cpa_-_far_copy_20190610235057 Flashcards

Question 1

Q

Which one of the following is not a legal form of business combination?

Consolidation.
Merger.
Pooling of interests.
Acquisition.

Answer

A

Pooling of interests.A pooling of interests is not one of the three legal forms of business combinations, which are: (1) merger, (2) consolidation, and (3) acquisition. A pooling of interests is a method of accounting for a business combination, but under GAAP, it cannot be used after June 30, 2001.

Question 2

Q

Under normal circumstances, what minimum level of voting ownership is considered to give the investor control over the investee?

10+%
20+%
50+%
100%

Answer

A

50+%In the absence of circumstances that restrict an investor from exercising its ownership rights, owning 50+% of the voting securities will give the investor control over the investee. Since it has majority ownership, it can elect the Board of Directors of the investee and, thus, control the operations of the investee.

Question 3

Q

For business combinations, which one of the following statements correctly reflects the determination of the accounts and amounts for the entry to record the combination?

Legal form determines both the entry accounts and entry amounts.
Legal form determines the entry accounts; accounting method determines entry amounts.
Legal form determines entry amounts; accounting method determines entry accounts.
Accounting method determines both the entry accounts and entry amounts.

Answer

A

Legal form determines the entry accounts; accounting method determines entry amounts.The legal form of a business combination determines the entry accounts (i.e., which accounts to debit and/or credit), and the accounting method (acquisition method) determines the amounts at which the entries will be made (i.e., fair value).

Question 4

Q

If, as a result of gaining control of another entity, the acquiring entity recognizes an investment in the acquired entity on its books, which of the following legal forms of business combination could have occurred? Merger Consolidation Acquisition

Answer

A

Merger - NO Consolidation - NO Acquisition - YES
In an acquisition, the acquiring entity recognizes (debits) on its books as an investment in the acquired entity, but in a merger and in a consolidation, the assets and liabilities of the acquired entity/entities are recorded on the books of the acquiring entity, not an investment in the acquired entity. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities, with the acquired entity a subsidiary of the acquiring entity. In a merger and in a consolidation, at least one preexisting entity ceases to exist, and the assets and liabilities are recorded on the books of the surviving entity.

Question 5

Q

In which of the following legal forms of business combination are the assets and liabilities of an acquired entity or entities recorded on the books of the acquiring entity? Merger Acquisition Consolidation

Answer

A

Merger - YES Acquisition - NO Consolidation - YES
In a merger and in a consolidation, the assets and liabilities of the acquired entity/entities are recorded on the books of the acquiring entity, but in an acquisition, the assets and liabilities of the acquired entity remain on the books of the acquired entity. In a merger and in a consolidation, at least one preexisting entity ceases to exist, and the assets and liabilities are recorded on the books of the surviving entity. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities.

Question 6

Q

In which of the following legal forms of business combination are two or more entities combined into one new entity? Merger Consolidation Acquisition

Answer

A

Merger - NO Consolidation - YES Acquisition - NO
Only a legal consolidation results from the combination of two or more existing entities into one new entity. In a merger, one preexisting entity is combined into another preexisting entity; no new entity is formed. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities; no new entity is formed.

Question 7

Q

Topco owns 60% of the voting common stock of Midco and 40% of the voting common stock of Botco. Topco wishes to gain control of Botco by having Midco buy shares of Botco’s voting stock. Which one of the following minimum levels of ownership of Botco must Midco have in order for Topco to have controlling interest of Botco’s voting stock?

11%
17%
26%
50+%

Answer

A

11%In order for Topco to gain control of Botco, it must own, either directly or indirectly, more than 50% of Botco’s voting stock. Since it directly owns 40% of Botco’s voting stock, it must acquire control over 10+% more. Also, since Topco owns 60% of Midco, it controls Midco. Therefore, if Midco acquires 11% of Botco, Topco will be able to exercise 51% of Botco’s voting stock - 40% directly and 11% indirectly through its control of Midco.

Question 8

Q

If a business combination is effected through an exchange of equity interests, assuming all other factors are equal, which one of the following independent circumstances would not indicate the likely acquirer in a business combination?

The combining entity whose owners have the larger portion of voting rights in the combined entity.
The combining entity whose owners have the ability to select or remove a voting majority of the governing body of the combined entity.
The combining entity whose debt-holders have the larger portion of the debt of the combined entity.
The combining entity whose former management dominates the combined entity.

Answer

A

The combining entity whose debt-holders have the larger portion of the debt of the combined entity.Because debt-holders do not have voting rights and cannot exercise control over an investee, the combining entity whose debt-holders have the larger portion of the debt of the combined entity by itself would not indicate that the entity is an acquirer in a business combination.

Question 9

Q

Which of the following statements concerning the acquisition date of a business combination is/are correct? The acquisition date may be before the closing date. The acquisition date may be on the closing date.
The acquisition date may be after the closing date.

Answer

A

The acquisition date may be before the closing date. - YES The acquisition date may be on the closing date. - YES
The acquisition date may be after the closing date. - YES

All three statements are correct. The acquisition date may be before the closing date, on the closing date, or after the closing date, if by agreement or otherwise the acquirer gains control of the acquiree at an earlier or later date than the closing date.

Question 10

Q

When a new entity is formed to effect a business combination, which of the following statements, if any, is/are correct? A legal consolidation has occurred. The new entity is always the acquirer in the business combination.

Answer

A

A legal consolidation has occurred. - YES The new entity is always the acquirer in the business combination. - NO
Statement I is correct; Statement II is not correct. When a new entity is formed to effect a business combination, a legal consolidation has occurred (Statement I), but the new entity is not always the acquirer in the combination (Statement II). If the new entity transfers cash or other assets or incurs liabilities to effect the combination, the new entity is likely the acquirer, but if the new entity issues equity interest to effect the business combination, one of the pre-existing combining entities must be the acquirer.

Question 11

Q

The acquisition date of a business combination is generally which one of the following?

The effective date.
The closing date.
The settlement date.
The recording date.

Answer

A

The closing date.The acquisition date of a business combination is the date on which the acquiring entity obtains control of the acquired business; usually, it is also the closing date (of the business combination).

Question 12

Q

At the closing date of a business combination, goodwill was recognized. During the subsequent measurement period, additional identifiable assets were properly recognized as part of the business combination. If no other changes occurred during the measurement period, which one of the following would be the effect, if any, of the additional assets recognized on the amount of goodwill recognized in the combination?

No change in the amount of goodwill recognized.
An increase in the amount of goodwill recognized.
A decrease in the amount of goodwill recognized.
An increase or decrease in the amount of goodwill recognized, depending on the underlying reason(s) for the goodwill.

Answer

A

A decrease in the amount of goodwill recognized.The recognition of additional identifiable assets would result in a decrease in the amount of goodwill initially recognized in a business combination. Since goodwill is basically the difference (residual) between the investment fair value and the fair value of the net identifiable assets acquired, an increase in the identifiable assets will result in a decrease in the amount of goodwill.

Question 13

Q

In which one of the following cases is Company A most likely to be the acquirer of Company B in a business combination?

Company A owns 80% of Company B’s long-term debt.
Company A owns 40% of Company B’s voting stock and 40% of Company C’s voting stock, which owns 20% of Company B’s voting stock.
Company A owns 35% of Company B’s voting stock and 60% of Company C’s voting stock, which owns 20% of Company B’s voting stock.
Company A owns 40% of Company B’s outstanding bonds and 20% of Company B’s voting stock.

Answer

A

Company A owns 35% of Company B’s voting stock and 60% of Company C’s voting stock, which owns 20% of Company B’s voting stock.Generally, to be an acquirer, an entity must own, either directly or indirectly, more than 50% of the voting stock of another entity. In this case, Company A owns 35% of Company B directly and would control 20% indirectly, or a total of 55%. (Since Company A owns 60% of Company C, it has absolute control of C and could control C’s 20% ownership of B.) Thus, Company A would control Company B and likely would be an acquirer in a business combination.

Question 14

Q

Which one of the following correctly describes the maximum length of the measurement period for a business combination?

The acquisition date of the business combination.
The end of the annual fiscal period in which the combination occurs.
One year from the acquisition date of the combination.
Indefinite, until all information about accounts and amounts is known.

Answer

A

One year from the acquisition date of the combination.The measurement period may extend up to one year from the acquisition (closing) date of a business combination. The measurement period is the period after the acquisition date during which the acquirer may adjust any provisional amounts recognized as part of the business combination, and it may extend for as long as one year after the acquisition date.

Question 15

Q

Which of the following statements, if any, concerning the accounting for business combinations is/are correct? All business combinations in the U.S. are subject to the acquisition accounting requirements of ASC 805, “Business Combinations.” The acquisition accounting requirements of ASC 805, “Business Combinations,” are identical to those of IFRS #3, “Business Combinations.”

Answer

A

NEITHER.either statement is correct. No business combinations in the U.S. are subject to the acquisition accounting requirements of ASC 805 (Statement I). That pronouncement specifically excludes certain combinations, including the formation of a joint venture, the acquisition of assets that do not constitute a business, a combination between entities under common control, a combination between not-for-profit organizations, and the acquisition of a for-profit entity by a not-for-profit organization. In addition, the requirements of ASC 805 are not identical to those of IFRS #3 (Statement II). Differences exist between the two pronouncements in the areas of scope; the definition of control; how fair value, contingencies, employee benefit obligations, noncontrolling interest, and goodwill are measured; and disclosure requirements.

Question 16

Q

Which one of the following would be subject to the acquisition accounting requirements of ASC 805, “Business Combinations?”

Formation of a joint venture.
Acquisition of a manufacturing entity by a holding company.
Acquisition of a for-profit entity by a not-for-profit organization.
Combination of entities under common control.

Answer

A

Acquisition of a manufacturing entity by a holding company.The acquisition of a manufacturing entity by a holding company would be subject to the acquisition accounting requirements of ASC 805. The formation of a joint venture, the acquisition of assets that do not constitute a business, a combination between entities under common control, a combination between not-for-profit organizations, and the acquisition of a for-profit entity by a not-for-profit organization are the only combinations specifically excluded from the scope of ASC 805.

Question 17

Q

The requirements of ASC 805, “Business Combinations,” apply to all of the following business combinations except for which one?

Combination between financial institutions.
The acquisition of a foreign entity by a U.S. entity.
Combination between not-for-profit organizations.
The acquisition of a group of assets that constitutes a business.

Answer

A

Combination between not-for-profit organizations.The requirements of ASC 805 do not apply to combinations between not-for-profit organizations (or to the formation of a joint venture, an acquisition of assets that do not constitute a business, a combination of entities under common control, or the acquisition of a for-profit entity by a not-for-profit organization).

Question 18

Q

Which of the following is/are acceptable methods to account for a business combination? Purchase Method Acquisition Method Pooling of interests Method

Answer

A

Purchase Method - NO Acquisition Method - YES Pooling of interests Method - NO
Only the acquisition method is acceptable in accounting for a business combination. The purchase method and the pooling of interests method of accounting for a business combination are not acceptable methods. The pooling of interests method was eliminated in 2001 and the purchase method was changed to the acquisition method in 2008. Although the acquisition method is a variation of the purchase method, it has sufficiently different requirements that it is not identified as the “purchase method,” but rather as the “acquisition method.”

Question 19

Q

Which one of the following is not a characteristic associated with the concept of a “business” for the purposes of ASC 805, “Business Combinations?”

Is an integrated set of activities and assets.
Uses inputs and processes.
Is intended to provide economic benefits to owners or others.
Must be in the form of a separate legal entity.

Answer

A

Must be in the form of a separate legal entity.For the purposes of ASC 805, a business does not have to be in the form of a separate legal entity. Specifically, a business is an integrated set of activities and assets that is capable of being conducted and managed through the use of inputs and processes for the purpose of providing economic benefits to owners, members, or participants. The concept of a “business” for the purposes of ASC 805 does not have to be in the form of a separate legal entity. Under this definition, a “business” may be a group of assets (or net assets) that constitute a business (e.g., a line of business) and does not have to be in the form of a separate legal entity.

Question 20

Q

Zipco, Inc. acquired 100% of the voting stock of Narco, Inc. with an acquisition date of March 31, 2009. During the following three months, Zipco learned the following: A major credit customer of Narco had declared bankruptcy on March 1, 2009, but the adverse effect on Narco’s accounts receivable had not been recognized in the amount of accounts receivable recognized in the acquisition date amounts. Narco had a lawsuit against it that existed at the acquisition date of the combination but was not recognized on Narco’s books or in the liabilities recognized at the acquisition date. Analysis determined that it was more likely than not that the party that brought the lawsuit would win a material judgment against Narco/Zipco.
Which of these items of new information, if any, should be recognized in accounting for the business combination?

Answer

A

BOTH.The effects of both the reduced accounts receivable and the lawsuit liability would be recognized in accounting for the business combination. Since the effects on Narco’s accounts receivable and the lawsuit liability both occurred before the acquisition date, both items would be recognized in accounting for the business combination and would be adjustments made during the measurement period. The effects would be to reduce accounts receivable (Item I) and to increase liabilities (Item II) in the final recording of the business combination.

Question 21

Q

The terms of a business combination can provide that former shareholders of the acquired firm may receive additional compensation based on post-combination earnings or post-combination market share price. Would additional compensation based on such earnings or market price be considered an additional cost of the business combination? Based on Earnings Based on Share Price

Answer

A

Based on Earnings - NO Based on Share Price - NO
Additional compensation to former shareholders of an acquired entity based on either post-combination earnings or post-combination share price would not be recognized as changes in the cost of the business combination. Changes in the fair value of contingent consideration resulting from occurrences after the acquisition date, including meeting earnings targets and reaching a specified share price, are not measurement period adjustments and do not enter into the cost of a business combination.

Question 22

Q

Which of the following statements concerning the acquisition of a business is/are correct?

Most consideration transferred to effect a business combination should be measured at fair value.
Contingent consideration should be included in the cost of an acquired business at fair value existing on the acquisition date.
The cost of carrying out a business combination should be included in the cost of an acquired business.

Answer

A

1 and 2 Only.Statement I and Statement II are correct; Statement III is not correct. Most consideration used to effect a business combination should be measured at fair value (Statement I). The only exception is when the consideration transferred remains under the control of the acquirer. Contingent consideration should be included in the cost of an acquired business at fair value as of the acquisition date (Statement II). The cost of carrying out a business combination should not be included in the cost of an acquired business (Statement III); most such costs should be expensed.

Question 23

Q

Changes in the fair value of contingent consideration transferred in a business combination resulting from occurrences after the acquisition date should be recognized as a gain or loss in the current income when the contingent consideration is classified as An Asset or a Liability An Equity Item

Answer

A

An Asset or a Liability - YES An Equity Item - NO
Changes in the fair value of contingent consideration resulting from occurrences that occur after the acquisition date are recognized as gains or losses when the contingent consideration is classified as an asset or a liability. Contingent considerations classified as equity are not remeasured, and no gain or loss is recognized. The change in fair value of equity items is recognized as an adjustment within equity.

Question 24

Q

An obligation of an acquirer to pay contingent consideration to the former owners of an acquired entity in a business combination can be recognized as which of the following? A Liability An Equity Item

Answer

A

A Liability - YES An Equity Item - YES
An obligation to pay contingent consideration in a business combination may be recognized by the acquirer as either a liability or as an equity item, depending on the nature of the obligation under the provisions of FASB #150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”

Question 25

Q

On January 2, 2009, the beginning of its fiscal year, Zable, Inc. acquired all of the stock of Sideco, Inc. from its owners using the following forms and amounts of consideration to pay Sideco owners: Cash $50,000 An investment in Loco, Inc. bonds which Zable had designated as held-for-trading, and which had a cost of $100,000 and a carrying amount of $102,000. Land, with a cost of $50,000 and a fair value of $60,000.
Which one of the following is the total amount of consideration Zable paid to acquire Sidco?A.$200,000B.$202,000C.$210,000D.$212,000

Answer

A

$212,000Generally, assets (and liabilities and equity) transferred as consideration in a business combination should be measured at fair value. When assets being transferred have a carrying value different than fair value, they should be adjusted to fair value before the transfer and a gain or loss recognized. Thus, the correct answer ($212,000) results from using the fair value of the bonds ($102,000) and the fair value of the land ($60,000), together with the cash ($50,000), or a total of $212,000 as the total consideration. In this case, since the assets are transferred to Sideco’s former owners and not Sideco, the following would apply:Cash would be transferred at face amount, $50,000, with no gain or loss.The investment in Loco would be transferred at carrying value ($102,000), which is also fair value because the bonds are held-for-trading and would have been adjusted to fair value at December 31, 2008, with any gain or loss recognized at that time.The land would be transferred at fair value, $60,000, and a $10,000 gain would be recognized in connection with the business combination.Thus, the total consideration would be $212,000.

Question 26

Q

On January 2, 2009, the beginning of its fiscal year, Zable, Inc. acquired all of the stock of Sideco, Inc. from its owners using the following forms and amounts of consideration to pay Sideco owners: Cash $50,000 An investment in Loco, Inc. bonds which Zable had designated as held-for-trading, and which had a cost of $100,000 and a carrying amount of $102,000. Land, with a cost of $50,000 and a fair value of $60,000.
Which one of the following is the amount of gain or loss, if any, that Zable should recognize in connection with the transfer of these assets to Sideco owners?
* 0 - (no gain or loss).
* $2,000
* $ 10,000
* $ 12,000

Answer

A

$10,000The amount of gain recognized in connection with the business combination would be $10,000. Generally, assets (and liabilities and equity) transferred as consideration in a business combination should be measured at fair value. When assets being transferred have a carrying value different than fair value, they should be adjusted to fair value before the transfer and a gain or loss recognized. In this case, since the assets are transferred to Sideco’s former owners and not Sideco, the following would apply:Cash would be transferred at face amount, $50,000, with no gain or loss.The investment in Loco would be transferred at carrying value ($102,000), which is also fair value because the bonds are held-for-trading and would have been adjusted to fair value at December 31, 2008, with any gain or loss recognized at that time. So, no gain or loss would be recognized on January 2, 2009, in connection with the business combination.The land would be transferred at fair value, $60,000, and a $10,000 gain would be recognized in connection with the business combination.

Question 27

Q

In which one of the following cases will a non-cash asset transferred as consideration in a business combination be measured at carrying value, not at fair value?

The asset transferred is a non-monetary asset.
The asset transferred is a non-depreciable asset.
The asset transferred remains under the control of the acquiring entity.
The asset transferred has a fair value less than the carrying value.

Answer

A

The asset transferred remains under the control of the acquiring entity.When the transferred asset remains under the control of the acquiring entity, the asset is transferred at carrying value, not fair value; for example, when the acquirer transfers a non-cash asset (e.g., land) as consideration and the asset remains with the acquiree, over which the acquirer has control. Otherwise, all assets (and liabilities and equity) transferred as consideration in a business combination are measured at fair value, not carrying value.

Question 28

Q

Which one of the following payments by an acquirer in a business combination is most likely to be a part of the cost in recording a business combination transaction?

Payment by the acquirer to settle a trade payable due to the acquired entity.
Payment by the acquirer to the acquiree’s management personnel to remain with the firm for one year following the business combination.
Payment by the acquirer to the acquiree for a valid patent not previously recognized by the acquiree.
Payment by the acquirer to reimburse the acquiree for cost it incurred in carrying out the business combination.

Answer

A

Payment by the acquirer to the acquiree for a valid patent not previously recognized by the acquiree.Payment for a valid patent, even though not previously recognized by the acquiree, most likely would be a part of the business combination transaction. Since costs of developing a patentable item are expensed when incurred, the acquiree may not have recognized any asset associated with the patent, but the acquirer should record the patent acquired in a business combination at fair value.

Question 29

Q

On July 1, 2009, Lazer, Inc. acquired all of the assets, with a fair value of $400,000, and liabilities, with a fair value of $150,000, of Tipco, Inc. for $250,000 cash. In addition, Lazer paid $20,000 in legal and accounting fees for the combination and expects to pay $50,000 to close one of Tipco’s plants and relocate its employees. Which one of the following is the total amount of consideration that Lazer paid for Tipco in the business combination?

$250,000
$270,000
$300,000
$320,000

Answer

A

$250,000The total consideration paid by Lazer to acquire Tipco is $250,000, the cash paid. The other cost of carrying out the business combination ($20,000) and the expected cost of closing one of Tipco’s plants and relocating its employees ($50,000) would not be part of the cost of the acquisition. The $20,000 legal and accounting fees will be expensed as cost of carrying out the combination. The expected cost of closing one of Tipco’s plants and relocating its employees will not be recognized until there is an actual liability.

Question 30

Q

On July 1, 2009, Lazer, Inc. acquired all of the assets, with a fair value of $400,000, and liabilities, with a fair value of $150,000, of Tipco, Inc. for $250,000 cash. In addition, Lazer paid $20,000 in legal and accounting fees for the combination and expects to pay $50,000 to close one of Tipco’s plants and relocate its employees. Which one of the following is the amount of liability that Lazer should recognize in recording the business combination?

$- 0 - (no liability)
$150,000
$170,000
$200,000

Answer

A

$150,000Lazer will recognize $150,000 in liabilities, the fair value of the amount acquired from Tipco. The $20,000 legal and accounting fees will be expensed as cost of carrying out the combination. The expected cost of closing one of Tipco’s plants and relocating its employees will not be recognized until there is an actual liability.

Question 31

Q

Which of the following kinds of intangible assets on the books of an acquired entity immediately before a business combination would be recognized by the acquiring entity? Future benefits that derive from legal rights Future benefits that can be separately sold

Answer

A

Future benefits that derive from legal rights - YES Future benefits that can be separately sold - YES
Intangible assets on the books of an acquired entity immediately before a business combination would be recognized by the acquiring entity if they either have future benefits that arise from contractual or legal rights (e.g., trademarks, copyrights, franchise agreements, etc.) or are capable of being separately sold, transferred, licensed, rented, or exchanged (e.g., customer lists, databases, etc.).

Question 32

Q

Which of the following statements, if any, concerning a noncontrolling interest in an acquiree is/are correct? I. The value assigned to a noncontrolling interest in an acquiree should be based on the proportional share of that interest in the net assets of the acquiree. II. The fair value per share of the noncontrolling interest in an acquiree must be the same as the fair value per share of the controlling (acquirer) interest.

Answer

A

NEITHER.Neither Statement I nor Statement II is correct. The value assigned to a noncontrolling interest in an acquiree would not be based simply on the proportional share of that interest in the net assets of the acquiree (Statement I), but rather on the separately determined fair value of the noncontrolling interest. The fair value per share of the noncontrolling interest in an acquiree does not have to be the same as the fair value per share of the controlling interest (Statement II), because there is likely to be a premium in value associated with having control of an entity that the noncontrolling interest would not enjoy.

Question 33

Q

On May 1, 2008, Hico, Inc. acquired 20% of the voting securities of Lowco, Inc. for $400,000 cash. The investment did not give Hico significant influence over Lowco and was classified as an available-for-sale investment. On July 1, 2009, Hico acquired the remaining 80% of Lowco’s voting securities for $1,800,000 cash. At that time, Hico’s original 20% investment in Lowco had a carrying value and a fair value of $450,000. Which one of the following is the amount of gain that Hico should recognize in July, 2009 net income as a result of the effect of the business combination on Hico’s original investment in Lowco?

$- 0 - (no gain)
$40,000
$50,000
$400,000

Answer

A

$50,000Because the original investment was treated as available-for-sale, between May 1, 2008, and July 1, 2009, it would have been adjusted to fair value ($450,000) and the increase recognized in other comprehensive income (not in net income). The cumulative entries would have been DR: Investment $50,000 and CR: Unrecognized Gain/Other Comprehensive Income $50,000. In connection with the combination, the $50,000 unrecognized gain in Accumulated Other Comprehensive Income would be reclassified and recognized as a gain in net income of the period. The $450,000 carrying amount/fair value of the original investment would be included as part of the total consideration used in acquiring Lowco.

Question 34

Q

Zooco, Inc. acquired 40% of the voting stock of Stubco, Inc. on September 1, 2008, and accounted for the investment using the equity method of accounting. On May 1, 2009, Zooco acquired an additional 20% of Stubco’s voting stock to achieve a business combination. Which one of the following is the value Zooco should use to measure its original 40% investment in Stubco when recording the combination?

Original cost, September 1, 2008.
Carrying value, May 1, 2009.
Fair value, May 1, 2009.
40% of Stubco’s book value, May 1, 2009.

Answer

A

Fair value, May 1, 2009.When a business combination is accomplished in stages (or steps), the fair value of the investment on the date of the combination is used to value the business combination. In this case, that would be the fair value on May 1, 2009. Any difference between the carrying value and the fair value on the acquisition date would be recognized as a gain or loss for the period.

Question 35

Q

Which of the following contingencies that exist on the acquisition date should be recognized by the acquirer in a business combination? I. A contractual contingency to provide warranty services to prior customers of the acquiree. II. An outstanding lawsuit against the acquiree for which an expert legal authority believes there is a 20% probability that the suit will be successful.

Answer

A

1 ONLY.Item I would be recognized; Item II would not be recognized. Contractual contingencies (contingencies related to existing contracts) are recognized by the acquirer and measured at fair value. Noncontractual contingencies (contingencies that do not result from an existing contract), including lawsuits, are recognized only if it is more likely than not that the contingency will give rise to a liability (or an asset). A probability of 20% that the suit will be lost is not more likely than not, and the lawsuit would not be recognized.

Question 36

Q

Generally, which of the following items acquired in a business combination should be measured at fair value? Identifiable Assets Acquired Liabilities Assumed Noncontrolling Interest

Answer

A

Identifiable Assets Acquired - YES Liabilities Assumed - YES Noncontrolling Interest - YES
Generally, identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree are measured at fair value. A few exceptions exist for selected assets and liabilities.

Question 37

Q

Which one of the following items acquired in a business combination is least likely to require that the acquirer reconsider the acquiree’s classification?

An investment classified as held-to-maturity by the acquiree.
An investment classified as held-for-trading by the acquiree.
A lease classified as a sales-type capital lease by the acquiree.
A derivative instrument used for speculative purposes by the acquiree.

Answer

A

A lease classified as a sales-type capital lease by the acquiree.In a business combination, an acquirer that obtains a lease contract should continue to classify the contract as established at the inception of the contract. The classification of a lease contract is established at the inception of the lease and would not change as a result of a transfer of ownership in a business combination.

Question 38

Q

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction?

$ 55,000
$ 70,000
$ 80,000
$250,000

Answer

A

$70,000Damon should report a $70,000 gain, calculated as:

Fair value of net assets acquired:
Assets ($350,000) - Liabilities ($70,000)= $280,000
Cost of Investment:
Stock (20,000 shares x $10/share)=$200,000
Contingent consideration @ fair value=10,000
Total cost of investment= 210,000
FV of net assets > Cost of investment = Gain= $70,000

Question 39

Q

On July 1, Dill, Inc. exchanged 10,000 shares of its common stock for all 20,000 shares of Ledo, Inc.’s outstanding common stock. Dill’s stock is closely held and seldom traded; it has a par value of $10 per share and a book value of $12 per share. Ledo’s stock is traded in an active market and has a par value of $5 per share, a book value of $8 per share, and a market price of $11 per share. Which one of the following amounts is most likely the appropriate value of Dill’s investment in Ledo?

$100,000
$110,000
$120,000
$220,000

Answer

A

$220,000Stock issued in a business combination should be measured at fair value. In some cases in which equities are exchanged, the fair value of the acquiree’s stock may be a more reliable measure of the value of the transaction than can be determined for the acquirer’s stock. In this question, that is the case. Since Dill’s stock is closely held and seldom traded, it is less likely to be the basis for determining fair value than is Ledo’s stock, which is traded in an active market. Therefore, the most likely value for the transaction would be the 20,000 shares of Ledo’s stock that were obtained multiplied by the $11 market price of those shares, or 20,000 shares x $11 = $220,000.

Question 40

Q

f an acquiree elects to apply pushdown accounting, which of the following accounts of the acquiree cannot be recorded at acquisition date fair value?

Goodwill.
Property and Equipment.
Common Stock.
Bonds Payable.

Answer

A

Common Stock.The acquireecannotapply pushdown accounting to revalue its common stock to fair value as of the acquisition date.

Question 41

Q

In recording its acquisition of Lambda, Inc., Omega, Inc. properly recognized a contingent consideration liability of $28,000 associated with a possible payment based on a target amount of post-combination cash flow from operations. Shortly after the combination, but during the measurement period, the national economy experienced a significant downturn which made it unlikely that the target amount would be reached. As a consequence, at the end of Omega’s fiscal period, the liability was properly revalued to a fair value of $9,000. Which one of the following is the amount of increase or decrease, if any, in the consideration paid to acquire Lambda that results from the change in the fair value of the contingent liability?

$ - 0 - (no increase or decrease)
$19,000 increase.
$19,000 decrease.
$9,000 decrease.

Answer

A

$ - 0 - (no increase or decrease)A contingent consideration liability is the obligation of an acquirer to transfer additional consideration, if specific conditions are met. Contingent consideration liabilities are initially recognized at fair value and adjusted to fair value each period until the contingency is resolved or expires. A change in fair value resulting from occurrencesafterthe acquisition date would be recognized as a gain or loss in income in the period of the change, not as an adjustment to the consideration paid to acquire the acquiree. In this question, a $19,000 gain (reduction in liability) would be recognized ($28,000 - $9,000 = $19,000) and no change in the consideration paid will be recognized.

Question 42

Q

In recording its acquisition of Lambda, Inc., Omega, Inc. properly recognized a contingent consideration liability of $28,000 associated with a possible payment based on a target amount of post-combination cash flow from operations. Shortly after the combination, but during the measurement period, the national economy experienced a significant downturn which made it unlikely that the target amount would be reached. As a consequence, at the end of Omega’s fiscal period, the liability was properly revalued to a fair value of $9,000. Which one of the following is the amount of gain or loss that will be recognized in income as a result of the reevaluation of the contingent liability?

$ - 0 - (no gain or loss).
$19,000 gain.
$19,000 loss
$9,000 loss

Answer

A

$19,000 gain.A contingent consideration liability is the obligation of an acquirer to transfer additional consideration, if specific conditions are met. Contingent consideration liabilities are initially recognized at fair value and adjusted to fair value each period until the contingency is resolved or expires. A change in fair value resulting from occurrences after the acquisition date would be recognized as a gain or loss in income in the period of the change. In this question, a $19,000 gain (reduction in liability) would be recognized ($28,000 - $9,000 = $19,000).

Question 43

Q

Which one of the following items that was acquired in a business combination is most likely to be accounted for using post-combination accounting requirements specific for the item?

Plant and equipment.
Investments held-to-maturity.
Contingency-based assets.
Patents.

Answer

A

Contingency-based assets.Assets (and liabilities) arising from contingencies are likely to be accounted for using specific post-combination accounting requirements. Those requirements provide that when new information is obtained about a contingency-based asset, it will be measured at the lower of (1) its acquisition-date fair value or (2) the best estimate of its future settlement amount.

Question 44

Q

Which of the following statements, if any, concerning a contingency that arises in a business combination is/are correct? I. After an acquisition and until it is settled, a contingency that is a liability will be measured at no less than the fair value reported on the acquisition date. II. After an acquisition and until it is settled, a contingency that is an asset will be measured at no less than the fair value reported on the acquisition date.

Answer

A

I ONLY.Statement I is correct. After an acquisition, a contingency that is a liability will be measured and reported at the higher of the amount reported on the acquisition date or the amount that would be recognized if the requirements of FASB #5 were followed. Thus, such a liability would not be measured at less than the fair value on the acquisition date (Statement I). Statement II is not correct. After an acquisition, a contingency that is an asset will be measured at the lower of the amount reported on the acquisition date or the best estimate of its future settlement amount. Thus, such an asset would be measured at no more than, not at no less than, the fair value reported on the acquisition date.

Question 45

Q

When a bargain purchase occurs in a business combination, which of the following types of information must be disclosed in the period of the combination?

I. The amount of gain recognized.
II. The income statement line item that includes the gain.
III. A description of the basis for the bargain purchase amount.

Answer

A

ALL THREE.All three statements identify required disclosures. When a bargain purchase occurs in a business combination, the amount of the gain (Statement I), the income statement line item that includes the gain (Statement II), and a description of the basis for the bargain purchase amount (Statement III) must be disclosed.

Question 46

Q

Which of the following occurrences in a business combination, if any, identify circumstances that require extensive disclosures in the period of the combination? I. The existence of a noncontrolling interest. II. Achieving control in step acquisition.

Answer

A

I. The existence of a noncontrolling interest. - YES II. Achieving control in step acquisition. - YES
Both Statements I and II identify circumstances that require extensive disclosures in the period of a combination. When there is a noncontrolling interest in the acquiree, the fair value of the noncontrolling interest at the acquisition date, and the valuation techniques and inputs used to measure that fair value, must be disclosed. When control is achieved in steps (or stages), the fair value of the equity held by the acquirer immediately before the combination, the amount of any gain or loss resulting from adjusting the interest to fair value, and the line item in the income statement where the gain or loss is reported must be disclosed.

Question 47

Q

Plant Company acquired controlling interest in Seed Company in a legal acquisition. Which one of the following could not be part of the entry to record the acquisition?

Debit: Investment in Seed Company.
Debit: Goodwill.
Credit: Cash
Credit: Common stock

Answer

A

Debit: Goodwill.The entry that Plant will make to record its legal acquisition of Seed cannot include a debit to Goodwill. The entry Plant makes will debit (only) the Investment account and credit whatever form(s) of consideration is given (e.g., Cash, Bonds Payable, Common Stock, etc.). Goodwill cannot be debited at the time of the acquisition, though it may be recognized at the time of consolidation.

Question 48

Q

Under which one of the following circumstances will goodwill be recognized in a business combination carried out as a legal merger?

Book value of net assets acquired > Cost of investment.
Fair value of net assets acquired > Book value of net assets acquired.
Fair value of net assets acquired > Cost of investment.
Fair value of net assets acquired < Cost of investment.

Answer

A

Fair value of net assets acquired < Cost of investment.Goodwill is recognized when the cost of the investment is greater than the fair value of net assets acquired (= the fair value of net assets acquired is less than the cost of the investment). In a legal merger, the goodwill would be recognized on the books of the surviving firm at the time of the business combination.

Question 49

Q

Pine Company acquired all of the assets and liabilities of Straw Company for cash in a legal merger. Which one of the following would not be recognized by Pine on its books in recording the business combination?

Accounts receivable.
Investment in Straw.
Intangible asset - Patent.
Accounts payable.

Answer

A

Investment in Straw.Pine will not recognize on its books an investment in Straw. Because the business combination is a legal merger, Pine recognizes on its books almost all of Straw’s assets and liabilities, not an investment in Straw. There can be no investment in Straw, because Straw will cease to exist.

Question 50

Q

Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in an acquisition-business combination. The market value of Sayon’s common stock is $12 per share. Legal and consulting fees incurred in relation to the acquisition are $110,000. Registration and issuance costs for the common stock are $35,000. What should be recorded in Sayon’s additional paid-in capital account for this business combination?

$1,545,000
$1,400,000
$1,365,000
$1,255,000

Answer

A

$1,365,000The calculation is: Fair value (200,000 sh. x 12/sh.) $2,400,000 Par value (200,000 sh. x $5/sh) ($1,000,000) Gross additional paid-in capital $1,400,000 Less: Registration and issuance costs $35,000 Net additional paid-in capital $1,365,000
The legal and consulting fees ($110,000) were paid in cash and would be expensed in the period incurred. The registration and issuance costs of the common stock are properly deducted from the additional paid-in capital derived from the issuance of the stock.

Question 51

Q

Which of the following statements concerning the primary beneficiary of a variable-interest entity is/are correct? I. The primary beneficiary has the ability to direct the most significant economic activities of the variable-interest entity. II. Only one entity can be the primary beneficiary of a variable-interest entity. III. The investor that has the greatest equity ownership in a variable-interest entity will be the primary beneficiary of the entity.

Answer

A

1 and 2 ONLY.Both Statement I and Statement II are correct; Statement III is not correct. By definition, the primary beneficiary of a variable-interest entity is the entity that is able to direct the most significant economic activities of the variable-interest entity (Statement I). Only one entity can be the primary beneficiary of a variable-interest entity, because only one entity will have the ability to direct the activities of the variable-interest entity that most significantly impacts its economic performance (Statement II).

Question 52

Q

Which one of the following is not a characteristic of a variable-interest entity?

A variable-interest entity is thinly capitalized.
The equity holders in a variable-interest entity control the entity.
The risks and rewards associated with a variable-interest entity mostly accrue to the variable-interest holders.
The value of a variable-interest entity depends on the net asset value of the variable-interest entity.

Answer

A

The equity holders in a variable-interest entity control the entity.The equity holders in a variable-interest entity do not control the entity. Control of the activities and decision-making in a variable-interest entity generally resides with the variable-interest holders (not the equity holders) as established by agreement or other instrument.

Question 53

Q

In which one of the following cases is the subsidiary most likely to be reported as an unconsolidated subsidiary?

The subsidiary is in an industry unrelated to the parent.
The subsidiary has a fiscal year-end that is one month different from the parent’s year-end.
The subsidiary is in legal bankruptcy.
The subsidiary has a controlling interest in another entity.

Answer

A

The subsidiary is in legal bankruptcy.When a subsidiary is in bankruptcy, it is under the control of the bankruptcy court and, therefore, not under the control of the parent. When a parent cannot exercise financial and/or operating control of a subsidiary, the subsidiary would not be consolidated, but would be reported as an unconsolidated subsidiary by the parent.

Question 54

Q

Which of the following legal forms of business combination will result in the need to prepare consolidated financial statements? Merger Acquisition Consolidation

Answer

A

Merger - NO Acquisition - YES Consolidation - NO

Question 55

Q

Penn, Inc., a manufacturing company, owns 75% of the common stock of Sell, Inc., an investment company. Sell owns 60% of the common stock of Vane, Inc., an insurance company.In Penn’s consolidated financial statements, should consolidation accounting or equity method accounting be used for Sell and Vane?

Consolidation used for Sell and equity method used for Vane.
Consolidation used for both Sell and Vane.
Equity method used for Sell and consolidation used for Vane.
Equity method used for both Sell and Vane.

Answer

A

Consolidation used for both Sell and Vane.If one looked just at Penn’s interest in Vane’s result of 45% (75% x 60%), one might say that the equity method would be appropriate.However, because Sell owns 60% of Vane, it controls Vane and would need to consolidate Vane. Because Penn owns 75% of Sell, it controls Vane and would need to consolidate Sell, which consolidated Vane. Thus, all three would be consolidated, making this response correct.

Question 56

Q

Which one of the following levels of voting ownership is normally assumed to convey significant influence over an investee?

0% - 10%.
20% - 50%.
50% - 100%.
100%.

Answer

A

20% - 50%.Between 20% and 50% voting ownership of an investee normally is assumed to give the investor significant influence over the investee. Ownership of 20% to 50% of the voting stock of an investee may not give the investor significant influence over the investee if additional special circumstances exist, but normally, it does.

Question 57

Q

The choice of methods that a parent uses on its books to account for its investment in a subsidiary will affect the: Consolidating Process Consolidated Financial Statements

Answer

A

Consolidating Process - YES Consolidated Financial Statements - NO
While the method a parent uses on its books to account for its investment in a subsidiary will affect the consolidating process, the choice of methods will not affect the final consolidated financial statements. The final consolidated financial statements will be the same regardless of the method used by the parent on its books; only the details of the process of developing those statements will be different. The primary difference will be in the nature of the investment eliminating entry on the worksheet.

Question 58

Q

Which one of the following methods, if any, may a parent use on its books to carry an investment in a subsidiary that it will consolidate? Cost Method Equity Method

Answer

A

Cost Method - YES Equity Method - YES
A parent may use the cost method, the equity method, or any other method on its books to carry an investment in a subsidiary that it will consolidate. The method that is used on its books will affect the consolidating process, but the final consolidated financial statements will be the same regardless of the method the parent uses on its books.

Question 59

Q

Which of the following statements, if any, concerning the preparation of consolidated financial statements is/are correct? I. The consolidating process is carried out on the books of the parent entity. II. The consolidated financial statements report two or more legal entities as though they are a single economic entity.

Answer

A

I. The consolidating process is carried out on the books of the parent entity. - NO
II. The consolidated financial statements report two or more legal entities as though they are a single economic entity. - YES

Statement I is incorrect. The consolidating process is not carried out on the books of the parent entity (or any other entity). The consolidating process takes place on worksheets and schedules that are separate from any set of books. Statement II is correct. The consolidated financial statements report two or more legal entities (a parent and its subsidiary/ies) as though they are a single economic entity. Because the entities are under the common economic control of the parent’s shareholders, GAAP requires that consolidated statements be the primary form of financial statement disclosure.

Question 60

Q

Which one of the following kinds of accounts is least likely to be eliminated through an eliminating entry on the consolidating worksheet?

Receivables.
Investment.
Goodwill.
Payables.

Answer

A

Goodwill.Goodwill may be recognized by the entry that eliminates the parent’s investment in the subsidiary against the parent’s share of the subsidiary’s shareholders’ equity, but goodwill will not be eliminated through an eliminating entry.

Question 61

Q

Which one of the following kinds of eliminations, if any, will be required in every consolidating process? Intercompany Receivables/Payables Intercompany Investment Intercompany Revenues/Expenses

Answer

A

Intercompany Receivables/Payables - NO Intercompany Investment - YES Intercompany Revenues/Expenses - NO
An intercompany investment elimination will be required in every consolidating process (to eliminate the parent’s investment against the subsidiary’s shareholders’ equity). Intercompany receivables/payables and intercompany revenues/expenses eliminations will not be required in every consolidating process. Those kinds of eliminations will be required only if the affiliated companies have engaged in intercompany transactions that resulted in such balances.

Question 62

Q

The results of the consolidating process are recorded in the books of the: Parent Subsidiary

Answer

A

Parent - NO Subsidiary - NO
The results of the consolidating process (adjustments, eliminations, etc.) are not recorded on either the books of the parent or of any subsidiary. The consolidating process takes place on worksheets and schedules, and the results are presented in the form of consolidated financial statements. Some of the worksheet and schedule data is carried forward from period end to period end to facilitate the recurring consolidating process.

Question 63

Q

Under GAAP, which of the following can be issued as the primary form of public financial statement disclosure for a parent and its subsidiaries? Parent only Statement Separate Parent and Subsidiary Statements Consolidated Statements

Answer

A

Parent only Statement - NO Separate Parent and Subsidiary Statements - NO Consolidated Statements - YES
Under GAAP, only consolidated financial statements may be issued as the primary form of public disclosure for a parent and its subsidiaries. Parent only statements and separate parent and subsidiary statements may not be issued in lieu of consolidated financial statements.

Question 64

Q

Ownership of 51% of the outstanding voting stock of a company would usually result in

The use of the cost method.
The use of the lower of cost or market method.
The use of the equity method.
A consolidation.

Answer

A

A consolidation.This answer is correct. ASC Topic 810 states that consolidated financial statements should generally be prepared when there is greater than 50% ownership of the outstanding voting stock of the company, although unusual circumstances may arise in which reporting under the equity method or even the cost method is more appropriate. (Note that consolidation may also refer to a form of business combination where two or more entities form a new entity.) The exhibit below illustrates the accounting treatment for equity investments.Financial reporting% owned FV or amortized cost 20% Equity or fair value method 20-50% Consolidated or equity 51-100%

Answer 65

A

$300,000In an acquisition, the difference between the cost of an acquired company and the fair value of its net identifiable assets (fair value of tangible and identifiable intangible assets less liabilities) is recorded as goodwill.The cost of the Cable Corp. is $1,600,000, and the fair value of its net assets is $1,300,000 ($160,000 + $460,000 + $1,040,000 − $360,000). Therefore, goodwill to be recorded is $300,000 ($1,600,000 − $1,300,000).

Answer 66

A

$56,000When computing combined revenue, the objective is to restate the accounts as if the intercompany transaction had not occurred. Assuming that there was no sale between Twill and Webb, the correct amount of consolidated revenue would be the $81,200 sold to unrelated customers. Thus, unadjusted revenue is overstated by the $56,000 ($40,000 × 140%) intercompany revenue recognized by Webb.

Answer 67

A

The parent’s share of the subsidiary’s dividends.When a parent company uses the cost method to account for its investment in a subsidiary, the parent will recognize its share of the subsidiary’s dividends declared as income to the parent.

Answer 68

A

Depreciation expense would be decreased, and goodwill would be recognized.Although the cost of the investment was equal to book values, the cost of the investment was greater than the fair values, because the carrying amount of Scarp’s building was more than its fair value. For consolidated statement purposes, the building would be written down to its lower fair value, and the excess of cost over fair values would be assigned to recognize goodwill. Since for consolidated purposes the building has a lower fair value than its carrying value, the depreciation expense taken on the carrying value would be greater than the depreciation expense for consolidated purposes. Thus, depreciation expense would be decreased in the consolidating process, and goodwill would be recognized.

Answer 69

A

Depreciable Assets - Decrease Depreciation Expense - Decrease
Both accounts will be decreased. The investment eliminating entry on the consolidating worksheet will write down (decreasing on the worksheet) the value of depreciable asset, from book value to the lower fair value on the date of the combination. The decrease in depreciable asset value recognized on the worksheet will mean that the depreciation expense on the worksheet, brought on by the subsidiary, will overstate depreciation expense to the parent, resulting in a reduction (decreasing) depreciation expense for consolidated statement purposes.

Answer 70

A

Depreciable Assets - Increase Depreciation Expense - Increase
The investment eliminating entry on the consolidating worksheet will write up (increasing on the worksheet) the value of depreciable asset, from book value to fair value on the date of the combination. The additional depreciable asset value recognized on the worksheet will then be depreciated on the worksheet, resulting in additional (increasing) depreciation expense.

Answer 71

A

$552,000The amount of an investment eliminating entry is the balance in the investment accountas of the beginning of the period being consolidated. In this case, that was $552,000. If the parent uses the equity method to account for its investment in the subsidiary, the entries it makes during the year are reversed so that the investment account has its beginning of the year balance.

Answer 72

A

$30,000During 2009 Parco would recognize Subco’s reported net income of $42,000 as equity revenue; the entry would be: DR: Investment in Subco and CR: Equity Revenue. The $12,000 dividends would not be recognized as equity revenue but rather as a liquidation of part of Parco’s investment in Subco; the entry would be: DR: Dividends Receivable/Cash and CR: Investment in Subco. Therefore, the net amount of investment to be reversed would be $30,000, computed as +$42,000 - $12,000 = $30,000.

Answer 73

A

Subsidiary Reports Income - YES Subsidiary Declares Dividend - YES
Under the equity method, when a subsidiary reports income, the parent recognizes its share as:
DR: Investment CR: Equity Income.
Therefore, the subsidiary’s reported income increases the investment account. In addition, when a subsidiary declares a dividend, the parent recognizes its share as:
DR: Dividends Receivable/Cash CR: Investment.
Therefore, the subsidiary’s dividends do not increase the investment account but rather decrease the investment account.

Answer 74

A

Veto rights.Protective rights protect the party holding the rights without given that party a controlling financial interest and include rights such as veto rights and the ability to remove the entity with the power to direct the activities of the VIE. Participating rights include the ability to block or participate in the actions of the reporting entity with the power to direct the VIE activities and include examples such as establishing operating procedures and controlling the management overseeing the investee policies.

Answer 75

A

Goodwill.Goodwill will occur on the date of a business combination as a result of the parent paying more for its investment in a subsidiary than the fair value of identifiable net assets acquired. Goodwill does not occur as a result of operating period transactions between a parent and its subsidiaries.

Answer 76

A

$200,000The amount to be eliminated is $200,000, which is the full amount of the intercompany receivable-payable resulting from the cash advance.

Answer 77

A

$275,000The amount of accounts receivable reported by Cobb from investees is $275,000. The amount of receivable from Vick ($260,000) would be eliminated against the payable to Cobb as brought onto the consolidating worksheet from Vick’s balance sheet. The amounts receivable from Hill ($75,000) and Ward ($200,000) would not be eliminated, because since Cobb does not have controlling interest in either firm, they would not be consolidated with Cobb. Both would be accounted for using the equity method of accounting, which does not eliminate intercompany receivables/payables. Since the amounts due from Hill ($75,000) and Ward ($200,000) would not be eliminated, they would show as accounts receivable in the consolidated balance sheet (total = $275,000).

Answer 78

A

$400,000When consolidated statements are prepared, 100% of all reciprocal accounts are eliminated regardless of the ownership fraction. Thus, the whole $400,000 must be eliminated.

Answer 79

A

$550,000The consolidated financial statements should reflect 100% of the assets and liabilities of the subsidiary less any intercompany balances. Therefore the balance on the consolidated balance sheet should be: $450,000 + 200,000 - 100,000 = $550,000.

Answer 80

A

$12,000Even though the intercompany inventory sale from Strawco to Pine was at no profit or loss (at Strawco’s cost to manufacture), the intercompany sale and purchase, nevertheless, must be eliminated. Otherwise, consolidated sales and purchases (cost of goods sold) will be overstated. Therefore, the elimination related to the intercompany inventory transaction will be for $12,000, the cost of the sale from Strawco to Pine.

Answer 81

A

An overstatement of sales.If an intercompany inventory transaction is not eliminated in the consolidating process, consolidated financial statements would show an overstatement of sales. Sales would be overstated by the amount of the intercompany sales reported by the selling affiliate. All intercompany sales and related purchases must be eliminated, even if they do not result in a profit or loss.

Answer 82

A

Voting Interest Entity Model - YES Variable Interest Model - YES
There are two models to evaluate if one entity should consolidate another entity: the voting interest entity model and the variable interest model. The voting interest entity model relies on one entity owning more than 50% of the voting interest in the other entity. The variable interest model relies on determination if one entity has the power to direct the activities of the other entity.

Answer 83

A

$2,000The amount of intercompany gain to be eliminated at the end of the year following the year of the intercompany fixed asset sale is $2,000. At the end of the year of the intercompany sale, depreciation taken by the buying affiliate on the $3,000 inter-company gain will be $1,000 ($3,000/3 years). As a consequence, $1,000 of the $3,000 intercompany gain will have been properly recognized, leaving only $2,000 to eliminate at the end of the second year. Depreciation expense taken on the intercompany gain for the second year will confirm another $1,000 of the intercompany gain, and depreciation expense taken on the intercompany gain for the third year will confirm the last $1,000 of the intercompany gain.

Answer 84

A

Water’s original cost less Fire’s recorded gain.The individual books of Water and Fire would record this transaction as if they were independent companies. Fire would remove the asset and record a gain. Water would put the asset on its books at cost.The problem is that they are not independent companies, and therefore, no real sale took place. The gain that was recorded must therefore be eliminated on the consolidated books. The net result is that the asset will be on the books at Water’s original cost less Fire’s recorded gain.

Answer 85

A

At a Profit - Overstate At a Loss - Understate
An intercompany sale of a fixed asset at a profit will result in the buying affiliate overstating depreciation expense by the amount of depreciation taken on the intercompany profit, and an intercompany sale at a loss will result in an understatement of depreciation expense taken by the buying affiliate. When an intercompany sale of a fixed asset results in a loss, the carrying value of the asset will be understated by the amount of the loss. As a result, depreciation expense taken by the buying affiliate will be understated by the amount of depreciation that would have been taken on the intercompany loss.

Answer 86

A

Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined.Consolidated depreciation expense will be less, not more, than the sum of depreciation expense of the separate companies being combined. Because the intercompany transaction resulted in a gain, the buying affiliate will have the asset on its books with the intercompany gain included in its carrying value and will depreciate that value on its books. For consolidated purposes, that depreciation on the intercompany gain will be eliminated, resulting in less depreciation expense than the sum of the depreciation expense of the separate companies.

Answer 87

A

$8,000There are two ways to approach this solution. First, take the difference in carrying values 72,000-48,000 = 24,000. The 24,000 is the incremental amount Cinn carries the equipment over the carrying amount of Zest. The 24,000/3 = 8,000OR, compute the depreciation for each company:Cinn is 72,000/3 = 24,000Zest is 80,000/5 = 16,000Since Cinn is 100% owned by Zest, the equipment cannot be depreciated by a greater amount through an intracompany sale. The difference is 24,000 - 16,000 = 8,000.

Answer 88

A

$1,100,000A premium on a bond liability results from the sale of the bonds at a price in excess of par (face) value. Therefore, a premium would be added to par value to get net carrying value. Sico’s premium on its bond liability ($100,000) should be added to the par (or face) value of its bond liability ($1,000,000) to determine the net carrying value of the liability. Thus, the answer should be $1,000,000 par value + $100,000 premium = $1,100,000 net carrying value.

Answer 89

A

$50,000 discountThe premium or discount on a bond investment is the difference between the par value of the bonds and the price paid for the bonds in the market. If the price paid is more than par value, there is a premium on the bond investment. If the price paid is less than par value, there is a discount on the bond investment. In this case, the price paid for the investment ($200,000) is less than the par value of the bonds ($250,000) by $50,000. Therefore, there is a $50,000 discount on Pico’s investment.

Answer 90

A

$250,000The amount that should be included in sales is the amount of sales with unrelated parties. In this case, that is the $250,000 sales by Branch to unaffiliated entities.

Answer 91

A

$56,000 Since all the goods have been sold outside the combined entity, income recognition is correct. However, sales and cost of goods sold have been recorded at two different points (i.e., the sale from Webb to Twill and the sale from Twill to outsiders). To the combined entity, Webb’s cost of merchandise (the original cost to the combined entity) is what is needed for cost of goods sold, and Twill’s sales (the amount the merchandise was sold for outside the combined entity) is needed for sales. This means that the sale from Webb to Twill and the cost of goods recorded by Twill need to be eliminated. That amount is $56,000 (computed as $40,000 cost to Webb x transfer price to Twill of 140% of cost = $56,000). The amount at which Webb sold the inventory to Twill ($40,000 x 1.40 = $56,000) will be the amount of cost of goods sold to Twill and should be eliminated in combining the financial statements of Webb and Twill. The cost of goods to Webb ($40,000) is the cost from an unrelated entity and should be the cost of goods sold for the combined entity. Since both the $40,000 cost of goods to Webb and the $56,000 cost of goods to Twill will be on the combining worksheet, the cost of goods to Twill (from Webb) must be eliminated, leaving only the $40,000 cost from a nonaffiliate.

Answer 92

A

$150,000The accounts receivable from investees to be reported on the balance sheet should only include the receivables from investees considered unconsolidated subsidiaries. The receivables from the unconsolidated subsidiaries ($50,000 + $100,000) would not be eliminated and, therefore, would be reported as receivables in the consolidated balance sheet. However, the $160,000 receivable from the consolidated subsidiary would be eliminated on the consolidated worksheet and thus not reported on the consolidated balance sheet.

Answer 93

A

Company X for 12 months and Company Y for 3 months.In an acquisition,the acquirer includes net income for the acquiree only from the date ofacquisition (see ASC Topic 810).

Answer 94

A

Retained earnings - $100,000 Increase Noncontrolling interest - no effect
When Seal purchased the bonds from Wagner, the bonds were viewed as retired from a consolidated viewpoint since there is no longer any obligation to an outside party. Therefore, the consolidated entity would recognize a $100,000 gain ($1,075,000 carrying amount − $975,000 cash paid), which would increase net income, thus increasing consolidated retained earnings. This transaction has no effect on the noncontrolling interest, since the acquiree (Seal) has merely exchanged one asset for another (cash for investment in bonds).

Answer 95

A

$500,000Per ASC Topic 805 the finder’s and consultant’s fees should be expensed. The SEC registration costs should be netted against the additional paid-in capital account.

Answer 96

A

$15,000Peace will report only the dividend of the parent company in the consolidated financial statements. The dividends declared and paid by Surge will be eliminated in the consolidated worksheet entries. Therefore, this answer is correct because the dividends reported in the consolidated statement of retained earnings would be $15,000.

Answer 97

A

$160,000Wall Co. purchased 100% of the stock of Hart Corp. for $860,000. The amount of goodwill that should be reported on the September 30, year 2 balance sheet would be the amount paid in excess of the FV of the net identifiable assets. The FV of the net assets would be calculated by taking the FV of the assets and subtracting the FV of the liabilities. The FV of the net assets would be $840,000 – 140,000 = 700,000. Goodwill will equal$860,000 Consideration transferred–700,000Less: Fair value of net identifiable assets$160,000

Answer 98

A

Inventories - Fair Value Long-term debt - Fair Value
Under the acquisition method, the acquired assets and liabilities are reported at their fair values. Therefore, Company X should report Company Y’s inventories and long-term debt at their fair values.

Answer 99

A

$1,365,000In a business combination accounted for as an acquisition, costs of registering securities and issuing common stock are netted against the proceeds and recorded in the additional paid-in capital account. Acquisition costs are expensed in the year the costs are incurred or the services are received, and the acquisition is recorded at the fair value of consideration given. Therefore, this answer is correct because the amount recorded in the additional paid-in capital account is equal to $1,365,000 [(200,000 shares × $7 per share) – $35,000 registration and issue costs].

Answer 100

A

A gain from bargain purchase of $400,000.Per ASC Topic 810, the excess of FV over acquisition cost is recognized as a gain from a bargain purchase in the period of acquisition.

Cost $1,000,000
FMV of identifiable assets and liabilities ($1,400,000)
Bargain purchase ($400,000)

Answer 101

A

$70,000Consolidated statements are prepared as if the acquirer and acquiree were one economic entity. From the point of view of the consolidated entity, the $70,000 is not payable to or receivable from any outside company. In other words, the consolidated entity does not have a receivable or payable. Therefore, the entire $70,000 payable on Sub’s books and the entire $70,000 receivable on Par’s books must be eliminated against each other. The level of ownership (60%) does not affect this elimination.

Answer 102

A

$700,000Per ASC Topic 810, in an acquisition of another company, goodwill is recorded as the difference between the cost of the acquired company plus the fair value of noncontrolling interests plus the acquisition date fair value of previously held interests in the acquiree less the fair value of its net identifiable assets. The cost of Perch Company is $7,500,000 (300,000 shares × $25), and the fair value of its net assets is $6,800,000 ($6,000,000 + $800,000). Thus, the resulting goodwill from this transaction will be $700,000 ($7,500,000 − $6,800,000).

Answer 103

A

The $100,000 difference should be recorded as a gain in the period of acquisition.Per ASC Topic 810, a bargain purchase occurs when the fair value of net identifiable assets exceeds the acquisition cost. The bargain purchase is recorded as a gain on the date of acquisition.

Answer 104

A

$20,000Investments between 20% and 50% of the outstanding stock are presumed to give the investor significant influence over the investee and as such should be accounted for under the equity method. Birk Co. purchased 30% of the outstanding common stock of Sled. Birk Co. is presumed to have significant influence over Sled and must account for this investment using the equity method. Under the equity method, any excess paid over the fair value of the net assets is considered goodwill. The total purchase price paid by Birk was $200,000 and the fair value of the net assets was $180,000 ($600,000 × 30%). Goodwill would be the difference between $200,000 and the $180,000. Goodwill is $20,000.

Answer 105

A

It is prohibited for GAAP. (IFRS allows this under certain conditions)All intangibles are subject to impairment, but the resulting impairment losses cannot be reversed. Although impairment losses on plant assets held for disposal can be reversed to the extent of previous losses, this is not the case for intangibles.

Answer 106

A

Deferred revenue in the liability section of the balance sheet.Deposits and prepayments received for goods or services to be provided in the future are deferred revenues. These would be reported as liabilities because an enterprise has an obligation to provide goods or services to those who have paid in advance.

Answer 107

A

$88,000The unearned fees (current liability) balance is the sum of $40,000 cash received, plus the $48,000 present value of the note, for a total of $88,000. The remaining $12,000 (3 x $20,000 less the $48,000 present value) is interest to be recognized over the note term. No revenue is recognized until the service is performed.

Answer 108

A

0.81 to 1The quick ratio is the quotient of very liquid current assets to total current liabilities. Inventories and prepaids are not included in the numerator because they are not considered sufficiently liquid. As such, it is a more stringent test of liquidity than the current ratio. In this case, the quick ratio consists of: cash + net AR + marketable securities divided by current liabilities: ($60,000 + $180,000 - $8,000 + $90,000)/$400,000) = .805. The closest answer is 0.81 to 1.

Answer 109

A

Asset Fair Value - EXIT PRICE
Liability Fair Value - EXIT PRICE

The appropriate basis for determining the fair value of an asset or a liability is an exit price.

Answer 110

A

$0SFAC 5 states that revenues are to be recognized when realized or realizable, and earned. At 12/31/Y1, none of the subscription revenue has been earned, since magazine delivery will not begin until Year 2. Therefore, unearned subscriptions revenue in the 12/31/Y1 balance sheet is $72,000 and subscriptions revenue in the Year 1 income statement is $0. Note that the treatment of the $72,000 collection for tax purposes does not determine its treatment for financial accounting purposes.

Answer 111

A

Private sector body.The FASB has no official connection with the U.S. Government although the SEC, an agency of the federal government, can modify or rescind an accounting standard adopted by the FASB.Remember the SEC has authority to establish GAAP but delegated that distinction to the FASB.

Answer 112

A

Cost approach.When fair value is determined as the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), the cost approach has been used.

Answer 113

A

Quarterly Financial Statements - YES
Annual Financial Statements - YES

Firms which elect to measure financial assets and financial liabilities at fair value are required to make significant additional disclosures in both interim (quarterly, etc.) and annual financial statements.

Answer 114

A

$6,000The total gross profit on the equipment is $50,000 – $30,000 = $20,000. Under the installment-sales method, gross profit is recognized proportionally with the amount of the installment payment each year. The gross profit that should be recognized in year 3 is $15,000/($20,000 + $15,000 + $15,000) = 30% of the total revenue. Therefore, this answer is correct because $6,000 (30% × $20,000 total gross profit) of gross profit should be recognized in year 3.

Answer 115

A

Replacement cost.Current market value is a SELLING PRICE. Accounting standards define current replacement cost, as the amount of cash, or its equivalent, that would have to be paid if the same or an equivalent asset were acquired currently.

Answer 116

A

Allocation - YES Amortization - YES
SFAC 6 defines allocation as the process of assigning or distributing an amount according to a plan or formula and amortization as an allocation process for accounting for prepayments and deferrals. Allocation is broader in scope and thus includes amortization. Specific examples of amortization include recognizing expenses for depletion, depreciation, and insurance, and recognizing earned subscription revenues.Under accrual accounting, expenses are recognized as related revenues are recognized, that is, (product) expenses are matched with revenues. Some (period) expenses, however, cannot be associated with particular revenues. These expenses are recognized as incurred.
* Product costs are those which can be associated with particular sales (e.g., cost of sales). Product costs attach to a unit of product and become an expense only when the unit to which they attach is sold. This is known as associating “cause and effect.”
* Period costs are not particularly or conveniently assignable to a product. They become expenses due to the passage of time by

Immediate recognition if the future benefit cannot be measured (e.g., advertising)
Systematic and rational allocation if benefits are produced in certain future periods (e.g., asset depreciation)

Answer 117

A

$390,000The ending balance in Smith’s capital account on either the accrual or cash basis is computed as follows: Beginning capital + Investments + Income – Drawings = Ending capital
Smith’s beginning capital balance is measured as the cost of the assets purchased to establish the business ($350,000). The previously recorded value ($375,000) and estimated market value ($360,000) are irrelevant and do not affect beginning capital. No additional investments were made; cash basis income was $60,000 and drawings were $20,000. Therefore, the ending capital balance is $390,000 ($350,000 + $60,000 − $20,000).

Answer 118

A

An entity other than a public business entity, a not-for-profit entity, or Topic 960–965 employee benefit plan.A private entity is defined a private entity is defined as, “an entity other than apublic business entity, anot-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.”

Answer 119

A

A current liability.Revenue collected 1 month in advance is unearned and, therefore, should be accounted for as a current liability. Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets or the creation of other current liabilities. This includes collections received in advance of delivery of goods or services.Accrual—accrual-basis recognition precedes (leads to) cash receipt/expenditure
* Revenue—recognition of revenue earned, but not received
* Expense—recognition of expense incurred, but not paid
Deferral—cash receipt/expenditure precedes (leads to) accrual-basis recognition
* Revenue—postponement of recognition of revenue; cash is received, but revenue is not earned
* Expense—postponement of recognition of expense; cash is paid, but expense is not incurred

Answer 120

A

$90,000The legal cost for applying for a patent can be capitalized. Alta can also capitalize the costs associated with the legal defense of the patent. This response correctly includes the legal costs associated with applying for and defending the patent.

Answer 121

A

Constant dollar basis.The Consumer Price Index is used to compute information on a “constant dollar” basis. The index is used to restate financial statement elements to dollars which have the same purchasing power.

Answer 122

A

Periodic payments to the franchisor based on the franchisee’s revenues.Continuing franchise fees, based on revenues, should be reported as expenses when incurred.ASC Topic 952 provides that the initial franchise fee be recognized as revenue by the franchiseronlyupon substantial performance of their initial service obligation. The amount and timing of revenue recognized depends upon whether the contract contains bargain purchase agreements, tangible property, and whether the continuing franchise fees are reasonable in relation to future service obligations. Direct franchise costs are deferred until the related revenue is recognized.

Answer 123

A

Relevance.Relevance and faithful representation are the two fundamental qualitative characteristics of financial information (IASB Framework 5-18).Same as GAAP!

Answer 124

A

Consistency - YES Verifiability - YES
Verifiability and consistency (a component of comparability) are both enhancing qualitative characteristics relating to both relevance and faithful representation.

Answer 125

A

Income.The IASB Framework has five elements:
* asset,
* liability,
* equity,
* income, and
* expense.
The definition given is that of income. Note that income includes both revenues and gains.

Answer 126

A

75 days. (Large Accelerated is 60 Days)An accelerated filer has an aggregate worldwide market value of the voting and nonvoting common stock held by nonaffiliates of $75 million or more, but less than $700 million on the last business day of the issuer’s most recently completed second fiscal quarter. Alargeaccelerated filer has market capitalization (as described) of $700 million or more. Beginning in 2006 the SEC changed the 10-K filing deadline forlargeaccelerated filers to be 60 days from the fiscal year end. Accelerated filers still have 75 days to file their 10-K.

Answer 127

A

When the ultimate sale of the goods is at an assured sales price.Profit is to be considered realized when a sale in the ordinary course of business is effected. Inventory valuation above cost can only be justified by the following: an inability to determine approximate costs, immediate marketability at a quoted price, and the characteristic of unit interchangeability. Thus, a condition permitting recognition of revenue prior to sale would be an assured sales price.

Answer 128

A

$15,000The appropriate amortization period for the leasehold improvements is eight years because renewal is uncertain. $120,000/8 = $15,000. This is the amount in accumulated amortization because the property has been leased only one year. The office furniture and equipment are not included in leasehold improvements because they belong to the lessee.

Answer 129

A

Comparability.Comparability is anenhancing characteristic, which relates to both relevance andfaithful representation.

Answer 130

A

Neutrality.Information isrepresentationally faithful if it is neutral, complete, and free from error.

Answer 131

A

Which are recoverable in future periods.ABC is a development stage enterprise. Such enterprises are subject to the same accounting principles governing capitalization of costs as enterprises that have established themselves as on-going enterprises. Therefore, the amount of cost to be capitalized or deferred is the amount of cost that is recoverable in future periods.

Answer 132

A

$210,000Per ASC Topic 274, assets are to be reported at estimated current values in a personal statement of financial condition. The current value of the investment in stock is $75,000 (1,000 shares× $75 per share). The current value of the residence can be estimated at $135,000. This consists of the cost of $120,000 (since similar unimproved homes are selling at the same price level which they were selling at in year 1) and the cost of improvements ($15,000). It can be assumed that the improvements will increase the value of the house by at least their cost. Therefore, the total amount is $210,000 (investment of $75,000 plus the house worth $135,000).

Answer 133

A

$50,100Since fair value is based on an exit price, the amount at which Multico could have sold the asset in its principal market is its fair value to Multico. Since the asset could have been sold by Multico in its principal market for $50,100, that is its fair value to Multico. The transaction cost to execute the sale should not be deducted from the market price to get fair value.Remember if Principal market = no transaction costs (but may consider transportation cost), and if NO PRINCIPAL market = consider the transaction costs but only for ascertaining the most advantageous market, then go with the full price of the investment as the FV.

Answer 134

A

COGS / Average Inventory

Answer 135

A

Higher by $36,000Because accounts receivable decreased by $20,000, the cash received was $20,000 more than the accrual-basis sales. Since accounts payable increased by $16,000 during the year, accrual-basis expenses were $16,000 more than cash payments. Therefore, accrual-basis net income is equal to $114,000 ($150,000 – 20,000 – $16,000), andtherefore, cash-basis pretax income is $36,000 ($150,000 – $114,000) higher than accrual-basis income.

Answer 136

A

Current ratio - INCREASE Quick ratio - DECREASE
Cash is both a current and a quick asset (an asset immediately available to pay debts). Accounts payable is a current liability. Thus, the numerator and denominator of both ratios have decreased.The current ratio was greater than 1.0 before the transaction. Therefore, the denominator decreased a greater percentage than the numerator causing the ratio to increase.The quick ratio was less than 1.0 before the transaction. Therefore, the numerator decreased a greater percentage than the denominator causing the ratio to decrease.

Answer 137

A

Collection of a note receivable from a related party.Proceeds from a note payable is a financing activity.Collection on a note receivable from a related party is an investing activity. The company is lending money to the related party and lending is not a primary business activity – the fact that the loan is in the form of a note implies that it is interest bearing.

Answer 138

A

Transaction Cost - NO
Transportation Cost - YES

In determining the fair value of an asset in the most advantageous market, the market based exit price would not be adjusted for transaction cost associated with executing the (hypothetical) transaction, but would be adjusted for transportation cost to get the asset to the principal or most advantageous market.

Answer 139

A

To meet the requirements of GAAP.The preparation of prospective financial information is not required by GAAP.

Answer 140

A

Only the current ratio.Inventory is a current asset but not a quick asset (assets that are readily converted to cash). The current ratio is current assets/current liabilities. Thus, the current ratio is reduced.The quick ratio is quick assets/current liabilities. Thus, the quick ratio is unaffected.

Answer 141

A

$950,000This answer is correct. The amount reported in this liability account should be the total amount of outstanding service contracts at 12/31/Y1, or $950,000 ($300,000 + $450,000 + $200,000). Wright’s 12/31/Y1 adjusting entry would reduce the liability account from $1,440,000 to $950,000.
Dr. Unearned service contracts revenue $490,000 Cr. Service contracts revenue $490,000

Answer 142

A

Cost recovery method.The problem states that the sale has been consummated and that Kame’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property. However, the fact that Esker’s receivable is subject to future subordination precludes recognition of the profit in full. Instead, the cost recovery method must be used to account for the sale.The full accrual method may be used only if profit on the sale is determinable, the earning process is virtually complete, and all of the following: A sale is consummated. The buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property. The seller’s receivable is not subject to future subordination. The seller has transferred to the buyer the usual risks and rewards of ownership in a transaction that is, in substance, a sale and does not have a substantial continuing involvement in the property.
Since Esker’s receivable is subject to future subordination, the full accrual method may not be used to account for the sale.

Answer 143

A

$0When the intangible asset can be renewed indefinitely, and the company has the positive ability and intent to continuously renew, then the intangible asset is an indefinite life intangible. Indefinite life intangibles are not amortized, but are tested for impairment on an annual basis.

Answer 144

A

$504,000The remaining lease term at the end of 2002 is nine years (the 12-year lease term began January 1, 2000). The eight-year option is added to the term at that point to yield a revised lease term of 17 years (9 + 8). Leasehold improvements are amortized over the shorter of lease term (17 years) or useful life (15 years) because leasehold improvements revert to the lessor.Thus, the amortization of the leasehold improvements is $36,000 ($540,000/15). At the end of 2002, the carrying value of the leasehold improvement is $504,000 ($540,000-$36,000). A full year of amortization is warranted in 2002 because the improvements were completed in January.

Answer 145

A

40 days.A large accelerated filer is a company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more. A large accelerated filer must file its 10Q within 40 days after quarter end.

Answer 146

A

$605,000The following equation is used to explain the changes in the escrow liability and the ending balance (31 December, 2004):Beginning + Payments - Real estate + Interest - 10% (interest) = EndingBalance Received Tax Payments Balance$700,000 + $1.58mn - $1.72mn + $50,000 - $5,000 = $605,000The interest increases the liability, because it is an amount owed to the mortgagee. This debt is extinguished by crediting the receivable from the mortgagee. The 10% fee reduces the portion of the liability owing to interest.

Answer 147

A

$190,000The effect of estimated returns is recognized in the month of sale. Net sales to be reported for the current month equal $200,000 less the returns expected on those sales (5% or $10,000), or $190,000. The actual returns granted in the current month on previous months’ sales were recognized as reductions in net sales in those previous months.

Answer 148

A

Increase in inventory - Deducted from Increase in accounts payable - Added to
Cash payments to suppliers are converted to CGS as follows:
* Cash payments to suppliers
* + Increase in AP – Increase in inventory
* Cost of Goods Sold
An increase in ending inventory represents the cost of items purchased during the period which remain unsold. Thus, the increase should be deducted from cash payments to suppliers. An increase in AP indicates that certain items purchased during the period have not yet been paid for and are not included in cash payments. Since these represent unrecorded purchases, the increase must be added to cash payments to suppliers to arrive at CGS.Increase in inventory means purchases exceeded cost of goods sold and increase in AP means there was less cash payments to vendors than amount of purchases.

Answer 149

A

$798,000The building is a leasehold improvement because it reverts to the lessor at the end of the lease. The residual value belongs to the lessor and is not relevant to the lessee. The building was completed at the beginning of the second year of the lease. Therefore, the total cost to the lessee of $840,000 is amortized over 20 years, not 21.The carrying value of the leasehold improvement at the end of 2005, the first year of the building’s life but the second year of the lease, is $798,000 = $840,000(19/20).

Answer 150

A

How the reporting entity would use the asset.In determining the fair value of a nonfinancial asset, how the reporting entity would use the asset would not be taken into account in assessing the highest and best use of the asset. The highest and best use is based on use of the asset by market participants, not by the reporting entity.

Answer 151

A

The majority of its executive officers or directors are U.S. citizens or residents.A foreign private issuer is any foreign issuer other than a foreign government,exceptan issuer that meets the following conditions:

More than 50% of the outstanding voting securities are directly or indirectly owned by residents of the U.S., and
Any of the following:
The business of the issuer is administered principally in the U.S.
More than 50% of the assets of the issuer are located in the U.S.
The majority of its executive officers or directors are U.S. citizens or residents.

Answer 152

A

$400,000Under the installment method, gross profit is deferred at the time of sale and is recognized by applying the gross profit rate to subsequent cash collections. At the time of sale, gross profit of $500,000 is deferred ($1,000,000 – $500,000). The gross profit rate is 50% ($500,000 ÷ $1,000,000). Since year 1 collections on installment sales were $200,000, gross profit of $100,000 (50% × $200,000) is recognized in year 1. This recognition of gross profit would decrease the deferred gross profit account to a 12/31/Y1 balance of $400,000 ($500,000 – $100,000). Note that regular sales, cost of regular sales, and general and administrative expenses do not affect the deferred gross profit account.

Answer 153

A

As a change in accounting estimate.The amount of change in fair value resulting from a change in the valuation approach used to determine fair value is reported as a change in accounting estimate. That means that the amount of the change, like the change in fair value resulting from market forces, will be reported in current income (as income from continuing operations).

Answer 154

A

Managerial accounting need not follow Generally Accepted Accounting Principles (GAAP), while financial accounting must follow them.Managerial accounting is for internal use, and as such, does not follow GAAP. Financial accounting is for external users and must follow GAAP.

Answer 155

A

Number of company investments.Potential differential factors between public business entities and private companies include: number of primary users and their access to management; investment strategies of primary users; ownership and capital structure; accounting resources and learning about new financial reporting guidance not number of subsidiaries.

Answer 156

A

25 yearsThis copyright has a definite life; the question is what is the length of that life? The life assigned to the intangible asset is the shorter of its legal and useful life. The useful life is shorter than the legal life, so this copyright is amortized over 25 years.

Answer 157

A

A current asset and an expense.At the end of 2001, 1/2 of the prepayment is recognized as an expense. The minimum fee was incurred in 2001 equaling 1/2 of the prepayment amount. Sip has received the benefit of 1/2 of prepayment amount. The other 1/2 is applied to 2002 and allows Sip to use the patent in that year. This amount had future value as of 12/31/01. That future value is expected to expire at the end of 2002 and, thus, is classified as a current asset at the end of 2001. Additional use in 2002 beyond the minimum will be paid in that year.

Answer 158

A

January 15, 2008If Able Co. intends to elect to implement the fair value option for its investment in Baker’s debt, it must make its election on the date it first recognizes the investment, which is January 15, 2008.

Answer 159

A

$88,000Franchise fee revenue is recognized when all material services have been substantially performed by the franchiser. Substantial performance means that the franchiser has performed substantially all of the required initial services and has no remaining obligation to refund any cash received. As of December 31, year 1, the date the agreement was signed, no services have been performed. Therefore, this answer is correct because the entire $88,000 must be recognized as unearned franchise fees in the December 31, year 1 balance sheet.

Answer 160

A

$650,000This answer is correct. The basic cost of goods sold formula is:Beg. inv. + Net Purchases – End. inv. = CGSTo compute cost of goods sold from the information given, cash paid for purchases must be adjusted for increases (decreases) in both accounts payable and merchandise inventory. Cash payments for purchases during year 1 were $580,000. In addition, accounts payable increased by $50,000, indicating that total purchases exceeded cash payments for purchases by $50,000. Merchandise inventory decreased by $20,000, which means beginning inventory exceeded ending inventory by $20,000. This decrease in inventory must be added to cash payments for purchases to compute the cost of goods sold of $650,000. Cash paid for purchases $580,000 + Increase in AP $50,000 + Decrease in inv $20,000 Cost of goods sold $650,000

Answer 161

A

$100,000The net amount earned by the artist is also the royalty expense to the firm. Royalty expense is recognized on the basis of the sales of the CD. Adjustments to the final amount earned for 2000, after all return information is known, will be treated as an adjustment to royalty expense in 2001. New information in 2001 will require a change in estimate, not retroactive application. The $100,000 amount is the best estimate of the royalty cost to Bain in 2000 that will ultimately be paid on 2000 sales.

Answer 162

A

Assist the IASB in enforcing regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative treatments permitted by IFRSs.Remember that the IASB has no enforcement authority. The enforcement is carried out by regulators, such as the SEC in the U.S., Central Banks, and governmental authorities. As such, the purpose of the IASB’s Framework is not to assist in enforcing regulations, accounting standards, and procedures but, rather, to assist in promoting the harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative treatments permitted by IFRSs. IASB Framework, para. 1.

Answer 163

A

The needs of the users of the information.Per SFAC 8, the objectives of financial reporting focus on providing present and potential investors with information useful in making investment decisions. Financial statement users do not have the authority to prescribe the data they desire; therefore, they must rely on external financial reporting to satisfy their information needs.

Answer 164

A

Neutrality, completeness and free from error.TheIASB Framework for the Preparation and Presentation of Financial Statementshas converged with the FASB’s SFAC 8. The concept offaithful representation, includes completeness, neutrality, and free from error.

Answer 165

A

$2,300,000The solutions approach is to set up a T- account for the liability.As receipts are collected, the liability is credited to record the additional subscriptions owed to customers. In addition, the liability is decreased as revenue from the subscriptions is earned. Based upon the information given, Weaver should report $2,300,000 of subscriptions collected in advance at December 31, year 2.

Answer 166

A

In proportion to the cash collections received.The installment method of recognizing revenue is appropriate only when “collection of the sale price is not reasonably assured.” Under the installment method, gross profit is deferred to future periods and recognized proportionately to collection of the receivables.Revenue is recognized as cash is collected. Thus, revenue recognition takes place at the point of cash collection rather than the point of sale. Installment sales accounting can only be used where “collection of the sale price is not reasonably assured” (ASC Topic 605) (APB 10).Under the installment sales method, gross profit is deferred to future periods and recognized proportionately to collection of the receivables. Installment receivables and deferred gross profit accounts must be kept separate by year, because the gross profit rate usually varies from year to year.

Answer 167

A

Timeliness over faithful representation.Interim reporting emphasizes timeliness over faithful representation. Interim reports are generally more aggregate and reflect estimates that are of a more approximate nature than those found in annual reports. The objective is to provide reasonable information in a timely fashion, rather than exact information. The cost to provide the latter would often be prohibitive on a quarterly basis.

Answer 168

A

Net Credit Sales / Average Accounts Receivable

Answer 169

A

Unearned revenue for the entire proceeds.Per SFAC 5, revenue should not be recognized until earned. Revenues are generally earned when the product is delivered or services are rendered to customers. When a sale or cash receipt (or both) takes place prior to the delivery of the product or performance of the service, as in this case, the revenues should be earned as delivery/performance takes place. Since the entire proceeds in this problem are for the advance sale of tickets, they should be reported as unearned revenue in the seller’s financial statements before the performance.

Answer 170

A

Regulation S-X.Regulation S-X governs the form and content of financial statements and financial statement disclosures.

Answer 171

A

$500,000The project is 12.5% complete at the end of 2005 ($2mn/$16mn). Total gross profit through the end of 2005 is therefore $500,000 [= .125($20mn - $16mn)].The $500,000 amount is the proportion of completion applied to the total contract profit of $4mn. 2005 is the first year of construction; therefore no gross profit from previous years is subtracted. The entire $500,000 gross profit is recognized in 2005.

Answer 172

A

Expense approach.The expense approach is not one of the approaches for the determination of fair value specified in ASC 820; it is an irrelevant distracter in this question.

Answer 173

A

8.0 to 1The times interest earned ratio is: (income before interest expense and income tax/interest expense).For Ruhl, this ratio is: $800,000/$100,000 = 8. This means that the firm has earnings that would support interest eight times the current level. In other words, the firm could pay its current level of interest eight times.If interest expense were $800,000, net income would be zero and no tax would be due. $800,000 of interest could be paid from resources earned in the current period.

Answer 174

A

Current Assets / Current LiabilitiesPositive WC is a ratio > 1

Answer 175

A

$59,000Revenue on a franchise agreement should be recognized when the franchisor has substantially performed all material services and conditions, and collectibility is reasonably assured. Baker should recognize $59,000 in revenue: the initial cash payment ($25,000) plus the present value of the future cash payments ($34,000).

Answer 176

A

$1,000The fair value of the financial asset is $1,000, the quoted price in the most advantageous market, but without adjusting that price for transaction costs. Since there is no principal market for the financial asset, the most advantageous market must be used to determine fair value. The most advantageous market is the market that maximizes the amount that would be received to sell the asset (or minimizes the amount that would be paid to transfer a liability), after taking into account transaction costs and transportation costs. Thus, the most advantageous market is Market A, determined as:Market A,Market BQuoted price of asset $1,000, $1,050Transaction cost ($75), ($150)Net Proceeds $925, $900Even though transaction costs are considered in determining the most advantageous market, the price in the most advantageous (or principal) market used to measure the fair value of the asset (or liability) is not adjusted for transaction costs [ASC 820-10-35-9B]. Therefore, the quoted price of the asset in the most advantage market, unadjusted for the transaction costs, is fair value.

Answer 177

A

$19,000In computing life insurance expense, the increase in cash surrender value is subtracted from the annual premium because the net cost to the firm is the premium less the increase in that investment. The investment is property of the insured firm.The cash surrender value (an investment account) increased $21,000 during 2005 ($108,000-$87,000). This increase is treated as a direct reduction in the current year’s insurance premium. Therefore, insurance expense is $19,000 ($40,000-$21,000) for 2005.What makes this question difficult is realizing that the dividends are not treated as a separate revenue; rather, they are treated as an offset against insurance expense. The reason is that the dividends are directly related to the policy. The investment aspect of whole life insurance is an integral part of the life insurance policy.

Answer 178

A

Enterprise performance but not directly provide information about management performance.The financial statements provide a wealth of information about the performance and financial position of the enterprise, but they do not directly allow an evaluation of management. There are too many factors that affect the firm’s performance to be able to single out management’s contribution (or lack of it). Many factors interact to determine the performance of the enterprise, one of them being management’s performance. Also, for example, current enterprise performance is affected by the past actions of managers that may no longer be with the enterprise.

Answer 179

A

Had lower accrued expenses on December 31, 2004, than on January 1, 2004.If the accrued expenses account (a current liability, often called accrued expenses payable) decreased during 2004, then a greater amount of cash was paid for those expenses in 2004 than were accrued in 2004. This would cause cash-basis net income to be less than accrual-basis net income. Cash-basis net income reflects expenses paid; accrual-basis net income reflects expenses recognized (accrued).

Answer 180

A

No Effect on Both.The current ratio equals current assets divided by current liabilities. The quick ratio equals quick assets divided by current liabilities. Quick assets include cash, cash equivalents, trading securities, accounts receivable and other current assets readily convertible to cash. Quick assets exclude inventories and prepaids.Trading securities are included in both current assets and quick assets because they are, by definition, immediately marketable. The sale of trading securities at book value has no effect on current assets or quick assets because the cash received equals the reduction in the trading securities account. Thus, neither ratio is affected by such a sale.

Answer 181

A

$0Under the cost recovery method no profit of any type is recognized until the cumulative receipts (principal and interest) exceed the cost of the asset sold. This means that the entire gross profit ($3,000,000 – $2,000,000 = $1,000,000) and the year 2 interest received ($270,000) will be deferred until cash collections exceed $2,000,000. Therefore, no income is recognized in year 2.

Answer 182

A

Sales commissions.Sales commissions are recognized as an expense on the basis of a presumed direct association with the related sales revenue (SFAC 5).Under accrual accounting, expenses are recognized as related revenues are recognized, that is, (product) expenses are matched with revenues. Some (period) expenses, however, cannot be associated with particular revenues. These expenses are recognized as incurred.

Product costs are those which can be associated with particular sales (e.g., cost of sales). Product costs attach to a unit of product and become an expense only when the unit to which they attach is sold. This is known as associating “cause and effect.” Period costs are not particularly or conveniently assignable to a product. They become expenses due to the passage of time by
Immediate recognition if the future benefit cannot be measured (e.g., advertising)
Systematic and rational allocation if benefits are produced in certain future periods (e.g., asset depreciation)

Answer 183

A

Faithful representation - ONLYInformationis representationally faithfulif it is reasonably free from error and bias, andcomplete.

Answer 184

A

$0When the right of return exists, a seller may only recognize revenue when the buyer is obligated to pay the seller, and the obligation is not contingent on the resale of the product. Because Jensen’s obligation to repay is contingent upon Jensen reselling the goods, Jensen cannot recognize revenue in its December 31 income statement.

Answer 185

A

The end of preceding fiscal year.The Balance Sheet for the end of the preceding fiscal year would have been the last audited Balance Sheet. This Balance Sheet is presented along with the current fiscal quarter.

Answer 186

A

NO and YES.An increase in accounts receivable reflects recognized but uncollected sales. The accrual method recognizes these sales as earnings, causing income to exceed cash-basis income for such sales. Thus cash-basis income is understated relative to accrual-basis accounting. The opposite is true for an increase in accrued expenses. The increase in the liability reflects recognized but unpaid expenses. The accrual method recognizes these expenses in earnings, causing income to decrease relative to cash-basis income. Thus, cash-basis income is overstated, relative to accrual-basis accounting.

Answer 187

A

$1,600The $1,600 ending cash surrender value is the difference between the total premiums paid ($8,000 = 4 x $2,000) and the total amount charged to insurance expense ($6,400). An increasing portion of the premiums on life insurance are allocated to the investment feature of life insurance each year.

Answer 188

A

(Net Income + Interest Expense + Income Tax Expense) / Interest Expensemeasures ability of current earnings to cover interests costs for the period.

Answer 189

A

New GAAP should be neutral and not favor any particular reporting objective.One of the objectives of the FASB in setting standards is to develop rules that are unbiased. FASB statements generally do not reflect any reporting bias.For example, the requirement to expense all research and development costs is uniform across all firms and does not favor one firm over another.

Answer 190

A

$0If the goods are similar in nature and value, then no income or expense is recognized.Barter transactions are not recognized if the exchanged goods are similar in nature and value. If the goods are dissimilar, revenue is recognized at fair value of the goods received. If the fair value of the goods received cannot be measured, revenue is recognized at the fair value of goods or services given up.

Answer 191

A

Predictive Value.Predictive value is the ingredient that helps users increase the likelihood of forecasting the outcome of events. Financial statement information is useful if it helps users make decisions about investing and extending credit. These decisions involve predictions of a firm’s future financial performance, position, and cash flows.

Answer 192

A

Income.The income approach to fair value measurement of an asset measures fair value by converting future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.

Answer 193

A

Immediate recognition.Per SFAC 5, the principle of immediate recognition requires that items carried as assets in prior periods that are discovered to be impaired in value be charged to expense (e.g., a patent that is determined to be worthless).Losses =When future economic benefits are reduced or eliminatedWhen economic benefits are consumed during a period, the expense may be recognized by matching (such as cost of goods sold), immediate recognition (such as selling and administrative salaries), or systematic and rational allocation (such as depreciation).

Answer 194

A

$200,000The installment method of recognizing revenue is not acceptable for financial reporting purposes unless the circumstances are such that the collection of the sales price is not reasonably assured. Since the property was sold to a triple-A rated company and the value of the property is appreciating, collection can be assumed to be reasonably assured. Therefore, the entire gain should be recognized for financial reporting purposes at the date of sale:Sales price – Cost of building = Gain recognized$1,200,000 – $1,000,000 = $200,000

Answer 195

A

Financial statements included property with a carrying amount increased to management’s estimate of market value.Faithful representation is that the information depicts what it purports to represent. It has three subcomponents: completeness, neutrality, and free from error.Neutrality means that information should not be prepared or reported in such a way as to obtain a predetermined result. Also, the information should be free from bias.This answer is correct because management’s estimate violates the characteristics of neutrality and verifiability. Property should be valued at its carrying amount on the financial statements, not management’s estimates of market value. Completeness requires that information is presented or depicted in such a way that users can understand the item being depicted free from error is that no errors or omissions in the information are reported.

Answer 196

A

When installment sales are material, and there is no reasonable basis for estimating collectability.The installment sales method of revenue recognition is used when sales are material, and the collection of the sales price is not reasonably assured.

Answer 197

A

Redemption of certificates - DECREASE Lapse of certificates - DECREASE
This answer is correct. At the time the gift certificates were issued, the following entry was made: Cashxx Deferred revenuexx
Upon redemption of the certificates, the obligation becomes satisfied and the revenue is earned. Similarly, as the certificates expire, the store is no longer under any obligation to honor the certificates and the deferred revenue should be taken into income. In both instances, the deferred revenue account must be reduced (debited) to reflect the earning of revenue. This is done through the following entry: Deferred revenuexx Revenuexx

Answer 198

A

Financial Reporting Releases (FRR).The main pronouncements published by the SEC are the Financial Reporting Releases (FRR) and the Staff Accounting Bulletins (SAB).Another pronouncement type is Accounting and Auditing Enforcement Releases (AAER).

Answer 199

A

A significant amount of raw material inventory is acquired for cash from a bankrupt supplier.Since the raw material inventory was acquired from a supplier in bankruptcy, it is likely that the transaction occurred when the seller was under duress. Therefore, it is likely that the price paid (an entry price) does not represent fair value - an exit price at which the inventory could be sold by a seller not under financial duress.

Answer 200

A

$8,000This is an example of a single-period loss on a profitable contract. The loss for year two is computed as: $34,000 gross profit through year two - $42,000 gross profit year one = - $8,000 single-period loss. The loss “reverses” $8,000 of the $42,000 gross profit recognized in year one.

Answer 201

A

An asset provides future benefits.According to the IASB’s Framework, an asset is defined as “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.” IASB Framework, para. 49.

Answer 202

A

365 / Inventory Turnover = average number of days inventory is sold or used

Answer 203

A

$44,000Six years remained in the lease term at the point the leasehold improvements were made. Thus, they should be amortized over six years, rather than over their eight-year useful life.Leasehold improvements revert to the lessor at the end of the lease term. As of June 30, 2002, the leasehold improvements have been used only 1/2 year. Thus, the net balance in leasehold improvements is $44,000 [$48,000-($48,000/6)(1/2)].

Answer 204

A

$1,200,000Development stage enterprises capitalize the same costs as established on-going enterprises. Thus, only the leasehold improvements, equipment, and furniture ($1,200,000) would have been capitalized.Research and development is expensed as incurred, as are most general and administrative costs. There is no information in the question to justify capitalizing the laboratory operations cost.

Answer 205

A

An investment classified as held-to-maturity.An entity may elect to measure and report an investment classified as held-to-maturity at fair value. Traditionally, investments classified as held-to-maturity would be measured and reported at amortized cost, but the provisions of the fair value option permit such investments to be measured and reported at fair value at the option of the reporting entity. - could be either FV or AC

Answer 206

A

$0Under the cost recovery method no profit of any type is recognized until the cumulative receipts exceed the cost of the asset sold. This means that the entire gross profit ($5,000,000 – $4,000,000 = $1,000,000) and the year 1 interest revenue ($132,000) will be deferred until cash collections exceed $4,000,000. Therefore, no income is recognized in year 1.

Answer 207

A

I and II only.Both Statements I and II are correct. The determination of fair value is based on a hypothetical transaction and on the use of a (hypothetical) exit price. Statement III is not correct. The determination of fair value of a nonfinancial asset should be based on the highest and best use of the asset by market participants, not based on the intended use by the reporting entity.

Answer 208

A

94The operating cycle is the total period of time from the purchase of inventory, to sale, and then finally to the collection of cash from receivables.The operating cycle thus can be approximated by the sum of the number of days’ sales in inventory, which is the average number of days before an item of inventory is sold, plus the number of days’ sales in receivables, which is the average number of days to collect a receivable. This sum is 94 (61 + 33) days.

Answer 209

A

$70,000Initial franchise fees are recognized as revenue when all of the initial services required of the franchisor have been substantially performed. Continuing franchise fees are reported as revenue as the fees are earned and become receivable. In this case, since all the initial services were performed by 7/1/Y1, the initial fee ($50,000) is recognized as revenue in year 1. Also, continuing fees of $20,000 (5% × $400,000) should be recognized. Therefore, the total franchise fee revenue to be recognized in year 1 is $70,000 ($50,000 + $20,000).

Answer 210

A

International Federation of Accountants (IFAC).The International Federation of Accountants (IFAC) is a global organization for the accounting profession. Its members are accounting and auditing organizations throughout the world. It is an independent organization not under the IFRS Foundation umbrella, but it does support the activities of the IFRS Foundation by encouraging high-quality practices by the world’s accountants and auditors.

Answer 211

A

$0The percentage of completion is ($2mn)/($2mn + $6mn) = 25%. This is the ratio of cost incurred to date, divided by the total project cost, which is the sum of cost to date and estimated remaining costs. Gross profit recognized is therefore .25($9mn - $2mn - $6mn) = $250,000. The contract price is $1mn more than the total estimated project cost. At 25% complete, the firm recognizes $250,000 of gross profit. The construction-in-progress balance is therefore $2mn + $250,000 = $2.25mn, the sum of cost to date, plus gross profit to date. With billings only $1.8mn so far, the firm reports a net asset equal to the difference between $2.25mn, the balance in construction in progress, and $1.8mn of billings. Billings are contra to construction in progress for reporting. This $450,000 difference is labeled “cost and profit in excess of billings on long-term contracts” in the balance sheet.No current liability is reported, because the asset balance (construction in progress) exceeds billings.

Answer 212

A

Relevance.The question is asking which of the following terms captures predictive value. Predictive value along with confirmatory value is a component of relevance. Predictive Value Confirmatory Value Materiality

Answer 213

A

Using the current replacement cost of the asset.Current replacement cost adjusted for obsolescence can be used for determining fair value measurements under the cost approach. Relevant information = market approach
discounted cash flows = income approach

Answer 214

A

(Cash + Accounts Receivable + Marketable Securities) / Current LiabiliitesDoes NOT include inventory in current assetsAlways less than the Current Ratio as inventory is excluded for this ratio.

Answer 215

A

Recognition and measurement; disclosures; display; effective date; and transition method.The five items to be used as a guide to determine if there should be differential guidance between public and private companies are:
Recognition and measurement—considerations include current guidance relevance, more practical expedients, needs of users, access to management, industry-specific guidance, and cost effectiveness;
Disclosures—considerations include current guidance relevance , management access, cost effectiveness, and the need for additional disclosures;
Display—considerations include current guidance relevance;
Effective date—generally, the effective date is one year after the first annual reporting date for which public companies are required to adopt standards ; and
Transition method—considerations include the retrospective method, the modified retrospective method, practical expedients; and cost effectiveness.

Answer 216

A

Decreasing annual insurance expense.A portion of the premium is allocated to the cash surrender value, which is an asset to the insured firm. Thus, the insurance expense is reduced by the amount of the premium so allocated.For example, if the annual premium is $4,000, and the increase in cash surrender value is $800 for the year, insurance expense is $3,200 for the year.

Answer 217

A

Debit prepaid services and credit services expense for $60,000.This question is testing your knowledge of what portion of a cash outlay should be recognized as an asset and what portion should be recognized as an expense. The entire cost of the service is $90,000 for 6 months; therefore, the monthly cost is $15,000 a month. On October 31, the company expensed the entire $90,000, but will receive future benefit over 4 months in the next year. The adjusting entry would be to reduce service expense for $60,000 (4 x $15,000) and increase prepaid services for $60,000.

Answer 218

A

Total costs incurred to date to total estimated costs.The proportion of completion at the end of any year for a construction contract is the amount of work done, divided by the total amount of work required for the contract. Typically, cost is the measure of “work done.” At the end of year three, the numerator is the cost incurred for all three years. The denominator is the total estimated cost of the project, which is the sum of the cost incurred for all three years so far, plus estimated costs to complete as of the end of year three.
The percentage of completion changes each year, because both the numerator and denominator change. The gross profit to be reported for year three is the profit for all three years (using the proportion of completion just computed), less the profit already reported in the first two years.

Answer 219

A

6.0Inventory turnover = cost of goods sold/average inventory.Average inventory is the sum of beginning inventory and ending inventory divided by 2.To find beginning inventory and average inventory, the basic inventory equation is used:Beginning inventory+Purchases=Ending inventory+Cost of goods soldBeginning inventory+$960,000=$180,000 +$900,000Beginning inventory=$120,000Average inventory = ($180,000 + $120,000)/2 = $150,000Inventory turnover = cost of goods sold/average inventory= $900,000/$150,000 = 6

Answer 220

A

Wages payable.An accrued liability results from recording an expense that has been incurred but not paid. Wages payable is an example of an expense incurred but not paid.Accrual—accrual-basis recognition precedes (leads to) cash receipt/expenditure
* Revenue—recognition of revenue earned, but not received
* Expense—recognition of expense incurred, but not paid
Deferral—cash receipt/expenditure precedes (leads to) accrual-basis recognition
* Revenue—postponement of recognition of revenue; cash is received, but revenue is not earned
* Expense—postponement of recognition of expense; cash is paid, but expense is not incurred
*

Answer 221

A

Lower by $16,000This answer is correct. This question requires the calculation of accrual-based income, as shown below. Cash-basis pre-tax income $100,000 Increase in accounts receivable + $10,000 Decrease in accounts payable + $6,000 Accrual-basis income $116,000
This cash pretax income is $16,000 ($116,000 – $100,000) lower than the accrual-basis income.

Answer 222

A

Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.SFAC 8 states that information provided by financial reporting pertains to individual business enterprises rather than to industries or an economy as a whole or to members of society as consumers.

Answer 223

A

$16,000Since Peabody has elected to report the investment in Newman using the fair value option, it should recognize its share of cash dividends received during the period (.30 x $20,000 = $6,000) and the increase in the fair value of the investment ($400,000 > $410,000 = $10,000), or $6,000 + $10,000 = $16,000.

Answer 224

A

$115,500The capitalizable costs for an intangible asset under IFRS 38 are essentially the same as U.S. GAAP. The cost of the asset is the cash paid to acquire the asset, including the cost to obtain legal title and control of the asset. This cost will include the purchase price ($100,000), the taxes ($5,000), and the legal costs to register the asset ($10,500).The training of the sales personnel ($7,000) or the administrative personnel ($12,000) is not a cost of the asset. The research associated with the purchase of the asset ($24,000) may sound like a cost that can be capitalized-but this cost is for the purchase transaction-not the research of the asset itself. The trademark is already developed when we acquired it-we did not do any research related to the development of the asset.

Answer 225

A

Inventory reported at lower of cost or market.Inventory valuation under lower of cost or market is specifically exempt from the fair value measurement guidance provided by ASC 820, “Fair Value Measurement.” The use of lower of cost or market valuation places upper (“ceiling”) and lower (“floor”) limits on the measurement of “market” that may not result in a true fair value measurement. Thus, the measurement of inventory at “market” is one of the few exceptions to the use of ASC 820 guidance for fair value measurement.

Answer 226

A

FIFO (first in, first out).Inventory turnover ratio is Cost of Goods Sold/Average Inventory. Therefore, to produce the lowest inventory turnover ratio, we need the highest value of ending inventory. The method that produces the highest value of ending inventory in an inflationary economy (prices are rising) is FIFO.

Answer 227

A

Expense
Asset - An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Liability - A liability is a present obligation of the entity arising from past events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Equityis the residual interest in the assets of the entity after deducting all its liabilities.
Incomeis increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Answer 228

A

The asset is in its highest and best use.Fair value measurement also assumes the highest and best use of the asset. Notethat for financial assets and financial liabilities, the highest and best use concept is not relevant since they do not have alternative uses and their fair values do not depend upon their use within a group. Thehighest and best usewill maximize the value of the asset or group of assets. The use of the asset must be physically possible, legally permissible, and financially feasible at the measurement date. The highest and best use of the asset is then used to determine the valuation premise used to measure fair value.

Answer 229

A

BOTH.There are two assumptions underlying the preparation and presentation of financial statements: accrual basis and going concern. IASB Framework, para 22-23.US GAAP has 4, and does not specifically reference the accrual method of accounting.

Answer 230

A

$105,000The net cash sales are not involved in the accounts receivable turnover ratio, nor are inventory or purchases. Working backwards from accounts receivable, net credit sales is found as:Accounts receivable turnover = net credit sales/average accounts receivable.5 = net credit sales/[($20,000 + $22,000)/2]5($21,000) = net credit sales = $105,000

Answer 231

A

Prepayment of 3-year insurance premiums on machinery.A deferred cost is a cost which has been paid in advance of its use in the business and is, therefore, an asset which will provide future benefits such as the prepayment of insurance premiums.

Answer 232

A

BOTH.Per SFAC 6, gains and losses may be described or classified as “operating” or “nonoperating,” depending on their relation to an entity’s major ongoing or central operations.Gains (losses)are increases (decreases) in equity from peripheral transactions of entity excluding revenues (expenses) and investment by owners (distribution to owners).Characteristics of gains and losses:

Result from peripheral transactions and circumstances which may be beyond control
May be classified according to sources or as operating and nonoperating
Change in equity reported net

Answer 233

A

Neutrality.Neutrality is a component of faithful representation, but does not interact with relevance.

Answer 234

A

Predictive value, confirmatory value, and materiality.Relevance.Information has relevance when it can influence the user’s economic decisions by helping them evaluate past, present, or future events. Relevance has certain attributes such as predictive value and a confirmatory role. (Note the change in vocabulary here: in US GAAP, relevance has predictive value and feedback value.) In addition, IFRS includes materiality under the characteristic of relevance. Relevance is affected by the nature and materiality of the information. Information is considered material if its omission or misstatement could make a difference in a user’s decision.

Answer 235

A

$36,000Franchise fee revenue shall be recognized when all material services have been substantially performed by the franchisor (i.e., the franchisor has no remaining obligation to refund any cash received and substantially all of the initial services of the franchisor have been performed). Of the initial fee of $75,000, the $30,000 down payment applies to the initial services already performed by Reed. Additionally, this amount is not refundable. Therefore, the $30,000 may be recognized as revenue in year 1. The three remaining $15,000 installments relate to substantial future services to be performed by Reed. The present value of these payments, $36,000, is recorded as unearned fees and recognized as revenue once substantial performance has occurred. Cash $30,000 Notes Receivable $45,000 Discount on NR $9,000 Franchise revenue $30,000 Unearned franchise fees $36,000

Answer 236

A

Johan - YES Abco - NO
The intangible asset has a definite life and is amortized. Goodwill has an indefinite life, and is not amortized but is tested for impairment.

Answer 237

A

Accounts receivable - $800,000 Deferred gross profit - $320,000
Under the installment method of accounting, gross profit is recognized in proportion to cash collected on installment sales. Since this is the first year of operations for Bear Co., there is no beginning balance for accounts receivable and no previously deferred gross profit. The year-end balance in accounts receivable is determined by subtracting from total accounts receivable ($1.4mn) the amount collected during the period. Since the gross profit percentage of sales is 40%, the realized gross profit ($240,000) represents 40% of accounts receivable collected. Therefore:
* .40 X (amount collected) = $240,000
* X = $240,000/.40
* X = $600,000 (total A/R collected)
The year-end balance in accounts receivable will be:
* Sales on account $1,400,000
* A/R collected ($600,000)
* A/R balance $800,000
The total deferred gross profit, less the amount realized during the period, will be the year-end deferred gross profit. The total deferred gross profit for the year is 40% of installment sales. Therefore:
* Installment sales $1,400,000
* Gross profit rate .40
* Total deferred gross profit $560,000
* Less: Amount realized $240,000
* Year-end deferred gross profit $320,000

Answer 238

A

Alphaco, Betaco, and Charlieco.As the parent, Alphaco may elect to report all of the investments held-to-maturity at fair value in its consolidated statements (only), whether or not the fair value option was elected by its subsidiaries for their separate books and any separate reporting purposes.

Answer 239

A

$600,000Percentage of completion for 2004= $5.4mn/($5.4mn + $10.8mn) = 33%. Gross profit recognized in 2004 = .33[$18mn - ($5.4mn + $10.8mn)] = $600,000.The denominator of the proportion of completion, which is estimated total project cost, includes cost to date and costs remaining. The proportion is multiplied by total estimated project profit, the difference between contract price and total estimated project cost.

Answer 240

A

BOTH.This question is not asking whether other comprehensive bases of accounting are acceptable under GAAP. Rather, it is simply asking which statements describe a comprehensive basis other than GAAP. Both I and II are found in various situations of accounting practice.

Answer 241

A

Net realizable valueWhen a firm is in liquidation, historical cost and entry values (replacement cost) are no longer relevant.The going concern assumption supports the historical cost principle. The firm is no longer a going concern. The only amounts relevant are the amounts to be received on sale of the assets. Net realizable value is the net value to be received, after the costs of getting the asset ready for sale are deducted.

Answer 242

A

Product market share.The market share of the company’s product is not a required disclosure. The company may chose to voluntarily present this information, but it is not a required disclosure.

Answer 243

A

Land = $60,000, Building = $50,000
Even though there was no profit or loss on the intercompany transaction, it resulted in amounts being redistributed between the depreciable asset office building and the non-amortizable asset land, which would result in different amounts of depreciation expense than if the transaction had not occurred. Therefore, the intercompany transaction must be “eliminated” so that the consolidated statements would show land at $60,000 and buildings at $50,000. (Sonny also would need to assess the building for possible impairment.) Land = $75,000, Building = $35,000
Papa should record the land and building on its books at the appropriately determined fair value at the date of the transaction. The prior carrying values on Sonny’s books are not relevant to the amounts at which Papa should record the assets on its books, but are relevant to the amounts that should be reported in the consolidated financial statements.

Answer 244

A

What influences or makes a difference to a decision marker.Relevant information is capable of making a difference in a user’ s decision. Materiality is entity specific and related to relevance—if omitting it or misstating it could influence a user’ s decision. Therefore, materiality and relevance are defined by what influences or makes a difference to a decision maker.

Answer 245

A

After cash collections equal to the cost of sales have been received.This is the most conservative method.Installment methods of recognizing revenue are appropriate only when “collection of the sale price is not reasonably assured.” Under the cost recovery method, gross profit is deferred and recognized only when the cumulative receipts exceed the cost of the asset sold.

Answer 246

A

The cost recovery method.Profit is deemed to be realized when a sale in the ordinary course of business is effected, unless the circumstances are such that the collection of the sale price is not reasonably assured. The most conservative accounting treatment in such instances is the cost recovery method, which defers the recognition of any profit until the full cost of the item sold has been collected. Subsequent collections are then considered to be all profit.

Answer 247

A

Comparability.Comparability is the quality of information that enables users to identify similarities and differences between sets of information. For information to be comparable, it must be both relevant (make a difference to a user) and reliable (be accurate and trustworthy).

Comparability
Verifiability
Timeliness
Understandability

Answer 248

A

Ultimate amount collectible is indeterminate.The profit on a sale in the ordinary course of business is considered to be realized at the time of the sale unless it is uncertain whether the sales price will be collected. The Board concluded that use of the installment method of accounting is not acceptable unless this uncertainty exists.

Answer 249

A

Relevance and predictive value.The characteristic of relevance includes the components of predictive value, confirmatory value, and materiality.

Answer 250

A

2001 net income - Overstated
12/31/01 owner’s equity - No effect

Supplies expense for 2001 under the accrual method is: supplies expense = beginning supplies + purchases - ending supplies. If beginning supplies cannot be determined, then it is assumed to be zero and supplies expense is understated, causing 2001 income to be overstated. However, total supplies expense for the entire life of the business is unaffected by the inability to determine beginning supplies for 2001. Total supplies expense for the life of the business is total purchases less ending inventory in 2001. These two amounts are determinable, and thus, owners’ equity at the end of 2001 can be determined.From test bank = Inability to determine beginning supplies inventory would cause supplies expense to be understated and year 2 net income to be overstated. Cumulative supplies expense would be properly stated so there would be no effect on December 31, year 2 retained earnings.

Answer 251

A

An asset and revenue for $10,000 is recognized.UVW has a receivable and revenue for the $10,000 of advertising services provided to date. Without receipt of any travel and lodging services, the firm reports a receivable for the unpaid advertising services. These services will be “paid” in the form of travel and lodging.

Answer 252

A

Current Assets - Current LiabilitiesIf positive, there are more CA than CL

Answer 253

A

$59,400Gross sales are $600,000 for Hitch Corp. The estimated 1% returns should be subtracted from gross sales to determine the net sales for the period, or $594,000 ($600,000 – $6,000). Therefore, this answer is correct because the royalty amount for the year is equal to $59,400 ($594,000 net sales × 10% royalty rate).

Answer 254

A

$400,000Deferred gross profit is the gross profit remaining on uncollected sales accounted for under the installment method. The gross profit percentage is 50% [($1mn - $500,000)/$1mn)] on these sales.Uncollected installment sales = $800,000 = $1mn - $200,000. Deferred gross profit = $400,000 = .50($800,000)

Answer 255

A

365 / AR Turnover = number of days required to collect receivables

Answer 256

A

The principal market.ASC Topic 820 defines the principal market as the market with the greatest volume and level of activity.The fair value measurement assumes that the asset or liability is sold or transferred in either the principal market or the most advantageous market. Theprincipal marketis a market in which the greatest volume and level of activity occurs. Themost advantageous marketmaximizes price received for the asset or minimizes the amount paid to transfer the liability. Market participants in the principal or most advantageous market should have the following characteristics:
* Be independent of the reporting entity (not related parties)
* Be knowledgeable
* Able to transact and,
* Willing to transact (i.e. motivated, but not compelled to transact).
This hypothetical price in the principal or most advantageous market should not be adjusted for transaction costs, such as costs to sell. However, the cost to sell is used to determine which market is the most advantageous. If location is an attribute of the asset or liability, the price is adjusted for costs necessary to transport the asset or liability to the market.

Answer 257

A

$0Revenue can be recognized only when all material services or conditions relating to the sale have been substantially performed by the franchisor. Since North’s services were not complete in the current year, no revenue can be recognized in the current year.Franchise AgreementsASC Topic 952 provides that the initial franchise fee be recognized as revenue by the franchiseronlyupon substantial performance of their initial service obligation. The amount and timing of revenue recognized depends upon whether the contract contains bargain purchase agreements, tangible property, and whether the continuing franchise fees are reasonable in relation to future service obligations. Direct franchise costs are deferred until the related revenue is recognized.

Answer 258

A

Accrued if attributable to employees’ services already rendered.Only costs that are attributable to employee service already rendered can be accrued. The firm has received no benefit for services that employees have not yet rendered. The firm owes employees nothing for future services and therefore has no liability for these amounts and no cost or expense should be recognized.

Answer 259

A

$15,000The liability must be accrued only for the vacation pay, because it is probable that paid vacations will be taken. Therefore, the liability is $15,000 (150 days x $100 per day).The firm may, but is not required to, accrue a liability for sick days. If the employees were routinely paid for sick days not taken, then sick days would be required to be accrued. For this firm, there is no payment for sick days not taken, therefore there is no requirement to accrue this cost.It may be argued that illness is the condition that mandates payment of sick pay. Illness cannot be predicted and therefore is not required to be accrued.

Answer 260

A

Accumulated - YES Vested - YES
Under FAS 43, if compensated absences either accumulate OR vest, then the liability should be accrued. Benefits accumulate if they can be carried over to future years.For example, assume an employee earns four weeks’ vacation per year, but does not take a vacation for two years. If the employee can take an eight-week vacation in the third year, the benefits are said to accumulate (firms usually place restrictions on the total time that can be accumulated).Benefits vest if they are no longer contingent on continued employment. This means that if an employee retires, he or she will receive their vested vacation pay.Either way, through accumulation or vesting, it is probable that the vacation compensation will be paid. Therefore, a liability has been incurred as of the balance sheet date.

Answer 261

A

$50,000The failure to accrue warranty expense is an accounting error. It gives rise to a Prior period adjustment in the year of discovery (2004).Prior period adjustments are limited to corrections of errors affecting prior-year net income. They adjust the beginning balance of retained earnings in the year of correction. The change in depreciation method is an estimate change, which is reported in earnings. It is not a Prior period adjustment.

Answer 262

A

As a Prior period adjustment (net of tax), by adjusting the beginning balance of retained earnings.The accrual basis of accounting is required by GAAP. A change from an inappropriate method to the correct method is treated as an error correction. The procedure requires retrospective application, resulting in an after-tax cumulative adjustment to prior years’ earnings (called a Prior period adjustment) to the beginning balance in retained earnings.

Answer 263

A

Understatement of accumulated depreciation of $40,000.Accumulated depreciation is a pre-tax amount. The journal entry omitted in the past is:dr. Depreciation expense, $40,000;cr. Accumulated depreciation, $40,000.The beginning balance of accumulated depreciation in the year the error was discovered is understated by $40,000 because that amount was not recorded in a prior year.

Answer 264

A

In the period of change and future periods if the change affects both.Accounting-estimate changes are treated currently and prospectively (in the future).If the change affects only the current period, then only current-period earnings is affected. More frequently, though, the change affects future periods as well. Then, current and future earnings are affected.An estimate change is never treated retroactively. Prior-year earnings are never adjusted for a change in estimate, because the information giving rise to the change could not have been known in prior periods.

Answer 265

A

$105,000Depreciation for three years (2000-02) is 3($210,000 - $10,000)/10 or $60,000. Through the beginning of 2003, retained earnings before tax, therefore, is understated $150,000 ($210,000 from immediate expensing of the asset, less $60,000 of depreciation, that would have been taken through 2002). The after-tax understatement is .70 x $150,000 = $105,000. Prior period adjustments are recorded as of the beginning of the year in which the error is discovered

Answer 266

A

$428,000The 2005 statement of retained earnings must disclose a Prior period adjustment to the beginning retained-earnings balance for the amount required to correct prior-year net income.

2004 insurance expense actually recognized (in error) $60,000
Less 2004 correct insurance expense - the amount that should have been recognized ($60,000/3 - a three-year policy) ($20,000)
Equals the error in pre-tax income before 2005(income understated) $40,000
Times (1 - tax rate) to determine after-tax errorx .70
Equals the error correction, the amount by which retained earnings at January 1, 2005 must be increased(the Prior period adjustment) $28,000
Plus unadjusted retained earnings at January 1, 2005 $400,000
Equals adjusted retained earnings at January 1, 2005 $428,000

Answer 267

A

$230,000 debit.The after-tax amount of the overstatement of 2004 earnings is $230,000 ($300,000 - $70,000 tax effect).2004 income is overstated by this amount, because the expense and tax effect were not recorded. Ending 2004 retained earnings is overstated by $230,000. Therefore, beginning 2005 retained earnings must be decreased (debited) $230,000. This is accomplished by adjusting the beginning 2005 retained earnings balance with a Prior period adjustment of $230,000 (debit).

Answer 268

A

The correction of a mathematical error in the calculation of prior years’ depreciation.A Prior period adjustment is defined as the correction of an error affecting prior-year income. The adjustment reverses the error by correcting beginning retained earnings in the year of discovery. If depreciation in a prior year is misstated, then income in that year is also incorrect, as well as the balance in retained earnings. The Prior period adjustment corrects retained earnings and accumulated depreciation.

Answer 269

A

$10,000The year-one error has no bearing on the amount of depreciation to be recognized in subsequent years. Annual depreciation is $10,000 (= $100,000/10). In year two, a Prior period adjustment will be recorded, correcting beginning retained earnings and accumulated depreciation. Year-one statements reported comparatively with year two’s statements will be shown correctly. Year two will report $10,000 of depreciation expense.

Answer 270

A

2003 ending working capital - Overstated 20x4 ending retained earnings - No effect
The entry that should have been accrued at the end of 2003 is:
dr.Commission expense xxx cr.Commission payable xxx
Working capital (current assets, less current liabilities) is overstated, because current liabilities (via unrecorded commission payable) are understated. By the end of 2004, the error has counterbalanced. The commission expense attributable to 2003 (in the above entry) would have been recognized as expense upon payment in 2004. Although earnings of both years are in error, the ending retained earnings balance for 2004 is correct.

Answer 271

A

Completed-contract method of accounting for long-term construction-type contracts to the percentage-of-completion method.Accounting-principle changes such as this one are recorded by retroactively restating prior-year financial statements. The entry to record the change results in an adjustment to the beginning balance of retained earnings in the year of the change.

Answer 272

A

Cumulative-effect adjustment to retained earnings, with separate disclosure.This accounting change is a change in the application of an accounting principle, which merits the reporting of a cumulative effect of accounting principle change.Accounting-principle changes, as well as changes in the application of principles, are accounted for using the retrospective approach, which recognizes the effect of the change on all prior years affected as an adjustment to retained earnings at the beginning of the year of change.

Answer 273

A

As a component of income from continuing operations, in the period of change and future periods if the change affects both.When an accounting principle change cannot be distinguished from an estimate change, it is accounted for as an estimate change. Changes in accounting estimate are accounted for currently and prospectively and are reported in income from continuing operations. The relevant accounts affected by the change are adjusted for the current and future years. The change is not retroactively applied.

Answer 274

A

In 2004 income from continuing operations.This is a change in accounting estimate, because experience in the current period implies that a different estimate should be used. This new information does not invalidate the good-faith estimate made in 2003, because the new information was not known at that time. These changes are treated currently and prospectively; that is, in the current and future periods, if affected. They are not applied retroactively.In this instance, the $10 increase in warranty costs per unit is recognized as an increase in warranty expense of 2004. Therefore, income from continuing operations will reflect this increase.

Answer 275

A

By restating the financial statements of all prior periods presented.The elimination of foreign-currency controls would legitimately change the status of the foreign sub from non-consolidated to consolidated.This causes a change in the reporting entity, since both companies must now be reported together. A change in reporting entity utilizes the retrospective method.

Answer 276

A

$146,000 Book value, January 2, 2005, date of accounting change: $264,000(5/8 years) = (as of January 2, 2005, five years of useful life remain) $165,000
Accumulated depreciation January 2, 2005, date of accounting change: $264,000(3/8 years) = (as of January 2, 2005, three years of the asset’s life have been used) $99,000
Plus 2005 depreciation: ($165,000 - $24,000)/(6 - 3 years) = $47,000
Equals accumulated depreciation balance, December 31, 2005 $146,000

As of January 2, 2005, the equipment has been used for three years. The new estimate of total life is six years. Therefore, 6-3 = three years remain. This remaining number of years is the basis for depreciating the asset, as well as the remaining book value at the beginning of the year of the accounting change ($165,000).

Answer 277

A

$600The book value at the beginning of the year of the change in estimated useful life is used as the base for subsequent depreciation. After four years, the book value remaining is one-fifth of its original cost, because there is no salvage value and the firm uses SL depreciation.That remaining book value is spread equally over four more years, yielding $600 of depreciation in each of those years. Book value at the beginning of year five = $12,000 - 4($12,000/5) = $2,400. Depreciation expense for year five = $2,400/4 = $600. The four years remaining include year five.

Answer 278

A

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.When it is impossible to determine whether the change is an estimate or a change in accounting principle, the change should be considered a change inestimateand accounted for prospectively.

Answer 279

A

$489,600This is a change in accounting estimate. The beginning 2007 patent balance is $714,000(12/15) = $571,200, because three years of amortization would have been recorded as of that date, based on 15 years. Amortization in 2007, therefore, is $571,200(1/7) = $81,600.As of the beginning of 2007, only seven years remain in the useful life, because the total useful life as of that date was changed to ten years, and the patent had been used for three years as of that date.Therefore, the ending net balance in the patent is $571,200 - $81,600 = $489,600.

Answer 280

A

The change in estimate is applied as of the beginning of 2005 for current and future periods.This is an accounting-estimate change. These accounting changes are handled currently and prospectively by applying the new estimate to the current and future periods, if affected. The effect of the change on prior years’ earnings is not computed, because the new information causing the estimate change was not known at that time.Cumulative effects are reported for accounting principle changes, not estimate changes, because the effect of the change on prior years is computed and reported for accounting principle changes only.

Answer 281

A

$0A change in depreciation method is treated as a change in estimate with the remaining book value at the beginning of the year of change being subject to the new method for the remainder of the asset’s life. No cumulative effect is reported.

Answer 282

A

$0The change in accounting principle is indistinguishable from a change in accounting estimate. This change can be effected by changing the useful life of the demo costs to zero - a change in estimate. The firm should write off the remaining unamortized costs at the beginning of the year of change. Earnings in 2004 will be reduced by $500,000 before tax as a result.

Answer 283

A

Cumulative effect of accounting principle change = NO Deferred income tax adjustment = NO
The change in expected service life is an accounting-estimate change. These are handled currently and prospectively. No attempt is made to compute the effect of the change on prior years’ income, because the new information was not available at that time.With no catch-up adjustment, there is no change in deferred taxes, because future differences between book and tax depreciation have not been changed.

Answer 284

A

$105,000The change results in a $150,000 increase in the inventory valuation for ending inventory at December 31, year 2, which means the before-tax effect on income in year 2 is also $150,000. Since the period-specific effects must be reported net of year 2 effects, the tax effect is $45,000 (30% × $150,000) and must be subtracted to leave a period-specific effect of $105,000 ($150,000– $45,000). The $150,000 increase in inventory should be added to the balance in inventory on the year 2 comparative balance sheet, $105,000 is the increase in net income, and the income tax payable account will increase by $45,000.

Answer 285

A

An accounting change that should be reflected in the period of change and future periods if the change affects both.A change in the salvage value of an asset is a change in accounting estimate. ASC 250-10-45-17 states that a change in accounting estimate should be accounted for in the period of change and future periods if the change affects both.

Answer 286

A

An accounting change that should be reflected in the period of change and future periods if the change affects both.According to ASC Topic 250. A change in the salvage value of an asset is a change in accounting estimate. ASC 250-10-45-17 states that a change in accounting estimate should be accounted for in the period of change and future periods if the change affects both.

Answer 287

A

A company presents consolidated financial statements in place of individual company financial statements.When there is a change in reporting entity, the change is retrospectively applied to the financial statements of all prior periods presented. Previously issued interim statements are also presented on a retrospective basis. Footnote disclosures for change in reporting entity include the nature and reason for the change, net income, other comprehensive income, and any related per-share amounts for all periods presented.

Answer 288

A

An accounting change that should be reported in the period of change and future periods if the change affects both.ASC Topic 250 states that a change in the periods benefited by a deferred cost should be treated as a change in accounting estimate. Changes in accounting estimates are accounted for in the period of change and future periods if the change affects both.

Answer 289

A

Retained earnings statement as an adjustment of the opening balance.ASC Topic 250 states that a change from an accounting principle that is not generally accepted to one that is generally accepted should be treated in the same manner as a correction of an error. A correction of an error should be reported as a prior period adjustment. This means that the cumulative effect at the beginning of the period of change is entered directly as an adjustment to the opening balance of retained earnings. When comparative statements are presented, prior years’ statements are retroactively restated.

Answer 290

A

$0.The change from an unacceptable accounting principle to an acceptable accounting principle is considered a correction of an error per ASC Topic 250. Thus both of these items are corrections of errors and as such are reported as prior period adjustments. Prior period adjustments are reported in the retained earnings statement and not in the income statement. Thus, year 2 earnings are not affected by the aforementioned items.

Answer 291

A

Revising future depreciation per year to equal the book value on January 2, year 6, divided by 6.Cory Company’s change of depreciation is considered a change in estimate. A change in estimate is treated prospectively by revising the remaining years’ depreciation expense. Book value of the asset at the time of change should be divided by 6, the estimated remaining life.

Answer 292

A

From using the percentage-of-completion method of accounting for long-term construction contracts to the completed contract method.Per ASC Topic 250, an entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.

Answer 293

A

As an adjustment to the balances of inventory, and a retrospective application to cost of goods sold, net income, and retained earnings in the year 1 comparative financial statements.Per ASC Topic 250, retrospective application requires the changes to be reflected in the carrying amounts of assets and liabilities of the first period presented. The financial statements for each individual prior period are adjusted to reflect the period-specific effects of applying the new accounting principle if it can be determined.

Answer 294

A

The unamortized cost at January 1, year 6, should be amortized over a 45-year life.The estimated useful life of an intangible asset is revised, the unamortized cost should be allocated over the remaining periods of the new useful life.

Answer 295

A

The correction of a mathematical error in the calculation of prior years’ depreciation.A correction of an error in previously issued financial statements requires a prior period adjustment by restating the financial statements. Prior period adjustments are covered in the previous section of this module.

Answer 296

A

An accounting change that should be reported by restating the financial statements of all prior periods presented.Per ASC Topic 250, accounting changes that result from a change in the business entity should be reflected in financial statements that are restated.

Answer 297

A

$0ASC Topic 250 requires changes in accounting principle to be given retrospective application, and the cumulative effects of the change reflected in the carrying value of assets and period-specific effects on the financial statements for each period presented.

Answer 298

A

PPE - Historical Cost and Depreciated/Amortized Historical Cost
Rec. - Net Realizable Value
Inv. - Lower of Cost or Market
IMS - Market Value
Liab. - Present Value
OE - Historical Value of Cash Inflows and Residual Valuation

Answer 299

A

NEITHERexpense is normally included in general and administrative expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified.

Answer 300

A

Because it is more meaningful presentation of revenue and expenses.A multi-step Income Statement is not required but is prepared because it is a more meaningful presentation of revenue and expenses. In a multi-step Income Statement, gross profit (margin), operating profit (margin), and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations.

Answer 301

A

$260,000The only costs included in general and administrative costs are:	
* Accounting and legal$25,000	
* Officers' salaries $150,000	
* Insurance $85,000
Total G&amp;A cost =$260,000

Answer 302

A

Gross profit (margin) is shown as a separate item.In a multi-step Income Statement, gross profit (margin), operating profit (margin), and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations. Gross profit (margin) is shown as a separate item.

Answer 303

A

All Three...Current market value or "quoted market price" is used as a measurement base, for example, in the case of precious metals having a fixed selling price with no substantial cost of marketing. Discounted cash flow is used as a measurement base for assets capitalized under long-term leases. Replacement cost is used as a measurement base for inventories when the replacement cost has fallen below historical cost.Five different attributes are used to measure assets and liabilities in present practice. These are discussed below in an excerpt from SFAC 5.	
Historical cost (historical proceeds). Property, plant, and equipment and most inventories are reported at their historical cost, which is the amount of cash, or its equivalent, paid to acquire an asset, commonly adjusted after acquisition for amortization or other allocations. Liabilities that involve obligations to provide goods or services to customers are generally reported at historical proceeds, which is the amount of cash, or its equivalent, received when the obligation was incurred and may be adjusted after acquisition for amortization or other allocations.		
Current cost. Some inventories are reported at their current (replacement) cost, which is the amount of cash, or its equivalent, that would have to be paid if the same or an equivalent asset were acquired currently.		
Current market value. Some investments in marketable securities are reported at their current market value, which is the amount of cash or its equivalent, that could be obtained by selling an asset in orderly liquidation. Current market value is also generally used for assets expected to be sold at prices lower than previous carrying amounts. Some liabilities that involve marketable commodities and securities, for example, the obligations of writers of options or sellers of common shares who do not own the underlying commodities or securities, are reported at current market value. Current market value is now referred to as fair value.		
Net realizable (settlement) value. Short-term receivables and some inventories are reported at their net realizable value, which is the nondiscounted amount of cash, or its equivalent, into which an asset is expected to be converted in due course of business less direct costs, if any, necessary to make that conversion. Liabilities that involve known or estimated amounts of money payable at unknown future dates, for example, trade payables or warranty obligations, generally are reported at their net settlement value, which is the nondiscounted amount of cash, or its equivalent, expected to be paid to liquidate an obligation in the due course of business, including direct costs, if any, necessary to make that payment.		
Present (or discounted) value of future cash flows. Long-term receivables are reported at their present or discounted value (discounted at the implicit or historical rate), which is the present value of future cash inflows into which an asset is expected to be converted in due course of business less present values of cash outflows necessary to obtain those inflows. Long-term payables are similarly reported at their present or discounted value (discounted at the implicit or historical rate), which is the present or discounted value of future cash outflows expected to be required to satisfy the liability in due course of business. Assets that are impaired, such as fixed and intangible assets, are valued at the present value of the future cash flows expected to be derived from the assets.

Answer 304

A

$851,000Idle machinery ($11,200) and cash surrender value of life insurance ($13,700) are both assets. The only item listed which should not be included in the asset section of the balance sheet is the treasury stock ($24,000). Although the treasury stock account has a debit balance, it is not an asset; instead, it is reported as a contra equity account. Therefore, the $24,000 must be excluded from the asset section, reducing the net asset amount to $851,000 ($875,000 − $24,000).

Answer 305

A

Both total assets and stockholders’ equity would decrease.This answer is correct because when the premium on the 3-year insurance policy was paid in total on January 1, year 1, a prepaid asset was recorded. At the end of each of the next 3 years, one-third of the premium must be amortized to expense using the following journal entry:Insurance expense xxxPrepaid insurance (asset)xxxThe effect of this amortization is to increase expenses (a decrease in stockholders’ equity) and decrease prepaid assets.

Answer 306

A

Expensed immediatelyStart-up costs and organization costs should be expensed as incurred.Reporting on the Costs of Start-up ActivitiesASC Topic 720 provides guidance on financial reporting of start-up costs, including organization costs. It requires such costs to be expensed as incurred. Start-up costs are defined as onetime activities related to opening a new facility or new class of customer, initiating a new process in an existing facility, or some new operation. In practice, these are referred to as preopening costs, preoperating costs, and organization costs. Routine ongoing efforts to improve existing quality of products, services, or facilities, are not start-up costs.

Answer 307

A

Cumulative currency-translation adjustments.Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.

Answer 308

A

To summarize all changes in equity from nonowner sources.The purpose of comprehensive income is to show all changes to equity, including changes that currently are not a required part of net income. Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.

Answer 309

A

CI = 28,000, AOCI = 1,000 creditCI ($28,000) is the sum of income ($21,000) and other comprehensive income (-$2,000 + $9,000 = $7,000). AOCI is the running OE account, which is increased or decreased by other comprehensive income for the period. Ending AOCI = $6,000 dr. - $7,000 other comprehensive income (positive) = $1,000 cr. AOCI began the year with a new loss of $6,000 (debit balance), but the $7,000 positive other comprehensive income for the year turned the beginning dr. balance of AOCI into a net credit of $1,000.

Answer 310

A

$17,000 other comprehensive loss.Other comprehensive income is comprised of unrealized gains/losses on available-for-sale securities, minimum pension liability adjustment, foreign currency translation adjustment, and unrealized gains/losses on cash flow hedges. The only other comprehensive income item listed is the $17,000 unrealized gains/losses on available-for-sale securities

Answer 311

A

Reconciles all of the beginning and ending balances in the equity accounts.The Statement of Changes in Equity reconciles all of the beginning and ending balances in the equity accounts. The statement shows the opening balance then details all changes in the accounts, ending with the closing balance.

Answer 312

A

$12If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price is the sum of the par value ($2) and the additional paid-in capital ($10,000/1,000 shares, or $10), which totals $12.

Answer 313

A

Gains (losses) on sale of treasury stock.Other comprehensive income items should be classified based on their nature. Therefore, there should be separate classifications for foreign currency items, pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. Gains (losses) on the sale of treasury stock result from a transaction with owners in their capacity as owners and are not included in comprehensive income.

Answer 314

A

Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.The other comprehensive income section does not include changes in all stockholders’ equity accounts. It merely includes those items that are included in comprehensive income.Comprehensive income is the sum of net earnings (loss) and other comprehensive income. It requires disclosure ofchanges during a periodof the following components of other comprehensive income: unrealized gains and losses on available-for-sale investments and foreign currency items,reclassification adjustments, gains and losses on the effective portion of cash flow hedges,and any adjustments necessary to recognize the funding status of pension plans or other postemployment benefits.This standard allows the management of an enterprise twochoices for presentingother comprehensive income. These are as follows: At the bottom of the income statement, continue from net income to arrive at a comprehensive income. In a separate statement thatmay start with net income, (illustrated below) and thatdirectlyfollows the statement of income.

Answer 315

A

II.Criteria for determining which investments are treated as cash equivalents ONLY.Disclosure of accounting policies should identify and describe the accounting principles followed by the reporting entity and the methods of applying those principles that materially affect the determination of financial position, cash flow, or results of operations. However, financial statement disclosure of accounting policies should not duplicate details presented elsewhere as part of the financial statements.In this problem, both (I) management’s intention to vary the dividend payout ratio and (III) the composition of the sales order backlog by segment are not required to be disclosed under Generally Accepted Accounting Principles. As such, these should not be disclosed in a summary of significant accounting policies. An enterprise shall disclose its policy for determining which items are treated as cash equivalents. Thus, the criteria for determining which investments are treated as cash equivalents (II) should be disclosed in a summary of significant accounting policies.

Answer 316

A

Composition - NO Depreciation expense amount - NO
Accounting policies footnote should not duplicate information reported elsewhere in the FS.ASC Topic 235 states that disclosure of accounting policies should identify and describe the accounting principles and the methods of applying them. Information and details presented elsewhere as a part of the financial statements should not be repeated. Thus, the depreciation expense amount should not be disclosed in the summary of significant accounting policies. ASC Topic 235-10-50-5 specifically states that composition of plant assets should not be presented.

Answer 317

A

Sales of inventory by a subsidiary to its parent.ASC Topic 850 requires disclosure of any material related-party transactions except Compensation agreements, expense allowances, and similar items in the ordinary course of business. Transactions which are eliminated in the preparation of consolidated or combined financial statements.
Since sales of inventory between subsidiary and parent are eliminated in preparing consolidated financial statements, such sales need not be disclosed as a related-party transaction.

Answer 318

A

Operating income - YES Investments by owners - NO
Per SFAC 6, comprehensive income consists not only of its basic components (revenues, expenses, gains, and losses) but also the various intermediate components or measures that result from combining the basic components (e.g., income from continuing operations). SFAC 6 further states that over the life of an entity comprehensive income equals the net of its cash receipts and cash outlays, excluding cash invested by owners or distributed to owners. Note that under ASC Topic 220 this statement would not hold because corrections of errors and certain changes in accounting principles are still reported in retained earnings. Thus, ASC Topic 220 does not fully implement comprehensive income as defined in SFAC 6.CloseRevenues, expenses, gains, and losses are used to computeearnings. Earnings is the extent to which revenues and gains associated with cash-to-cash cycles substantially completed during the period exceed expenses and losses directly or indirectly associated with those cycles. Earnings adjusted for cumulative accounting adjustments and other nonowner changes in equity (such as foreign currency translation adjustments) iscomprehensive income. Per SFAC 5, comprehensive income would reflect all changes in the equity of an entity during a period, except investments by owners and distributions to owners.

Answer 319

A

Shown as a separate item in operating revenues or expenses and supplemented by a footnote if deemed appropriate.Items unusual in nature or infrequent in occurrence are to be disclosed separately in the operating section of the income statement and also may be supplemented by a footnote. Note that such items should not be shown net of income taxes.Definition -An unusual or infrequent event considered to be material that does not qualify as extraordinaryPlacement on income statementor retainedearnings statement -Placed as part of income from continuing operations after normal recurring revenues and expenses

Answer 320

A

Should be issued for each period for which an income statement is presented.When a balance sheet, income statement, and statement of retained earnings are issued, a statement of cash flows must be presented for each period for which an income statement is presented.

Answer 321

A

The statement of financial position.Accumulated other comprehensive income is a permanent account and is reported in the statement of financial position. Changes in the account are reported in the statement of comprehensive income.

Answer 322

A

Retrospectively, including note disclosures, and application to all prior period financial statements presented.Changes in reporting entities are required to be accounting for retrospectively similar to changes in accounting principle.

Answer 323

A

I, II, and III.Prospective financial information can be used by general users with whom the responsible party is not negotiating directly, the responsible party, and third parties with whom the responsible party is negotiating directly.Prospective Financial InformationDefinitions:
Prospective financial information–any financial information about the future
Responsible party–person(s), usually management, who are responsible for assumptions underlying the information
Users of prospective financial information:
* General–use of FS by parties with whom responsible party is not negotiating directly
* Limited use–use of prospective financial information by the responsible party only or by responsible party and third parties with whom responsible party is negotiating directly

Answer 324

A

Future periods - NO The period of change - NO
A change in accounting principle is accounted for through retrospective application to all prior periods, unless it is impracticable to do so.An entity may change accounting principles only if the change is required by a newly issued accounting pronouncement, or if the entity can justify the use of the alternative accounting principle because it is preferable. A change in accounting principle is accounted for through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so. Retrospective changes require the following:
* The cumulative effects of the change are presented in the carrying amounts of assets and liabilities as ofthe beginning of the first period presented.
* An offsetting adjustment is made to the opening balance of retained earnings for that period (the beginning of the first period presented).
* Financial statements for each individual prior period presented are adjusted to reflect theperiod-specific effectsof applying the new accounting principle.
Only thedirect effectsof the change are recognized.

Answer 325

A

The form and content of financial statements to be filed with the SEC. Regulation S-Xdescribes the form and content of financial statements filed with the SEC Regulation S-Kdescribes the requirements for information and forms required by Regulation S-X. Regulation ABdescribes reporting requirements for asset-backed securities. Regulation Fair Disclosure (FD)mandates that publicly traded companies disclose material information to all investors simultaneously.

Answer 326

A

Accumulated depreciation of equipment.ASC Topic 255, nonmonetary items include assets and liabilities whose amounts may change over time in terms of a monetary unit (e.g., the U.S. dollar). Examples of nonmonetary assets and liabilities included inventory, property, plant, equipment, and obligations under warranties. Accumulated depreciation is a nonmonetary item because it relates to equipment.The holding of a nonmonetary asset such as land during a period of inflation need not result in a loss of purchasing power because the value of that land can “flow” with the price level (hence, the need for restatement). However, if a monetary asset such as cash is held during a period of inflation with no interest, purchasing power is lost because the cash will be able to purchase less goods and services at year-end than at the beginning of the year. This type of loss is simply called a “purchasing power loss.” Holding a monetary liability has the opposite effect. Therefore, if a firm’s balance sheet included more monetary liabilities than monetary assets throughout a given year, a purchasing powergainwould result, since the firm could pay its liabilities using cash which is “worth less” than the cash they borrowed.

Answer 327

A

Pensions.ASC Topic 825 provides that the fair value option does not apply to pensions.

Answer 328

A

Effect of a failure to provide for uncollectible accounts in the previous period.The correction of an error in the financial statements of a prior period which is discovered after issuance should be reported as a prior period adjustment to the opening balance of retained earnings. Such errors are described in and include oversights or misuse of facts that existed at the time the financial statements were prepared. Failure to provide for uncollectible accounts would be such an error.

Answer 329

A

Current financial condition, conditional and unconditional obligations due, and funds necessary to maintain operations.Conditions or events to examine when evaluating an entity’s ability to continue as a going concern include the entity’s current financial condition, conditional and unconditional obligations dues, and funds necessary to maintain operations.

Answer 330

A

Revenue recognition policies.According to ASC Topic 235, revenue recognition policies are included in the summary of significant accounting policies in the notes to the financial statements.

Answer 331

A

When Envoy classifies it as held-for-sale.The earliest point at which Envoy should report the small appliance group as a discontinued operation is when Envoy classifies it as held-for-sale.Many of the assets disposed of as discontinued operations are long-lived assets. Such assets are subject to the requirements of ASC Topic 205. Accordingly, the component is classified as discontinued operations in the first period that it meets the criteria as being “held for sale”:a.Management commits to a plan of disposalb.The assets are available for salec.An active program to locate a buyer have been initiatedd.The sale is probablee.The asset is being actively marketed for sale at a fair pricef.It is unlikely that the disposal plan will significantly changeTo be reported as discontinued operations, the disposal must represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASC Topic 205 also requires (1) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal, and (2) the entity will not have any significant involvement in the operations of the component after disposal.

Answer 332

A

Income statement for year 1 - $0 Income statement for year 2 - $35,000
The amount of gain reported in Watson’s net income would be $0 for year 1 and $35,000 for year 2. The gain reported in net income for year 2 is the excess of the selling price of $185,000 over the cost of $150,000. The unrealized gain of $22,000 ($172,000 less $150,000) for year 1 is reported as a component of other comprehensive income in year 1. Since the securities were available-for-sale, unrealized gains and losses prior to their sale are not reported in net income. This is why there was $0 reported for the gain in year 1.

Answer 333

A

$250,000Total revenues recognized on an income statement are calculated as sales less sales returns and allowances, sales discounts, and estimated allowance for returns. The purchase discounts account is a contra account to purchases, and is not used in the calculation of net sales. Recovery of accounts written off requires an entry to reinstate the account receivable, and a second entry to record the payment. It does not affect total revenues. Therefore, total revenue is equal to the sales amount of $250,000.

Answer 334

A

Most advantageous market.
* Theprincipal marketis a market in which the greatest volume and level of activity occurs. Themost advantageous marketmaximizes price received for the asset or minimizes the amount paid to transfer the liability.

Answer 335

A

Retained earnings statement as an adjustment of the opening balance.The correction of an error in the financial statements of a prior period is a prior period adjustment which is to be shown net of tax as an adjustment to the beginning balance of retained earnings.ASC Topic 250 defines accounting errors as errors in recognition, measurement, presentation, or disclosure in the financial statements. An error can occur from mathematical mistakes, mistakes in applying GAAP, or oversight of facts that existed when the financial statements were prepared. A change in accounting principle from non-GAAP to GAAP is also a correction of an error.An error in the financial statements is treated as a prior period adjustment by restating the prior period financial statements. The cumulative effect of the error is reflected in the carrying value of assets and liabilities at the beginning of the first period presented, with an offsetting adjustment to the opening balance in retained earnings for that period. Financial statements for each period presented are then adjusted to reflect the correction of the period-specific effects of the error.A footnote should disclose that the previously issued financial statements were restated, along with a description of the error. In addition, the line item effects of the error and any per share amounts must also be disclosed for each period presented. Footnote disclosures must also indicate the cumulative effect of the change on retained earnings or other components of equity or net assets at the beginning of the earliest period presented.The entity should also disclose the gross effects and net effects of applicable income taxes on the net income of the prior period, as well as the effects on retained earnings and net income for each of the periods presented. The amount of income tax applicable to each prior period adjustment must also be disclosed. Once the correction of the error is disclosed, the financial statements of subsequent years do not need to repeat the disclosures.

Answer 336

A

Treasury stock.ASC Topic 820 provides rules for measuring the fair value of balance sheet items such as asset impairments, business combinations, and goodwill.Fair value measurements.Fair value measurements are required for certain assets and liabilities (investments, derivatives, asset impairments, asset retirement obligations, goodwill, business combinations, troubled debt restructuring).Applying the fair value measurement approach involves the following six steps: Identify the asset or liability to be measured. Determine the principal or most advantageous market. Determine the valuation premise. Determine the appropriate valuation technique (market, income, or cost approach). Obtain inputs for valuation (Level 1, Level 2, or Level 3). Calculate the fair value of the asset.
Fair value is 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 (at exit price) under current market conditions. An orderly transaction is a transaction that allows for normal marketing activities that are usual and customary. In other words, it is not a forced transaction or sale.

Answer 337

A

Must be evaluated by management on an interim and annual basis.Substantial doubt about an entity’s ability to continue as a going concern must be evaluated by management on an interim and annual basis.

Answer 338

A

Effect of a failure to provide for uncollectible accounts in the previous period.The correction of an error in the financial statements of a prior period which is discovered after issuance should be reported as a prior period adjustment to the opening balance of retained earnings. Such errors are described in and include oversights or misuse of facts that existed at the time the financial statements were prepared. Failure to provide for uncollectible accounts would be such an error.Emphasis is on Error vs. Estimate

Answer 339

A

A separate line item appearing within income from continuing operations.ASU 2015-01 requires items previously classified as extraordinary to be included as a separate line item within income from continuing operations.Elimination of extraordinary item classification—potential testing due to early adoption.(1)ASU 2015-01 is effective for annual periods beginning after December 15, 2015. Firms could choose to early adopt. Until the effective date, the CPA exam could test both the current rule and the change.(2)The concept of extraordinary items is eliminated and replaced by the concept of unusual or infrequently occurring items. The master glossary will be amended by removing the term, “extraordinary item,” and including the following:(a)Infrequency of occurrence—exists when the underlying transaction or event would not reasonably be expected to recur in the foreseeable future taking into account the entity’s operating environment.(b)Unusual nature—exists when a transaction or event possesses a high degree of abnormality and is clearly unrelated, or incidental to, typical entity activities.(3)Items considered unusual, infrequently occurring or both are to be reported as a separate item within income from continuing operations or disclosed in the notes to the financial statements.(a)Individually immaterial similar gains and losses shall be aggregated.(b)Items shallnotbe reported net of income tax and EPS impacts shallnotbe reported separately.(4)Adoption may be on a prospective or retrospective basis.(a)For prospective adoption, disclose the nature and amount of an item previously classified as an extraordinary to be included in income from continuing operations.(b)For retrospective adoption, follow the new guidance disclosure rules by disclosing the nature and financial effects of each event or transaction that is unusual in nature or occurs infrequently or both. Disclosure may occur in the notes to the financial statements or as a separate line item presented within continuing operations.

Answer 340

A

Composition - NO Pricing - YES
ASC Topic 235, inventory pricing would be considered a significant accounting policy. Additionally, ASC Topic 235 states that financial statement disclosure of accounting policies should not duplicate details (e.g., composition of inventories or of plant assets) presented elsewhere as part of the financial statements.Accounting policiesmust be set forth as the initial footnote to the statements. Disclosures are required of: Accounting principles used when alternatives exist Principles peculiar to a particular industry Unusual or innovative applications of accounting principles

Answer 341

A

As a separate item under stockholders’ equity.Accumulated other comprehensive income shall be reported in the stockholders’ equity section in the statement of financial position (balance sheet).

Answer 342

A

The price that would be received to sell the asset.ASC Topic 820 requires that the fair value of an asset be based upon the price that would be received to sell the asset, which is an exit price.

Answer 343

A

Management’s intended plans to alleviate substantial doubt about its ability to continue as a going concern.Conditions giving rise to substantial doubt, management’s evaluation of the significance of the events, and management’s plans that alleviated the doubt are all required disclosures when an entity has alleviated substantial doubt about its ability to continue as a going concern. Management’s intended plans are disclosed when substantial doubt has not been alleviated.

Answer 344

A

Form 8-K

Regulation S-Xdescribes the form and content of financial statements filed with the SEC
Regulation S-Kdescribes the requirements for information and forms required by Regulation S-X.
Regulation ABdescribes reporting requirements for asset-backed securities.
Regulation Fair Disclosure (FD)mandates that publicly traded companies disclose material information to all investors simultaneously.
Form S-1/F-1- registration statement for U.S./foreign companies.
Form 8-K /6-K- information about material events for U.S./foreign companies.
Form 10-K/20F– annual report for U.S./foreign companies.

Answer 345

A

Basis of consolidation.ASC Topic 235 states that the summary of significant accounting policies should encompass those accounting principles and methods that involve a selection from existing acceptable alternatives (or are peculiar to the industry in which the entity operates). Of the answers listed, only basis of consolidation involves a choice among acceptable methods.

Answer 346

A

Current cost of cost of goods sold is less than historical cost.Current Cost Income Statement
* Sales xxx
* Cost of goods sold xxx
* Current cost income from continuing operations xxx
* Realized holding gain (loss) xxx
* Realized income xxx
* Unrealized holding gain (loss) (xxx)
* Current cost net income xxx
Current cost income from continuing operations is sales revenue less expenses on a current basis. Realized holding gains (losses), the difference between current cost and historical costs of assets consumed, are then added (subtracted) to arrive at realized income (loss). Realized income (loss) is always the same as historical net income (loss). Finally, unrealized holding gains (increases in the current cost of assets held during the year) are included to arrive at current cost net income. Therefore, if current cost of goods sold is less than historical cost of goods sold, then current cost income from continuing operations will be increased compared to historical cost income from operations.

Answer 347

A

Lower of current cost or recoverable amount.ASC Topic 255 requires that the current cost for inventories be measured at the lower of current cost or recoverable amount at the measurement date.

Answer 348

A

Gain - YES Loss - YES
A material event or transaction which is considered to be unusual in nature or infrequent in occurrence (but not both) that results in either a gain or a loss should be presented as a separate component of income from continuing operations.

Answer 349

A

As an extraordinary loss of $700,000, net of $300,000 income tax.This answer is correct. To qualify as an extraordinary item an event must be both unusual and infrequent. A volcanic eruption would generally meet these criteria. Extraordinary items should be shown net of taxes in a separate section in the income statement.

Loss from volcano ($1,500,000 − $500,000) $1,000,000
Less: Tax effect (30% tax rate) ($300,000)
Net loss after tax effect $700,000

Answer 350

A

Net income plus other comprehensive income.Comprehensive income is the sum of net earnings (loss) and other comprehensive income. It requires disclosure ofchanges during a periodof the following components of other comprehensive income: unrealized gains and losses on available-for-sale investments and foreign currency items,reclassification adjustments, gains and losses on the effective portion of cash flow hedges,and any adjustments necessary to recognize the funding status of pension plans or other postemployment benefits.

Answer 351

A

I ONLY.ASC Topic 220 applies to enterprises that develop a full set of financial statements which report cash flows, results of operations, and financial position.

Answer 352

A

$0An extraordinary gain is included on the income statement if the gain is both infrequent in occurrence and unusual in nature. A gain on disposal of a business segment should be included on the income statement in the calculation of the gain or loss from discontinued operations. A foreign currency translation gain is recorded in other comprehensive income for the period. Neither item is treated as an extraordinary item on the income statement.

Answer 353

A

BOTH.Per ASC Topic 850, for related-party transactions an entity must disclose the nature of the relationship involved, a description of the transactions, the dollar amounts of the transactions for each of the periods, amounts due from or to related parties as of each balance sheet date, and the terms and manner of settlement.

Answer 354

A

Outsourcing a customer service.This would normally not be of sufficient significance to constitute an exit activity.An exit activity includes but is not limited to restructurings which are programs that are planned and controlled by management, and materially changes either
* The scope of a business undertaken by the company, or
* The manner in which that business is conducted
* Examples include:
Sale or termination of line of business Closure of business activities at a particular location Relocation of business activities from one location to another Changes in management structure Fundamental reorganization of the business

Answer 355

A

Income.Three valuation techniques can be used to measure fair value: the market approach uses prices and relevant information from market transactions for identical or comparable assets or liabilities; the income approach converts future amounts to a single current (discounted) amount; and the cost approach relies on the current replacement cost to replace the asset with a comparable asset, adjusted for obsolescence. This answer is correct because the income approach relies on discounting cash flows.

Answer 356

A

Donotaccrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements.Subsequent events are of two types: (1) those that relate to the current financial statements but come to light after year-end, and (2) those that come to light after year-end and relate to the next year’s financial statements. The first situation may require accrual but the second situation requires disclosure only if it is material. In this case, the company’s only manufacturing plant was shut down in February of year 2. Since this event occurred after year-end, no accrual is necessary. However it would qualify as a subsequent event requiring disclosure.

Answer 357

A

Been eliminated.ASU 2015-01 eliminates extraordinary item classification.

Answer 358

A

Stock purchases.Stock purchases results in more cash outflow. Disposals, borrowings, restructurings, extended payment terms, and increasing ownership equity are considered a method to alleviate an entity’s doubt about its ability to continue as a going concern.

Answer 359

A

40 days.Form 10-Qs are due 40 days after the end of the fiscal quarter for accelerated filers and45 days after the end of the fiscal quarter for all other companies.Form 10-Ks are due 60 days after the end of the fiscal year for large accelerated filers (more than $700 million of aggregate worldwide market value of voting and nonvoting common stock), 75 days after the end of the fiscal year for accelerated files (between $70 million of aggregated worldwide market value of voting and nonvoting common stock), and 90 days after the end of the fiscal year for all other companies.

Answer 360

A

Quarterly reviewed financial information and other information about the company.Quarterly report (Form 10-Q) provides quarterly information similar to that in the 10-K but in less detail. It includes quarterly financial statements that are reviewed (not audited) by public accountants. The company files three Form 10-Qs every year and the Form 10-K contains the quarterly results for the fourth quarter.

Answer 361

A

Current financial condition, conditional and unconditional obligations due, and funds necessary to maintain operations.Conditions or events to examine when evaluating an entity’s ability to continue as a going concern include the entity’s current financial condition, conditional and unconditional obligations dues, and funds necessary to maintain operations.

Answer 362

A

The fair value option can be elected on an instrument-by-instrument basis.The fair value option can be elected on an instrument-by-instrument basis. Once the fair value option is elected, it is irrevocable However, if the fair value option is elected, it must be applied to the entire instrument and not a portion of the instrument.

Answer 363

A

$520,000Extraordinary items are material items which are both unusual in nature and infrequent in occurrence. Neither a sale of plant facility nor a foreign currency transaction is unusual in nature. Therefore, these two items would be reported as infrequent but not extraordinary. In addition, the gain on retirement of debt is no longer classified as extraordinary. Note that the sale of the plant facility is not classified as discontinued operations because similar operations are carried on at another location.

Answer 364

A

2 and 3.Comprehensive income can be displayed in the financial statements either as a separate statement that begins with net income or as a continuation of net income presentedat the bottom of the income statement. Comprehensive income can no longer be displayed as part of the statement of changes in stockholders’ equity.

Answer 365

A

NEITHER.A change in accounting principle is accounted for through retrospective application to all prior periods, unless it is impracticable to do so. The cumulative effects of the change are presented in the carrying amounts of assets and liabilities as ofthe beginning of the first period presented.
An offsetting adjustment is made to the opening balance of retained earnings for that period (the beginning of the first period presented).
Financial statements for each individual prior period presented are adjusted to reflect theperiod-specific effectsof applying the new accounting principle.

Answer 366

A

Adjustment made to avoid double counting items.A reclassification adjustment is an adjustment made to avoid double counting in comprehensive income items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.

Answer 367

A

$275,000Taft’s comprehensive income for year 1 is $275,000. Comprehensive income for year 1 consists of the following amounts:

Net income for year 1$300,000
Other comprehensive loss:
Unrealized loss on available-for-sale securities ($42,000)
Translation adjustments$ 17,000 ($25,000)
Comprehensive income for year 1$275,000

Answer 368

A

$310,000The accounting and legal fees ($160,000) and the portion of office rent not allocable to sales (3/4 × $200,000 = $150,000) are all considered general and administrative expenses. Therefore, general and administrative expense should be $310,000 ($160,000 + $150,000). In addition, the interest expense ($60,000) would be included with financial expense or other expenses. The $25,000 loss on the sale of office equipment should be included in other expenses and losses. The office rent for the sales department (1/4 × $200,000 = $50,000) is an operating expense and included in selling expenses rather than general and administrative expenses.

Answer 369

A

Income statement for year 1 - $0 Income statement for year 2 - $35,000
The amount of gain reported in Watson’s net income would be $0 for year 1 and $35,000 for year 2. The gain reported in net income for year 2 is the excess of the selling price of $185,000 over the cost of $150,000. The unrealized gain of $22,000 ($172,000 less $150,000) for year 1 is reported as a component of other comprehensive income in year 1. Since the securities were available-for-sale, unrealized gains and losses prior to their sale are not reported in net income. This is why there was $0 reported for the gain in year 1.

Answer 370

A

Disposal of a component of an entity due to a major change in business strategy.Discontinued operations must represent a strategic shift or major operating impact.ASU 2014–08Modifies the definition of discontinued operations by requiring only those component disposals representing strategic shifts/major operating impacts to be reported as a discontinued operation. This modification eliminates the potential of routine disposals of small groups of assets being classified as discontinued operations which was possible under the prior guidance.

Answer 371

A

$885,000Mirr began operations on 1/1/Y1 with the following balance sheet elements:
* Assets = Liabilities + Owners’ equity
* $860,000 = $110,000 + $750,000
During year 1, liabilities increased to $120,000, and owners’ equity increased to $765,000 [$750,000 beginning balance + $18,000 net income ($82,000 revenues − 64,000 expenses) − $3,000 dividends declared]. Therefore, 12/31/Y1 assets must be $885,000.
* Assets = Liabilities + Owners’ equity
* $885,000 = $120,000 + $765,000

Answer 372

A

Monetary liability.Per ASC Topic 255, the dollar amounts of monetary assets and liabilities are fixed or determinable without reference to future prices or specific goods or services. If the general price level changes, a purchasing power gain (loss) may occur on monetary items. A monetary liability held constant during a period of inflation creates a purchasing power gain because the liability could be paid using a fixed amount of cash which is worth less than the cash borrowed earlier.The preparation of constant dollar financial statements requires the classification of balance sheet items as either monetary or nonmonetary. Items are monetary if their amounts are fixed by statute or contract in terms of numbers of dollars. Examples include cash, accounts and notes receivable, accounts and notes payable, and bonds payable. By contract or statute, these items are already stated in current dollars and require no restatement. Nonmonetary items, on the other hand, do require restatement to current dollars. Inventory, property, plant, and equipment, and unearned service revenue are examples of nonmonetary items. Under some increasingly popular loan arrangements, when the repayment of loan principal is adjusted by an index, the receivable/payable is classified as a nonmonetary item.The holding of a nonmonetary asset such as land during a period of inflation need not result in a loss of purchasing power because the value of that land can “flow” with the price level (hence, the need for restatement). However, if a monetary asset such as cash is held during a period of inflation with no interest, purchasing power is lost because the cash will be able to purchase less goods and services at year-end than at the beginning of the year. This type of loss is simply called a “purchasing power loss.” Holding a monetary liability has the opposite effect. Therefore, if a firm’s balance sheet included more monetary liabilities than monetary assets throughout a given year, a purchasing powergainwould result, since the firm could pay its liabilities using cash which is “worth less” than the cash they borrowed.

Answer 373

A

Extraordinary gains from extinguishment of debt.Extraordinary gains from extinguishment of debt are not classified as other comprehensive income. Gains from extinguishment of debt (ordinary or extraordinary) are reported on the income statement.

Answer 374

A

Statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes.A complete set of IFRS financial statements includes the following: statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes.

Answer 375

A

Methods of amortizing intangibles.ASC Topic 235 recommends that when financial statements are issued, a statement identifying the accounting policies adopted and followed by the reporting entity should be presented as an integral part of the financial statements. The accounting policies are the specific accounting principles and the methods of applying the principles that have been adopted for preparing the financial statements.

Answer 376

A

Income from continuing operations.The tax benefit of the carry-forward reduced taxes on 2005 income from continuing operations, as indicated in the question. Therefore, the benefit is included in income from continuing operations.

Answer 377

A

$100,000Generally, gains and losses on the sale of land are not accorded special treatment. The entire $100,000 gain should, therefore, be included in income before taxes.

Answer 378

A

Components of other comprehensive income may not be shown net of tax-related effects.Components of other comprehensive income can be shown either net of tax-related effects or before tax-related effects with the aggregate income tax effects shown as one amount.Question 3:

Answer 379

A

$222,222This answer is correct. Depreciation is a nonmonetary item. Therefore, it must be adjusted to current year dollars. The $200,000 of historical cost depreciation is converted into year 3 dollars by multiplying it by the To/From ratio of 200/180.
* $200,000× (200 /180) = $222,222
Therefore, year 3 depreciation stated in constant dollars is $222,222.

Answer 380

A

An amount after continuing operations and before extraordinary items.both the gain or loss from discontinued operations and the gain or loss on sale of the segment should be shown after income from continuing operations.

Answer 381

A

Component of income from continuing operations on a prospective basis.ASC Topic 250 requires changes in depreciation method to be treated as a change in estimate and handled on a prospective basis.

Answer 382

A

$2,750$2,750 had been a deduction of other comprehensive income in prior years. When the securities are sold, the loss will be included in net income, so the $2,750 must be added back to other comprehensive income to avoid taking the loss twice.

Answer 383

A

Component of income from continuing operations, butnotnet of applicable income taxes.an item not meeting the unusual or infrequently occurring definition would be recorded as a component of income from continuing operations.

Answer 384

A

Year 1 - YES Year 2 - NO
This answer is correct. Since the securities were available-for-sale, unrealized gains and losses are reported as a component of other comprehensive income (loss) for year 1. The decline in market value from $62,000 to $55,000 should be reported as a $7,000 reduction in other comprehensive income for year 1. In year 2, the further reduction in the market value from $55,000 to $50,000 should be reported as a $5,000 reduction in other comprehensive income for year 2. Since the securities were sold in year 2 for $50,000, a realized loss of $12,000 would be reported in net income for year 2. The realized loss is computed by subtracting the selling price of $50,000 from the cost of $62,000. To avoid double counting the loss in comprehensive income, $12,000 should be reported as a reclassification adjustment in other comprehensive income for year 2. The reclassification adjustment of $12,000, when netted with the $5,000 unrealized loss recognized in year 2, causes a net positive effect of $7,000 in comprehensive income for year 2. This results in answer “B” being the correct answer. The schedule below shows how the effects described above would be reported in net income and other comprehensive income for 2010 and year 2.

Answer 385

A

$87,000Net income as reported ($74,100) properly included the gain on early retirement of bonds payable ($33,000) and the loss from fire ($14,000). The fact that the loss was reported net of taxes in the income statement was incorrect, but does not cause the net income amount to be in error. However, the other two items should not be reported in the income statement. If Thorpe does not elect the fair value option, the rules of ASC Topic 320 apply. Therefore, an unrealized loss on available-for-sale investments in stock ($5,400) is reported in “other comprehensive income,” net of tax under one of three acceptable alternatives and as part of “accumulated other comprehensive income” in the stockholders’ equity section. A correction of an error ($7,500) is treated as a prior period adjustment. It is reported in the financial statements as an adjustment to the beginning balance of retained earnings, rather than in the income statement. Since both of these items were subtracted in the computation of reported net income, they must be added back to compute the correct net income of $87,000 ($74,100 + $5,400 + $7,500).

Answer 386

A

To report a measure of overall enterprise performance.The purpose of reporting comprehensive income is to report a measure of overall enterprise performance by displaying all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity with owners. An enterprise should continue to display an amount for net income with equal prominence to the comprehensive income amount displayed.

Answer 387

A

The fair value option must be applied to all interests in the same entity.

Answer 388

A

Leases.FV Option does not apply to Leases or Pensions!!!

Answer 389

A

$140,000Comprehensive income is net income plus or minus unrealized gains and losses that are recognized in comprehensive income for the period. Net income is equal to $110,000 ($800,000 − $600,000 − $90,000). An unrealized holding gain on available-for-sale securities is classified as other comprehensive income. Therefore, this answer iscorrect because comprehensive income is calculated as net income of $110,000 plus the $30,000 unrealized holding gain on available-for-sale securities, which equals $140,000.

Answer 390

A

$512,000Beg. inventory + Net purchases = End. inventory + Cost of goods sold$122,000 + ($540,000 + $10,000 + $5,000) = ($145,000 + $20,000) + $512,000The freight-in and transportation to consignees is added to net purchases because they are costs of placing the inventory into salable condition (the general rule for capitalizing costs to inventory). The goods on consignment are included in ending inventory because they are owned by Kam.

Answer 391

A

$10,000Consignment sales revenue is the revenue recognized on consignment sales.In this case, total consignment revenue is 10 x $1,000 = $10,000. The commission and transportation costs are expenses that reduce earnings on consignment revenues, but they do not affect total revenues to be recognized.

Answer 392

A

$43,000The merchandise out on consignment is included in inventory at selling price. But inventory must be measured at cost. $40,000 = cost + .40($40,000). Thus, cost = $24,000. Therefore, inventory should be reduced by the $16,000 of markup on the merchandise out on consignment.The goods held on consignment should be removed from the inventory because these goods do not belong to Opal.Hence, the total reduction from inventory is $43,000 ($16,000 + $27,000). The goods in transit are properly included in inventory because they were shipped FOB shipping point, which means the goods belong to Opal when the goods reach the common carrier at the shipping point.

Answer 393

A

Accounts receivable.Jel will recover the freight costs when Jel deducts the costs from the amount it submits to Dale. Until that happens, the amount spent on freight is recorded in a receivable.When Jel submits its payment for the sale of Dale’s goods (also less a commission), the receivable is credited; thus reducing the amount of cash that must be paid to Dale. Therefore, the freight costs are borne by Dale. Jel simply paid the costs for Dale and will be reimbursed later. This is not a cost or expense of Jel.

Answer 394

A

Insurance premium - YES Advanced commissions - NO
The insurance in transit is included in inventory because it is a cost necessary to bring the inventory into a salable condition. This is the criterion for capitalizing inventory costs.The advance commissions are not inventoriable. They are not incurred to bring the inventory to a salable condition but rather are selling expenses. The costs will be recognized as such when the goods are sold. At that time, the commission is earned by the consignee and is an expense to the consignor. The commissions are never inventoried.

Answer 395

A

$18,900The $18,900 amount to be included in consigned inventory (this would be included in Stone’s ending inventory) = $18,000 + $900 freight.This inventory is owned by Stone. The freight is included because it is a cost necessary to bring the inventory into salable condition and location. The inventory Stone received on consignment is not an asset of Stone’s and is not included in Stone’s inventory. Stone is helping to sell Alpha’s inventory, just as Beta is helping to sell Stone’s inventory.

Answer 396

A

$6,000Nomar includes in its inventory account items of inventory it owns, regardless of its location. Nomar’s inventory on consignment at Seabright continues to be owned by Nomar and is included in Nomar’s inventory at cost. 70% of the inventory shipped has been sold.Therefore, only 30%, or $6,000 (.30 x $20,000), remains in ending inventory. The commission and advertising costs are not inventory costs and are not included in inventory.

Answer 397

A

The goods should be included in the ending inventory of the consignor.Consigned goods belong to the consignor and are included in the consignor’s ending inventory.

Answer 398

A

Assets - Understated Retained earnings - Understated
Both responses in this choice are correct. FOB shipping point means that the title passed to the buyer at the selling company’s warehouse. Therefore, Garson should have included this inventory in the ending inventory. This leaves inventory (assets) understated. This error also has overstated the cost of goods sold, which understates net income and retained earnings.

Answer 399

A

$50,000Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs.Even the shipping costs are borne by the seller because the terms are FOB destination. This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr’s recorded cost is $50,000.

Answer 400

A

$408,000Merchandise purchased for resale $400,000PLUS Freight-in $10,000SUBTRACT Purchase returns ($2,000)= Total inventoriable cost $408,000

Answer 401

A

$14,400This is a chain discount and the correct recorded cost is $20,000(1 - .20)(1- .10) = $14,400. Each successive discount in a chain discount is applied to the previous net amount.

Answer 402

A

$375,000Only transportation-in is treated as a product cost and included in inventory. This cost is considered a cost necessary to bring the inventory to a salable condition. $1.5 million was incurred for this cost - the cost to import. Inventory represents $3/$12 or 25% of total purchases. Therefore, 25% of $1.5 million, or $375,000, of transportation-in is included in inventory. Shipping costs to customers are treated as a period cost.

Answer 403

A

$150,000 Beginning inventory$90,000 Plus purchases $124,000 Less write-off($34,000) Less ending inventory($30,000) Equals cost of goods sold$150,000

Answer 404

A

$118,220Cost of goods sold is determined (in a periodic inventory system) as:Beginning Inventory+ Net Purchases= Goods Available for Sale- Ending Inventory= Cost of Goods SoldNet Purchases includes any purchase discounts (or allowances) and other cost of getting the goods in place and condition for resale, including freight-in. Freight-out (to customers) is a selling cost. Therefore, Azur Co.’s cost of goods sold would be: Beginning Inventory $30,840 + Purchases $102,800 - Purchases Discounts ($10,280) + Freight-in $15,420 + Net Purchases $107,940 = Goods Available for Sale $138,780 - Ending Inventory $20,560 = Cost of Goods Sold $118,220

Answer 405

A

$910,000 The correct answer is $910,000: Raw materials purchase d$430,000 Plus decrease in raw materials $15,000* Direct labor $200,000 Factory overhead $300,000 Less finished goods increase ($35,000)** Cost of goods sold $910,000
*The decrease in raw materials is added to the amount purchased resulting in the cost of materials incorporated into production. In other words, $15,000 of materials purchased in 2005 were placed into production in 2005. The total cost of materials brought into production in 2005 equals $445,000.** The increase in finished goods represents costs incurred in the current period to finish inventory that was not sold in the current period. Therefore, these costs must be removed in determining cost of goods sold.Freight-out is not a manufacturing cost but rather is a distribution cost.Therefore, freight-out is not inventoried.There is no change in work-in-process inventory to affect the calculation.

Answer 406

A

FIFO - YES LIFO - NO
Under a perpetual inventory system, the cost of goods sold (COGS) is determined at the time of each sale. In a perpetual FIFO inventory system, the cost of each sale (COGS) would be based on the cost of the earliest acquired goods on hand at the time of the sales. The cost of the most recently acquired goods would remain in ending inventory. In a perpetual LIFO inventory system, the cost of each sale (COGS) would be based on the cost of goods acquired just prior to the sale. The cost of the earlier acquired goods would remain in inventory.Under a periodic inventory system, the costs of goods sold (COGS) and ending inventory are determined only at the end of the period. In a periodic FIFO inventory system, the cost of sales for the period (COGS) would be based on the cost of the earliest acquired goods available during the period. The cost of the most recently acquired goods would remain in ending inventory. In a periodic LIFO inventory system, the cost of sales for the period (COGS) would be based on the last goods acquired during the period. The cost of the earliest acquired goods would remain in ending inventory.

Answer 407

A

A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.A periodic system does not record the cost of each item as it is sold; nor does it maintain a continuously current record of the inventory balance. Rather, cost of goods sold is the amount derived from the equation: Beginning inventory + Purchases = Ending inventory + Cost of goods sold. A count of ending inventory establishes the inventory remaining at the end of the period, but there is no recording of cost of goods sold during the period. Cost of goods sold is the amount that completes the equation. Thus, cost of goods sold is really the cost of inventory no longer with the firm at year-end - an amount that includes shrinkage. Inventory shrinkage refers to breakage, waste, and theft. Shrinkage cannot be identified directly with a periodic inventory system.

Answer 408

A

FIFO:	
* Oldest costs -----> COGS	
* Recent costs -----> Ending Inventory
Period of rising prices:	
* Lowest COGS	
* Highest Net Income	
* Highest Ending Inventory

Answer 409

A

LIFO:	
* Recentcosts -----> COGS	
* Oldest costs -----> Ending Inventory
Period of rising prices:	
* Highest COGS	
* Lowest Net Income	
* Lowest Ending Inventory

Answer 410

A

Ending inventory - DECREASE Net income - DECREASE
Ending inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO.The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.

Answer 411

A

The same as in a periodic inventory system.FIFO produces the same results for periodic and perpetual systems. FIFO always assumes the sale of the earliest goods acquired. Therefore, unlike LIFO periodic, goods can never be assumed sold before they are acquired.Cost of goods sold and ending inventory are the same under FIFO for both a periodic and a perpetual system.

Answer 412

A

Cost of goods sold - LIFO Ending inventory - FIFO
LIFO assumes the sale of the most recent purchases first and thus results in cost of goods sold that is the most current value. FIFO assumes the sale of the earliest purchases first (and beginning inventory before any purchases) and thus results in ending inventory that is the most current value. FIFO is sometimes called LISH: last in still here.

Answer 413

A

Debit - COGS $20,000 Credit - LIFO Reserve $20,000
The ending difference between average cost and LIFO is $55,000 ($375,000 - $320,000). This is the required LIFO reserve account.The balance before adjustment is $35,000. Thus, $20,000 must be added to the account. The conversion to LIFO, for reporting purposes, increases cost of goods sold because, under LIFO, ending inventory is lower. The entry in this answer alternative increases the cost of goods sold. The inventory account itself is not credited. Rather, the LIFO reserve account acts as a valuation account to reduce inventory to LIFO for balance sheet purposes.

Answer 414

A

FIFOFIFO assumes the sale of the earliest goods first. With rising prices, the earliest goods reflect the lowest prices. Therefore, cost of goods sold under FIFO is the lowest of the cost flow assumptions. With the lowest cost of goods sold, gross margin and income are the highest among the available cost flow assumptions (LIFO and average being the others).

Answer 415

A

Dollar-value LIFO.DV LIFO is based on price level indices. The ending inventory is determined at current cost, and then reduced to the price level existing at the base-year (the year LIFO was adopted). The ending inventory measured in base-year dollars is compared to beginning inventory measured in base-year dollars. The difference is the increase in inventory measured in base-year dollars. This difference is then raised to the current-year price level and added to beginning inventory DV LIFO, yielding ending inventory DV LIFO.Thus, price-level changes are used throughout this method.Price-level changes are used as a means of estimating the ending inventory. Individual item costs are not maintained or used in the valuation of inventory.

Answer 416

A

$527,500 Ending inventory at current cost$577,500 Ending inventory in base-year dollars$577,500/1.10$525,000 Less beginning inventory in base-year dollars $500,000 Equals increase in inventory in base-year dollars $25,000 Times current price level indexx 1.10 Equals increase in inventory at current prices $27,500 Plus beginning inventory, DV LIFO $500,000 Equals ending inventory, DV LIFO$527,500

Answer 417

A

$83,000Beginning inventory of $50,000 is at base-year dollars and the current year increase of $30,000 is also at base-year dollars. The current year layer must be converted to current year costs ($30,000 x 1.10) = $33,000. Ending dollar value LIFO is the beginning dollar value LIFO (in this case it was adopted in January so the beginning inventory must be $50,000) plus the current year layer of $33,000 or $83,000. Note that the sentence “The designated market value of Stitch’s inventory exceeded its cost at year end” is a distracter. It is simply stating that there is not an issue with the lower of cost or market since cost is lower.

Answer 418

A

II only.When a company reports its inventory at replacement cost (market value), original cost must exceed replacement cost. Lower of cost or market means the inventory is reported at replacement cost when replacement cost is less than original cost. Thus, statement I is not correct.When determining market value, net realizable value is the ceiling or maximum amount. If replacement cost is less than net realizable value, then replacement cost is used as market (as long as replacement cost exceeds net realizable value less a normal profit margin - the floor or minimum value for market).The firm in the question is reporting the inventory at replacement cost. Therefore, replacement cost must be less than net realizable value.

Answer 419

A

Separately to each item.When LCM is applied to each item, the lowest overall inventory amount is achieved because in no case will market exceed cost.However, when LCM is applied to groups or to the total inventory, the total difference between items with cost exceeding market is partially offset by items with market exceeding cost. Thus, the resulting inventory valuation is not the lowest possible.

Answer 420

A

$24,000Market is the middle figure of replacement cost - $20,000, net realizable value - $28,000 ($40,000 - $12,000 processing cost), and net realizable value less normal profit margin - $24,000 ($28,000 - .10 x $40,000). Therefore, market is $24,000, the middle value of the three.The lower of cost ($26,000) or market ($24,000) is market ($24,000), and market is the reported amount for the inventory.

Answer 421

A

Replacement cost.The easiest way to answer a question like this is to make up simple numbers. The following simple numbers were made up to fit the abstract information in the question. Lower of cost or market states you record the inventory at the lower of original cost or market value (replacement cost) within the range of a ceiling and a floor. The numbers below show that replacement cost is lower than original cost and within the floor and ceiling. Replacement cost is the correct answer. Original cost $10 Net realizable value $9 Replacement cost $8 NRV less normal PM $7

Answer 422

A

$360,000Under the LCM valuation method, market value is the middle figure (in dollar amount) of the following three items: Replacement cost: $360,000 Net realizable value: $408,000 - $20,000 = $388,000 Net realizable value lessnormal profitmargin:$388,000 - $60,000 = 328,000
Thus, market value is $360,000. This value is less than the cost of $400,000. Thus, LCM equals $360,000, the valuation or carrying value of the inventory at the end of the year.

Answer 423

A

$251,000The “ceiling” for LCM (lower of cost or market) valuation is $261,000 net realizable value ($275,000 selling price less $14,000 disposal cost). The “floor” is net realizable value less normal profit margin or $251,000 ($261,000 - $10,000). Replacement cost of $230,000 is below the floor so “market” value is the floor, or middle, of the three amounts ($251,000). This amount is less than cost of $258,000. Therefore, the lower of cost or market valuation is $251,000.

Answer 424

A

Original cost.Using small numerical examples or a visual helps to solve this type of question. In the diagram below, the higher an amount is listed, the greater its dollar amount. —-> RC and NRV amounts are the highest; although which of the two is the higher is not given —-> Original cost —-> NRV - normal profit margin
Under LCM, the market value of the inventory is the middle figure (in dollar amount) from among RC, NRV and NRV - normal profit margin. Thus, market must be either RC or NRV, and it does not matter which one of the two is the middle amount. Thus, original cost is less than market, meaning the inventory is valued at original cost (which is the lower of cost or market).

Answer 425

A

The original cost is greaterthan replacement cost - YES

The net realizable value, less anormal profit margin, is greaterthan replacement cost - NO

Under LCM, the market value of inventory is the middle of three figures (in amount): replacement cost net realizable value net realizable value less normal profit margin.
If the middle figure (market) is less than cost, then the inventory is reported at market. The inventory in this question is reported at replacement cost, which means that replacement cost is market value and replacement cost is less than cost. Also, replacement cost is the middle of the three figures (or tied with one of the other two).Net realizable value less normal profit margin could not exceed replacement cost because that would imply that replacement cost is the lowest of the three figures, which contradicts the fact that replacement cost is market value.Therefore, in terms of the question,(1) original cost is greater than replacement cost, and(2) net realizable value less normal profit margin is not greater than replacement cost.

Answer 426

A

Present value of future cash flows.Discounting is not allowed in the valuation of inventory. Historical cost is the primary valuation basis used in inventory but the other two answer alternatives are also encountered in practice.

Answer 427

A

Original cost.In LCM, market value is replacement cost if replacement cost is between the ceiling value (net realizable value) and the floor value (net realizable value less normal profit margin).This is the situation in this question. The original cost is below the floor value. Thus, market exceeds cost and the item is recorded at cost (lower of cost or market).

Answer 428

A

Net realizable value.Inventory must be carried at lower of cost (such as LIFO, FIFO) or market. Market is replacement cost subject to a ceiling and floor. The ceiling for replacement cost is net realizable value (selling price less cost to complete) and the floor is net realizable value less normal profit margin. Use simple numbers to help solve this abstract question. In this question original cost (assume = 100) is greater than market ((replacement cost) assume = 80). Market (80) is greater than net realizable value (assume = 70). Market is subject to a ceiling of net realizable value (70). In this case the inventory would be valued at net realizable value.

Answer 429

A

$55,000The gross margin method of estimating inventory is used to solve this problem. The cost of inventory lost cannot be identified by count but it can be estimated.First, an estimate of cost of goods sold is subtracted from the cost of goods available on the date of the flood yielding the total amount of inventory that would have been present on May 1.Second, the amount of inventory not lost is subtracted from the May 1 estimated total inventory. The result is an estimate of the amount lost.With gross profit being 40% of sales, cost of goods sold must be 60% of sales, on average. Therefore, the estimate of cost of goods sold is $150,000 (.60 x $250,000). Beginning inventory ($35,000) + Purchases ($200,000) = Goods available = $235,000. Subtracting $150,000 of cost of goods sold yields $85,000 of inventory on May 1 ($235,000 - $150,000).With $30,000 of inventory still accounted for, the amount of lost inventory at cost is $55,000 ($85,000 - $30,000).

Answer 430

A

71The gross margin method applies the cost to sales ratio to sales in order to derive an estimate of cost of goods sold. Subtracting the resulting estimate of cost of goods sold from the cost of goods available for sale yields an estimate of ending inventory without counting the items. This firm determines the selling price to be 140% of cost because the markup is 40% of cost. Cost plus markup yields selling price. Therefore, the cost to sales ratio is 1.00/1.40 or .71.

Answer 431

A

$364When items are purchased as a group, the total cost of the group is allocated to the individual items based on fair value. Replacement cost is the appropriate value to use in this case. The total replacement cost of the items is $1,100 ($400 + $700). Therefore, Item A is allocated 4/11 of the purchase cost, or $364 = ($400/$1,100)$1,000.

Answer 432

A

By excluding net markdowns from the cost-to-retail ratio.Although the result is approximate, by excluding net markdowns from the denominator of the cost-to-retail ratio, the ratio is a smaller amount, resulting in a lower ending inventory valuation.

Answer 433

A

Purchase returns.The retail method measures beginning inventory and net purchases at both cost and retail. It then applies the average relationship between cost and retail (based on beginning inventory and purchases) to ending inventory at retail to determine ending inventory at cost.Purchase returns reduce net purchases at both cost and retail because returns represent amounts included in gross purchases that are not available for sale.

Answer 434

A

A prior period adjustment is recorded if the error is discovered in year two.Counterbalancing simply means that the effect of the inventory error in the second year is opposite that of the first year. Discovery in year two provides an opportunity for the firm to correct year two beginning retained earnings, which is overstated by the error in year one. The overstatement of inventory in year one caused cost of goods sold to be understated and income overstated in year one. The prior period adjustment, dated as of the beginning of year two, is a debit to retained earnings for the after-tax effect of the income overstatement in year one. Inventory is credited for the amount of the overstatement. This allows year two to begin with corrected balances.

Answer 435

A

Net income for 20x5 will be understated and CGS for 20x6 will be understated.Use the equation BI + PUR = EI + CGS. When EI is understated, CGS must be overstated to maintain the equation. Net income, therefore, is understated (20x5). Then next year, BI is also understated because BI for 20x6 is EI for 20x5. Using the equation, if BI is understated, CGS is also understated to maintain the equation.

Answer 436

A

Understated by $78,000.The effect of the beginning-inventory error is to understate cost of goods sold $26,000. The effect of the ending-inventory error is to understate cost of goods sold $52,000. The total effect then is to understate cost of goods sold $78,000.These effects are analyzed by using the equation:Beginning inventory + Purchases-Ending inventory = Cost of goods soldFor example, if beginning inventory is understated, then the right hand side of the equation (cost of goods sold) must also be understated by the same amount.

Answer 437

A

Cost of goods sold is understated for the current year.The error affects purchases but not ending inventory. Therefore, cost of goods sold for the current period is understated because goods available is understated. When ending inventory (which is not in error) is subtracted from goods available, cost of goods sold is understated by the amount of the understatement in purchases.

Answer 438

A

$52,000This amount represents the amount of the minimum guaranteed amount ($60,000 {200,000 units a year x 3 years x $.10}) less what was already purchased ($8,000 {80,000 units x $.10}) = $52,000.

Answer 439

A

The inventory is recorded at $60,000.The maximum recorded value of the inventory is $60,000, which is the contractual amount and, also, the cost. If the firm can sell the inventory for more than $60,000, then gross margin will be recognized. The value of the inventory more than fully recovered, but gains are limited to the amount of previously recognized losses, which in this case, is $8,000.

Answer 440

A

The contractual cost of the inventory in an irrevocable purchase contract exceeds the current cost.Both qualities are required for a loss to be recognized. The firm must honor a contract in a later period by paying more than current cost and, thus, is in a loss position at the end of the current year.

Answer 441

A

Describe the nature of the contract in a note to the financial statements, recognize a loss in the Income Statement, and recognize a liability for the accrued loss.The firm has committed to a fixed price but must recognize the loss in the period the decline in price occurred, much like under lower-of-cost-or-market. Inventory is not reduced because the firm has not purchased the inventory under contract. There is no asset to reduce, but the decrease in net assets is accomplished by recording the liability for the portion of the purchase price that has no value.

Answer 442

A

Inventory pools of similar items - YES A specific price index for each year - YES
Dollar-value LIFO uses dollar-value pools which are made up of “similar” items (in terms of interchangeability, type of material, or similarity in use). Dollar-value LIFO determines increases or decreases in ending inventory in terms of dollars of the same purchasing power. Ending inventory is deflated to base-year cost by dividing ending inventory by the current year’s specific conversion price index. The resulting amount is then compared with the beginning inventory which has also been stated in base-year dollars.

Answer 443

A

Periodic - NO Perpetual - YES
The moving average method is used with perpetual records. A new average unit cost is computed each time a purchase is made and this unit cost is used in costing withdrawals of inventory until another purchase is made. The weighted-average method is used with periodic records.

Answer 444

A

FIFO - YES LIFO - NO
Under the FIFO method, ending inventory is the same whether a perpetual or periodic system is used. The inventory flow is always in chronological order, and ending inventory is made up of the latest (most recent) purchases. Under the LIFO method, ending inventory is made up of the first (oldest) purchases. When LIFO periodic is used, the first/last purchase determination is based upon the chronological order of all purchases. When LIFO perpetual is used, this determination is made continuously based on the inventory layers available. Therefore, LIFO periodic ending inventory is usually different from LIFO perpetual ending inventory.

Answer 445

A

Dollar-value LIFO.Dollar-value LIFO bases inventory on “dollars” in inventory rather than “units” in inventory. Inventory layers are identified with the price index in the year in which the layer was added. ’Double extension’ and ’link-chain” are two variations of dollar-value LIFO. Link-chain differs from double extension in that inventory values are extended at beginning of the year prices for link-chain and at base year prices for double extension. Because of this difference, link-chain is more appropriate for situations in which inventory is going through rapid technological changes. The two variations are not alternatives and use of the link-chain method should be restricted to situations in which the double extension method is impractical.

Answer 446

A

Total costs incurred to date to total estimated costs.In practice, various procedures are used to measure the extent of progress toward completion under the percentage-of-completion method, but the most widely used one iscost-to-costwhich is based on the assumed relationship between a unit of input and productivity. Under cost-to-cost, either revenue and/or profit to be recognized in the current period can be determined by the following formula.

Answer 447

A

$0When a company uses the completed-contract method of accounting for construction projects, all revenue and expense recognition is deferred until the project is complete or substantially complete (ASC Topic 605). Because there is an estimated $40,000 of remaining costs, the contract cannot be considered to be substantially complete. Thus, no revenue, expenses, or gross profit would be recognized by Syl Co. in year 1 using this method.

Answer 448

A

$900,000When using the gross margin method of inventory valuation, the CGS is estimated as Sales - (Sales × Gross margin). Silver Company’s estimated CGS is $3,600,000 [$4,800,000 − ($4,800,000 × 0.25)]. Therefore, ending inventory can be calculated as follows:	
* Beginning inventory$900,000	
* Add: Purchases $3,400,000	
* Add: Freight-in $200,000	
* = Cost of goods available $4,500,000
Deduct:	
* Cost of goods sold (estimated)($3,600,000)	
* Ending inventory$900,000

Answer 449

A

$55,000The gross profit method should be used to estimate the cost of goods sold and the amount lost in the flood. If the gross profit percentage is 40%, the cost of sales percentage is 60% and cost of goods sold can be estimated to be $150,000 ($250,000 × 60%). Beginning inventory plus purchases equals goods available for sale or $235,000 ($35,000 + $200,000). Goods available for sale of $235,000 less cost of goods sold of $150,000 equals $85,000 (estimated ending inventory). A count of inventory not lost in the flood resulted in $30,000; therefore, the amount lost in the flood equals $55,000 ($85,000 − $30,000), and this is correct.

Answer 450

A

The use of FIFO permits some control by management over the amount of net income for a period through controlled purchases, which is not true with LIFO.Under FIFO, current purchases usually become part of ending inventory rather than cost of goods sold and thus do not affect current income. Under LIFO, however, current purchases are normally included in cost of goods sold and thus net income could be affected by controlled purchases.

Answer 451

A

A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.A disadvantage of the periodic inventory system is that the exact amount of inventory shortages cannot be determined. The amount is buried in cost of goods sold.

Answer 452

A

Freight-In - YES Warehousing - YES
All costs incurred to acquire goods or to prepare them for sale are inventoriable. Freight-in is a cost incurred to acquire goods, and warehousing is a cost incurred to store goods awaiting sale. Therefore, both freight-in and warehousing are inventoriable costs.

Answer 453

A

$2,015,000Since sales terms are FOB shipping point, title passes to the buyer when the seller (Wildwood) delivers the goods to the common carrier. The goods shipped on 12/31/Y1 ($40,000) should be added to sales since the sale was not recorded until year 2. The goods lost in transit ($50,000) were correctly recorded as a sale in year 1. Because the terms were FOB shipping point, Wildwood has a valid receivable, and the buyer must proceed against the common carrier for recovery. The goods returned ($25,000) should be recorded as a return in year 1, when Wildwood authorized the return. Since the return was not recorded until year 2, year 1 net sales must be adjusted downward for the $25,000. Therefore, adjusted net sales are $2,015,000 ($2,000,000 + $40,000 − $25,000).

Answer 454

A

$660,000The dollar-value LIFO method accounts for inventory by layers. Each layer is valued using the price index for the year the inventory was purchased. To begin, the December 31, year 2 inventory at year-end prices ($780,000) must be restated back to base-year prices ($780,000/1.20 = $650,000). Thus, the ending inventory consists of the base-year layer of $600,000 (December 31, year 1 inventory) and an incremental layer of $50,000 (quantity change holding prices constant) added in year 2 ($650,000 - $600,000). The base-year layer is left at base-year prices, but the year 2 layer must be expressed in terms of year 2 prices.Base-year layer$600,000year 2 layer ($50,000 × 1.20)60,00012/31/Y2 inventory$660,000

Answer 455

A

Inventory pools of similar items - YES A specific price index for each year - YES
Dollar-value LIFO uses dollar-value pools which are made up of “similar” items (in terms of interchangeability, type of material, or similarity in use). Dollar-value LIFO determines increases or decreases in ending inventory in terms of dollars of the same purchasing power. Ending inventory is deflated to base-year cost by dividing ending inventory by the current year’s specific conversion price index. The resulting amount is then compared with the beginning inventory which has also been stated in base-year dollars.

Answer 456

A

Completed-contract - Contra Asset Percentage-of-completion - Contra Asset
Under the percentage-of-completion method, income is recognized periodically on the basis of the percentage of the job that is complete. The completed-contract method recognizes income from the job only when the contract is completed. This is the only difference in accounting for the two methods. For both methods, when progress billings are sent, “Billings on construction in progress” is credited for the amount billed. This is shown on the balance sheet as a contra account to Construction in progress.

Answer 457

A

$5.40Per ASC Topic 330, inventory should be valued using the lower of cost or market (LCM) method. Cost is historical cost ($7.50 in this case). Market value is the replacement cost subject to an upper limit (ceiling) and a lower limit (floor). The ceiling is the net realizable value, which is the selling price less disposal costs. The floor is the net realizable value less a normal profit margin. The ceiling is $7.00 ($8.00 — $1.00) and the floor is $5.40 ($7.00 — $1.60). Since the replacement cost of $5.30 is below the floor, the floor ($5.40) represents market value to be compared with cost. Since market ($5.40) is less than cost ($7.50), the proper valuation is $5.40.

Answer 458

A

$2,800,000Since net sales are $4,000,000 and the estimated gross profit rate is 30% of net sales, gross profit can be estimated at $1,200,000. The estimated cost of goods sold is net sales ($4,000,000) less estimated gross profit ($1,200,000), or $2,800,000. A short cut is to realize that if the gross profit rate is 30%, cost of goods sold must be 70% of sales; therefore, CGS is $2,800,000 ($4,000,000 × 70%).

Answer 459

A

Total goods available for sale minus the net purchases.In a periodic inventory system (regardless of the cost flow method assumed), the computation of CGS is:
* Beginning inventory
* +Net purchases
* Cost of goods available for sale
* −Ending inventory
* Cost of goods sold
From this computation can be derived the equation CGAS minus net purchases equals BI.

Answer 460

A

Income previously recognized - YES Progress billings to date - NO
ASC Topic 605 suggests a cost-to-cost measure which is a method of recognizing income based on costs incurred. The formula used for the calculation is:Current year’s profit = ((Costs to date / Total expected cost) × Expected profit) − Profit recognized in previous periodsBased on this formula, only income previously recognized is required in the calculation. Progress billings to date is an accumulation of amounts billed, and the balance in the account does not normally coincide with the costs incurred to date.

Answer 461

A

$15,000To calculate the loss, you must first determine an estimate of the inventory on hand, and information is provided to estimate the inventory based on the gross profit method. If the gross profit percent is 25% of sales, an estimate of the loss may be calculated as shown below:

Sales $620,000
COGS (75%) ($465,000)
Gross Profit 25% $155,000
Beginning inventory $40,000
- Purchases $480,000
Goods avail. for sale $520,000
− Cost of goods sold (estimated) ($465,000)
Ending inventory (estimated) $55,000
Ending inventory (estimated) $55,000
Less: sales value of damaged goods($5,000)
Estimated loss $50,000
× 30% (not reimbursed) ×30%
Amount of loss not reimbursed $15,000

Answer 462

A

Construction in progress.When revenue is recognized, the following entry is made:
Construction in progress xxx Income on long-term contractxxx

Answer 463

A

$40,000Ending inventory for Lin Co. can be estimated by using the gross profit percentage to convert sales to cost of goods sold (estimated). If gross profit is 30% of sales, then cost of goods sold is 70% (1-30%) of sales. In this case, estimated cost of goods sold is $140,000 ($200,000 sales × 70%). Estimated cost of goods sold is then subtracted from actual goods available for sale to determine estimated ending inventory.

Beginning inventory $50,000
Purchases $130,000
Goods available for sale $180,000
Less estimated cost of goods sold ($140,000)
Estimated ending inventory $$40,000

Answer 464

A

2.5Average inventory is calculated as beginning of the year inventory plus end of year inventory divided by 2. Cost of goods sold is calculated as purchases plus beginning inventory minus ending inventory, or $500,000 ($700,000 + $100,000 − $300,000). Therefore, this answer is correct because inventory turnover is equal to 2.5 {$500,000/[($100,000 + $300,000)/2]}.

Answer 465

A

$6,000The amount of inventory remaining on consignment at the end of the year can be calculated as follows. Consignment inventory was $20,000, and 70% of consignment inventory ($20,000 × 70% = $14,000) was sold. Therefore, ending consignment inventory is equal to $6,000 ($20,000 − $14,000). Therefore, this is correct.

Answer 466

A

$500,000The costs to be charged to merchandise purchases should include those costs necessary to prepare the merchandise for sale. Salesmen’s commissions are a selling expense and not related to the acquisition of the merchandise. These costs are expensed in the period incurred. The interest is a financing expense and is also expensed in the period incurred. Thus, only the $500,000 should be included in the cost of the merchandise purchases.

Answer 467

A

$95,000Gross margin is sales minus cost of goods sold and is computed as follows for this question:

Sales$150,000 Less cost of goods sold
Beginning inventory$35,000
Purchases $70,000
Goods available$105,000
Ending inventory($50,000)
Cost of goods sold($55,000)
Gross margin$95,000

Answer 468

A

Original cost.Under lower of cost or market, market is replacement cost provided that replacement cost is lower than net realizable value (ceiling) and higher than net realizable value less a normal profit margin (floor). Since the replacement cost is below the floor, the floor will be used as market value. Therefore, original cost will be the value of the inventory because it is lower than the market value (floor).

Answer 469

A

First-in, first-out.Most manufacturing operations process and sell inventory in the order it is received, that is the first items in are the first to be sold, which is FIFO.

Answer 470

A

$7,600Garnett’s net income is $7,600, as calculated below.

Revenue $32,000
Cost of goods sold ($50,000 × 40%) ($20,000)
Commission ($32,000 × 10%) ($3,200)
Advertising ($1,200)
Net income $7,600

Answer 471

A

$208,000To solve the problem, first calculate cost of sales. Since gross margin is 20%, cost of sales is equal to $220,000 ($275,000× 80%). Then, purchases are calculated by adding ending inventory and deducting beginning inventory from cost of sales. $208,000 ($18,000 − $30,000 + $220,000).

Answer 472

A

Deducted from inventory, whether taken or not.There are two methods of accounting for cash discounts: the gross method and the net method. The gross method records purchases before any discounts, and records cash discounts only when taken. The net method records purchases net of cash discounts whether taken or not, and any discounts foregone are considered to be financing expenses. Theoretically, purchases and accounts payable should be shown net of cash discounts whether taken or not because this net method allows for a more correct reporting of the related asset and liability, and it allows for a measure of the inefficiency of financial management if the discount is not taken.

Answer 473

A

78The number of days’ sales in average inventories is calculated using the formulaDays in Year / COGSorAverage inventory at cost /Average sales per day at costAverage inventory at cost would be $312,000 [($336,000 + $288,000) ÷ 2]. The average sales per day at cost is $4,000 ($1,200,000 cost of goods sold ÷ 300 days). Therefore, the number of days’ sales in average inventories is 78 days ($312,000 ÷ $4,000).

Answer 474

A

$11.20The solutions approach to this problem is to visualize where original and replacement cost (market) lie in respect to the floor and ceiling limitations.In this situation, replacement cost lies below NRV and NRV less a normal profit margin. Therefore, NRV less a normal profit margin will be used as the market to determine LCM. Since original cost is greater than market, market will be used to price the inventory for the period.

Answer 475

A

$1,200,000Gross margin is 40% of net sales ($1,800,000), or $720,000. Therefore, cost of goods sold is $1,080,000 ($1,800,000 net sales less $720,000 gross margin). Finally, cost of goods available for sale is $1,200,000 ($1,080,000 cost of goods sold plus $120,000 ending inventory). The amounts for freight-in ($45,000) and purchase discounts ($25,000) are not necessary for the computation.

Answer 476

A

When it is below the net realizable value and above the net realizable value less the normal profit margin.ASC Topic 330 “market” is equal to current replacement cost, subject to the following constraints: (1) market cannot exceed the net realizable value (NRV) of an item, and (2) market cannot be below NRV less the normal profit margin.

Answer 477

A

$251,000ASC Topic 330 requires the use of lower of cost or market (LCM) for reporting inventory. The market value of inventory is defined as the replacement cost (RC), as long as it is less than the ceiling, net realizable value (NRV), and more than the floor NRV less a normal profit (NRV − NP). In this case, the amounts are computed as follows:Ceiling: NRV = ($275,000 est. selling price − $14,000 cost to sell) = $261,000Floor: NRV − NP = $261,000 − $10,000 = $251,000The replacement cost is $230,000, which is lower than the floor. Therefore, the net carrying value of the inventory should be reported at the floor value of $251,000, which is lower than the cost of $258,000. Therefore, this is the correct answer.

Answer 478

A

All of the above.All items listed are required disclosures: useful life, depreciation methods, and the accumulated depreciation of plant asset. Read through select disclosures of the financial statements of real companies-this will help reinforce the disclosure requirements and jog your memory because you will remember reading about the disclosure.

Answer 479

A

Deducted from the cost of the land.The proceeds from the building removed and sold reduce the cost of the land to the buyer. Had the building been razed, the net razing cost would be added to the land. Compared to the latter situation, the case in the problem results in a cost savings.

Answer 480

A

$332,000The correct answer, $332,000, equals: $300,000 + $25,000-$4,000 + $5,000 + $6,000.The net cost to raze the old building ($21,000) is capitalized to land because it is a cost necessary to bring the land into its intended condition. The legal fees and title guarantee cost, likewise, must be incurred to avoid future legal problems, and thus contribute to the value of the land.

Answer 481

A

Part of continuing operations.The gain or loss on the sale of an asset is part of continuing operations as it is expected that a company will sell existing assets from time to time as the assets are replaced.

Answer 482

A

The amount is increased by the excess of the replacement forestland’s cost over the condemned forestland’s carrying amount.The two transactions are not related. The land account is decreased by the book value of the land condemned and increased by the cost of the land purchased. The relative magnitudes of the book values are shown below: award > book value of condemned land cost of new land > award
Therefore: cost of new land > book value of condemned landThus, the land is increased by the net amount: cost of new land-book value of old land

Answer 483

A

Building modification costs - YES Production line rearrangement costs - YES
The criterion for capitalizing post-acquisition costs is not whether the market value of the overall asset is increased. Rather, the criteria are increase in useful life or increase in productivity or efficiency including cost reduction.
An overall reduction in production costs meets the second criterion. Therefore, both costs are capitalized rather than immediately expensed.

Answer 484

A

$332,000The correct answer, $332,000, equals: $300,000 + $25,000-$4,000 + $5,000 + $6,000.The net cost to raze the old building ($21,000) is capitalized to land because it is a cost necessary to bring the land into its intended condition. The legal fees and title guarantee cost, likewise, must be incurred to avoid future legal problems, and thus contribute to the value of the land.

Answer 485

A

$464,000

Land purchase price $400,000
Plus demolition of old building $50,000
Less salvage proceeds ($8,000)
Plus title insurance $12,000
Plus legal fees $10,000
Equals recorded land cost $464,000

Answer 486

A

Interest Expense - $1,800 Capitalized Amount - $50,000
The interest expense recognized for the first year is .06($30,000) = $1,800. Although no interest is paid, interest is accrued, increasing the carrying value of the note. The asset is capitalized at $50,000, the sum of cash down payment and present value of the note. The interest over the note term is not capitalized because it does not assist in the process of placing the asset into its intended condition and location.

Answer 487

A

$24,980The capitalized cost is the sum of the down payment, present value of the note payments, and the shipping and installation charges. $4,000 + $6,000(2.58) $2,000 $3,500 = $24,980. The present value of the three payments required on the note is capitalized, which excludes the interest included in those payments. The two charges are capitalized because they were incurred to place the asset into its intended condition and location.

Answer 488

A

$154,125The amounts necessary to get the land ready for its intended purpose attach themselves as a part of the total cost of the land. This would be the: $2,500+625+135,000+16,000=$154,125

Answer 489

A

Both 1 and 2.When average accumulated expenditures exceeds interest bearing debt, all interest for the period is capitalized because all debt could have been avoided if the construction had not taken place. Also, if the interest rates on all debt are the same, then the two approaches yield the same results because, ultimately, only one interest rate is applied to average accumulated expenditures for computing capitalized interest.

Answer 490

A

$8,190Average accumulated expenditures is $156,000 = $40,000 + $120,000(10/12) + $96,000(2/12). This method uses the average interest rate on all interest bearing debt, weighted by principal. That rate is the quotient of the interest on all the debt divided by the principal on all the debt. The rate = ($3,600 + $3,600 + $5,400)/$240,000 = .0525. Interest capitalized = (.0525)$156,000 = $8,190.

Answer 491

A

Interest incurred for machinery for own use - interest incurred after completion
Interest incurred for machinery held for sale - All interest incurred

Answer 492

A

8.57%Neither debt issuances were identified as the construction loan. Therefore, the interest rate must be determined based on the weighted average of the interest on all of the debt outstanding during the year. The calculation is as follows:$6,000,000 x .08 = $480,000$8,000,000 x .09 = $720,000Totals $14,000,000 /$1,200,000$1,200,000 / $14,000,000 = 8.57%

Answer 493

A

$17,000Interest can be capitalized on the accumulated average expenditures during the year. During year 1 the weighted average expenditures were ($120,000 x 12/12) + ($150,000 x 4/12) = $170,000. Interest is capitalized based on the weighted average expenditures times the interest rate of 10% ($170,000 x .10 = $17,000).

Answer 494

A

Debt for purchase - EXPENSE Debt during construction - CAPITALIZE
Interest on debt incurred when purchasing a plant asset, is incurred after the asset has reached its intended condition and location. Therefore, it is expensed as incurred. Debt incurred during the construction of plant assets is considered avoidable and also incurred before the asset has reached its intended condition and location. Therefore, it is capitalized to the asset in the same way material, labor, and overhead are capitalized. The interest is expensed as part of depreciation during the service life of the asset.

Answer 495

A

$40,000Capitalized interest is limited to the interest that would have been avoided had the construction not occurred. This is the amount of interest based on average accumulated expenditures.

Answer 496

A

$60,000Average accumulated expenditures for the second year = $400,000(12/12) + $240,000(10/12) + $600,000(3/12) = $750,000. Interest capitalized = .08($750,000) = $60,000. Note that the interest capitalized in year one is compounded in year two because year one capitalized interest is included in average accumulated expenditures for the second year.

Answer 497

A

Warehouse - YES Land - NO

Answer 498

A

$280,000Average accumulated expenditures is the amount of debt for the annual period that could have been avoided. In this case, the firm has $160,000 already invested in the project at the beginning of year six. That amount represents $160,000 in debt, that could have been avoided for year six if the firm had not been involved in the construction project. The expenditures during year six were incurred evenly. Average accumulated expenditures therefore = $160,000(12/12) + $240,000/2 = $280,000. Also, [$160,000 + ($160,000 + $240,000)]/2 = $280,000.

Answer 499

A

$160,000All four costs should be capitalized because they result in an increase in the productivity of the asset. Costs that increase EITHER the life OR productivity are capitalized. Either type of increase results in enhanced asset values. $160,000 is the sum of the four costs listed.

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