Far 1

Question 1

Bay Manufacturing Co. purchased a three-month U.S. Treasury bill. In preparing Bay’s statement of cash flows, this purchase would

Have No effect
Be treated as an outflow from financing activities
Be treated as an outflow from investing activities
Be treated as an outflow from lending activities

Answer 1

Have no effect

Question 2

During the current year, Casual Wear Co. had total retail sales of $800,000 and collected a 5% state sales tax on all sales. At the end of the prior year, Casual Wear had $4,500 in sales taxes that had not been remitted to the state authorities. During the current year, Casual Wear remitted $39,500 in state sales tax. What amount should be recorded in Casual Wear’s current-year financial statements?

5,000 in sales tax payable
39,500 in sales tax expense
40,000 in sales tax revenue
840,000 in sales revenue

Answer 2

5,000 in sales tax payable

Sales tax = Total sales × Sales tax rate
Beginning balance $4,500
Sales tax collected 40,000
Sales tax remitted (39,500)
Ending balance $5,000

Question 3

Dannon Co. mistakenly reported its expenses of $35,200 on the cash basis. Corporate records revealed the following information:

Beginning prepaid expense $1,300
Beginning accrued expense 1,650
Ending prepaid expense 1,800
Ending accrued expense 1,200

What amount of expense should the Dannon report on its books under the accrual basis?

34,250
35,150
35,300
36,150

Answer 3

34,250

a net increase in a prepaid (ie, debit) to exclude the current cash paid that will be expensed when incurred under accrual accounting (ie, next period).

a net decrease in a payable (ie, debit) to exclude current cash paid for an expense that would have been recorded in the prior period under accrual accounting.

In this scenario, Dannon Co. must adjust the $35,200 cash payments for the net increase in prepaids and the net decrease payables. Setting up the journal entry shows the accrual-based expenses are $34,250.

Accrual based expense (plug) 34,250
Prepaid accounts ($1,300 − $1,800) ↑ 500
Payable accounts ($1,650 − $1,200) ↓ 450
Cash (amount paid) 35,200

Question 4

What type of bond matures in installments?

Debenture
Term
Variable rate
Serial

Answer 4

Serial

Question 5

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows:

Accrued interest payable $17,000 decrease
Prepaid interest $23,000 decrease
In its income statement for the current year, what amount should Ness report as interest expense?

30,000
64,000
76,000
110,000

Answer 5

76,000

A net decrease in a payable (ie, debit) is deducted from the cash payments. This adjustment excludes current cash paid to reduce a liability created from a prior period expense under accrual basis accounting.

A net decrease in a prepaid (ie, credit) is added to the cash payments. This adjustment includes the current year expense that was paid in the prior period under accrual basis accounting.

In this scenario, Ness Co. must adjust the $70,000 interest cash payments for the net decrease in the prepaid and payable. The journal entry shows accrual basis interest expense of $76,000.

Interest expense (plug) 76,000
Interest payable ↓ 17,000
Prepaid interest ↓ 23,000
Cash (amount paid) 70,000

Question 6

A company obtained a $300,000 loan with a 10% interest rate on January 1, Year 1, to finance the construction of an office building for its own use. Building construction began on January 1, Year 1, and the project was not completed as of December 31, Year 1. The following payments were made in Year 1 related to the construction project:

January 1 Purchased land for $120,000
September 1 Progress payment to contractor for $150,000
What amount of interest should be capitalized for the year ended December 31, Year 1?

13,500
15,000
17,000
30,000

Answer 6

17,000

Step 1: The January 1 payment was outstanding for the entire year (ie, a proportion of 12/12). The September 1 payment was outstanding for 4 months of the year (ie, a proportion of 4/12).
AAE = (January 1 payment
× Proportion of year) + (September 1 payment
× Proportion of year)

= $120,000 × 12/12 + $150,000 × 4/12

= $120,000 + $50,000

= $170,000

Step 2: Avoidable interest is $17,000, or $170,000 AAE applied to the construction debt at the 10% rate (no general debt in problem).
Avoidable interest = (AAE portion applied to
construction debt
× Construction debt rate) + (AAE portion applied to
general debt
× General debt rate)

= $170,000 × 10% + $0

= $17,000

Step 3: Actual interest incurred is $30,000.
Actual interest
incurred = (Construction debt
× Construction debt rate) + (General debt
× General debt rate)

= $300,000 × 10% + $0

= $30,000

Step 4: The amount of interest capitalized is $17,000: the lesser of avoidable interest ($17,000) and actual interest incurred ($30,000).
Step 5: Interest that is not capitalized is expensed, which is $13,000 ($30,000 − $17,000).

Question 7

On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current year and to continue each month thereafter for a total of 56 months. The lease term spans five years. The company has a calendar year end. What amount is the company’s lease expense for the current calendar year?

86,700
161,838
188,813
202,300

Answer 7

188,813

In this scenario, the lessee has to pay rent for only 56 months of the 60-month lease (5 years × 12 months). The total amount of rent paid is $1,618,400 ($28,900 payment × 56 months). The S/L amount of monthly rent expense equals $26,973 ($1,618,400 total payments / 60 months). The lease expense for the current year (ie, June through December) is $188,813 ($26,973/month × 7 months)

Question 8

Which of the following is a true statement regarding disclosures for subsequent events?

Recognize a loss for all recognized and unrecognized subsequent events in the current year financial statements

Recognize a gain or loss for any recognized subsequent event in the current year FS

Recognize a loss for a recognized subsequent event in the financial statements in the year when the subsequent event occurs

Recognize a loss for a recognized subsequent event in the current year FS

Answer 8

Recognize a loss for a recognized subsequent event in the current year FS

Question 9

A customer pays in advance for goods to be delivered in three equal shipments. The seller makes the first shipment at the time of customer payment. The seller will recognize revenue

When all shipments are made.
When the customer pays for the goods.
Evenly over the time period during which shipments are made.
Evenly over each shipment

Answer 9

Evenly over each shipment

Question 10

How should a nongovernmental not-for-profit organization classify gains and losses on investments purchased with net assets with donor restrictions?

A. Gains may not be netted against losses in the statement of activities.
B. Gains and losses can only be reported net of expenses in the statement of activities.
C. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restriction.
D. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in permanently restricted net assets.

Answer 10

C. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restriction.

Question 11

A nongovernmental, not-for-profit hospital reported the following information for the year ended December 31:

Gross patient service charges at the hospital’s full established rates $775,000
Credit loss expense 100,000
Difference between billing rates and contracted rates with third-party payors 70,000
Gross patient service charges include charity care of $25,000. What amount should the hospital report as net patient service revenue in its statement of operations for the year ended December 31?

A. $605,000
B. $650,000
C. $680,000
D. $705,000

Answer 11

C. $680,000

In this situation, the hospital recognizes gross health care service revenue of $750,000 (775,000 − 25,000 charity care) before any adjustments (the charity care is disclosed but is not considered revenue). The hospital has a contractual adjustment of $70,000, which is an agreement with third-party payors (eg, patients’ medical insurance) to pay a reduced reimbursement rate. Therefore, the hospital will recognize $680,000 (750,000 − 70,000) of net patient service revenue.

Question 12

In its December 31, Year 2, balance sheet, Fleet Co. reported accounts receivable of $100,000 before the allowance for credit losses of $10,000. Credit sales during Year 3 were $611,000, and collections from customers, excluding recoveries, totaled $591,000. During Year 3, accounts receivable of $45,000 were written off and $17,000 were recovered. Fleet estimated a $15,000 allowance for credit losses was required at December 31, Year 3. In its December 31, Year 3, balance sheet, what amount should Fleet report as accounts receivable before allowance for credit losses?

A. $58,000
B. $67,000
C. $75,000
D. $82,000

Answer 12

C. $75,000

AR
Beg. Balance Collections
Credit Sales Recoveries
Reinst. of Write-offs
Acct. written off
End Balance

(+100,000+611,000+17,000-591,000-17,000-45,000)

Question 13

Rue Co.’s allowance for credit losses had a credit balance of $12,000 at December 31, Year 2. During Year 3, Rue wrote off uncollectible accounts of $48,000. The aging of accounts receivable indicated that a $50,000 allowance for credit losses was required at December 31, Year 3. What amount of credit loss expense should Rue report for Year 3?

A. $48,000
B. $50,000
C. $60,000
D. $86,000

Answer 13

D. $86,000

(+12000-48000-50000)

Question 14

As of December 1, Year 2 a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 three-year balloon note. The company has no other liabilities. How should the company’s debt be presented in its classified balance sheet on December 31, Year 2 if no debt repayments were made in December?

A. Current liabilities of $1,000,000; long-term liabilities of $1,050,000.
B. Current liabilities of $500,000; long-term liabilities of $1,550,000.
C. Current liabilities of $400,000; long-term liabilities of $900,000.
D. Current liabilities of $500,000; long-term liabilities of $800,000.

Answer 14

C. Current liabilities of $400,000; long-term liabilities of $900,000.

In this scenario, the due date or maturity of each obligation should be determined for proper classification of the company’s liabilities.

The company’s secured note is due in five installments; therefore, $150,000 ($750,000 / 5 years) is due each year. The current portion of the secured note due is $150,000, and the amount due in future periods is $600,000 ($150,000 × 4 remaining years).

The line of credit matures in one year (ie, short-term). However, only the portion drawn against the line of credit ($250,000) needs to be paid back and reported as a current liability (Choice A).

Without contrary information, the entire balance of the balloon note will be paid when due in three years (ie, no current maturities). The entire balance of the loan ($300,000) is considered long-term (Choices B and D).

Therefore, the company’s current liabilities are $400,000 (150,000 + 250,000) and long-term liabilities are $900,000 (600,000 + 300,000).

Question 15

Which of the following adjustments is necessary to convert cash receipts to revenues as reported on an accrual basis?

A. Add beginning accounts receivable to cash receipts from customers.
B. Subtract ending contract liability from cash receipts from customers.
C. Subtract ending accounts receivable from cash receipts from customers.
D. Subtract beginning contract liability from cash receipts from customers.

Answer 15

B. Subtract ending contract liability from cash receipts from customers.

Question 16

Indirect effects from a change in accounting principle should be reported

A. Retrospectively to the earliest period presented.
B. As a cumulative change in accounting principle in the current period.
C. In the period in which the accounting change occurs.
D. As a prior period adjustment.

Answer 16

C. In the period in which the accounting change occurs.

Question 17

On June 30, year 1, Lomond, Inc. issued twenty $10,000, 7% bonds at par. Each bond was convertible into 200 shares of common stock. On January 1, year 2, 10,000 shares of common stock were outstanding. The bondholders converted all the bonds on July 1, year 2. The following amounts were reported in Lomond’s income statement for the year ended December 31, year 2:

Revenues $977,000
Operating expenses 920,000
Interest on bonds 7,000
Income before income tax 50,000
Income tax at 30% 15,000
Net income $35,000
What is Lomond’s year 2 diluted earnings per share?

A. $2.50
B. $2.85
C. $2.92
D. $3.50

Answer 17

B. $2.85

The effect of convertible bonds is included in diluted EPS under the if converted method, if they are dilutive. The bonds are dilutive as shown below.

Basic EPS = $35,000 = $2.92
(1/2) 10,000 + (1/2) 14,000
Incremental per share effect =

(7% × $10,000) − 30% (7% × $10,000) = $490 = $2.45
200 shares per bond 200
Since $2.45 < $2.92, the bonds are dilutive. Under the if converted method, the assumption is made that the bonds were converted at the beginning of the current year (1/1) or later in the current year if the bonds were issued during the current year. In this case, conversion is assumed for the first six months of year 2 only because the bonds were actually converted on July 1. Under their assumed conversion, the numerator would increase because bond interest expense would not have been incurred for the first six months of the year [1/2 ($14,000 − 30% × $14,000) = $4,900]. The denominator would increase because the 4,000 shares (20 × 200) would have been outstanding for the first six months of the year (4,000 × 6/12 = 2,000). Therefore, diluted EPS is $2.85.

$35,000 + $4,900 = $39,900 = $2.85
12,000 + 2,000 14,000

Question 18

Which of the following statements, if any, concerning disclosures about fair value measurements in periods subsequent to initial recognition is/are correct?

I. The fair value hierarchy level within which fair value measurements fall must be disclosed.
II. Quantitative fair value measurement disclosures must be in tabular format.

A. Both I and II are correct.
B. I only.
C. II only.
D. Neither I nor II are correct.

Answer 18

A. Both I and II are correct.

Question 19

Falton Co. had the following first-year amounts related to its $9,000,000 construction contract:

Actual costs incurred and paid $2,000,000
Estimated costs to complete 6,000,000
Progress billings 1,800,000
Cash collected 1,500,000

What amount should Falton recognize as a current liability at year-end, using the percentage-of-completion method?

A. $0
B. $200,000
C. $250,000
D. $300,000

Answer 19

A. $0

This answer is correct. The percentage-of-completion method uses a construction-in-progress account to record the costs accumulated during the period. A progress billings account is used to record the billings made on the long-term projects. At the end of the year, if the construction-in-progress account is greater than the progress billings, an asset is recognized. If the balance in the construction-in-progress account is less than the progress billings account, a liability is recognized. At the end of the year, Falton’s construction-in-progress account was equal to $2,000,000 for the actual costs incurred and paid, and a balance of $1,800,000 was in the progress billings account for amounts billed to customers. Since the amount of costs incurred is greater than the amount billed, Falton would recognize an asset of $200,000 and no liability is recognized for the construction contract.

Question 20

Under the current expected credit loss (CECL) model, the entry to record the write-off of a specific account

A. Decreases both accounts receivable and the allowance for credit losses.
B. Decreases accounts receivable and increases the allowance for credit losses.
C. Increases the allowance for credit losses and decreases net income.
D. Decreases both accounts receivable and net income.

Answer 20

A. Decreases both accounts receivable and the allowance for credit losses.

Question 21

Ina Co. had the following beginning and ending balances in its prepaid expense and accrued liabilities accounts for the current year:

Prepaid expenses Accounts payable
Beginning balance $5,000 $8,000
Ending balance 10,000 20,000
Debits to operating expenses totaled $100,000. What amount did Ina pay for operating expenses during the current year?

A. $83,000
B. $93,000
C. $107,000
D. $117,000

Answer 21

B. $93,000

In this scenario, Ina Co. had a $5,000 ($5,000 − $10,000) increase in prepaid expenses and a $12,000 ($8,000 − $20,000) increase in A/P. Cash paid for operating expenses is $93,000.

Operating expenses (accrual basis) $100,000
Add: Increase in prepaid expenses (uses current year cash) 5,000
Less: Increase in A/P (uses future year cash) (12,000)
Cash paid for operating expenses $93,000
Note: The cash paid can also be determined by constructing thejournal entry.

Things to remember:
When accrual-based operating expenses are converted to cash basis, the changes in prepaid expenses and accounts payable (A/P) must be considered. Increases in the prepaids are added to the accrual-based expense and an increase in A/P is deducted from the expense.

Question 22

On November 1, Year 1, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1, Year 1. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31, Year 1, balance sheet?

A. $10,667
B. $11,667
C. $16,000
D. $17,500

Answer 22

C. $16,000

Mason Corp.’s cash interest payments occur on October 1 and April 1. Interest payable at year end for the 3 months from October 1 through December 31 equals $16,000 ($800,000 bond face value × 8% stated rate × 3/12 months). The accrued interest related to Mason’s bond issuance is not included in the December 31 interest payable.

Question 23

On June 10, a company issued two thousand $1,000 5% bonds, payable in 10 years. Each bond contained a detachable warrant that provided a right to purchase five shares of $1 par common stock for $30. The value of the warrants at issuance was $50 each. On June 30, the market rate of interest was 9%. At the time of issuance, what amount was the increase in shareholders’ equity?

A. $60,000
B. $100,000
C. $200,000
D. $300,000

Answer 23

B. $100,000

In this scenario, 2,000 bonds were issued, each containing one detachable warrant valued at $50. Therefore, 2,000 warrants were issued. The fair value of the warrants equals $100,000 (2,000 warrants × $50 per warrant), recorded as paid-in capital (ie, increase shareholders’ equity). The stock purchase price and number of shares stated on the warrants are not included in the warrant’s fair value (Choices A, C, and D).

Question 24

Baxley Co. makes a sale on account to a longtime customer on December 31, Year 5, for $3,000. The customer has 90 days to return the product if they are not satisfied with it. Based on prior experience, Baxley has determined that approximately 15% of similar products are returned within the acceptable 90-day period. The journal entry to record the sale on December 31, Year 5, should include which of the following?

A. A $3,000 debit to accounts receivable.
B. A $450 debit to right to recover goods.
C. A $3,000 credit to sales revenue.
D. A $2,550 credit to refund liability.

Answer 24

B. A $450 debit to right to recover goods.

In this scenario, Baxley Co. will recognize only the portion of revenue that it expects to retain. Therefore, Baxley will debit accounts receivable and credit sales revenue for $2,550 [$3,000 sales price − ($3,000 × 15% estimated returns)]. To reflect the potential sales returns, Baxley will debit right to recover goods and credit a refund liability for $450 ($3,000 × 15%) (Choices A, C, and D). The full journal entry is as follows:

Accounts receivable 2,550
Right to recover goods 450
Sales revenue
2,550
Refund liability
450
Things to remember:
To record a sale with a right of return, an entity will record revenue net of any expected returns if the returns can be estimated. The estimated amount of returns is recognized as both a right to recover goods (debit) and a refund liability (credit).

Question 25

A company issues $1,500,000 face value bonds at 98 on January 1, Year 1, with a maturity date of December 31, Year 30. Bond issue costs are $90,000, and the stated interest rate of the bonds is 6%. Interest is paid semiannually on January 1 and July 1. Ten years after the issue date, the entire issue is called at 102 and canceled. The company uses the straight-line method of amortization for bond discounts and issue costs, and the result of this method is not materially different from the effective interest method. The company should classify what amount as the loss on extinguishment of debt at the time the bonds are called?

A. $30,000
B. $50,000
C. $90,000
D. $110,000

Answer 25

D. $110,000

In this scenario, the company issues $1,500,000 bonds at 98 in Year 1, resulting in a $30,000 discount ($1,500,000 face − $1,470,000 [ie, Face × 98%]). Because the company uses the straight-line method of amortization, one-third (10 years / 30-year maturity) of the discount and BIC will be amortized when the bonds are called, leaving two-thirds unamortized. The loss on extinguishment is $110,000, calculated as follows:

Determine Year 10 CV:
Face value $1,500,000
Less: Unamortized discount ($30,000 discount × 2/3) (20,000)
Less: Unamortized BIC ($90,000 BIC × 2/3) (60,000)
Year 10 CV: $1,420,000

Calculate loss on extinguishment:
Year 10 CV $1,420,000)
Less: Cash paid ($1,500,000 face × 1.02) (1,530,000)
Loss on extinguishment (ie, CV < Cash paid) ($110,000)

Question 26

On June 1 of the current year, Cross Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Cross report?

A. $6,000
B. $8,000
C. $12,000
D. $14,000

Answer 26

D. $14,000

Because Cross Corp.’s $300,000 8% bonds were issued at par, the 8% stated rate equals the effective rate. Annual interest expense is $24,000 ($300,000 × 8% effective rate). Interest expense reported on the income statement for the 7 months the bonds were outstanding (ie, June–December) = $14,000 ($24,000 annual expense × 7/12 months).

Question 27

Inge Co. determined that the net value of its accounts receivable at December 31, Year 3, based on an aging of the receivables, was $325,000. Additional information is as follows:

Allowance for credit losses at 1/1/Year 3 $30,000
Uncollectible accounts written off during Year 3 18,000
Uncollectible accounts recovered during Year 3 2,000
Accounts receivable at 12/31/Year3 350,000
For Year 3, what would be Inge’s credit loss expense?

A. $5,000
B. $11,000
C. $21,000
D. $25,000

Answer 27

B. $11,000

Beg. Balance - 30000
less writeoffs 18000
add recoveries 2000
equals 14000
ending is 25000 (350000-325000)
25000 less 14000

Question 28

Hercules Co.’s monthly bank statement shows a balance of $22,300. Reconciliation of the statement with company books reveals the following information:

Bank service charge $15
Insufficient funds check 700
Outstanding checks 2,250
Deposits in transit 500
Hercules deposited a check and the bank cleared it for $267, but Hercules improperly recorded it as $276. The bank credited Hercules’s account for a $200 deposit that was meant for another bank customer. What is the net cash balance per books after the reconciliation?

A. $19,635
B. $20,350
C. $20,550
D. $21,885

Answer 28

B. $20,350

Based on the information provided in this scenario, Hercules Co. will start with the balance per the bank statement, which already includes the insufficient funds check and bank service charge. The deposits in transit will be added and outstanding checks deducted. Because the bank improperly added funds to the bank balance, the $200 bank error will be deducted. Therefore, the net cash balance per books after the reconciliation is $20,350.

Bank statement balance $22,300
Deposits in transit 500
Outstanding checks (2,250)
Bank error (200)
Net cash balance $20,350

Question 29

Young Corp. purchased equipment by making a down payment of $4,000 and issuing a note payable for $18,000. A payment of $6,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of an ordinary annuity factor for three years at 8% is 2.58, and the present value for the future amount of a single sum of one dollar for three years at 8% is 0.735. Shipping charges for the equipment were $2,000, and installation charges were $3,500. What is the capitalized cost of the equipment?

A. $19,480
B. $21,480
C. $24,980
D. $27,500

Answer 29

C. $24,980

In this scenario, Young Corp. acquired equipment by making a $4,000 down payment and incurring a noninterest-bearing note payable with a PV of $ $15,480. Considering the other costs incurred, Young will record the capitalized cost of equipment as $24,980, as shown below:

Down payment $4,000
PV of note payable ($6,000 × 2.58 PV of an annuity) 15,480
Cash equivalent cost $19,480
Shipping 2,000
Installation 3,500
Total cost of equipment $24,980

Question 30

On December 31, Year 1, Ames Co. leased equipment under a finance lease. Annual lease payments of $40,000 are due December 31 for 10 years. The equipment’s useful life is 12 years, and the interest rate implicit in the lease is 10%, which is known by Ames. The finance lease liability was recorded at $270,000 on December 31, Year 1, before the first payment. In recording the December 31, Year 2, payment, by what amount should Ames reduce the finance lease liability?

A. $17,000
B. $22,500
C. $23,000
D. $27,000

Answer 30

A. $17,000

In this scenario, Ames Co. uses the lease’s implicit rate of 10% to determine the PV of lease payments (ie, lease liability) of $270,000. The first $40,000 payment is made at lease inception, reducing the lease liability to $230,000 ($270,000 − $40,000). The Year 2 liability reduction is $17,000, calculated as follows:

December 31, Year 1, lease liability
$230,000
Year 2 payment $40,000
Less: Year 2 interest expense ($230,000 × 10%) (23,000)
Year 2 liability reduction
17,000
December 31, Year 2, lease liability
$213,000

Question 31

Rosenthal Hospital, a nongovernmental, not-for-profit hospital affiliated with a private university, reported the following information for the year ended December 31, Year 5:

Cash donations received for capital additions to be acquired in Year 6 $150,000
Proceeds from sales at hospital gift shop and snack bar 75,000
Dividend revenue not restricted by donors or by law 25,000
What amount should be reported as other revenue and gains on the hospital’s statement of operations for the year ended December 31, Year 5?

A. $25,000
B. $75,000
C. $100,000
D. $250,000

Answer 31

C. $100,000

On a not-for-profit hospital’s statement of operations (income statement equivalent), other revenues are generally classified as operating if they relate to the hospital’s day-to-day operations (eg, cafeteria sales) or nonoperating if they relate to activities outside the core businesses and services of the hospital (eg, interest income). Regardless of the operating classification, other revenues and gains represent amounts that are

received for reasons besides the performance of healthcare services, and
currently available (ie, without restrictions) to be used at the discretion of the hospital’s governing body.
In this case, Rosenthal Hospital would report other revenues of $100,000, which consists of operating revenue from the gift shop ($75,000) and unrestricted dividend income ($25,000). These represent amounts that were obtained from sources other than providing patient care and are available for general use by the hospital.

Question 32

The orientation of accounting and reporting for all proprietary funds of governmental units is

A. Income determination.
B. Project.
C. Flow of funds.
D. Program.

Answer 32

A. Income determination.

Question 33

Information concerning the capital structure of the Petrock Corporation is as follows:

December 31,

Year 1 Year 2
Common stock (CS) 90,000 shares 90,000 shares
Convertible preferred stock 10,000 shares 10,000 shares

During year 2, Petrock paid dividends of $1.00 per share on its common stock and $2.40 per share on its preferred stock. The preferred stock is convertible into 20,000 shares of common stock. The net income for the year ended December 31, year 2, was $285,000. Assume that the income tax rate was 30%. What should be the diluted earnings per share for the year ended December 31, year 2, rounded to the nearest penny?

A. $2.53
B. $2.59
C. $2.90
D. $2.61

Answer 33

B. $2.59

(Choice B) This answer is correct. Diluted EPS includes the effect of any dilutive security. The convertible preferred stock must be tested for dilution. To calculate the basic EPS, in the numerator, reported income of $285,000 would be reduced by the $24,000 of preferred dividends which gives $261,000 available for common stockholders. In the denominator 90,000 shares is the weighted-average of shares outstanding during the year. The conversion of the preferred stock will have an income effect of $24,000 (there is no tax effect) to the numerator and increase the denominator by 20,000 shares. DEPS is calculated as follows:

($261,000 + $24,000) / (90,000 shs + 20,000 shs) = $2.59

Question 34

Cart Co. purchased an office building and the land on which it is located for $750,000 cash and an existing $250,000 mortgage. For realty tax purposes, the property is assessed at $960,000, 60% of which is allocated to the building. At what amount should Cart record the building?

A. $500,000
B. $576,000
C. $600,000
D. $960,000

Answer 34

C. $600,000

In this scenario, an office building and land were purchased for $1,000,000 ($750,000 cash + $250,000 mortgage). Because the building’s relative fair value percentage (60%) is provided, the building is recorded at $600,000 ($1,000,000 × 60%).

Question 35

At December 31, Year 1, Gasp Co.’s allowance for credit losses had a credit balance of $30,000. During Year 2, Gasp wrote off uncollectible accounts of $45,000. At December 31, Year 2, an aging of the accounts receivable indicated that $50,000 of the December 31, Year 2, receivables may be uncollectible. What amount of allowance for credit losses should Gasp report in its December 31, Year 2, balance sheet?

A. $20,000
B. $25,000
C. $35,000
D. $50,000

Answer 35

D. $50,000

In this case, Gasp Co. estimated a $50,000 balance in the allowance for credit losses at December 31, Year 2. The allowance account has an unadjusted balance of $30,000, which is decreased by the write-offs of $45,000, creating a temporary debit balance of $15,000 ($30,000 − $45,000). A journal entry is prepared to debit credit loss expense by $65,000 and credit allowance for credit losses by $65,000; this entry adjusts the allowance account balance to the uncollectible ending amount of $50,000.

Question 36

At January 1, Year 4, Jamin Co. had a credit balance of $160,000 in its allowance for credit losses. During Year 4, Jamin wrote off $125,000 of uncollectible accounts. Year 4’s ending balance for accounts receivable was $550,000. In performing the evaluation of credit losses at year end, the accounts receivable aging schedule shows $485,000 of customer accounts are expected to be collected. In its December 31, Year 4, balance sheet, what amount should Jamin report as the allowance for credit losses?

A. $30,000
B. $65,000
C. $325,000
D. $485,000

Answer 36

B. $65,000

Beg Balance 160000
less write offs 125000
adjustment for credit losses 30000
allowance for credit losses (ending balance) 65000

Based on the aging of receivables schedule, the net carrying value of the A/R is $485,000. Accordingly, Jamin will require a credit balance of $65,000 ($550,000 − $485,000) in the allowance for credit losses at year end. The write-offs affect the adjustment required for the credit loss expense but not the ending balance for the allowance account.

Question 37

In March year 2, an explosion occurred at Nilo Co.’s plant, causing damage to area properties. By May year 2, no claims had yet been asserted against Nilo. However, Nilo’s management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages. Nilo’s $5,000,000 comprehensive public liability policy contains a $300,000 deductible clause. In Nilo’s December 31, year 2 financial statements, for which the auditor’s fieldwork was completed in April year 3, how should this casualty be reported?

A. As a footnote disclosing a possible liability of $3,000,000.
B. As an accrued liability of $300,000.
C. As a footnote disclosing a possible liability of $300,000.
D. No footnote disclosure or accrual is required for year 3 because the event occurred in year 2.

Answer 37

C. As a footnote disclosing a possible liability of $300,000

This answer is correct. Per ASC Topic 450, a loss contingency should be accrued if it is probable that a liability has been incurred at the balance sheet date and the amount of the loss is reasonably estimable. Although this contingency is reasonably estimable, it is not probable. Therefore, no loss is accrued. However, since the contingency is reasonably possible, it will be disclosed in the footnotes to the 12/31/Y2 financial statements. The possible loss will be disclosed as $300,000. The additional potential liability above the deductible would be covered by the insurance policy, and would not be a loss for Nilo.

Question 38

Which of the following statements concerning inputs used in ascertaining fair value is/are correct?

I. Only observable inputs can be used.

II. Inputs that incorporate the entity’s assumptions may be used.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

Answer 38

B. II only.