FAR 2 Flashcards
Finch Co. reported a total asset retirement obligation of $257,000 in last year’s financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year’s balance sheet?
A. $238,000
B. $264,000
C. $280,000
D. $306,000
B. $264,000
In this case, the company’s beginning ARO is increased for the discounted cash flows associated with future obligations for the new assets and the annual accretion expense (Choice C). The ARO is decreased by the payments made to satisfy prior obligations (Choice A). The ending ARO is $264,000.
ARO T Account
Beg Balance
Payments
New obligations
Accretion Exp.
End. Balance
On March 1, Year 1, Evan Corp. issued $500,000 of 10% nonconvertible bonds at 103, due on February 28, Year 11. Each $1,000 bond was issued with 30 detachable stock warrants, each of which entitled the holder to purchase, for $50, one share of Evan’s $25 par common stock. On March 1, Year 1, the market price of each warrant was $4. By what amount should the bond issue proceeds increase stockholders’ equity?
A. $0
B. $15,000
C. $45,000
D. $60,000
D. $60,000
In this scenario, the market price of Evan Corp.’s warrants is $4 each. Since each $1,000 bond includes 30 warrants, there are 15,000 warrants ([$500,000 face / $1,000 per bond] × 30 warrants per bond). The total warrant FV equals $60,000 (15,000 warrants × $4 per warrant), recorded as APIC that increases shareholders’ equity (Choice A).
On July 1, Year 1, Cody Co. paid $1,198,000 for 10%, 20-year bonds with a face value of $1,000,000. Interest is paid on December 31 and June 30. The bonds were purchased to yield 8%. Cody intends to hold the bonds until maturity and uses the effective interest method to recognize interest income from this investment. What should be reported as the carrying value of the bonds in Cody’s December 31, Year 1, balance sheet?
A. $1,193,050
B. $1,195,920
C. $1,198,000
D. $1,207,900
B. $1,195,920
In this scenario, Cody Co. purchased the bonds on July 1, Year 1, with a premium of $198,000 ($1,198,000 amount paid − $1,000,000 face value). On the purchase date, the $1,198,000 cost equaled the CV. To determine the CV on December 31, Year 1, six months’ worth of bond premium needs to be amortized:
Cash interest payment ($1,000,000 face value × 10% stated rate × 6/12 months) $50,000
Less: interest income ($1,198,000 CV × 8% effective interest rate × 6/12 months) (47,920)
Bond premium amortization $2,080
Unamortized bond premium ($198,000 premium − $2,080 premium amortization) $195,920
The December 31, Year 1, CV is $1,195,920 ($1,000,000 face value + $195,920 unamortized premium).
On December 31, Year 1, Grove Co. leased a machine from Farm, Inc. for the machine’s 7-year useful life. Equal annual payments under the lease are $105,000, including $7,500 allocated annually for taxes and insurance, and are due on December 31 of each year. The first payment was made on December 31, Year 1. The present value of lease payments at the inception of the lease was $576,500. The lease is appropriately accounted for as a finance lease by Grove. In its December 31, Year 2, balance sheet, Grove should report a right-of-use asset equal to
A. $411,786
B. $494,143
C. $471,500
D. $576,500
B. $494,143
In this scenario, Grove Co.’s finance lease term equals the machine’s 7-year useful life. On December 31, Year 1, Grove will record the ROU asset as $576,500 (ie, PV of lease payments given) (Choice D). The annual amortization of the ROU asset is $82,357 ($576,500 / 7 years).
During Year 1, Wall Co. purchased bonds of Hemp Corp. for $31,500 and properly classified the investment as available-for-sale. The fair value of this investment was $29,500 at December 31, Year 1. Wall did not elect to use the fair value option for reporting financial assets. Wall sold all of the Hemp bonds for $28,000 on December 15, Year 2, incurring $1,400 in brokerage commissions and taxes.On the sale, Wall should report a realized loss of
A. $4,900.
B. $3,500.
C. $2,900.
D. $1,500.
A. $4,900.
(Choice A) Correct! A realized loss on the disposal of available-for-sale securities is the excess of the carrying value (before recognition of any unrealized gain or loss) of the investment ($31,500) over the net proceeds from the sale [28,000 − $1,400 = $26,600].Therefore, the loss is $4,900 ($31,500 − $26,600).
A company has experienced operating losses from its appliance division for the past five years. The division is the lowest level of identifiable cash flows. Having determined the division is the lowest level of identifiable cash flows, the company’s next step in performing its impairment test is to
A. Perform a recoverability test on the carrying amount of the division’s assets.
B. Reduce the carrying amount of the division’s assets to the amount of expected divisional cash flows.
C. Adjust the carrying amount of the division’s assets to fair value.
D. Adjust the carrying amount of the division’s assets to replacement value.
A. Perform a recoverability test on the carrying amount of the division’s assets.
Imparment of Fixed Assets
Step 1: perform impairment review
Do any events or changes in circumstances indicate possible impairment? If yes move to step 2 of no then no further action is requires
Step 2: Perform recoverability test. Is the sum of the undiscounted cash flows expected from the asset less than the CV? If yes move to step 3, if no then no impairment
Step 3: Determine the impairment loss. Loss = CV -FV
Write -off entry: debit impairment loss and credit accum. depr.
At January 1, Year 4, Claymore Co. had a credit balance of $340,000 in its allowance for credit losses. Based on the aging schedule of the accounts receivable, Claymore estimates current credit losses to be $155,000. During Year 4, Claymore recovered $160,000 of previously uncollectible customer accounts. On December 31, Year 4, accounts receivable were $3,000,000 with a net carrying value of $2,715,000. What was the amount of customer accounts written off during Year 4?
A. $50,000
B. $60,000
C. $210,000
D. $370,000
D. $370,000
Allowance for Credit losses T Account
Beg. Balance
Recoveries
Credit Losses
Subtotal Writeoffs
End Balance
340000
160000
155000
655000 ?
285000 (3 mil-2.715 mil)
solve for the ?
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?
A. Decrease Decrease
B. Decrease No effect
C. No effect Decrease
D. No effect No effect
D. No effect No effect
Which of the following funds of a governmental unit recognizes revenues in the accounting period in which they become available and measurable?
General fundEnterprise fund
A. Yes No
B. No Yes
C. Yes Yes
D. No No
A. Yes No
Governmental funds (eg, general fund) have a budgetary focus and therefore emphasize the reporting of sources, uses, and balances of current financial resources. They use modified accrual accounting and recognize revenues in the period in which they become available and measurable.
Wilk Co. reported the following liabilities at December 31, Year 1:
Accounts payable-trade $750,000
Short-term borrowings 400,000
Loan from Bank I, current portion $100,000 3,500,000
Loan from Bank II, matures June 30, Year 2 1,000,000
The bank loan of $3,500,000 was in violation of the loan agreement. The creditor had not waived the rights for the loan. What amount should Wilk report as current liabilities at December 31, Year 1?
A. $1,250,000
B. $2,150,000
C. $2,250,000
D. $5,650,000
D. $5,650,000
A debt covenant is a loan agreement that limits the activities of the borrower while funds are owed to the lender. For example, the borrower may need to maintain a certain debt-to-equity ratio or provide audited financial statements each period. Sometimes, the violation of a covenant allows the lender to call the debt (ie, demand immediate payment). If the lender does not waive this right, the violation typically results in the entire debt being classified as current.
Wilk Co. should report current liabilities of $5,650,000 at December 31, Year 1, calculated as follows:
Accounts payable $ 750,000
Short-term borrowings 400,000
Loan from Bank I 3,500,000
Loan from Bank II, matures June 30, Year 2 1,000,000
Total $5,650,000
On July 1, Year 1, Kay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10% note receivable for the entire sales price. The fair value option was not elected. This note is payable in two equal installments of $50,000 plus accrued interest on December 31, Year 1 and Year 2. On July 1, Year 2, Kay discounted the note at a bank at an interest rate of 12%. Kay’s proceeds from the discounted note were
A. $48,400
B. $49,350
C. $50,350
D. $51,700
D. $51,700
Face value of N/R
$100,000
− Principal payment
(50,000)
Outstanding balance
$50,000
+ Interest at maturity ($50,000 × 10% × 12/12) 5,000
MV
$55,000
− Bank’s discount ($55,000 × 12% × 6/12) (3,300)
Net cash proceeds
$51,700
Garcel, Inc. held unfinished inventory at a cost of $85,000 with a sales value of $125,000. The inventory will cost $10,500 to complete. The normal profit margin is 30% of sales. The replacement cost of the inventory was $75,000. If Garcel uses the last-in, first-out method to determine inventory cost, what amount should Garcel report as inventory on its balance sheet?
A. $75,000
B. $77,000
C. $85,000
D. $114,500
B. $77,000
In this scenario, Garcel, Inc. will apply the LCM because it uses the LIFO method. Because replacement cost is given, the ceiling and floor limitations must be calculated to determine the market value of $77,000, which is also the LCM.
Replacement cost given - 75000
Ceiling limitation NRV - 114500 (125000-10500)
Floor Limitation (NRV-Profit) - 77000
Market (Limited by ceiling and floor) - 77000 (114500-30%X125000)
Lower of 85000 and 77000
Jay Co.’s lease payments are made at the end of each period. Jay’s liability for a finance lease would be reduced periodically by the
A. Minimum lease payment less the portion of the minimum lease payment allocable to interest.
B. Minimum lease payment plus the amortization of the right-of-use asset.
C. Minimum lease payment less the amortization of the right-of-use asset.
D. Minimum lease payment.
A. Minimum lease payment less the portion of the minimum lease payment allocable to interest.
Lease payments in a finance lease include interest expense and a reduction in lease liability. Interest expense equals the lease liability balance multiplied by the interest rate in the lease. The difference between the lease payment and the interest expense equals the lease liability reduction.
At the inception of Jay Co’s finance lease, it recorded a lease liability and an ROU asset. The minimum lease payments include interest expense and a lease liability reduction (Choice D). The ROU asset is amortized on a S/L basis and is not part of the minimum lease payment (Choices B and C).
On January 3, Year 1, Falk Co. purchased 500 shares of Milo Corp. common stock for $36,000. On December 2, Year 3, Falk received 500 stock rights from Milo. Each right entitles the holder to acquire one share of stock for $85. The market price of Milo’s stock was $100 a share immediately before the rights were issued and $90 a share immediately after the rights were issued. Falk sold its rights on December 3, Year 3, for $10 a right. Falk’s gain from the sale of the rights is
A. $0.
B. $1,000.
C. $1,400.
D. $5,000.
C. $1,400.
Correct! When the rights are received, the cost of the investment ($36,000) is allocated between the stock and the rights based on their relative fair values(FV), calculated below.
FV of stock 500 × $90 = $45,000
FV of rights 500 × $10 = 5,000
Total FV
$50,000
The cost allocated to the stock is $32,400 ($45,000/ $50,000, or 90%, of $36,000) and to the rights is $3,600 ($5,000/$50,000, or 10%, of $36,000). The net proceeds from the sale of the rights is $5,000 (500 × $10), so the gain on the sale of the rights is $1,400 ($5,000 − $3,600).
A company records items on the cash basis throughout the year and converts to an accrual basis for year end reporting. Its cash basis net income for the year is $70,000. The company has gathered the following comparative balance sheet information:
Beginning of year End of year
Accounts payable $3,000 $1,000
Unearned revenue 300 500
Wages payable 300 400
Prepaid rent 1,200 1,500
Accounts receivable 1,400 600
What amount should the company report as its accrual based net income for the current year?
A. $68,800
B. $70,200
C. $71,200
D. $73,200
C. $71,200
In this scenario:
A/P decreased by $2,000. The cash was paid to reduce a prior year accrued expense (ie, liability). Cash basis reports the decrease as a current year expense. Therefore, this amount is added back to cash basis NI to prevent counting the expense twice.
Unearned revenue increased by $200. This indicates that amounts received were greater than amounts earned. Cash basis reports the increase as revenue. Therefore, this amount is deducted from cash basis NI.
Wages payable increased by $100. This indicates that payments made were lower than expenses incurred. Cash basis income was higher because the expenses were excluded. Therefore, this amount is deducted from cash basis NI.
Prepaid rent increased by $300. This indicates that more cash was paid than the expense incurred. Cash basis reports the increase as an expense. Therefore, this amount is added back to cash basis NI.
A/R decreased by $800. This indicates that amounts received were greater than amounts earned. Cash basis reports the decrease as revenue. Therefore, this amount is deducted from cash basis NI.
The company’s accrual based NI for the current year is $71,200, as calculated below.
Cash basis NI $70,000
+ Decrease in A/P 2,000
− Increase in unearned revenue (200)
− Increase in wages payable (100)
+ Increase in prepaid rent 300
− Decrease in A/R (800)
Accrual basis NI $71,200
