CPA FAR_TLR Flashcards

Question

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?

Answer 1

NO, Conditional promises to give are not recognized as revenue until all conditions are met.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

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.

Answer 6

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.

Answer 7

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.

Answer 8

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.

Answer 9

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).

Answer 10

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 ```

Answer 11

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

Answer 12

government-wide financial statements, fund financial statements, and the notes to the financial statements.

Answer 13

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.

Answer 14

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."

Answer 15

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.

Answer 16

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.

Answer 17

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).

Answer 18

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.

Answer 19

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.

Answer 20

a gain in an amount determined by the ratio of cash received to total consideration.

Answer 21

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.

Answer 22

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.

Answer 23

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.

Answer 24

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.

Answer 25

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.

Answer 26

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.

Answer 27

$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.

Answer 28

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.

Answer 29

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.

Answer 30

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).

Answer 31

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.

Answer 32

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.

Answer 33

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.

Answer 34

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.

Answer 35

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

Answer 36

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

Answer 37

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.

Answer 38

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.

Answer 39

$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.

Answer 40

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.

Answer 41

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).

Answer 42

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.

Answer 43

GASB has now codified all of its standards in the Codification of Governmental Accounting and Financial Reporting Standards.

Answer 44

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."

Answer 45

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."

Answer 46

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

Answer 47

1. The change in fair value of each significant type of investment 2. Investment income 3. Contributions from employers 4. Contributions from participants 5.Contributions from other identified sources 6.Benefits paid to participants 7. Payments to insurance entities to purchase contracts 8. Administrative expenses Only the net change in the actuarial present value of accumulated plan benefits is not included in this list.

Answer 48

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."

Answer 49

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.

Answer 50

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."

Answer 51

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.

Answer 52

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

Answer 53

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!

Answer 54

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.

Answer 55

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 =========

Answer 56

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.

Answer 57

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.

Answer 58

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

Answer 59

$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

Answer 60

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.

Answer 61

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.

Answer 62

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.

Answer 63

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.)

Answer 64

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.

Answer 65

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.

Answer 66

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.

Answer 67

Current rate method: used when the subsidiary functions in the local (foreign) currency Remeasurement method: used when the subsidiary functions in U.S. dollars

Answer 68

Current Rate Method 1. Assets/Liabilities: Convert at current exchange rate 2. Revenues/Expenses: Convert at weighted-average rate for the period 3. Retained Earnings: not actually converted, back into 4. C/S (common stock) and APIC (additional paid-in capital): Convert at historical rate 5. Dividends: Convert Using rate on DOD (date on distribution) 6. Translation Gains/Losses NOT on the income statement; go to OCI (other comprehensive income)

Answer 69

Remeasurement Method 1. Monetary Items: convert at current rate 2. Nonmonetary: convert at historical rate 3. Revenues/Expenses: convert at weighted-average rate for the period 4. Retained Earnings: not actually converted, back into 5. C/S and APIC: convert at historical rate 6. Dividends: convert using rate on DOD 7. Depreciation use historical rate (treat as non-monetary) 8. 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 2. Nonmonetary Items: items not fixed in terms of carrying value, but values change Fixed Assets, Inventory, Intangibles, Available for Sale Securities, and Trading Securities

Answer 70

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

Answer 71

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.

Answer 72

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

Answer 73

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

Answer 74

The inception of a lease is the date of the lease agreement. Rental expense should begin as of that date.

Answer 75

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.

Answer 76

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.

Answer 77

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

Answer 78

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

Answer 79

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

Answer 80

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

Answer 81

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.

Answer 82

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.

Answer 83

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.

Answer 84

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.

Answer 85

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.

Answer 86

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.

Answer 87

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 ========

Answer 88

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

Answer 89

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.

Answer 90

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.

Answer 91

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.

Answer 92

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).

Answer 93

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.

Answer 94

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.

Answer 95

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.

Answer 96

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.

Answer 97

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.)

Answer 98

$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.

Answer 99

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.

Answer 100

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.

Answer 101

$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).

Answer 102

$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.

Answer 103

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.)

Answer 104

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 ========

Answer 105

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.

Answer 106

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.

Answer 107

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.

Answer 108

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.

Answer 109

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.

Answer 110

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.

Answer 111

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.

Answer 112

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.

Answer 113

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.

Answer 114

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.

Answer 115

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.

Answer 116

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.

Answer 117

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.

Answer 118

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."

Answer 119

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 ```

Answer 120

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."

Answer 121

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.

Answer 122

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.

Answer 123

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.

Answer 124

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.

Answer 125

$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

Answer 126

To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences.

Answer 127

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.

Answer 128

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.

Answer 129

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.

Answer 130

amortized cost.

Answer 131

The change in the liability is recognized in profit or loss.

Answer 132

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.

Answer 133

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.

Answer 134

$1,314,600

Answer 135

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.

Answer 136

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%).

Answer 137

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.

Answer 138

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.

Answer 139

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.

Answer 140

$(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.

Answer 141

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.

Answer 142

$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

Answer 143

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

Answer 144

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

Answer 145

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.

Answer 146

$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).

Answer 147

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.

Answer 148

$8,500 Initial lease obligation on December 31, 20X1 $135,000 Less payment made on December 31, 20X1 - 20,000 -------- Lease obligation during 20X2 $115,000 ======== Portion of December 31, 20X2, payment that is interest = rate x obligation x time = 10% x $115,000 x 1 = $11,500 Portion of December 31, 20X2, payment that is related to lease obligation = payment - interest portion = $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.

Answer 149

Change in unrestricted net assets.

Answer 150

not reported on the balance sheet but disclosed in the notes to the financial statements.

Answer 151

lending institution.

Answer 152

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

Answer 153

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.

Answer 154

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

Answer 155

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.

Answer 156

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

Answer 157

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

Answer 158

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.

Answer 159

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.

Answer 160

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.

Answer 161

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.

Answer 162

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

Answer 163

carrying amount.

Answer 164

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.

Answer 165

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.

Answer 166

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.

Answer 167

$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.

Answer 168

$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.

Answer 169

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.

Answer 170

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.

Answer 171

$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.)

Answer 172

Dividend per share payout ratio as numerator and earnings per share not used.

Answer 173

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.

Answer 174

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.

Answer 175

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.

Answer 176

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.

Answer 177

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.

Answer 178

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.)

Answer 179

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.

Answer 180

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.

Answer 181

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

Answer 182

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).

Answer 183

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.”

Answer 184

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.

Answer 185

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.

Answer 186

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.

Answer 187

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.

Answer 188

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

Answer 189

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%).

Answer 190

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

Answer 191

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

Answer 192

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.

Answer 193

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.

Answer 194

a controlling majority of the members of its governing board are appointed by state government officials.

Answer 195

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.

Answer 196

As a decrease in temporarily restricted net assets and an increase in unrestricted net assets.

Answer 197

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.

Answer 198

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 ========== 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.

Answer 199

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

Answer 200

$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

Answer 201

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.

Answer 202

$30,000. Impairment of goodwill is a two-step process: Step 1, Compare: (a) year-end fair value of reporting unit $400,000 (b) carrying amount, including goodwill $470,000 If (b) exceeds (a), go to step 2. If (a) exceeds (b), no impairment. Step 2, Compare: (a) implied fair value of reporting unit goodwill ($400,000 - $330,000) $ 70,000 (b) carrying amount of goodwill $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.

Answer 203

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

Answer 204

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.

Answer 205

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.

Answer 206

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.

Answer 207

$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.

Answer 208

“additional paid-in capital”

Answer 209

$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.

Answer 210

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.

Answer 211

$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.