FAR 1 Flashcards
Information regarding Pinn, Inc.’s noncurrent investments in marketable debt securities available-for-sale (AFS) at December 31, Year 2 and Year 1, follows:
Year 1 Year 2 Cost of AFS securities $275,000 $275,000 AFS securities-unrealized losses (valuation account) $37,000 $25,000
The decline in fair value is noncredit-related and due to market risk. What amount should Pinn report in its December 31, Year 2, stockholders’ equity section of the balance sheet
as the net unrealized holding losses on noncurrent marketable debt securities?
A. $0
B. $12,000
*C. $37,000
D. $87,000
On October 31, Year 1, a company with a calendar year end paid $90,000 for services that will be performed evenly over a six-month period from November 1, Year 1, through April 30, Year 2. The company expensed the $90,000 cash payment in October, Year 1, to its services expense general ledger account. The company did not record any additional journal entries in Year 1 that were related to the payment. What is the adjusting journal entry that the company should record to properly report the prepayment in its Year 1
financial statements?
A. Debit prepaid services and credit services expense for $30,000.
*B. Debit prepaid services and credit services expense for $60,000.
C. Debit services expense and credit prepaid services for $30,000.
D. Debit services expense and credit prepaid services for $60,000.
$90,000/6 = $15,000 a month
Nov. + Dec. = $30,000
Jan. + Feb. + Mar. + Apr. = $60,000
What they did was:
Debit Service Expense $90,000
Credit Cash $90,000
However, they only actually incurred $30,000 of the service expense, and the rest is considered a prepayment for the next four months, so we have to reverse their bad accounting by:
Debit Prepaid services 60,000
Credit Service Expense 60,000
Trey Co.’s December 31, Year 1, unadjusted trial balance includes the following information:
Cash $550,000
Accounts receivable 1,450,000
Allowance for credit losses 50,000
Prepaid taxes 300,000
Note receivable, due June 30, Year 3 250,000
Trey has no deferred taxes and a current income tax liability of $350,000 but has not yet recorded income tax expense. What amount should be reported as total current assets in Trey’s December 31, Year 1, balance sheet?
A. $1,950,000
B. $2,050,000
C. $2,200,000
D. $2,250,000
General purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users?
A. Regulatory and taxing authorities.
*B. Investors and creditors and their advisors.
C. The board of directors of the corporation.
D. The management of the corporation.
Gold Corp.’s trial balance included the following at June 30, Year 2:
Cash overdraft $(10,000)
Accounts receivable, net 35,000
Inventory 58,000
Prepaid expenses 12,000
Property, plant, and equipment, net 95,000
Unearned rent 83,000
Checks amounting to $30,000 were written to vendors and recorded on June 29, Year 2, resulting in a cash overdraft of $10,000. The checks were mailed on July 9, Year 2. Gold issued its financial statements on July 31, Year 2.
What amount should be included in the current asset section of Gold’s June 30, Year 2 balance sheet?
A. $83,000
B. $125,000
C. $135,000
D. $208,000
A company has equity of $9,000. Long-term debt is $1,900. Net working capital, other than cash, is $2,500. Fixed assets are $2,200. What amount of cash does the company have?
A. $7,400
B. $6,800
*C. $6,200
D. $2,400
Each of the following statements is correct regarding the criteria to report an asset on the balance sheet, except:
A. The entity must have control of the asset.
B. The asset must provide a probable future benefit.
C. Assets with restrictions may still be reported as assets.
*D. All highly valuable resources must be reported as assets.
Zinc Co.’s adjusted trial balance at December 31, Year 1, includes the following account balances:
Common stock, $3 par $600,000
Additional paid-in capital 800,000
Treasury stock, at cost 50,000
Net unrealized holding loss on noncurrent available-for-sale 20,000
marketable debt securities
Retained earnings: appropriated for uninsured earthquake 1 50,000
losses
Retained earnings: unappropriated 200,000
What amount should Zinc report as total stockholders’ equity in its December 31, Year 1, balance sheet?
*A. $1,680,000
B. $1,720,000
C. $1,780,000
D. $1,820,000
Each item listed belongs to owners’ equity. The treasury stock and net unrealized loss are negative items (debits), but the rest are positive items (credits).
Therefore, total owners’ equity is $1.68m = $600,000 + $800,000 - $50,000 - $20,000 + $150,000 + $200,000.
The following trial balance of Trey Co. at December 31, 20X5 has been adjusted except for income tax expense.
Dr. Cr. Cash $550,000 Accounts Receivable, net 1,650,000 Prepaid taxes 300,000 Accounts payable $120,000 Common stock 500,000 Additional paid-in capital 680,000 Retained earnings 630,000 Foreign currency translation adjustment 430,000 Revenues 3,600,000 Expenses 2,600,000
$5,530,000 $5,530,000
Additional information:
* During 20X5, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between the financial statement and the income tax income, and Trey’s tax rate is 30%.
* Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer require payments in equal, semiannual installments of $125,000
every April 1 and October 1.
In Trey’s December 31, 20X5 Balance Sheet, what amount should be reported as total current assets?
*A. $1,950,000
B. $2,200,000
C. $2,250,000
D. $2,500,000
Current assets are assets that are collectible within one year.
The sum of the stated current assets is $2,500,000 ($550,000+$1,650,000+$300,000).
However, once the current tax bill is calculated, the prepaid taxes of $300,000 are transferred into a tax expense account to cover the $300,000 in current year tax expense.
In addition, $250,000 of the special accounts receivable is not due for over one year and is, therefore, non-current.
Therefore, current assets should be $1,950,000 ($2,500,000-$300,000-$250,000).
Mint Corp.’s December 31, Year 1, unadjusted trial balance includes the following information:
Cash $60,000
Accounts receivable 400,000
Allowance for credit losses (50,000)
Construction in progress in excess of billings on long-term (50,000)
contracts
Prepaid taxes 160,000
Property, plant, and equipment 45,000
Accumulated depreciation 100,000
(52,000)
Mint has an income tax liability of $45,000 but has not yet recorded income tax expense. Mint recognizes revenue from long-term construction contracts as the performance obligation is being satisfied. What amount should be reported as total current assets on Mint’s December 31, Year 1 balance sheet?
A. $410,000
B. $570,000
C. $615,000
D. $663,000
Gar, Inc.’s trial balance reflected the following liability account balances at December 31, year 1:
Accounts payable $19,000
Bonds payable, due year 2 34,000
Deferred income tax liability 4,000
Discount on bonds payable 2,000
Dividends payable on 2/15/Y2 5,000
Income tax payable 9,000
Notes payable, due 1/19/Y3 6,000
The deferred income tax liability is based on temporary differences stemming from different depreciation methods for financial reporting and income taxes.
In Gar’s December 31, year 1 balance sheet, the current liabilities total was
A. $71,000
B. $69,000
C. $67,000
*D. $65,000
ASC 210-10-20 Glossary states that current liabilities are obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities.
This means that generally, current liabilities are liabilities due within 1 year of the balance sheet date. Clearly, accounts payable ($19,000), dividends payable ($5,000), and income tax payable ($9,000) are current liabilities.
Generally, bonds payable are a long-term liability; however, since these bonds are due in year 2, they must be reported as a current liability at 12/31/Y1 ($34,000 face less $2,000 discount, or $32,000).
Therefore, total current liabilities are $65,000 ($19,000 + $5,000 + $9,000 + $32,000). The deferred income tax payable ($4,000) is classified as a long-term liability because it is related to the noncurrent asset, property, plant, and equipment.
Similarly, the notes payable ($6,000) are classified as long-term because they are due in year 3.
On December 31, year 4, Largo, Inc. had a $750,000 note payable outstanding, due July 31, year 5.
Largo borrowed the money to finance the construction of a new plant. Largo planned to refinance the note by issuing long-term bonds. Because Largo temporarily had excess cash, it
prepaid $250,000 of the note on January 12, year 5.
In February year 5, Largo completed a $1,500,000 bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs
during year 5.
On March 3, year 5, Largo issued its year 4 financial statements.
What amount of the note payable should Largo include in the current liabilities section of its December 31, year 4 balance sheet?
A. $750,000
B. $500,000
*C. $250,000
D. $0
Current liability can be classified into long-term liability when management has the intent and ability to do so. and the maximum amount of long-term liability converted from current liability cannot exceed the original amount. It means that only 750K out of 1500k can be classified into long-term.
There are two material statements in this question, and these two statements make a huge difference in getting an answer.
- Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, Year 3.
- On March 3, Year 3, Largo issued its Year 2 financial statements.
$250k was paid off before the issuance F/S statement. Therefore, the company has to look back to its F/S and make adjustments about $250K.
Since the company has a plan and ability to pay off the $250k portion out of the total long-term portion within a couple of months before issuing F/S, $250k shall be classified as a current liability on Year 2‘s F/S.
Reporting accounts receivable at net realizable value is a departure from the accounting principle of:
A. Conservatism.
B. Fair value.
C. Market value.
*D. Historical cost.
The following trial balance of Mint Corp. at December 31, 20X5, has been adjusted except for income tax expense.
TRIAL BALANCE
December 31, 20X5
Dr. Cr.
Cash $600,000
Accounts receivable, net $3.5mn
Cost in excess of billings on long-term contracts $1.6mn
Billings in excess of costs on long-term contracts $700,000
Prepaid taxes 450,000
Property, plant, and equipment, net 1.48mn
Note Payable - non-current 1.62mn
Common stock 750,000
Additional paid-in capital 2mn
Retained earnings - unappropriated 900,000
Retained earnings - restricted for note payable 160,000
Earnings from long-term contracts 6.68mn
Costs and expenses 5.18mn
$12.81mn $12.81mn
Other financial data for the year ended December 31, 20X5, are:
- Mint uses the percentage-of-completion method to account for long-term construction contracts for financial statements and income tax purposes. All receivables on these contracts are considered to be collectible within 12 months.
- During 20X5, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense. There were no temporary or permanent differences, and Mint’s tax rate is 30%.
In Mint’s December 31, 20X5 balance sheet, what amount should be reported as total retained earnings?
A. $1.95mn
*B. $2.11mn
c. $2.4mn
D. $2.56mn
Earnings before taxes equals $1,500,000 ($6,680,000 revenues - $5,180,000 expenses).
Income tax expense is thus $450,000 ($1,500,000 × 30%) and net income $1,050,000 ($1,500,000 - $450,000).
Year-end retained earnings is therefore $2,110,000 ($900,000 unappropriated RE + $160,000 restricted RE + $1,050,000 net income).
Which of the following defines equity as it relates to a business entity?
A. Total revenues less total expenses.
B. Total revenues less total expenses and dividends.
C. Total assets and liabilities.
*D. Total assets less total liabilities.
