FAR 10 Flashcards
Which of the following can be overstated on consolidated financial statements if intercompany inventory balances on-hand at the end of a period are not eliminated?
Either consolidated income or consolidated loss could be overstated on consolidated statements as a result of failure to eliminate intercompany inventory balances. An overstatement of income would result if the goods were sold by the selling affiliate at a price greater than the cost to the selling affiliate. An overstatement of loss would result if the goods were sold by the selling affiliate at a price less than the cost to the selling affiliate.
During 200X, Papa Company sold inventory, which cost it $18,000, to its subsidiary, Sonnyco, for $27,000. At the end of 200X, Sonnyco had $9,000 of the intercompany goods still on its books. The balance had been resold to unaffiliated customers for $24,000. Which one of the following is the correct amount of profit or loss that would be recognized in the consolidated statements for 200X?
$12,000
With an intercompany selling price of $27,000 and $9,000 of those goods on-hand at year-end, one third of the cost from non-affiliates is still on-hand and should not be included in the cost of goods sold. That amount is $6,000 (i.e., 1/3 x $18,000 = $6,000). Therefore, the consolidated profit that should be recognized for 200X is the selling price to non-affiliates ($24,000) less the cost of that inventory from non-affiliates ($18,000 - $6,000 = $12,000), or $24,000 - $12,000 = $12,000.
On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability.
Which one of the following is the net amount of gain or loss that will be recognized by Pico in its December 31, 2008, consolidated financial statements as a result of its intercompany bonds?
In the elimination of intercompany bonds, the intercompany bond liability at par will be eliminated against the intercompany bond investment at par. Therefore, the gain or loss recognized as a result of constructive retirement of intercompany bonds is the net of the premium or discount on the bond liability and the premium or discount on the bond investment. In this case, there is a total $100,000 premium on the bond liability, but because only one-fourth ($250,000/$1,000,000 = 1/4) of the bonds are intercompany, only one fourth of the premium is eliminated. Thus, $25,000 of premium on the bond liability (a credit) will be eliminated against the $50,000 discount on the bond investment (also a credit). As a result of eliminating the two credits ($25,000 + $50,000 = $75,000), a $75,000 gain on constructive retirement will be recognized.
Which of the following is the correct accounting measurement and treatment under IFRS for assets classified as “Loans and Receivables”?
Amortized cost, with interest and amortization recognized in current income.
Where in its financial statements should a company disclose information about its concentration of credit risks?
The notes to the financial statements or the body of the financial statements.
A derivative financial instrument is best described as:
A contract that has its settlement value tied to an underlying notional amount.
Recognized servicing assets should be assessed for impairment and servicing liabilities should be assessed for understatement. In which of the following cases will an impairment loss be recognized?
Servicing liability with carrying value less than fair value.
How is a contingent gain (such as a possible lawsuit verdict) treated?
It is put in the foot notes, not recorded.
Hudson Corp. operates several factories that manufacture medical equipment. The factories have a historical cost of $200 million. Near the end of the company’s fiscal year, a change in business climate related to a competitor’s innovative products indicated to Hudson’s management that the $170 million carrying amount of the assets of one of Hudson’s factories may not be recoverable. Management identified cash flows from this factory and estimated that the undiscounted future cash flows over the remaining useful life of the factory would be $150 million. The fair value of the factory’s assets is reliably estimated to be $135 million. The change in business climate requires investigation of possible impairment. Which of the following amounts is the impairment loss?
Under U.S. GAAP, impairment testing is a two step process. The first step compares the assets’ carry value (CV) to its undiscounted cash flows (UCF). In this problem the CV > UCF; therefore the asset is potentially impaired and we must go to the second step. The second step compares the assets CV to its fair value (FV). In this problem the FV
Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?
The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%.
What amount was Comma’s basic earnings per share for the current year?
One year of preferred stock dividends is subtracted from income in the numerator of EPS because the stock is cumulative. The amount of dividends declared does not affect the calculation. The bonds are not relevant because basic EPS does not assume conversion of the bonds. The calculation is: Basic EPS = [$200,000 - (8,000 x $20 x .10)]/25,000 = ($200,000 - $16,000)/25,000 = $7.36.
On May 15, 2003, Munn, Inc. approved a plan to dispose of a segment of its business. It is expected that the sale will occur on February 1, 2004, at a selling price of $500,000. The segment reported $195,000 in operating losses for 2003. The segment is expected to lose $30,000 from operations in 2004. The carrying amount of the segment at the date of sale was expected to be $850,000. Before income taxes, what amount should Munn report as a loss from discontinued operations in its 2003 income statement?
$545,000
There are two components for discontinued operations: (1) the operating income or loss for the period in which the decision is made to dispose, and (2) the disposal loss. Only actual operating income (or loss) is recognized, but estimated as well as actual disposal losses are recognized. The $350,000 estimated disposal loss is the difference between the $850,000 carrying value of the segment, and its $500,000 estimated selling price. The operating loss for the period ($195,000) plus the estimated disposal loss ($350,000) equals the $545,000 total loss to be recognized for discontinued operations for 2003.
Which of the following transactions qualify as a discontinued operation?
Approved sale of a segment that represents a strategic shift in the entities operations.
To qualify for a discontinued operation, the component to be disposed of must be approved as a sale and represents a strategic shift in the entity’s operations.
In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:
Of the environment in which the subsidiary primarily generates and expends cash.
Soco plans to buy 100,000 Euros with U.S. dollars. The exchange rate is $1.00 = 0.75 Euro. Assuming no transaction cost, how much will Soco have to pay in dollars (rounded) for 100,000 Euros?
$133,333
