FAR 1 Flashcards
Zance Corp. has the following information available for the year ended September 30, Year 2:
Net income $60,000
Beginning accounts receivable 125,000
Ending accounts receivable 90,000
Credit sales 75,000
Customer accounts written off during the year 5,000
What amount of cash did Zance receive from its customers during Year 2?
A. $90,000
B. $105,000
C. $110,000
D. $115,000
B. $105,000
You have to subtract the written off accounts.
At December 31, Year 1 and Year 2, Carr Corp. had 4,000 shares outstanding of $100 par value 6% cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, Year 1, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in Year 2 totaled $44,000. Of the $44,000, what amounts were payable to each class of stock?
Preferred stock Common stock
A.
$24,000 $20,000
B.
$32,000 $12,000
C.
$36,000 $8,000
D.
$44,000 $0
C.
$36,000 $8,000
12000 dividends in arrears
24000 current pref. dividends (100.064000)
Remainder goes to common stock
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?
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.
B. Describe the nature of the contract and the estimated amount of the loss in a note to the financial statements, but do not recognize a loss in the income statement.
C. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation account.
D. Neither describe the purchase obligation nor recognize a loss on the income statement or balance sheet.
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.
If the market value of the goods in a purchase commitment declines below the fixed purchase price by a material amount, the purchasing company must evaluate the loss contingency. If there is a probable loss that can be reasonably estimated, the loss is recognized in the income statement, recorded as a liability, and disclosed in the notes to the financial statements.
Mikado Co.’s monthly bank statement shows a balance of $37,500. Reconciliation of the statement with company books reveals the following information:
Bank service charge $25
Insufficient funds check 550
Outstanding checks 3,000
Deposits in transit 2,750
Bank error: included extra deposit 200
Check deposited by Mikado and cleared by the bank for $527,
but improperly recorded by Mikado as $572
What is the net cash balance after the reconciliation?
A. $37,050
B. $37,025
C. $37,225
D. $37,250
D. $37,050
The following information pertains to Hyde Corp.’s issuance of bonds on January 1, Year 1:
Face value $1,000,000
Term 10 years
Stated interest rate 6%
Interest payment dates July 1 and January 1
Yield 8%
At 3% At 4% At 6% At 8%
Present value of $1 for 10 periods 0.744 0.676 0.558 0.463
Present value of $1 for 20 periods 0.554 0.456 0.312 0.215
Present value of ordinary annuity for 10 periods 8.530 8.111 7.360 6.710
Present value of ordinary annuity for 20 periods 14.878 13.590 11.470 9.818
What should the issue price be for each $1,000 bond?
A. $864
B. $902
C. $961
D. $1,000
A. $864
In this scenario, Hyde Corp.’s bonds pay interest semiannually; therefore, 20 periods (10-year term × 2 payments/year) and a 4% yield (8% annual yield / 2 payments/year) are used to calculate the issue price. Each bond equals $1,000 paid at maturity (Choice D). The issue price is $864 as calculated below.
Interest payments: $1,000 × 6% stated rate × 6/12 months $30
PV interest payments: $30 × 13.59 (ie, PV of ordinary annuity) 408
PV bond maturity: $1,000 × 0.456 (ie, PV of $1) 456
Issue price: $408 PV interest payments + $456 PV bond maturity $864
As of December 15, Year 2, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends of $100,000 for Year 2 have not yet been declared. The board of directors’ plan to declare cash dividends on its preferred and common stock on January 16, Year 3. Aviator paid an annual bonus to its CEO based on the company’s annual profits. The bonus for Year 2 was $50,000, and it will be paid on February 10, Year 3. What amount should Aviator report as current liabilities on its balance sheet at December 31, Year 2?
A. $50,000
B. $150,000
C. $200,000
D. $350,000
A. $50,000
A liability for a dividend is accrued on the date that the board of directors makes the declaration for the dividend payment. Dividends in arrears are recorded as a current liability only when dividends are declared.
On November 1, Year 2, Davis Co. discounted, with recourse, a $20,000, 10%, one-year, interest-bearing note receivable. The note is scheduled to mature on January 31, Year 3, and the bank’s discount rate is 12%. What amount, if any, must Davis disclose as a contingent liability for the year ended December 31, Year 2?
A. $0
B. $20,000
C. $21,340
D. $22,000
D. $22,000
Because Davis Co. discounted the note with recourse, it must disclose the maturity value, $22,000 ($20,000 + [$20,000 × 10% × 12/12]), as a contingent liability.
(Choice B) The $20,000 is the principal of the note and the amount reclassified as N/R discounted.
(Choice C) The $21,340 is the cash received from the bank when discounting the note.
Hansen Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. During year 2, Hansen started work on a $3,000,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, year 2:
Costs incurred $930,000
Estimated cost to complete 2,170,000
Progress billings 1,100,000
Collections 700,000
How much loss should Hansen have recognized in year 2?
A. $230,000
B. $100,000
C. $30,000
D. $0
B. $100,000
The requirement is to determine the amount of loss to recognize in year 2 on a long-term, fixed-price construction contract. Under both the percentage-of-completion method and the completed-contract method, an expected loss on a contract must be recognized in full in the period in which the expected loss is discovered. Therefore, Hanson must recognize a loss of $100,000 in year 2.
Valuation techniques for fair value that include the Black-Scholes-Merton formula, a binomial model, or discounted cash flows are examples of which valuation technique?
A. Income approach.
B. Market approach.
C. Cost approach.
D. Exit value approach.
A. Income approach.
Clara Corp. does not elect to use the fair value option to report financial assets. For marketable debt securities included in Clara’s held-to-maturity portfolio, which of the following amounts should be included in the period’s net income?
Credit losses during the period
Gains on securities sold during the period
Write-off of HTM debt security to the credit allowance
A. III only
B. II only
C. I and II
D. I, II, and III
C. I and II
This answer is correct because both I and II should be reported on the income statement. Credit losses on held-to-maturity securities are reported in earnings. Gains on securities sold are included as realized gains in the income statement of the applicable period. A write-off does not impact earnings because the HTM security is credited and the allowance for credit loss is debited.
A company produces three products. Normal pricing information on the products is as follows:
Product A $80
Product B 20
Product C 60
The company regularly offers a discounted price of $90 when Products A and B are purchased together. If the company contracts to sell a package including all three products for a discounted price of $100, what amount of the discount should be allocated to Product A?
A. $20
B. $25
C. $30
D. $32
D. 32
In this case, there is a smaller bundle that will get the first allocation. Products A and B are regularly sold for $90; the $10 ($100 − $90) discount is allocated as follows:
Item Standalone price
(A) % of total
standalone price
A ÷ $100 = (B) Smaller bundle
discount allocation
$10 × (B) = (C) Adjusted standalone price
(A) − (C) = (D)
Product A $80 80% $8 $72
Product B
20 20% 2 18
Total $100 100% $10 $90
With a package price of $100 for all three items, the remaining discount of $50 ($150 − $100) is allocated as follows:
Item Adjusted
standalone price
(D) % of total adjusted
standalone price
D ÷ $150 = (E) Larger package
discount allocation
$50 × (E) = (F) Revenue allocation
(D) − (F) = (G)
Product A $72 48% $24 $48
Product B 18 12% 6 12
Product C 60 40% 20 40
Total $150 100% $50 $100
The total discount allocated to Product A is $32 ($8 + $24).
What is the basic criterion used to determine the reporting entity for a governmental unit?
A. Special financing arrangement.
B. Geographic boundaries.
C. Scope of public services.
D. Financial accountability.
D. Financial accountability.
The basic criterion used to determine the financial reporting entity for a governmental unit is financial accountability. Funds help ensure fiscal compliance by segregating resources for tracking and reporting purposes.
On January 2, Year 1, Gill Co. issued $2,000,000 of 10 year, 8% bonds at par. The bonds pay interest semiannually on January 1 and July 1. Bond issue costs were $250,000. Gill elects to amortize bond issue costs on a straight-line basis. What amount of bond issue costs are unamortized on June 30, Year 2?
A. $200,000
B. $212,500
C. $225,000
D. $237,500
B. $212,500
Gill Co. issued bonds on January 2, Year 1, and incurred BIC of $250,000. The bonds have a 10-year term (ie, 120 months). On June 30, Year 2, the bonds were outstanding for 18 months. Unamortized BIC of $212,500 are calculated as follows:
Monthly straight-line amortization ($250,000 BIC / 120 months) $2,083
Total BIC amortization (18 months) $37,500
Original BIC $250,000
Less BIC amortization (37,500)
Unamortized BIC balance, June 30, Year 2 $212,500
(Choices A, C and D) Unamortized BIC of $200,000, $225,000, and $237,500 incorrectly use 24, 12, and 6 months to amortize BIC, respectively.
Beach Co. determined that the decline in the fair value of an investment was below its amortized cost. Beach also determined that the decline is credit related and permanent in nature. The investment was classified as an available-for-sale debt security. Beach does not intend to sell the security within a short period of time. How should Beach account for the decrease in fair value?
Report in Measure investment at
A. Income from continuing operations Amortized cost basis
B. Income from continuing operations Fair value, using a contra-asset account
C. Other comprehensive income Amortized cost basis
D. Other comprehensive income Fair value, using a contra-asset account
B. Income from continuing operations Fair value, using a contra-asset account
Available-for-sale debt securities are carried at fair value (FV). Any decline in FV due to credit risk is reported as a credit loss expense in income. The security is reported at FV on the balance sheet using a contra account.
In year 1, Cobb adopted the dollar-value LIFO inventory method. At that time, Cobb’s ending inventory had a base-year cost and an end-of-year cost of $300,000. In year 2, the ending inventory had a $400,000 base-year cost and a $440,000 end-of-year cost. What dollar-value LIFO inventory cost would be reported in Cobb’s December 31, year 2 balance sheet?
A. $440,000
B. $430,000
C. $410,000
D. $400,000
C. $410,000
This answeris correct. Since ending inventory at base-year cost is greater than last year’s ending inventory at base-year cost ($300,000), a layer has been added. As layers are added, the increase at base-year costs is restated using the price index in effect at the time each layer was added. The year 2 price index can be computed by dividing the ending inventory at year-end cost by the ending inventory at base-year cost ($440,000 / $400,000 = 1.10). Therefore, the 12/31/Y2 inventory is $410,000, as computed below.
Cost at base-year
prices × Price index = Dollar-value LIFO
inventory cost
12/31/Y1 layer $300,000 × 1.00 = $300,000
12/31/Y2 layer 100,000 × 1.10 = 110,000
Inventory at 12/31/Y2
$410,000
Information regarding Stone Co.’s portfolio of available-for-sale debt securities is as follows:
Aggregate cost at December 31, Year 2 $170,000
Aggregate market value at December 31, Year 2 153,000
Temporary unrealized holding losses during Year 2 5,500
Credit-related losses during Year 2 10,000
At December 31, Year 1, Stone reported an unrealized holding loss of $1,500 but no credit losses. Stone does not elect the fair value option. Related to these securities, what amount should Stone report in accumulated other comprehensive income on the balance sheet at December 31, Year 2?
A. $5,500
B. $7,000
C. $17,000
D. $18,500
B. $7,000
Any remaining change is considered a market risk unrealized holding gain (loss) and is reported in other comprehensive income (OCI). In each period, the gains (losses) reported in OCI are transferred (ie, closed) to accumulated other comprehensive income (AOCI) in stockholders’ equity. In this scenario, Stone Co. has a $1,500 loss in AOCI from the prior year.
Stone Co.’s AFS securities have a $17,000 ($153,000 − $170,000) decrease in FV, of which $10,000 is designated as a credit loss (reported on the income statement). The remaining $7,000 ($17,000 − $10,000) is an unrealized holding loss. Because $1,500 has already been recorded, only $5,500 from the current year is reported in OCI. When the $5,500 is transferred to AOCI, Stone will report a $7,000cumulative ($5,500 current year + $1,500 prior year) unrealized holding loss in stockholders’ equity.
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.
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 (C) 2,550
Refund liability (C) 450
When the current expected credit loss method of recognizing uncollectible accounts is used, how would the collection of an account that was previously written off affect accounts receivable and the allowance for credit losses?
Accounts
receivable Allowance for credit losses
A. Increase Decrease
B. Increase No effect
C. No effect Decrease
D. No effect Increase
D. No effect Increase
The entry to write off a specific uncollectible account is recorded with a debit (decrease) to the allowance for credit losses and a credit (decrease) to A/R. The subsequent collection of an account that was written off is a two-step process:
Reinstate the previously written off account receivable (ie, reverse the write-off).
Collect the cash in satisfaction of the outstanding account receivable.
These steps result in the net effect (ie, offsetting entries) of zero A/R, an increase in the allowance for credit losses, and an increase in cash.
Gains or losses from the early extinguishment of debt should be
A. Recognized in income before taxes in the period of extinguishment.
B. Recognized in income before taxes over the life of the debt, using the retrospective method.
C. Amortized over the life of the new debt issue.
D. Amortized over the remaining original life of the extinguished issue.
A. Recognized in income before taxes in the period of extinguishment.
When debt is extinguished (retired), any resulting gain or loss is recognized immediately on the income statement. Additionally, the liability (and any related discount or premium) is removed.
Clay Corp. sold $500,000 of 8%, five-year bonds for $550,000. The purchasers were issued 2,000 detachable warrants, each of which was for one share of Clay’s $5 par value common stock at $12 per share. Shortly after issuance, the warrants sold at a market price of $10 each. What amount of premium on the bonds should Clay record at issuance?
A. $20,000
B. $24,000
C. $30,000
D. $50,000
C. $30,000
When detachable warrants are issued with a bond, the sales proceeds are allocated between the warrants and the bond based on their relative fair values (FV) on the issue date. The proceeds assigned to the warrants are recorded as APIC (ie, equity), and the remainder is assigned to the bond (ie, liability). If only one FV is known, that amount is allocated first and the remainder is assigned to the other instrument.
In this scenario, Clay Corp. issued a $500,000 face value bond with detachable warrants. Only the warrants’ FV (ie, $10 per warrant) is known. The total FV of the warrants is $20,000 (2,000 warrants × $10) (Choice A). The $12 warrant price is the price at which the warrant holders are entitled to buy shares of Clay’s stock; it is not used to determine the warrant FV.
The $530,000 remainder ($550,000 − $20,000 warrant FV) of the issue proceeds is assigned to the bond. Because the amount assigned to the bond is greater than its face value, a $30,000 premium is recorded ($530,000 assigned value − $500,000 face value).
Ashe Co. recorded the following data pertaining to raw material X during January 2005:
Units Received
Date Units Rec. Cost Issued On Hand
1/1/05 Inventory $8.00 3,200
1/11/05 Issue 1,600 1,600
1/22/05 Purchase 4,800 $9.60 6,400
The moving-average unit cost of X inventory on January 31, 2005 is
A. $8.80
B. $8.96
C. $9.20
D. $9.60
C. $9.20
Units beginning inventory remaining at year-end (3,200 - 1,600)$8 = $12,800
Plus 1/22 purchase: 4,800($9.60) = 46,080
Ending inventory $58,880
Ending unit cost: $58,880/6,400 = $9.20
The moving average method costs issues at the unit cost of goods on hand at that point. Thus, the issue was costed at $8.00 per unit. The cost per unit changes with each purchase.
During Year 5, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows:
FIFO Weighted-average January 1, Year 5 $71,000 $77,000 December 31, Year 5 $79,000 $83,000 Orca's income tax rate is 30%.
In its Year 5 financial statements, what amount should Orca report as the cumulative effect of this accounting change?
A. $2,800
B. $4,000
C. $4,200
D. $6,000
C. $4,200
$6,000 is the cumulative pre-tax income difference between the two methods as of January 1, Year 5.
The after-tax difference is .70($6,000) or $4,200. Accounting changes are measured as of the beginning of the year of change. The $6,000 represents the total difference in cost of goods sold between the two methods for the entire life of the firm, because under weighted-average, the firm has $6,000 more in inventory than under FIFO at January 1, Year 5. This is the “ending” inventory for that firm, as of that date, for the firm’s entire existence.
The $6,000 difference completely explains the pre-tax difference in income under the two methods for years up to January 1, Year 5; the $4,200 is the after-tax difference.
Cumulative effects are reported net of tax as an adjustment to the beginning balance of retained earnings in the year of the change.
Which of the following is an appropriate income approach for developing fair value measurements?
A. Using the relevant information from recent transactions
B. Using present value techniques to discount cash flows
C. Using the current replacement cost of the asset
D. Using the undiscounted cash flows from the asset
B. Using present value techniques to discount cash flows
Which of the following may affect total income tax expense for an entity in Year 1?
Change in income tax rate for Year 1 Change in income tax rate for Year 2
A. Yes Yes
B. Yes No
C. No Yes
D. No No
A. Yes Yes
Total income tax expense/benefit is the sum of current and deferred income tax expense/benefit. Changes to current and/or future tax rates that have been enacted (ie, passed into law) generally affect total income tax expense.
Which of the following funds of a local government would report transfers to other funds as an other financing use?
A. Enterprise.
B. Internal service.
C. Pension trust.
D. General.
D. General.
Governmental funds (eg, general fund) use modified accrual accounting and refer to transfers in and out as other financing sources and other financing uses, respectively. Proprietary funds (eg, enterprise fund) and fiduciary funds (eg, pension trust fund) use full accrual accounting and refer to transfers in and out as other revenues and other expenses, respectively.
According to ASC Topic 820, the market that has the greatest volume and level of activity is the
A. Most advantageous market.
B. The most relevant market.
C. The independent market.
D. The principal market.
D. The principal market.
This answer is correct because ASC Topic 820 defines the principal market as the market with the greatest volume and level of activity.
Jones Wholesalers stocks a changing variety of products. Which inventory costing method will be most likely to give Jones the lowest ending inventory when its product lines are subject to specific price increases?
A. Specific identification.
B. Weighted-average.
C. Dollar-value LIFO.
D. FIFO periodic.
C. Dollar-value LIFO.
During periods of rising prices, the inventory costing methods which will give Jones the lowest ending inventory balance are LIFO methods, because inventory items that were purchased at the earliest date (when prices were lower) will remain in inventory and the most recently purchased and more expensive items will be expensed through cost of goods sold.
Gibbs Co. uses financial forecasts when estimating credit losses under the aging-of-accounts-receivable method. A customer’s account in the amount of $5,000 is determined to be uncollectible. What impact does the write-off have on the company’s credit loss expense and working capital?
Credit loss expense Working capital
A. Decrease Decrease
B. Decrease No effect
C. No effect Decrease
D. No effect No effect
D. No effect No effect
The entry to write off a specific uncollectible account is recorded with a debit (decrease) to the allowance for credit losses and a credit (decrease) to accounts receivable. The write-off has no effect on credit loss expense or working capital.
On July 1, a firm purchased $1,000,000 of 8% bonds for $946,000, including accrued interest of $40,000, with plans to hold them until maturity. The bonds were purchased to yield 10% interest and pay interest annually on January 1. The firm uses the effective interest method of amortization. What is the balance of the investment in the bonds account at year end?
A. $911,300
B. $916,600
C. $953,300
D. $1,000,000
A. $911,300
Each reporting period, the bondholder records interest revenue (carrying value [CV] × yield rate × time, per the effective interest method) on the security. The difference between interest revenue and the actual cash received (face value × coupon rate × time) is amortization of the discount. The amortized discount is added to the bond’s CV each period to bring the investment up toward par (Choice D).
In this scenario, at year end, the investor will have held the bonds for six months, resulting in a CV of $911,300:
Total purchase price $946,000
Less: accrued interest 40,000
Net purchase price of bonds $906,000
Interest revenue $45,300 ($906,000 × 10% × 6/12)
Less: actual interest received 40,000 ($1,000,000 × 8% × 6/12)
Amortization of bond discount $5,300
Net purchase price of bonds $906,000
Plus: amortization of bond discount 5,300
Carrying amount of investment $911,300
Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?
A. Average cost.
B. First-in, first-out.
C. Last-in, first-out.
D. Base stock.
B. First-in, first-out.
This answeris correct because 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.
