FAR 1 Flashcards
Based on 2000 sales of compact discs recorded by an artist under a contract with Bain Co., the artist earned $100,000 after an adjustment of $8,000 for anticipated returns.
In addition, Bain paid the artist $75,000 in 2000 as a reasonable estimate of the amount recoverable from future royalties to be earned by the artist.
What amount should Bain report in its 2000 Income Statement for royalty expense?
100,000. The net amount earned by the artist is also the royalty expense to the firm. Royalty expense is recognized on the basis of the sales of the CD. Adjustments to the final amount earned for 2000, after all return information is known, will be treated as an adjustment to royalty expense in 2001. New information in 2001 will require a change in estimate, not retroactive application. The $100,000 amount is the best estimate of the royalty cost to Bain in 2000 that will ultimately be paid on 2000 sales
In financial statements prepared on the income-tax basis, how should the nondeductible portion of expenses, such as meals and entertainment, be reported?
A. Included in the expense category in the determination of income.
Despite the fact that these expenses are not deductible for tax purposes, they are still business expenses and need to be included in the determination of income on the financial statements. In addition, the income tax return requires information on the total meals and entertainment expense in order to calculate the deductible amount.
Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as an expense:
B. In the period incurred.
Compared to its 2004 cash-basis net income, Potoma Co.’s 2004 accrual-basis net income increased when it:
C. Had lower accrued expenses (current liability) on December 31, 2004, than on January 1, 2004.
Before 2001, Droit Co. used the cash basis of accounting. As of December 31, 2001, Droit changed to the accrual basis. Droit cannot determine the beginning balance of supplies inventory.
What is the effect of Droit’s inability to determine beginning supplies inventory on its 2001 accrual basis net income and December 31, 2001, accrual basis owners’ equity?
Supplies expense for 2001 under the accrual method is: supplies expense = beginning supplies + purchases - ending supplies. If beginning supplies cannot be determined, then it is assumed to be zero and supplies expense is understated, causing 2001 income to be overstated. However, total supplies expense for the entire life of the business is unaffected by the inability to determine beginning supplies for 2001. Total supplies expense for the life of the business is total purchases less ending inventory in 2001. These two amounts are determinable, and thus, owners’ equity at the end of 2001 can be determined.
General rule to convert cash to accrual?
The general rule to convert from cash to accrual is to add the beginning liability balances and subtract the ending liability balances; also, subtract beginning asset balances and add ending asset balances.
Is unearned revenue considered in cash accounting?
Yes, it is included in revenue.
Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?
B. A proposed accounting standards update.
Which of the following characteristics relates to both accounting relevance and faithful representation?
Comparability is the quality of information that enables users to identify similarities and differences between sets of information. For information to be comparable, it must be both relevant (make a difference to a user) and reliable (be accurate and trustworthy).
Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of:
The matching principle requires that we recognize and match expenses with the revenues generated. For all sales in a given period, some will be uncollectible. The cost of those uncollectible accounts is matched in the period that the revenue is recognized.
According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:
Cost-benefit is the only constraint among the four answer alternatives. When the cost of information exceeds its benefit, it should not be reported, even if it might be useful.
On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.’s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody’s investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment?
Since Peabody has elected to report the investment in Newman using the fair value option, it should recognize its share of cash dividends received during the period (.30 x $20,000 = $6,000) and the increase in the fair value of the investment ($400,000 > $410,000 = $10,000), or $6,000 + $10,000 = $16,000.
Blythe Corp. is a defendant in a lawsuit. Blythe’s attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency?
Contingencies are accrued and recognized as a liability when the occurrence of the liability is probable and the amount can be reasonably estimated. This lawsuit is reasonably possible, but not probable. Reasonably possible is typically a 50/50 chance of occurrence, where probable is a higher likelihood of occurrence. This answer is correct because this lawsuit would be disclosed, but not accrued.
Are discontinued operations included in total revenue?
no.
Palmyra Co. has net income of $11,000, a positive $1,000 net cumulative effect of a change in accounting principle, a $3,000 unrealized loss on available-for-sale securities, a positive $2,000 foreign currency translation adjustment, and a $6,000 increase in its common stock. What amount is Palmyra’s comprehensive income?
The components of comprehensive income are: Net Income, Unrealized gain/loss on AFS securities, foreign currency translation adjustment, unrecognized gain/loss on pension benefits, and deferred gain/loss on certain hedging transactions. Therefore, the Comprehensive income of Palmyra Co is $11,000 - 3,000 + 2,000 = $10,000.
