CPA FAR_TLR Flashcards
The budget for the City of Goodville for the year ending December 31 was adopted and recorded on January 2 of the same year. After recording the budget, the accounting records showed a debit balance of $50,000 in the Budgetary Fund Balance account. What does this indicate?
mo
Appropriations are $50,000 greater than estimated revenues. Below is a typical entry where expenditures exceed revenue.
Estimated Revenue Control 40,000
Budgetary Fund Balance 50,000
Appropriations Control 90,000
Roy City received a gift, the principal of which is to be invested in perpetuity with the income to be used to support the local library. In which type of fund should this gift be recorded?
Permanent fund
GASB Codification directs that resources that must be held as investment principal with earnings restricted to support the reporting government’s programs for a specific purpose must be accounted for in a permanent fund.
In its 20X1 income statement, Kilm Co. reported cost of goods sold of $450,000. Changes occurred in several balance sheet accounts as follows:
Inventory $160,000 decrease
Accounts payable-suppliers 40,000 decrease
What amount should Kilm report as cash paid to suppliers in its 20X1 cash flow statement, prepared under the direct method?
Cost of Goods Sold $450,000
Inventory decrease (160,000)
———
Purchases $290,000
=========
Purchases $290,000
Accounts Payable decrease 40,000
———
Cash paid to suppliers $330,000
=========
A decrease in accounts payable during the current period indicates that suppliers were paid an amount of cash greater than a number of the current period’s purchases. Therefore, adding the decrease in accounts payable to purchases of the period yields the cash paid to suppliers in the current period.
Which of the following lead(s) to the use of fund accounting by a governmental organization?
Financial Control?
Legal Restriction?
Financial control: Yes; Legal restrictions: Yes
Louisiana Designer Yarn, Inc., applies IFRS and does substantial research and development work in designing new processes to produce its products. One yarn-producing machine design, which is in an advanced stage of development, and which the company thinks its present prototype model should be both technologically feasible and affordable to produce, is still going to be developed, internally, for 18 months prior to being finished. Can the corporation recognize and capitalize any of the costs of developing the new machine design?
Yes, as long as the design is likely to be feasible and marketable or profitable to use internally for future production.
Once a development project reaches the stage of a working model or prototype, and is found to be technologically feasible and financially affordable to complete, then it can be capitalized, and additional development costs added to its cost on the company books. The asset can be intended for sale or internal use, so long as it is expected to be valuable for that purpose.
A non-governmental not-for-profit entity received the following donations of corporate stock during the year:
Donation 1 Donation 2
---------- ---------- Number of shares 2,000 3,000
Adjusted basis $ 8,000 $5,500
Fair market value at time of donation
8,500 6,000
Fair market value at year-end 10,000 4,000
What net value of investments will the organization report at the end of the year?
The FASB guidance provides that investments in equity securities (stock) with readily determinable market value are reported at market value. The question asks specifically for the end-of-year amount.
With respect to the income statement, what are U.S. GAAP and IFRS differences?
There are very few differences between International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP) income statements. Some of the differences follow:
Under IFRS, companies may classify expenses by either nature (salaries, rent, etc.) or function (cost of goods sold, sales, etc.).
Under IFRS, if a company uses the functional method, it must disclose expenses by nature in the notes to the financial statement.
Under IFRS, net income or loss is simply “income” or “loss.”
The IFRS definition of discontinued operations is narrower than that of U.S. GAAP.
True or False - FASB ASC 815-10-25-1 (Derivatives and Hedging—Recognition) provides that derivatives should be reported at cost?
FALSE: FASB ASC 815-10 is the authority for accounting for derivatives and hedging activities. FASB ASC 815-10-30-1 requires derivatives to be recognized as assets or liabilities on the balance sheet at fair value. The accounting for any gains or losses from hedge transactions depends, in part at least, on whether the hedge is designated as a hedge and qualifies for hedge accounting.
Marta City’s school district is a legally separate entity, but two of its seven board members are also city council members and the district is financially dependent upon the city. The school district’s financial activity should be reported in the city’s financial statements by:
discrete presentation. Because only two of the seven school board seats are occupied by council members, the governing body of the school board is not “substantially the same” as the city council. Thus, the blending method is not required. Discrete presentation should be used unless the financial activities of the two entities are so intertwined as to make them substantially the same entity.
GASB I60, Investments—Securities Lending, states that a government that (1) loans securities to a broker-dealer and (2) receives collateral in the form of other securities that the government cannot pledge or sell without borrower default should report:
the securities lent as assets.
the collateral received as assets.
a liability for the government’s obligation to return the collateral securities.
I only
The GASB Codification (Section I60.103) states: “Governmental entities should report securities lent (the underlying securities) as assets in their balance sheets.” Further, GASB I60.105 states that “securities lending transactions collateralized by letters of credit or by securities that the governmental entity does not have the ability to pledge or sell unless the borrower defaults should not be reported as assets and liabilities in the balance sheet.”
Basic earnings per share for income from continuing operations and for net income are reported:
Basic EPS is reported on the face of the income statement.
Anchor Co. owns 40% of Main Co.’s common stock outstanding, 75% of Main’s noncumulative preferred stock outstanding. Anchor exercises significant influence over Main’s operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main?
$75,000 An entity that exerts significant influence over another company in which it owns stock must use the equity method to account for its investment. Under this method, dividends received from an investee reduce the carrying amount of the investment but are not included in the income of the investor. But an investment in preferred stock does result in dividend income. Consequently, Anchor will report dividend income of $100,000 × 0.75 ($75,000).
When a loan receivable is impaired but foreclosure is not probable, which of the following may the creditor use to measure the impairment?
The loan’s observable market price
The fair value of the collateral if the loan is collateral dependent
Answer either I or II. Simply, there are three ways to measure the present fair value of an impaired loan and they are listed in FASB ASC 310-10-35-22:
- Present value of the expected future cash flows from the loan discounted at the loan’s original effective rate
- The amount the loan could be sold for
- The net realizable value of the available loan collateral
Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell’s truck originally cost $23,000, its accumulated depreciation was $20,000, fair value was $5,000. Highway’s truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?
Generally, a nonmonetary exchange should be based on the fair values of the assets exchanged—resulting in the immediate recognition of a gain or loss.
Exceptions to this treatment include the following:
*Fair value is not determinable
*Exchange transaction to facilitate sales to customers
*Exchange transaction that lacks commercial substance
Under these exceptions, no gains or losses are recognized. So it will be BOOK VALUE $3K + $700 Cash paid
Should Treasury Stock be shown as a net asset be reported in the balance sheet (statement of financial position)?
No. Treasury stock should be presented as a reduction of stockholder’s equity, not as an asset.
An investor uses the cost method to account for an investment in common stock classified as an available-for-sale security. Dividends received this year exceeded the investor’s share of investee’s undistributed earnings since the date of investment. The amount of dividend revenue that should be reported in the investor’s income statement for this year would be:
Under the cost method, an investor reports only dividends received as revenue. Only distributions from undistributed earnings are considered dividends.
What items are included in OCI?
Accumulated other comprehensive income (AOCI) is a component of equity on the balance sheet, presented separately from retained earnings and additional paid-in-capital.
FASB defines OCI as “revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income”
Foreign currency translation gains or losses
Gains and losses (effective portion only) on derivative instruments that qualify as cash flow hedges
Unrealized holding gains and losses on available-for-sale securities
Unrealized holding gains and losses that result from a debt security being transferred into the available-for-sale category from the held-to-maturity category
Pension or post-retirement gains or losses (not recognized immediately as a component of net periodic benefit cost)
Prior service costs or credits
At the inception of a capital lease, the guaranteed residual value should be?
included as part of minimum lease payments at present value. Capital lease accounting for a lessee involves:
1) determining the amounts and timing of all cash flows not considered executory costs. This would include minimum lease payments as well as guaranteed residual value(s).
2) computing the present value of the amounts in item 1 shown above. The sum of these present value amounts is capitalized as an asset.
Should unrealized gains and losses from the ineffective portion of a derivative properly designated as a cash flow hedge be included in OCI?
No, Unrealized gains and losses from the ineffective portion of a derivative properly designated as a cash flow hedge are recognized immediately in income.
Should unrealized holding gains or losses on securities classified as trading securities be included in OCI?
No, unrealized holding gains or losses on trading securities are recognized immediately in income.
The net asset reclassifications of a nongovernmental not-for-profit organization would be reported on which financial statement?
Statement of activities
An overfunded single-employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a:
An overfunded plan is recognized as an asset, but only in the noncurrent assets section. The asset is measured as the amount that plan asset fair value exceeds the projected benefit obligation.
When NFP accept unconditional promises should they recognized, an expense for estimated uncollectible promises should be recorded?
NO, NFPs should not record an expense for estimated uncollectible promises when promises to give are initially recognized. When NFPs recognize promises to give, they create an Allowance for Uncollectible Promises (or Contributions) but do not recognize Bad Debt Expense as a business does. Instead, the NFP recognizes the net realizable value of the contribution revenue (FASB ASC 958-605-30-4).
Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years. The market rate for a note of this type is 10%. On issuing the note, Jole should record:
Discount on note receivable: Yes; Prepaid asset: Yes
On March 31st, Child Care Centers, Inc., a not-for-profit entity, receives $10,000 to be used only upon completion of a new playroom that was 75% complete at December 31, 20X1. Would that amount be reported as contributions revenue in its 20X1 Statement of Activities?
NO, Conditional promises to give are not recognized as revenue until all conditions are met.
The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale?
Purchase returns. When applying the retail inventory method, one must compute the total cost and total retail amounts for goods available for sale. Some items are only included in one of these totals, sales returns and markups only go into the retail column, and freight in only goes into the cost column. Purchase returns are an adjustment to both columns.
Texas A&M University, a publicly held institution, is required to report under the standards of which of the following bodies?
Primarily GASB. The GASB is to establish accounting and reporting standards for activities and transactions of state and local governmental entities—which include states, counties, cities, and towns; independent school districts; state and local government educational institutions (colleges and universities); hospitals and other health care organizations; and charitable and other not-for-profit organizations that are government organizations. FASB establishes standards for all other entities.
Assuming constant inventory quantities, which of the following inventory costing methods will produce a lower inventory turnover ratio in an inflationary economy?
In an inflationary period, rising prices will cause LIFO cost of goods sold to be highest (from recent purchases) and LIFO ending inventory to be lowest (earliest purchases). FIFO will give opposite results, with the lowest cost of goods sold (from earliest purchases) and highest ending inventory (from recent purchases). Average costing will be in the middle of the other two on both measures.
Inventory turnover is the division of cost of goods sold by average inventory.
Since FIFO gives the lowest cost of goods sold and a relatively high ending inventory amount going into the denominator average, FIFO will produce the lowest inventory turnover ratio.
Lower numerators and higher denominators yield lower ratios.
Regarding valuation allowances in accounting for income taxes, the effect of a change in the opening balance is normally included in income from operations. True or False.
TRUE - The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.
GAAP provides that only deferred tax assets (not deferred tax liabilities) be reduced by a valuation allowance, but only if it is more likely than not (i.e., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance should reduce the deferred tax asset to the amount that is more likely than not to be realized, considering both positive and negative evidence.
What are the three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:
FASB ASC 845-10-30-3 provides three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:
Fair value is not determinable.
Exchange transaction is to facilitate sales for customers.
Exchange transaction lacks commercial substance.
In determining if a nonmonetary exchange has commercial substance, the key issue is to determine if the exchange is expected to significantly change the entity’s future cash flows.
What items should be reported as the net investment in capital assets in the government-wide statement of net assets position?
Governmental activities typically include (1) all governmental fund assets and liabilities, (2) general capital assets (including infrastructure such as streets, roads, and bridges), (3) general long-term liabilities, and (4) the assets and liabilities of internal service activities. Short term assets and short term liabilities are NOT included.
Restrictions of net position should be displayed on the face of the financial statements for debt covenants requiring resources to be set aside and enabling legislation identifying certain resources to be used for specific purposes. True or False?
TRUE Per GASB 2200.119, net position should be reported as restricted if use is constrained either by externally imposed conditions such as from creditors or grantors, or by legislation. The council’s actions do not constitute external constraints or enabling legislation.
The provisions of FASB ASC 718-10-25-2, “Recognition Principle for Share-Based Payment Transactions,” apply to all of the following transactions except those related to:
employee stock ownership plan instruments. FASB ASC 718-10-25-2 applies to all transactions in which an entity grants shares of its common stock, stock options, or other equity instruments to its employees, except for equity instruments held by an employee stock ownership plan (as per FASB ASC 718-10-15-7).
Pine Corp. is required to contribute, to an employee stock ownership plan (ESOP), 10% of its income after deduction for this contribution but before income tax. Pine’s income before charges for the contribution and income tax was $75,000. The income tax rate is 30%. What amount should be accrued as a contribution to the ESOP?
The contribution has to be 10% of the income after deducting the contribution amount. The income prior to the contribution is $75,000. Thus, the contribution amount, C, is:
0.1 (10%) × $75,000 – C
Solving the equation for C:
C = $7,500 - 0.1C 1.1C = $7,500 C = $7,500 ÷ 1.1 = $6,818
Name the components of other comprehensive income?
Comprehensive income comprises both of the following:
“All components of net income
“All components of other comprehensive income.”
FASB ASC 220-10-20
Some items included in comprehensive income include (FASB ASC 220-10-45-10A):
Foreign currency translation adjustments
Unrealized holding gains and losses that result from a debt security
Prior service costs or credits associated with pension or other postretirement benefits
The basic financial statements of a general purpose government should include:
government-wide financial statements, fund financial statements, and the notes to the financial statements.
A private not-for-profit hospital’s performance indicator, which reports the results of operations, includes additional classifications. What types of revenues are normally included in the other operating revenues classification?
For a hospital’s performance indicator, revenues other than patient service revenues, such as revenues from educational programs, would be considered “other revenues.” Gifts and contributions would not be considered operating revenues.
FASB ASC 360-10-15-4 requires testing for impairment loss for certain long-lived assets. Which of the following types of leases is tested for impairment?
Both I and II
FASB ASC 360-10-15-4 lists the following types of leases that are tested for impairment:
“Capital leases or lessees
“Long-lived assets of lessors subject to operating leases
“Proved oil and gas properties that are being accounted for using the successful-efforts method of accounting
“Long-term prepaid assets.”
A state government had the following activities:
I. State-operated lottery $10,000,000
II. State-operated hospital 3,000,000
Which of these activities should be accounted for in an enterprise fund?
BOTH!
GASB 1300.109.c states that enterprise funds should be employed when the pricing policies of the activity establish fees and charges to external users designed to cover its costs, including capital costs.
Covering costs is an important objective of a lottery operation, so a lottery should be accounted for in an enterprise fund.
GASB Ho5.102 notes that accounting for government-operated hospitals financed in whole or in part by fees charged is usually reported in an enterprise fund. Note: Governmental hospitals may also be component units.
Which of the following is reported as interest expense?
Pension cost interest
Amortization of discount of a note
Deferred compensation plan interest
Interest incurred to finance software development for internal use
Only the discount amortization is reported as interest expense. Pension cost interest is not directly reported but causes a change in pension expense. Deferred compensation plan interest is not directly reported but causes an increase in the plan. Software production costs are capitalized and eventually amortized or expensed.
What is the difference between discrete presentation and blending?
The discrete presentation is for affiliated entities whose resources are entirely for the benefit of the primary government.
The blending of financial results is allowed in cases such in cases where the public school system and the city are not separate legal entities. IF the city is responsible for the finances of the school system (the school board has no authority to levy taxes or issue bonds).
The circumstances when blending is required
The circumstances requiring blending are ANY of the following:
(1) The primary gov’t and component unit governing bodies are substantively the same and either there is a financial benefit/burden relationship present or the management of the primary gov’t has operational responsibility for the component unit at the level of management below the governing body.
(a) A primary gov’t and a component unit have substantively the same governing body if a voting majority of the PG governing body serves on and constitutes a voting majority of the component unit ‘s governing body.
(b) Operational responsibility means that the primary gov’t manages the CU essentially the same way it does its departments and agencies.
(2) The component unit serves or benefits solely the primary gov’t.
(3) The primary gov’t is expected to repay the total liabilities of the CU.
(4) The component unit is incorporated as a not-for-profit corporation in which the primary gov’t is the sole corporate member.
With regard to infrastructure, how should a change from depreciation to the modified approach be reported?
According to GASB 1400.107, footnote 9, a change from depreciation to the modified approach should be reported as a change in an accounting estimate, and this change would not require a restatement of prior periods.
Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values. Assuming that the exchange does not meet the criteria for commercial substance, Slate should recognize:
a gain in an amount determined by the ratio of cash received to total consideration.
In Year 1, Gamma, a not-for-profit organization, deposited at a bank $1,000,000 given by a donor to purchase endowment securities. The securities were purchased January 2, Year 2. At December 31, Year 1, the bank recorded $2,000 interest on the deposit. In accordance with the bequest, this $2,000 was used to finance ongoing program expenses in March of Year 2. At December 31, Year 1, what amount of the bank balance should be included as current assets in Gamma’s statement of financial position?
In this situation, the income from the endowment is available to fund current program expenses (those incurred within the year).
Since the principal of the endowment is now in security investments (which are not current assets), only the income related to the investment is current, since it is intended to be expended within the coming year.
Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil. On the date of the exchange, cost and market values of the oil were as follows:
Yola Co. Zaro Co. Cost $100,000 $126,000 Market values 120,000 150,000
In Zaro’s income statement, what amount of gain should be reported from the exchange of the oil?
This is a non-monetary transaction without commercial substance, and thus full gain is not recognized yet, but is instead deferred. Some cash is received, though, so some gain is recognized.
$30,000 cash out of a market value of the exchange of $150,000 is 20% of the transaction being in cash, so 20% of the gain is recognized now.
Zaro’s gain is $150,000 – $126,000, or $24,000, and 20% of $24,000 is $4,800, the gain recognized now.
The City of Mullins considers derived tax receivables collected within 60 days after the close of the fiscal year to be “available.” Furthermore, the City wrote off $30,000 of receivables as uncollectible during the year.
What effect would the write-off of the receivables during the year ultimately have on equity?
No effect. Receivables usually are reported at the same time that revenue is recognized. For reporting purposes, revenues should be reduced by an appropriate allowance for amounts estimated to be uncollectible when revenue is recognized, thus affecting equity at the time of recognition. To the extent of the allowance made ($50,000), the actual write-off of the receivable against the allowance would have no effect on equity.
West Co. paid $50,000 for an intangible asset other than goodwill. Fair value of the asset is $55,000. West signed a contract to sell the asset for $10,000 in 10 years. What amount of amortization expense should West record each year?
The amount of an intangible asset to be amortized is the amount initially assigned to that asset less any residual value. The residual value is the estimated fair value of the intangible asset at the end of its useful life to the reporting entity less any disposal costs. The residual value should be assumed to be zero unless at the end of its useful life the asset is expected to continue to have a useful life to another entity and the reporting entity has a commitment from a third party to purchase the asset at the end of its useful life.
In this case, the amount to be amortized is $40,000 ($50,000 – $10,000) over 10 years, or $4,000 a year.
What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization?
Residual interest
Ownership interest
Donor’s interest
Equity interest
Net assets of a nongovernment not-for-profit are defined to be the residual interest in the assets of the entity that remains after deducting its liabilities. In a business enterprise, its equity represents the ownership interest, but not for a nongovernmental not-for-profit.
New Town’s review of payroll records indicates that employees providing governmental services have accrued $250,000 of vacation pay and employees of the proprietary funds have accrued $100,000 of vacation pay. It is anticipated that 5% of the accrued vacation pay will be claimed by employees within the first 60 days of 20X1. How would the vacation pay liability be recognized on the financial statements issued at December 31, 20X0?
Governmental fund liability: $12,500; Proprietary fund liability: $100,000; Governmental activities liability: $250,000; Business-like activities liability: $100,000
As employees earn the right to claim vacation pay, a compensated absence, the liability is accrued and reported in full in the proprietary fund and government-wide financial statements (governmental activities and business-like activities). The portion reported in the government-wide financial statements as governmental activities is a general long-term liability. The governmental funds, using the modified accrual method, report only the portion of the liability expected to be claimed by employees in the first 60 days of the new fiscal year.
Orange Township has two general obligation bond issues outstanding. One is for $2,000,000 and the other is for $3,000,000. Cash of $62,500 has been set aside in debt service funds, per the annual budget, to pay the interest due on these issues January 1, 20X2. What is the net liability that must be shown in the fund-based statements prepared as of December 31, 20X1?
$0. The debt is a long-term liability and would not appear on the balance sheets of the governmental funds, although it would be reported in the governmental activities section of the government-wide statement of net position. The interest that is due very early in the following year has been deposited in the debt service funds. The expenditure for debt service would usually be recognized in the year of payment. The expenditure and related liability could be recognized in the debt service fund but is not required in the December 31, 20X1, statements. Therefore, the correct answer is $0.
Civic Town’s basic financial statements included information for the nonmajor governmental funds in combined form. The aggregated data included expenditures summarized by major functional classifications. Narrative explanations are needed to accompany the combining statements of revenues, expenditures, and changes in fund balances to provide greater detail and assure the reader’s understanding of the statements. The narrative should appear:
Narrative explanations of combining and individual fund statements should be presented on divider pages, directly on the statements and schedules, or in a separate section according to GASB 2200.211. Notes to the financial statements, RSI, or MD&A are not options for locating these narratives.
A summary reconciliation between fund financial statements and government-wide financial statements is required at the bottom of the fund statements or in an accompanying schedule. For the governmental activities portion of the government-wide statement of net position, the reconciliation should tie with the fund balance(s) of:
all governmental and internal service funds that provide services to the governmental functions. The governmental activities portion of the government-wide statements reports the functions also reported in the general and other governmental funds. Internal service funds providing services for governmental functions are also included. Fiduciary fund information is not shown within the government-wide financial statements.
Forkin Manor, a nongovernmental not-for-profit, is interested in having its financial statements reformatted using terminology that is more readily associated with for-profit entities. The director believes that the term “operating profit” and the practice of segregating recurring and nonrecurring items more accurately depict the organization’s activities. Under what condition will Forkin be allowed to use “operating profit” and to segregate its recurring items from its non-recurring item in its statement of activities?
The organization reports the change in unrestricted net assets for the period.
FASB ASC 958-225-45-9 allows a great deal of flexibility in presentation format for the statement of activities. Amounts required are changes in net assets for each of the three classes (unrestricted, temporarily restricted, and permanently restricted) and totals for revenues, expenses, gains, losses and the amounts of assets released from restriction (see FASB ASC 958-225-45-1 and 45-10).
Which of the following information about threatened litigation should not be considered to determine whether an accrual is appropriate prior to an issuance of a company’s financial statements?
Proper accounting for loss contingencies (including pending or threatened litigation) requires an assessment of the probability that a future event or events will confirm a loss or asset impairment or the incurrence of a liability as of the date of the financial statements (not when management becomes aware of the event). Loss contingencies are only accrued if both (1) it is probable that there will be an unfavorable (i.e., loss) outcome and (2) the amount can be reasonably estimated.
How to determine the payable to the parent for an intercompany sale (when reporting a consolidated financial format)?
Total separate accounts receivable = $52,000 + $38,000 = $90,000
Less consolidated accounts receivable $78,000
Accounts receivable eliminated in consolidation $12,000
Intercompany receivables and payables are always eliminated in the consolidation process. Therefore, the $12,000 eliminated must represent the amount Shel owed to Pare for intercompany sales.
Rye Co. purchased a machine with a 4-year estimated useful life and an estimated 10% salvage value for $80,000 on January 1, 20X0. In its income statement, what would Rye report as the depreciation expense for 20X2 using the double-declining-balance method?
Double-declining-balance rate = 2 (1/4 years) = .50/year
20X0 DDB depre. = .50 ($80,000) = $40,000
20X1 DDB depre. = .50 ($80,000-$40,000) = $20,000
20X2 DDB depre. = .50 ($80,000-$40,000-$20,000) = $10,000. Notice that salvage value is not used in the depreciation formula, but the plant asset cannot be depreciated below its salvage value.
Valley Town’s public school system is administered by a separately elected board of education. The board of education is not organized as a separate legal entity and does not have the power to levy taxes or issue bonds. Valley’s city council approves the school system’s budget. How should Valley report the public school system’s annual financial results?
Discrete presentation, no; Blended, yes.
The blending of financial results is allowed as the public school system and the city is not separate legal entities. The city is responsible for the finances of the school system (the school board has no authority to levy taxes or issue bonds).
The discrete presentation is for affiliated entities whose resources are entirely for the benefit of the primary government. The school system does not operate for the sole benefit of the town.
The following information is relevant to one of the City of Mullins’ General Fund’s derived tax revenues:
Fiscal year-end June 30
Beginning receivables $450,000
Beginning deferred revenues 100,000
Beginning allowance for doubtful accounts 50,000
Receipts 1,250,000
Ending receivables 600,000
Receivables collected 6/30 - 8/30 125,000
Ending allowance for doubtful accounts 60,000
The City of Mullins considers derived tax receivables collected within 60 days after the close of the fiscal year to be “available.” Furthermore, the City wrote off $30,000 of receivables as uncollectible during the year.
What would be the amount of deferred revenues reported at the fund level for year-end?
At the fund level, derived tax revenues are reported using the modified accrual method. Using modified accrual, that portion of the ending receivable which is measurable but not available, or accounted for as an allowance, is accounted for as deferred revenue.
Deferred Revenues
Ending receivable $600,000
Less collections June 30 through August 30 (125,000)
Less ending allowance for doubtful accounts (60,000)
$415,000
Steam Co. acquired equipment under a capital lease for six years. Minimum lease payments were $60,000 payable annually at year-end. The interest rate was 5% with an annuity factor for six years of 5.0757. The present value of the payments was equal to the fair market value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease?
The initial obligation would be capitalized at $60,000 × 5.0757 = $304,542.
Initial obligation $304,542
Interest rate (5%) x .05
——–
Interest expense $ 15,227
An entity purchased new machinery from a supplier before the entity’s year-end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. Under IFRS, what is the proper accounting treatment for the freight and interest costs related to the machinery purchase?
The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.
The costs to buy equipment, along with the costs to bring it to its location for use and make it ready for use, are capitalized into the cost of the equipment. Any interest costs in financing the purchase of equipment (which is otherwise ready to use) are finance (interest) costs and are expensed.
What is the major difference between an exchange transaction and a nonexchange transaction for governmental units?
For governmental units, an exchange transaction involves giving and receiving equal value in a transaction. A nonexchange transaction (such as property tax collected or grant provided) means the government receives value from another party without directly providing value or provides value to another party without directly receiving value.
A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized?
$200,000 The three stages for internally developed software are the preliminary project stage, the application development stage, and the post-implementation-operation stage. All costs in this stage, including the investigation the feasibility of developing its own software, should be expensed. Costs incurred in the application development stage, including writing the code, are usually capitalized, except for training costs, which are expensed. The company should only capitalize the $200,000 paid to the developers.
True or False - Fair value is a market-based measurement?
True. FASB ASC 820-10-20 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability; it is a market-based measurement.
A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company’s annual financial statements?
The company’s accounting policy for the investment.
Accounting policy disclosure includes the selection of accounting principles from existing acceptable methods. This would include the company’s use of the equity method. The equity method must be used if the company has significant influence over the company whose stock has been acquired. Generally, 20% ownership is evidence of significant influence, but it is possible that other factors would indicate otherwise. Consequently, the use of the equity is the selection of an accounting principle from existing alternatives (equity method or cost method).
What are the three groups of primary users of a government’s external financial reports:
There are three groups of primary users of a government’s external financial reports: (1) the citizenry to whom the government is primarily accountable, including taxpayers, voters, service recipients, media, advocate groups, and public finance researchers; (2) legislative and oversight bodies, including members of state legislatures, county commissions, city councils, boards of trustees and school boards, and executive branch officials with oversight responsibility over other levels of government; and (3) investors and creditors, including individual and institutional investors and creditors, municipal security underwriters, bond rating agencies, bond insurers, and financial institutions.
To determine the accounting treatment for a transaction, a governmental entity must first refer to:
GASB has now codified all of its standards in the Codification of Governmental Accounting and Financial Reporting Standards.
A business combination is accounted for properly as an acquisition (initiated in a fiscal year beginning after December 15, 2008). Direct costs of combination, other than registration and issuance costs of equity securities, should be:
Deducted in determining the net income of the combined corporation for the period in which the costs were incurred.
Business combinations accounted for as an acquisition should treat expenses related to the combination as follows: (1) Out-of-pocket costs such as fees of finders and consultants are expensed. (2) Issuance costs such as SEC filing fees are charged to the paid-in-capital account.
FASB ASC 805-10-25-23 states the following: “Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.”
Pal Corp.’s 20X1 dividend income included only part of the dividend received from its Ima Corp. investment. The balance of the dividend reduced Pal’s carrying amount for its Ima investment. This reflects that Pal accounts for its Ima investment by the:
Pal Corp. recorded the receipt of the dividends received as follows:
Debit Credit Cash XXX Dividend Income XX Investment in Ima Corp. XX
This is in accord with the discussion in FASB ASC 325-20-35-1 describing application of the cost method: “Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment.”
Indicators of an investor’s ability to exercise significant influence over the operating and financial policies of an investee?
As a general rule, ownership of less than 20% (direct or indirect) of the voting stock of the investee leads to the presumption that an investor does not have the ability to exercise significant influence. This presumption can be overcome, however, if the ability to exercise significant influence can be demonstrated in other ways. Examples of such circumstances include the following:
Representation on the investee’s board of directors
Participation in the investee’s policy-making processes
Material intercompany transactions with the investee
Interchange of managerial personnel
Technological dependency of the investee on the investor
The statement of changes in net assets must include:
- The change in fair value of each significant type of investment
- Investment income
- Contributions from employers
- Contributions from participants
5.Contributions from other identified sources
6.Benefits paid to participants - Payments to insurance entities to purchase contracts
- Administrative expenses
Only the net change in the actuarial present value of accumulated plan benefits is not included in this list.
The fair value option established by FASB ASC 825-10 contains what requirements?
Answer = The statement permits election of fair value measurement on a contract-by-contract basis.
FASB ASC 825-10-25-1 permits the fair value election but does not require it. Unrealized gains and losses on these items are reported in earnings, not directly to retained earnings: “This Subtopic permits all entities to choose, at specified election dates, to measure eligible items at fair value (the ‘fair value option’).”
FASB ASC 825-10-25-2 requires that the fair value option be applied contract by contract: “The decision about whether to elect the fair value option:
“Shall be applied instrument by instrument, except as discussed in [FASB ASC] 825-10-25-7
“Shall be irrevocable (unless a new election date occurs, as discussed in [FASB ASC] 825-10-25-4)
“Shall be applied only to an entire instrument and not to only specified risks, specific cash flows, or portions of that instrument.”
During the current year, Xan, Inc., had the following activities related to its financial operations:
Payment for the early retirement of long-term bonds
payable (carrying amount $370,000) $375,000
Distribution of cash dividend declared in previous
year to preferred shareholders 31,000
Carrying amount of convertible preferred stock
in Xan, converted into common shares 60,000
Proceeds from sale of treasury stock (carrying
amount at cost, $43,000) 50,000
In Xan’s current-year statement of cash flows, net cash used in financing operations should be:
The net cash used in financing operations is $356,000, calculated as follows:
Payment for early retirement of long-term bonds
$375,000
Dividend paid 31,000
Proceeds for sale of treasury stock (50,000)
Net cash used $356,000
There is no cash involved in the conversion of stock. Only converting stock from one type to another. Treasury Stock is subtracted because assuming the company uses cash to purchase these shares, the total amount of cash the company has decreases as a result of financing operations.
According to the FASB’s conceptual framework, asset valuation accounts are:
neither assets nor liabilities. A valuation account is “a separate item that reduces or increases the carrying amount of an asset is sometimes found in financial statements. For example, an estimate of uncollectible amounts reduces receivables to the amount expected to be collected, or a premium on a bond receivable increases the receivable to its cost or present value. Those “valuation accounts” are part of the related assets and are neither assets in their own right nor liabilities.”
The criterion for classifying a lease as a capital lease by a lessee?
The FASB established four basic lease capitalization criteria to be used by both the lessor and lessee; only one must be met to consider the lease a capital lease. The four criteria are:
the lease transfers ownership of the property to the lessee by the end of the lease term;
the lease contains a bargain purchase option;
the lease term is 75% or more of the estimated economic life of the leased asset; or
the present value of the minimum lease payments is 90% or more of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor.
For exchanges of assets lacking in commercial substance, what approach should be used?
According to FASB ASC 360-10-40-4, an impairment loss is recognized on an exchange of similar productive assets if the carrying amount of the asset exceeds its fair value on the date of exchange. Exchanges should be based upon FV unless the exchange lacks commercial substance.
For exchanges of assets lacking in commercial substance, use the Book Value approach.
• Record new asset at the adjusted book value of the old
• Normally, defer/ignore gains; recognize losses
If cash (i.e., boot) is received as part of an exchange lacking commercial substance, how do you handle the gain?
If cash (i.e., boot) is received as part of an exchange lacking commercial substance, a portion of the gain must be recognized.
Cash divided by
FV of New Asset Received x Realized Gain
*Realized gain = Cash + FV received – Old BV
NOTE: you only do this when you RECEIVE the money not when you pay it!
With respect to the categories of assets, liabilities, and stockholders’ equity presented on the balance sheet (statement of financial position), what are U.S. GAAP and IFRS differences?
The categories of assets, liabilities, and stockholders’ equity are quite similar within U.S. GAAP and IFRS (International Financial Reporting Standards). However, IFRS statements may present property, plant, and equipment first in the balance sheet.
Under the installment sales method when and how is revenue recognized?
Under the installment sales method of recognizing revenue, recognition is deferred beyond the point of sale and is associated with the subsequent collection of payments. one must compute the annual gross profit percentage on sales for the year. As the installment receivables are received in cash, the gross profit is recognized as the gross profit percentage multiplied by the cash collections for the period.
Example:
Gross profit on sale = $1,500,000 - $1,000,000 = $500,000
Gross profit rate = $500,000 / $1,500,000 = 33-1/3%
Cash collected in 20X1 ($300,000 + $444,000) $744,000
Less interest collected ($444,000 - $300,000) 144,000
———
Cash collected from sales 600,000
Times gross profit rate x 33-1/3%
———
Gross profit reported in 20X1 $200,000
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A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts would be decreased by the:
cash proceeds received. When applying group or composite depreciation methods, when one sells an asset, the cost of the asset is removed, and the accumulated depreciation is assumed to be equal to the difference between cash received and cost.
When the asset cost and this accumulated depreciation amount are both removed, the carrying amount of the asset accounts is decreased by the cash proceeds exactly.
How should unconditional promises to give received by a nongovernmental not-for-profit entity that will be collected over more than one year be reported?
Answer = Contributions receivable, valued at their present values.
Unconditional contributions receivable expected to be collected over more than one year should be valued using present discounted value techniques and appropriate assumptions.
The contributions receivable are valued at present values, not future values. The contributions should be recognized as revenue in the period they are made and not deferred.
Tam Co. reported the following items in its year-end financial statements:
Capital expenditures $1,000,000
Capital lease payments 125,000
Income taxes paid 325,000
Dividends paid 200,000
Net interest payments 220,000
What amount should Tam report as supplemental disclosures in its statement of cash flows prepared using the indirect method?
Regardless of whether the direct or indirect method is used to determine cash flows from operating activities, the following items are required to be disclosed:
Amount of income taxes paid during the period ($325,000)
Amount of interest paid during the period ($220,000)
$325,000 + $220,000 = $545,000
During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma’s basic earnings per share for the current year?
$7.36. Convertible bonds do not affect basic earnings per share. They are used in computing diluted earnings per share. When the preferred stock dividend preference is cumulative, the current-year dividend on preferred stock must be deducted each year in computing the numerator for basic earnings per share, regardless of the amount of preferred dividends actually declared and/or paid.
Comma’s basic earnings per share for the current year is:
($200,000 - $16,000) ÷ 25,000 weighted-average shares outstanding
$184,000 ÷ 25,000 shares = $7.36 per common share
Restorations of carrying value for long-lived assets are permitted if an asset’s fair value increases subsequent to recording an impairment loss for which of the following?
A long-lived asset classified as held for sale (disposal) must be measured at the lower of its carrying amount or fair value less cost to sell.
A loss should be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain should be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized for a write-down to fair value less cost to sell.
At which of the following amounts should a nongovernmental not-for-profit entity report investments in debt securities?
Quoted market prices. Investments in debt securities should be reported at market prices because that is the source of readily available fair value information. Discounted expected future cash flows are required to value financial assets for which there is no market that can provide fair value information. Historical cost is used to value acquisitions of property, plant, and equipment. Liquidation values generally are used when liquidation of an entity is imminent.
Which of the following are required as part of the filing of the Form 10-Q?
Form 10-Q is the quarterly report required to be filed with the SEC by all publicly traded companies. The Form 10-Q contains financial statements, a discussion from the management, and a list of “material events” that have occurred with the company.
If a premium on a bonds payable transaction is not amortized, what are the effects on interest expense and total stockholders’ equity?
Interest expense: overstated; Total stockholders’ equity: understated. When a bond is issued for a premium, then the issuer receives more than the face amount of the debt upon issuance. Thus, the issuer will pay back (the face amount) less than the amount received. The additional receipts lower the interest expense over the course of the repayment, since the overall net repaid amount is less. As the bonds are repaid, the premium is amortized and lowers the interest expense taken over the term of the bond. If the amortization is not taken, then the interest expense is overstated, and the net income understated. (Thus, retained earnings and stockholder’s equity are also too low.)
With regard to infrastructure, how should a change from depreciation to the modified approach be reported?
According to GASB 1400.107, footnote 9, a change from depreciation to the modified approach should be reported as a change in an accounting estimate, and this change would not require a restatement of prior periods.
In addition to the most recent quarter-end, for which of the following periods is the company required to present balance sheets on Form 10-Q?
Form 10-Q is used to file quarterly reports with the SEC. Required financial statements include a quarterly and end of the preceding fiscal year balance sheet. If the company is subject to seasonal fluctuations, a balance sheet for the corresponding quarter of the prior fiscal year is required.
When remeasuring foreign currency financial statements into the functional currency, should inventories carried at cost be remeasured using historical exchange rates?
YES! FASB ASC 830-10-45-18 provides guidance for the remeasurement (i.e., translation) of the books of record into the functional currency. Specifically, a listing of accounts to be remeasured using historical exchange rates is provided and inventories carried at cost appears in that listing.
Note: Remeasurement using historical rates is the exception to the general guidance of using the current exchange rate for all assets and liabilities. Only those items on this listing are remeasured using historical rates.
What are the two types of Translation Methods?
Current rate method: used when the subsidiary functions in the local (foreign) currency
Remeasurement method: used when the subsidiary functions in U.S. dollars
Current rate method
Current Rate Method
- Assets/Liabilities: Convert at current exchange rate
- Revenues/Expenses: Convert at weighted-average rate for the period
- Retained Earnings: not actually converted, back into 4. C/S (common stock) and APIC (additional paid-in capital): Convert at historical rate
- Dividends: Convert Using rate on DOD (date on distribution)
- Translation Gains/Losses NOT on the income statement; go to OCI (other comprehensive income)
Remeasurement method
Remeasurement Method
- Monetary Items: convert at current rate
- Nonmonetary: convert at historical rate
- Revenues/Expenses: convert at weighted-average rate for the period
- Retained Earnings: not actually converted, back into 5. C/S and APIC: convert at historical rate
- Dividends: convert using rate on DOD
- Depreciation use historical rate (treat as non-monetary)
- Remeasurement Gains/Loss do go to the income statement
Monetary Versus Nonmonetary Items
1. Monetary Items: items whose amounts are fixed in terms of currency by contracts or otherwise
Cash, Accounts Receivable, Held to Maturity securities, Accounts Payable, Notes Receivable, Notes Payable, Bonds Payable
- Nonmonetary Items: items not fixed in terms of carrying value, but values change Fixed Assets, Inventory, Intangibles, Available for Sale Securities, and Trading Securities
FRS (International Financial Reporting Standards) defines currencies as three types:
IFRS (International Financial Reporting Standards) defines currencies as
a. Functional: the currency of the primary economic environment in which the entity operates
b. Foreign: currency other than functional
c. Presentation: currency in which the financial statements are presented
2. If functional currency = presentation currency, gains/losses on translation are recognized as profit or loss in the period
3. If functional currency ≠ presentation currency, translation gains/losses are recorded in OCI
