greater”), while retained earnings are not affected.
Note: The question asks if the amount is “greater,” not just if the account is affected.
An operating segment, under FASB ASC 280-10-50-1, must have all of the following characteristics, except:
engages in activities that may earn revenues and incur expenses.
separate legal standing as a sole proprietorship, partnership, corporation, or corporate joint venture.
its operating results are regularly reviewed by the chief operating decision maker.
discrete information about that part of the enterprise is available.
An important dimension of FASB ASC 280-10-50-1 is the notion of operating segments, which are defined as components of a business enterprise:
that engage in business activities from which the enterprise may earn revenues and incur expenses (including transactions with other segments),
whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resource allocation and to assess performance, and
for which discrete financial information is available.
Which of the following resources increases the temporarily restricted net assets of a nongovernmental, not-for-profit voluntary health and welfare entity?
Refundable advances for purchasing playground equipment
Donor contributions to fund a resident camp program
Membership fees to fund general operations
Participants’ deposits for an entity-sponsored trip
Of the answer choices presented, only the donor contributions for a specific purpose, to fund a resident camp program, would increase the temporarily restricted net assets. The refundable advances represent an asset of the organization as it had given cash to an equipment provider before the purchase had taken place. The participants’ deposits represent a receipt of cash and a liability to provide the promised activity for participants, a trip. Membership fees are exchange revenues considered unrestricted.
Lake County received the following proceeds that are legally restricted to expenditure for specified purposes:
Levies on affected property owners to install sidewalks: $500,000
Gasoline taxes to finance road repairs: $900,000
What amount should be accounted for in Lake’s special revenue funds?
Special revenue funds are used to account for resources raised from revenues that are either restricted or committed for expenditure for specific general government purposes other than capital outlay or debt service.
Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays.
The sidewalks are capital in nature and would not be part of a special revenue fund but of a capital fund, whereas the road repairs are not capital but maintenance.
On January 1, of the current year, Tree Co. enters into a 5-year lease agreement for production equipment. The lease requires Tree to pay $12,500 per year in lease payments. At the end of the 5-year lease term, Tree can purchase the equipment for $30,000. The fair value of the equipment is $75,000. The estimated useful life of the equipment is 10 years. The present value of the lease payments is $50,000. The present value of the purchase option is $20,000. Tree’s controller believes the purchase option price is sufficiently below the expected fair value of the equipment at the date the option becomes exercisable to reasonably assure its exercise. Tree would normally depreciate equipment of this type using the straight-line method. What amount is the carrying value of the asset related to this lease at December 31 of the current year?
The carrying value of the asset at December 31 of the current year would be $63,000 ($70,000 − $7,000).
The lease would be recorded as a capital lease as it contains a bargain purchase option (BPO).
A BPO is an option to purchase the property at a price so significantly below the fair market value (at the time of the purchase option) that purchase may be assumed.
The lessee records the lease at $70,000 ($50,000 + $20,000), the present value of the minimum lease payments and the present value of the BPO, respectively, and depreciates the equipment over 10 years, at $7,000 a year ($70,000 ÷ 10; the lessee takes ownership of the asset at the end of the lease, so the equipment’s estimated useful life is used).
The lessee’s relevant journal entries for year 1 are as follows:
Leased property 70,000
Obligation under capital lease 70,000
Depreciation expense 7,000
Accumulated depreciation 7,000
Thyme, Inc. owns 16,000 of Sage Co.’s 20,000 outstanding common shares. The carrying value of Sage’s equity is $500,000. Sage subsequently issues an additional 5,000 previously unissued shares for $200,000 to an outside party that is unrelated to either Thyme or Sage. What is the total noncontrolling interest after the additional shares are issued?
After Sage issued the additional $200,000 in equity, its total equity was $700,000 ($500,000 + $200,000). Thyme now owns 16,000 shares out of the total 25,000 (20,000 + 5,000) shares outstanding, or 64% (16,000 ÷ 25,000). The remaining 36% (100% − 64%) accounts for a noncontrolling interest of $252,000 ($700,000 × 36%).
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.
FASB ASC 958-605-2
Peterson Corp. had investments in equity securities classified as trading costing $650,000. On June 30 of the current year, Peterson decided to hold the investments indefinitely and accordingly reclassified them from trading to available-for-sale on that date. The investment’s fair value was $575,000 at December 31 of the previous year; $530,000 at this June 30; and $490,000 at December 31 of the current year. What amount of loss from investments should Peterson report in its current year income statement?
A. $ 45,000 When transferring from one portfolio the security has to enter new portfolio at FMV. So, the prior year it was trading security FROM $650 to $575K so in the previous year they would have DEBITED UNREALIZED LOSS and CREDITED Investment account for the $75K difference. So based upon the ending balance of the prior year $575K and the market value when it entered $530K the difference is $45K DEBITED UNREALIZED LOSS and CREDIT INVESTMENT So it’s new basis is $530K
Peterson Corp. had investments in equity securities classified as trading costing $650,000. On June 30 of the current year, Peterson decided to hold the investments indefinitely and accordingly reclassified them from trading to available-for-sale on that date. The investment’s fair value was $575,000 at December 31 of the previous year; $530,000 at this June 30; and $490,000 at December 31 of the current year. What amount should Peterson report as net unrealized loss on investments in equity securities in other comprehensive income at the end of the current year?
A. $ 40,000. When it went from trading to available securities the new basis would have been $530K So, now we go from $530K to a new basis at the end of the year of $490K so the answer is $40,000.
On both December 31, 20X1, and December 31, 20X2, Kopp Co.’s only marketable equity security had the same fair value, which was below cost. Kopp considered the decline in value to be temporary in 20X1 but other than temporary in 20X2. At the end of both years, the security was classified as a noncurrent available-for-sale security. Kopp could not exercise significant influence over the investee. What should be the effects of the determination that the decline was other than temporary on Kopp’s 20X2 net noncurrent assets and net income?
No effect on net noncurrent assets and a decrease in net income. Kopp Co. would have created a valuation allowance in 20X1 to lower the carrying value of the security to fair value. Since there was no change in the fair value between December 31, 20X1, and December 31, 20X2, there would be no effect on net noncurrent assets in 20X2. The recorded value in 20X2 is the 20X1 fair value. But, if the impairment is other than temporary an impairment loss shall be recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made.” Thus, recognition of this realized loss would result in a decrease in net income for Kopp in 20X2.
An organization is normally considered a governmental organization if:
a controlling majority of the members of its governing board are appointed by state government officials.
When using the equity method to account for investments in common stock, which of the following affects the investor’s reported investment income?
Neither a change in market value of the investee’s common stock nor cash dividends from the investee. When dividends are received from investee, investor will reduce the investment account balance but not increase investment income. No action is taken under the equity method when the market value of investee’s shares changes.
In 20X0, $400,000 was donated to Beaty Hospital, a private not-for-profit institution, by a donor who stipulated that the money be used to upgrade research equipment. The new equipment was not acquired until 20X1. How should the purchase of the equipment be reported in the 20X1 statement of activities?
As a decrease in temporarily restricted net assets and an increase in unrestricted net assets.
Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?
The FASB requires that non-goodwill intangible assets with finite (having limits or bounds) lives be amortized, whereas similar assets with indefinite (lasting for an unknown or unstated length of time) lives are not amortized.
Wagner, a holder of a $1,000,000 Palmer, Inc., bond, collected the interest due on March 31, 20X1, and then sold the bond to Seal, Inc., for $975,000. On that date, Palmer, a 75% owner of Seal, had a $1,075,000 carrying amount for this bond. What was the effect of Seal’s purchase of Palmer’s bond on the retained earnings and noncontrolling (minority) interest amounts reported in Palmer’s March 31, 20X1, consolidated balance sheet?
Retained earnings: $100,000 increase; Noncontrolling interest: $0
rrying value of Palmer bonds payable $1,075,000
Less acquisition cost to Seal, Inc. 975,000
———-
Gain to Palmer (Consolidated entity) $ 100,000
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This gain would, of course, increase consolidated retained earnings. The gain is identified with the issuer of the bonds, which is Palmer in this case. Therefore, the gain has no effect on noncontrolling (minority) interest.
On June 30, Huff Corp. issued at 99, 1,000 of its 8%, $1,000 bonds. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, Huff should report the bond liability at:
955,000. Accounting Standards Update (ASU) 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability,
The carrying value of the debt, initially, the bond liability, is $990,000, computed as the number of bonds multiplied by the face amount per bond, multiplied by the issue percentage, reduced by the bond issue costs of $35,000:
1,000 bonds × $1,000 face × 0.99 = $990,000
$990,000 − $35,000 = $955,000
For the year ended December 31, 20X1, Tyre Co. reported pretax financial statement income of $750,000. Its taxable income was $650,000. The difference is due to accelerated depreciation for income tax purposes. Tyre’s effective income tax rate is 30%, and Tyre made estimated tax payments during 20X1 of $90,000. What amount should Tyre report as current income tax expense for 20X1?
$195,000. Tyre’s current income tax expense is simply taxable income multiplied by the effective income tax rate. (Note: Tyre also has a noncurrent deferred income tax liability in the amount of $30,000 ($100,000 timing difference multiplied by the 30% tax rate).)
Current income tax expense = Taxable income x Tax rate
= $650,000 x 0.30
= $195,000
How should a city’s general fund report the acquisition of a new police car in its governmental fund statement of revenues, expenditures, and changes in fund balances?
Expenditure. assets are not reported in a statement of revenues, expenditures, and changes in fund balance.
oncurrent assets or an asset labeled “property, plant, and equipment” would not be reported in any governmental fund financial statement that does not include noncurrent items.
At the acquisition date, July 2, 20X1, reporting unit R has a fair value of $370,000 and a carrying amount (including goodwill of $100,000) of $470,000. On December 31, 20X1, the fair value of the assets and liabilities assigned to reporting unit R is $330,000, and the fair value of R is $400,000. The goodwill impairment loss reportable is:
$30,000.
Impairment of goodwill is a two-step process:
Step 1, Compare:
(a)year-endfairvalueofreporting unit $400,000
(b)carryingamount,includinggoodwill$470,000
If (b) exceeds (a), go to step 2.
If (a) exceeds (b), no impairment.
Step 2, Compare:
(a)impliedfairvalueofreporting
unitgoodwill($400,000-$330,000)$70,000
(b)carryingamountofgoodwill$100,000
Since (b) exceeds (a) by $30,000, an impairment loss of $30,000 is recognized.
If (a) exceeds (b), no impairment.
Note: The impairment loss cannot exceed the recorded goodwill.
FASB ASC 815-10-50-1A requires that an entity that holds or issues derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments) disclose which of the following?
mo
All of the listed disclosures are required under FASB ASC 815-10-50-1A:
Its objectives for holding or issuing those instruments
Its context needed to understand those objectives
Its strategies for achieving those objectives
Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise’s carrying amount over its market value should be:
reported as a reduction in income.
FASB ASC 845-10-30-1 requires that “a transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset.”
Since the market value of the merchandise was less than its carrying amount, Evie Corp. should report the resulting loss as a reduction in income.
When computing purchasing power gain or loss on net monetary items, which of the following accounts is classified as nonmonetary?
Accumulated depreciation of equipment. Monetary assets are cash or items whose amounts are fixed in terms of numbers of dollars. All of the assets are monetary assets except for accumulated depreciation.
When would a company use the installment sales method of revenue recognition?
When installment sales are material, and there is no reasonable basis for estimating collectibility.
Under the installment sale method of recognizing revenue, recognition is deferred beyond the point of sale and is associated with the subsequent collection of payments. The rationale underlying the method is that the length of the installment contract and the nature of the contract itself impose uncertainty concerning collection such that dependable estimates of uncollectibles are not possible.
Blue Township has a number of outstanding bond issues that include a $4,000,000 general obligation bond that financed City Hall, a $2,000,000 revenue bond that financed upgrades to the water treatment plant, a $1,000,000 special assessment bond for sidewalks, and a $3,000,000 general obligation bond used for streets and roads. Revenues of the water fund, a proprietary fund, are expected to pay off the revenue bond. What should Blue Township report as long-term liabilities in the governmental activities column of the government-wide statement of net position?
$8,000,000
The obligations of the proprietary fund, the revenue bonds of $2,000,000, should be shown as a fund liability. The other bonds should be shown in the government-wide statements as a liability relating to governmental activities, but not shown in the fund statements. The general obligation debt consists of the $4,000,000 and $3,000,000 general obligation bonds as well as the special assessment bonds of $1,000,000. Special assessment debt is usually an obligation of the general government, although some costs may be defrayed with special assessments.
The excess of proceeds over the cost of treasury stock sold would be credited to what account under the cost method?
“additional paid-in capital”
Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30% stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per share. By what amount will Universe decrease stockholders’ equity for the dividend?
$0
Stock dividends are accounted for by reclassifying a portion of retained earnings as contributed capital. They do not reduce assets or increase liabilities. Therefore, total stockholders’ equity is not changed.
Isle Co. owned a copy machine that cost $5,000 and had accumulated depreciation of $2,000. Isle exchanged the copy machine for a computer that cost $4,000. Isle’s future cash flows are not expected to change significantly as a result of the exchange. What amount of gain or loss should Isle report and at what amount should it record the asset?
No gain or loss in the income statement; $3,000 asset in the balance sheet
Normally, in a nonmonetary exchange, the asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident.
However, there are three exceptions in which the exchange is recorded at the carryover amount, not fair value. One of those exceptions is for exchange transactions that lack commercial substance, as does the exchange above. Isle should record the new copy machine at the carryover amount of $3,000 and not any gain or loss.
During the year, Smith University’s board of trustees established a $100,000 fund to be retained and invested for scholarship grants. The fund earned $6,000 which had not been disbursed at December 31. What amount should Smith report in a quasi-endowment fund’s net assets at December 31?
$106,000
Since the principal of the endowment and the income from investment of endowment funds are both restricted to the purpose of funding scholarships, and the investment income remained undisbursed at the end of the fiscal year, the principal and income both contribute to the net assets of this specific fund.
