F3

Question 1

bank account balances in the balance sheet

California Bank
Operating—Summit Ridge ($400,000)
Operating—Bakersville 300,000
Operating—Smithville 50,000
Savings 500,000

Sedona Bank
Checking ($375,000)

Answer 1

Although the balances in the various accounts within the same bank can be netted, balance totals for different banks must be accounted for separately on the balance sheet when one has a negative position. Here, because the checking account in Sedona Bank is negative, it must be accounted for separately as a liability. All of the accounts of California Bank can be netted to produce a $450,000 cash position.

Question 2

Cash and cash equivalents consist of

Answer 2

currency and demand deposits (cash), petty cash,

as cash equivalents are short-term, highly liquid investments that are readily convertible into cash and so close to maturity (90 days or less from the date of purchase) that risks of value changes are relatively insignificant, money market accounts

Question 3

reconciling items for the balance per the bank statement

Answer 3

Deposits in transit
Outstanding checks

DO Bank

Question 4

reconciling items to the book, or GL, balance

Answer 4

Bank collections
Interest income
NSF checks
Service charges

BINS

And errors

Question 5

Post-dated check from customer dated one month from balance sheet date

Answer 5

The post-dated check should not be included in cash and cash equivalents because it is dated after the balance sheet date.

Question 6

Cash is defined as actual unrestricted cash and cash equivalents are defined as short-term, liquid investments that are so near maturity (original maturity date was within three months of the purchase date) that the risk of changes in the value because of interest rate changes is insignificant.

Answer 6

Cash and cash equivalents would not include the $30,000 in the bond sinking fund. Cash in a bond sinking fund is restricted cash.

The post-dated check should not be included in cash and cash equivalents because it is dated after the balance sheet date.

The certificate of deposit with six months to maturity is not included in cash and cash equivalents because it does not meet the definition of a cash equivalent (maturity date within 3 months of the purchase date).

Question 7

Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a result of this transaction, which is best described as a:

Answer 7

Factoring receivables without recourse is a sales transaction. Factoring without recourse transfers the risk of uncollectible accounts to the buyer.

Factoring receivables may be treated as a sales transaction. Factoring with recourse leaves the risk of uncollectible accounts with the seller.

Assigning receivables is the process of obtaining a loan by transferring to the lender the debtor’s right to cash collected on receivables.

Pledging receivables is the process of obtaining a loan using the receivables as collateral.

Question 8

A method of estimating uncollectible accounts that emphasizes asset valuation rather than income measurement is the allowance method based on:

Answer 8

Aging the receivables.

Estimating bad debts on the aging analysis of accounts receivable balances focuses on the balance sheet and emphasizes the valuation of assets. It results in a good matching of revenue and expense.

Question 9

When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account:

Answer 9

when the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account decreases both accounts receivable and the allowance for uncollectible accounts.
Debit Credit
Allowance for uncollectible accounts
Accounts receivable

Question 10

to increase the allowance balance

Answer 10

Dr. Uncollectible accounts expense 34,000,
Cr. Allowance for uncollectible accounts

Question 11

if a previously written-off account is collected

Answer 11

DR-Cash, CR-Allowance

Question 12

When a previously written-off account “becomes collectible,

Answer 12

DR-Accounts Receivable, CR-Allowance

Question 13

The recording of a provision for uncollectible accounts i

Answer 13

DR-Provision for bad debts, CR-Allowance

Question 14

When a specific uncollectible account is written off under the allowance method of recognizing bad debt expense

Answer 14

DR- ALLOWNCE FOR DOUBTFUL ACC, CR-AR

Question 15

When calculating the ending allowance

Answer 15

the uncollectible accounts expense must be added and the accounts written off must be subtracted.

Question 16

A pledge of accounts receivable

Answer 16

involves the use of the receivables as collateral for a loan. The receivables remain on the company’s books and the company continues to service the receivables. When the cash proceeds are received by the company, a credit is recorded to notes payable. Pledging of receivables as collateral only requires note disclosure.

Question 17

After being held for 40 days, a 120-day 12% interest-bearing note receivable was discounted at a bank at 15%. The proceeds received from the bank equal:

Answer 17

Maturity value less the discount at 15%. The discount is always applied on the maturity value.

Question 18

Which method of recording uncollectible accounts expense is consistent with accrual accounting?

Answer 18

The allowance method is used to match expenses with revenues and to record the proper carrying amount for accounts receivable. The direct write-off method does not achieve these objectives.

Question 19

Inventoriable costs

Answer 19

include any cost required to get an inventory item in a state where it is ready to be sold. For manufactured inventory, this would include the cost of raw materials, direct labor, and the factory overhead. There may be instances in which 100 percent of factory overhead is not included in the inventoriable cost,

Question 20

Ending inventory includes

Answer 20

goods on hand, but may also include goods in transit, depending upon the shipping terms.

The inventory shipped to the customer F.O.B. destination is still owned by customer while in transit and therefore should be included in the year-end inventory value.

Ownership in inventory transfers to customer at F.O.B. shipping point and is added to the year-end inventory on hand, even though the goods are not physically present.

Question 21

In a consignment arrangement

Answer 21

the consignor will maintain title to the goods provided to the consignee until the point at which the consignee sells those goods to a third-party customer. will also include the freight cost

Question 22

A corporation issues quarterly interim financial statements and uses the lower cost or market method to value its inventory in its annual financial statements. Which of the following statements is correct regarding how the corporation should value its inventory in its interim financial statements?

Answer 22

Permanent declines in inventory market value should be reflected in interim financial statements in the period incurred.

Temporary declines in market value that are expected to reverse by the end of the annual period are not recognized in the interim statements. Only permanent declines are recognized.

The lower of cost or market method should be applied to interim periods.

Question 23

Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy?

Answer 23

Since the inventory turnover ratio is computed by

COGS/AVR INVENTORY

then we’re looking for an answer that would result in a lower COGS figure and/or a higher average inventory valuation.

Keep in mind that we’re assuming an inflationary environment or rising prices.

Under FIFO, our COGS would be lower, and our ending inventory would be higher, causing our average inventory to be higher as well. Therefore, FIFO will result in a lowest inventory turnover in an inflationary environment assuming constant inventory quantities.

LIFO results in a higher COGS figure and a lower ending inventory valuation amount which in turn causes a lower average inventory valuation amount as well. Therefore, LIFO would yield a higher inventory turnover ratio in an inflationary environment, not a lower one, assuming constant inventory quantities.

The moving average & weighted average inventory costing method would result in an inventory turnover ratio between those calculated using FIFO and LIFO.

Question 24

A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, by a material amount. Which of the following accounting treatments is most appropriate?

Answer 24

When the current market value of the inventory is less than the fixed purchase price in a purchase commitment, the loss must be recognized at the time of the decline in price, a liability must be recognized on the balance sheet and a description of the losses must be described in the footnotes.

Question 25

The machine should be recorded as a liability

Answer 25

Shipping terms determine the transfer of legal title to the machine (and recording of the related liability), According to the shipping terms of FOB destination, title does not pass until the machine is received at its destination by Archer Inc.

Question 26

Cirrus, Inc. purchased certain plant assets under a deferred payment contract. The agreement required Cirrus to pay $30,000 per year for ten years. The plant assets should be valued at:

Answer 26

Whenever assets are purchased requiring fixed payments extending beyond one year, the assets should be valued at the present value of all future payments.

Question 27

A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable. To account for these events, the owner should:

Answer 27

Since the carrying value of the damaged portion of the building is known and is uninsured, the component method is used and a loss in the amount of the carrying value of the damaged portion of the building must be recognized. The refurbishing costs create a new asset (the reconstructed building) and must be capitalized.

Question 28

Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be:

Answer 28

The proceeds from the sale of the building should be deducted from the cost of the land.

Rule: Cost of land includes all costs necessary to put the land in place and condition for construction of the plant. Any proceeds from the sale of any existing buildings (or standing timber, or soil) or scrap are deducted from the cost of the land.

interest incurred to acquire land should be expensed when incurred

Debt issuance costs are presented on the balance sheet as a direct reduction to the carrying amount of the bond and should not be included in the cost of the land

Question 29

Green Co. incurred leasehold improvement costs for its leased property. The estimated useful life of the improvements was 15 years. The remaining term of the nonrenewable lease was 20 years. These costs should be:

Answer 29

Leasehold improvements are capitalized and then amortized over the lesser of the life of the improvements or the remaining term of the lease (in this question, the amortization period is the lesser of 15 or 20). The leasehold improvement costs should thus be expensed over a period of 15 years. This rule makes sense because the party making the leasehold improvements will benefit from the improvements for either the life of the improvements or the term of the lease if the term of the lease is shorter than the life of the improvements (in which case, somebody else will benefit from the improvements for the remaining life of the improvements).

Question 30

The cost of equipment includes

Answer 30

amounts such as the invoice price, freight-in, and installation charges. All equipment costs must be incurred before depreciation of the equipment begins; therefore the installation date is the appropriate date to begin depreciation.

Question 31

What amount of interest should Lyle capitalize during the current year?

Answer 31

The capitalization of interest period begins when expenditures for the asset have been made,

activities necessary to get the asset ready for intended use are in progress,

and interest cost is being incurred.

Interest capitalization ends when the asset is substantially complete and ready for the intended use.

Question 32

Derby Co. incurred costs to modify its building and to rearrange its production line. As a result, an overall reduction in production costs is expected. However, the modifications did not increase the building’s market value, and the rearrangement did not extend the production line’s life. Should the building modification costs and the production line rearrangement costs be capitalized?

Answer 32

Rule: Expense ordinary repairs but capitalize expenditures, which are “additions” or “benefit several periods” or “improve efficiency” as is the case in this question.

Question 33

The amount of capitalized interest

Answer 33

capitalize interest based on the weighted average amount of accumulated expenditures, as long as it does not exceed the total amount of interest costs for the period.

Question 34

Leasehold improvements

Answer 34

Leasehold improvements are capitalized and then amortized over the lesser of the life of the improvements or the remaining term of the lease

Question 35

If borrowings are not tied specifically to the construction of an asset

Answer 35

the weighted average interest rate for the other borrowings of the company should be used.

Question 36

Under the double (200 percent) declining balance method of depreciation

2/N * (Cost-Accumulated Depreciation)

1/years of life*200% (for each tear)

Answer 36

Under declining balance depreciation, the salvage value is not included in the computation of depreciation expense.

The salvage value only impacts the expense calculation in the year when the book value would drop below the salvage value as a result of recording depreciation expense. In that year, depreciation expense is limited to the amount that would reduce the book value to the salvage value of the asset.

The double-declining balance percentage is calculated as the straight-line rate times 200%

Question 37

restoration of previously recognized impairment loss in the current year’s financial statements?

Answer 37

There will be no amount recorded because a subsequent reversal of an impairment loss is prohibited under U.S. GAAP (unless the asset is held for disposal).

Question 38

When a permanent impairment occurs

Answer 38

the book value is reduced and a loss is recorded.

The loss is credited to accumulated depreciation. In addition, the current year’s depreciation expense should be added.

The new book value is depreciated over the new life.

Question 39

Units-of-production depreciation method

Answer 39

reflects that an asset’s service potential declines with use.

Question 40

Straight-line depreciation method

Answer 40

reflects that an asset’s service potential declines with the passage of time.

Question 41

An accelerated depreciation method

Answer 41

reflect that an asset is subject to rapid obsolescence and asset incurs increasing repairs and maintenance with use.

Question 42

On January 1, Year 1, Crater, Inc. purchased equipment having an estimated salvage value equal to 20% of its original cost at the end of a 10-year life. The equipment was sold December 31, Year 5, for 50% of its original cost. If the equipment’s disposition resulted in a reported loss, which of the following depreciation methods did Crater use?

Answer 42

After 5 years of straight-line depreciation over a 10-year life, accumulated depreciation would equal 50% of the net unrecoverable cost (80% times cost) or 40% of the original cost, leaving a book value of 60% times the original cost. When the asset was sold for 50% of its original cost, this amount was less than book value, resulting in a

Question 43

The composite method

Answer 43

is appropriate for a collection of assets that are dissimilar in nature.

Question 43

A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct

Answer 43

The old building being actively marketed for sale will be valued at the lower of its book value or net realizable value (fair value less the costs to sell).

Because the company expects that the sale of the old building will be completed in a four month time period, the old building will be classified as a current asset.

Assets held for sale are no longer depreciated.

It is a correct statement that the old building being actively marketed for sale will be reclassified as an “asset held for sale.”

Question 43

Turtle’s policy for five-year assets is to use the 200% double-declining depreciation method for the first two years of the asset’s life, and then switch to the straight-line depreciation method

Answer 43

When switching methods, book value (not original cost) and remaining life (not original life) should be used to calculate depreciation.

Question 44

Estimated restoration costs should be

Answer 44

added to the depletable base of the natural resource. In this way, the amount of depletion charged to expense over the life of the mining operation will include the restoration costs.

While the costs are capitalized (by being added to the depletion base of the mine), they are depleted, not depreciated.

Restoration costs should not be expensed as incurred.

Question 45

A company has experienced operating losses from its appliances division for the past five years. The division is the lowest level of identifiable cash flows. Having determined the division is the lowest level of identifiable cash flows, the company’s next step in performing its impairment test is to:

Answer 45

Performance of an impairment test on fixed assets held for use and to be disposed of begins with a recoverability test, in which the sum of undiscounted future cash flows is compared with the carrying amount. If the undiscounted future cash flows are less than the carrying value, then an impairment loss would be calculated.

An impairment loss would be recorded after the recoverability test is performed. In addition, using undiscounted cash flows is not how the impairment loss would be calculated.

The loss would be based on the difference between the fair value and the carrying value of the assets.

The carrying amount of fixed assets should be tested for recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

Question 46

Bay Co. incurred legal fees in defending its patent rights. These legal fees should be capitalized when the outcome of the litigation is:

Answer 46

For defending a patent, the accounting for the legal fees will depend entirely on whether the defense is successful or not. If the defense is successful, the costs associated with legal fees will be capitalized and treated as an asset on the company’s balance sheet. If the defense is unsuccessful, the legal fees will be treated as an expense recorded on the income statement.

Question 47

Intangible assets should be amortized

Answer 47

over the lesser of the useful economic life or the legal life. The useful economic life is 25 years and the legal life is 30 years, so the copyright will be amortized over 25 years.

Question 48

Because the trademark is expected to be renewed indefinitely

Answer 48

there will be no amortization expense on the books. Amortization is only recorded for intangible assets with a definite life.

Question 48

If the pattern in which the economic benefits of an intangible asset are consumed or otherwise used up cannot be readily determined, which of the following methods should be used to amortize intangible assets?

Answer 48

For intangible assets with a finite life, amortization expense should be recorded each year to account for the loss in value of the asset. The straight-line method should be applied, unless there is another method which is deemed more appropriate by the company.

Question 49

capitalize related to the patent

Answer 49

Development costs of a new product idea are a direct expense. Legal fees incurred to apply for a patent and to successfully defend the patent rights are capitalized as an asset.

Legal costs associated with unsuccessfully defending a patent are immediately expensed.

Question 50

Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?

Answer 50

A patent is a type of intangible asset that has a limited useful life. The recoverability test is only performed on intangible assets with a limited life.

The recoverability test compares undiscounted future cash flows to the carrying value of the asset. If the carrying value is greater, then a fair value test would be performed.

R&D costs are expensed immediately; therefore, impairment is irrelevant as no intangible asset would exist to test for impairment.

Goodwill is an intangible asset with an indefinite life; therefore, the recoverability test is not performed.

Question 51

Southgate Co. paid the in-transit insurance premium for consignment goods shipped to Hendon Co., the consignee. In addition, Southgate advanced part of the commissions that will be due when Hendon sells the goods. Should Southgate include the in-transit insurance premium and the advanced commissions in inventory costs?

Answer 51

Southgate (as consignor) should include in its inventory cost the cost of goods shipped to Hendon (consignee) because it still holds title to the goods.

Yes - The in-transit insurance premium is included in inventory costs because it is a cost necessary to bring the goods to their location.

No - Advanced commissions are excluded because they do not add “time” or “place” utility to the inventory. Rather, they are classified as a prepaid expense that will become commissions expense when the goods are sold.

Question 52

A depreciable asset has an estimated 15% salvage value. Under which of the following methods, properly applied, would the accumulated depreciation equal the original cost at the end of the asset’s estimated useful life?

Answer 52

If accumulated depreciation equals original cost, then the asset has been depreciated to $0. Depreciable assets should not depreciated below salvage value under any depreciation method.

Question 53

On December 1, 1992, Alt Department Store received 505 sweaters on consignment from Todd. Todd’s cost for the sweaters was $80 each, and they were priced to sell at $100. Alt’s commission on consigned goods is 10%. At December 31, 1992, 5 sweaters remained. In its December 31, 1992, balance sheet, what amount should Alt report as payable for consigned goods?

Answer 53

Consigned goods are not included in inventory by Alt and a payable is not recorded until the goods are sold. 500 sweaters were sold for $50,000. After a 10% commission, $45,000 is payable.

Question 54

What factor must be present to use the units-of-production (activity) method of depreciation?

Answer 54

Total units to be produced can be estimated.

Rule: Under the units-of-production depreciation method, the cost of a fixed asset is allocated to expense based on the number of units produced during the period relative to the total number of units expected to be produced over the asset’s life. Accordingly, the total number of units over the asset’s life must be able to be estimated

Question 55

When the double extension approach to the U.S. GAAP dollar value LIFO inventory method is used, the inventory layer added in the current year is multiplied by an index number. Which of the following correctly states how components are used in the calculation of this index number?

Answer 55

In the numerator, the ending inventory at current year cost; in the denominator, the ending inventory at base year cost.

INDEX= END INV CURRENT YEAR/ END INV BASE

Question 56

When measuring a firm’s ending inventory, which of the following is the best reason that dollar-value LIFO would be greater than the comparable base-year value?

Answer 56

In order to compute dollar-value LIFO, the firm applies a price index to the LIFO inventory layers added. When the price index is greater than 1.0, dollar-value LIFO will be greater than the comparable base-year

Question 57

GAAP requires that start-up costs

Answer 57

including organizational costs, be expensed as incurred, without exception.

Question 58

compensated absence liability

Answer 58

Vacation pay is accrued if it vests or accumulates. Sick pay is accrued only if it vests.

Question 59

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest. What is an installment note’s receivable balance six months after the sale?

Answer 59

The present value of the remaining monthly payments discounted at 12% equals the installment note receivable balance at any time.

Question 60

Depreciable property constructed on leased land is

Answer 60

depreciated over the life of the property or the term of the lease, whichever is shorter.

Question 61

Capitalized interest

Answer 61

equals the smaller of the total interest incurred or the avoidable interest.
The recorded capitalized interest cost may never exceed the actual interest costs incurred by an entity for a specific period.

When computing capitalized interest for a period, the interest rate is applied to the average amount of accumulated expenditures for the qualifying asset, not the amount borrowed.
After all available funds under a specific (construction) borrowing are used, the weighted average interest rate on the entity’s other debt is used to compute the excess cost.

Although a firm may not capitalize interest on its ordinary inventory production, it can capitalize interest on special order goods on hand for sale to customers.

Question 62

Which of the following inventory valuation methods best reflects the economic value of ending inventory, assuming that the raw materials to produce the goods were purchased evenly throughout the year?

Answer 62

Because dollar-value LIFO inventory measures inventory in dollars and uses a price index to adjust for changing price levels (inflation/deflation), it best reflects the true economic value of the inventory.