FAR 2 Flashcards
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.
A. Both I and II are correct.
Fair value measurement disclosures require both that fair value amounts be disclosed separately for each level of the fair value hierarchy and that quantitative disclosures be provided in tabular format.
On July 1, year 1, Link Development Company purchased a tract of land for $900,000. Additional costs of $150,000 were incurred in subdividing the land during July through December year 1. Of the tract acreage, 70% was subdivided into residential lots as shown below and 30% was conveyed to the city for roads and a park.
Lot class Number of lots Sales price per lot
A 100 $12,000
B 100 8,000
C 200 5,000
Under the relative sales value method, the cost allocated to each Class A lot should be
A. $2,625
B. $2,940
C. $3,600
D. $4,200
D. $4,200
This answer is correct. Per ASC 970, real estate donated to municipalities or other governmental agencies for uses that will benefit the project shall be allocated as a common cost of the project. None of the cost should be allocated to land donated to the city, since that land will not directly generate revenue (and therefore has no sales value). Therefore, the total cost of acquiring the land ($900,000 + $150,000 = $1,050,000) should be allocated to the lots which will generate revenue. The $1,050,000 cost is allocated based on the relative sales value of the lots, as computed below.
Lot class # of
Sales price
Total sales value
A 100 × $12,000 = $1,200,000
B 100 × 8,000 = 800,000
C 200 × 5,000 = 1,000,000
$3,000,000
Total cost
Fraction allocated to Class A
Allocated cost
# of
Cost per lot in Class A
$1,050,000 × ($1,200/$3,000) = $420,000 ÷ 100 = $4,200
During 20X9, Steve Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts:
20X7 $60,000 understated
20X8 $75,000 overstated
Steve uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, Steve’s retained earnings at January1, 20X9, would be
A. Correct.
B. $15,000 overstated.
C. $75,000 overstated.
D. $135,000 overstated.
C. $75,000 overstated.
Since one year’s ending inventory is the next year’s beginning inventory, a misstatement in one period “corrects itself” in the next period. The understatement in 20X7 resulted in an overstatement to 20X7 cost of sales and an understatement to 20X8 cost of sales resulting in no net effect. The overstatement of inventory at 12/31/X8 resulted in an understatement of cost of sales and an overstatement of pre-tax income by $75,000. If taxes are ignored, this is the amount by which 1/1/X9 retained earnings is overstated.
Invern, Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and other claims. As a result of a year 2 accident, Invern is a defendant in a lawsuit in which it will probably have to pay damages of $190,000. What are the effects of this lawsuit’s probable outcome on Invern’s year 2 financial statements?
A. An increase in expenses and no effect on liabilities.
B. An increase in both expenses and liabilities.
C. No effect on expenses and an increase in liabilities.
D. No effect on either expenses or liabilities.
B. An increase in both expenses and liabilities.
Invern’s appropriation of retained earnings for contingencies is merely a reclassification of retained earnings on the balance sheet which tells the readers of the financial statements that such amounts are generally not available to pay dividends. This appropriation has no effect on the income statement. When a loss contingency is probable (as in this instance) and reasonably estimable ($190,000 in this instance), accrual of the loss is required. Therefore, Invern must accrue both a liability and an expense of $190,000. Note that Invern will also reclassify $190,000 of appropriated retained earnings into the “general” retained earnings.
Which of the following statements is correct regarding valuation allowances in accounting for income taxes?
A. A change in the balance of a valuation allowance is ordinarily included in net income.
B. Both deferred tax assets and deferred tax liabilities can be reduced by a valuation allowance.
C. Only negative evidence, not positive evidence, should be considered when determining whether a valuation allowance is needed.
D. A valuation allowance is necessary when the reasonably possible standard of evidence is satisfied.
A change in the balance of a valuation allowance is ordinarily included in net income.
A valuation allowance account is established if it is likely that a deferred tax asset will not be realized (conservative approach). Valuation allowance changes are ordinarily included in income because those changes will increase or decrease income tax expense.
On April 1 of the current year, Cassandra Corp. issued $600,000 of 4% bonds payable at 98 to yield 5% 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 Cassandra report?
A. $7,384
B. $14,700
C. $18,000
D. $22,084
D. $22,084
The bond’s interest expense equals the periodic interest payment plus the amortized discount. The expense is calculated by multiplying carrying value (CV) by the effective rate and the time period interest is accrued. Interest payments equal the bond’s face value multiplied by the stated rate and time period.
In this scenario, Cassandra Corp.’s $600,000, 4% (ie, stated rate) bonds were issued to yield 5% (ie, effective rate) on April 1 with a CV of $588,000 ($600,000 face value × 98%). Interest expense is calculated using the CV on April 1 for the 6 months from April 1 to September 30 and the CV on October 1 for the 3 months from October 1 to December 31.
Beginning
CV Effective rate
x Months Interest
expense (C) Semiannual
interest payment* Discount
amortization (E) Ending
CV
Date (A) (B) (A × B) (D) (C – D) (A + E)
Oct. 1 $588,000 5% × 6/12 $14,700 12,000 $2,700 $590,700
Dec. 31 $590,700 5% × 3/12 $ 7,384 12,000 × 3/6 $1,384 $592,084
*$600,000 face value × 4% stated rate × 6/12 months = $12,000
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.
C. In the period in which the accounting change occurs.
Indirect effects of a change in accounting principle should be reported in the period in which the accounting change occurs. Direct effects are reported retrospectively to the earliest period presented, if practicable.
East Corp. manufactures stereo systems that carry a two-year warranty against defects. Based on past experience, warranty costs are estimated at 4% of sales for the warranty period.
During Year 5, stereo system sales totaled $3,000,000, and warranty costs of $67,500 were incurred.
In its income statement for the year ended December 31, Year 5, East should report warranty expense of:
A. $52,500
B. $60,000
C. $67,500
D. $120,000
D. $120,000
Warranty expense is recognized in the year of sale under the accrual accounting system.
Warranties are a part of the selling effort, and the associated expense should be recognized when the liability is probable and estimable (in Year 5). The actual repairs reduce the liability recognized when the expense was recorded (in the year of sale).
The $120,000 of warranty expense in Year 5 = .04(sales in Year 5) = .04($3,000,000). The relevant entries for Year 5 are:
Warranty expense 120,000
Warranty liability (C) 120,000
Warranty liability 67,500
Cash, parts, etc. (C) 67,500
Swift Corp. prepares its financial statements for its fiscal year ending December 31, year 1. Swift estimates that its product warranty liability is $28,000 at December 31, year 1. On February 12, year 2, before the financial statements were issued, Swift received information about a product defect that will require a recall of all units sold in year 1. It is expected the product recall will cost an additional $40,000 in warranty repairs. What should Swift present in its December 31, year 1 financial statements?
A. A footnote disclosure explaining the product recall.
B. A footnote disclosure listing the estimated amount of $40,000 in warranty repairs and an explanation of the recall.
C. An estimated warranty liability of $68,000.
D. No disclosure is necessary.
C. An estimated warranty liability of $68,000.
This is a recognized subsequent event in the financial statement because Swift records an estimate for warranty liability. Prior to issuing the financial statements, Swift must make an adjustment for warranty liability for the product recall. Therefore, warranty liability should be $68,000 on the year 1 balance sheet.
On November 1, Year 1, Jaxon Co. purchased 200 shares of Abbot Co.’s common stock at fair value. This investment represents 25% of the ownership interests in Abbot, and Jaxon has elected not to use the fair value option. Fair values per share at relevant dates are as follows:
Date Fair value
November 1, Year 1 $150
December 31, Year 1 $135
December 31, Year 2 $172
Abbot incurred an $18,000 net loss in Year 1, earned at a constant rate throughout the year, incurred a $2,000 net loss in Year 2, and declared and paid a dividend on December 31, Year 2, in the amount of $1.20 per share. What is the balance in the investment account as of December 31, Year 2?
A. $24,760
B. $28,510
C. $28,750
D. $30,000
B. $28,510
Under the equity method, an investment is initially recorded at cost on the investor’s balance sheet. The investment account is adjusted annually for the investor’s ownership percentage of the investee’s income (loss). Dividends received from the investee reduce the investment account as they are a return of equity, not income.
In this case, Jaxon owns 25% of Abbot and, therefore, will use the equity method. In Year 1, Jaxon records the investment at cost and decreases the investment account for Jaxon’s share of Abbot’s Year 1 loss (ie, Jaxon multiplies the total loss by 2/12, as the investment was acquired in November):
Purchase price (200 shares × $150 per share) $30,000
Year 1 loss ($18,000 × 25% × 2/12) (750)
Year 1 ending balance $29,250
In Year 2, Jaxon adjusts the investment account for its share of Abbot’s net loss and dividends:
Year 2 beginning balance $29,250
Year 2 loss ($2,000.00 × 25%) (500)
Year 2 dividend (200 shares × $1.20 per share) (240)
Year 2 ending balance $28,510
Data for a firm using the Average LCM (conventional retail inventory method) retail inventory method is as follows:
Cost Retail
Beginning inventory $300 $467
Net purchases 1,200 2,000
Net additional markups 100
Net markdowns (300)
Sales $1,700
Compute cost of goods sold.
A. $1,169
B. $1,160
C. $1,177
D. $1,122
A. $1,169
Ending inventory at retail = $567 (= $467 + $2,000 + $100-$300-$1,700). The cost-to-retail ratio includes both the beginning inventory amounts, purchases and net markups. C/R = $300 + $1,200/($467 + $2,000 + $100) = .5843. Ending inventory at cost = $567(.5843) = $331. Cost of goods sold = $300 + $1,200 - $331 = $1,169.
On July 1, Year 2, Denver Corp. purchased 3,000 shares of Eagle Co.’s 10,000 outstanding shares of common stock for $20 per share. On December 15, Year 2, Eagle paid $40,000 in dividends to its common stockholders. Eagle’s net income for the year ended December 31, Year 2, was $120,000, earned evenly throughout the year. Denver uses the equity method to account for its shares in Eagle. In its Year 2 income statement, what amount of income from this investment should Denver report?
A. $36,000
B. $18,000
C. $12,000
D. $ 6,000
B. $18,000
This investment should be accounted for using the equity method since Denver owns a 30% interest (3,000 of 10,000 shares), which implies that Denver has significant influence over Eagle. Since Eagle’s $120,000 net income was earned evenly throughout Year 2, it can be assumed that Eagle’s net income since Denver’s July 1 purchases was $60,000 (6/12 × $120,000). Denver’s share of Eagle’s earnings (30% × $60,000 = $18,000) would be recognized as investment revenue under the equity method. The dividends received by Denver (30% × $40,000 = $12,000) do not affect investment revenue using the equity method; they are recorded as a reduction of the investment account.
Bee Co.’s accounts receivable balance at December 31, Year 2, increased over its January 1, Year 2, beginning balance. At December 31, Year 2, how would Bee Co. determine the amount of cash collected from customers?
A. Deduct from credit sales the accounts written off and deduct any increase in accounts receivable balance.
B. Add to credit sales the accounts written off and deduct any increase in accounts receivable balance.
C. Deduct from credit sales the accounts written off and add any increase in accounts receivable balance.
D. Add to credit sales the accounts written off and add any increase in accounts receivable balance.
Deduct from credit sales the accounts written off and deduct any increase in accounts receivable balance.
Accounts receivable is increased by credit sales and reinstatement of accounts written off. It is decreased by write-offs and cash collections. The amount of cash collected can be determined by analyzing the accounts affecting accounts receivable.
At the end of Year 3, Wissa Co. had a $19,000 deferred tax asset and a related valuation allowance of $4,000. During Year 4, $5,000 of the deferred tax asset was realized. Due to future anticipated operating losses, management determined on December 31, Year 4, that it is more likely than not that only $8,000 of the deferred tax asset would be realized in the future. What should Wissa report as the balance in the valuation allowance account at the end of Year 4?
A. $0
B. $4,000
C. $6,000
D. $8,000
C. $6,000
If required, a valuation allowance (ie, contra account) is created to ensure the DTA reflects the expected realizable amount (ie, conservatism). At year end, the DTA is evaluated to determine whether the valuation allowance requires adjustment or elimination.
For Year 4, Wissa Co. has a current DTA balance of $14,000 ($19,000 beginning balance − $5,000 realized). However, the company determines that, more-likely-than-not, only $8,000 will be realized in the future. Therefore, a valuation allowance of $6,000 ($14,000 − $8,000) is required at the end of Year 4.
Data regarding an entity’s available-for-sale debt securities follow:
Cost Allowance for
credit losses Market
value
December 31, Year 3 $200,000 $5,000 $185,000
December 31, Year 4 $200,000 $2,000 $195,000
Differences between cost and market value are considered temporary. The entity does not elect the fair value option to account for available-for-sale securities. The entity’s Year 4 other comprehensive income would be
A. $0
B. $3,000
C. $7,000
D. $10,000
C. $7,000
In this scenario, the entity’s $10,000 ($195,000 vs. $185,000) increase in FV in Year 4 must be broken down into credit and market risk (Choice D). The $3,000 ($5,000 beginning balance − $2,000) reduction in the allowance for credit losses indicates that credit risk has improved (Choice B). The entity will reverse $3,000 of the $5,000 credit loss recorded in Year 3.
Allowance for credit losses–AFS securities 3,000
Reversal of credit loss expense (income statement)
3,000
The remaining non–credit-related increase in FV of $7,000 ($10,000 – $3,000) is credited to OCI
AFS securities–unrealized losses (reduce contra to AFS) 7,000
OCI–unrealized holding gains on AFS
7,000
Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During Year 2, 100,000 shares of common stock were outstanding. In Year 3, two distributions of additional common shares occurred: On April 1, 20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock split was issued. Net income was $410,000 in Year 3 and $350,000 in Year 2. What amounts should Strauch report as basic earnings per share in its Year 3 and Year 2 comparative income statements?
Year 3 Year 2
A. $1.78 $3.50
B. $1.78 $1.75
C. $2.34 $1.75
D. $2.34 $3.50
B. $1.78 $1.75
However, shares issued due to stock splits and stock dividends are treated retroactively (ie, as if occurred at the beginning of the earliest period presented). The effect of a stock split is applied to the weighted shares of issued/reissued shares only if the transaction occurs before the split. Although outstanding shares at the end of Year 2 are 100,000, they are restated as 200,000 (100,000 × 2) for the Year 3 stock split since the comparative statements are being issued. The shares for Year 3 are 230,000. EPS for Year 3 and Year 2 are $1.78 and $1.75, respectively.
On January 1, year 3, Poe Construction, Inc. changed to the percentage-of-completion method of income recognition for financial statement reporting but not for income tax reporting. Poe can justify this change in accounting principle. As of December 31, year 2, Poe compiled data showing that income under the completed-contract method aggregated $700,000. If the percentage-of-completion method had been used, the accumulated income through December 31, year 2, would have been $880,000. Assuming an income tax rate of 40% for all years, the cumulative effect of this accounting change should be reported by Poe as
A. An increase in construction-in-progress for $180,000 in the year 2 balance sheet.
B. A decrease in the beginning balance of retained earnings for $108,000 in year 3.
C. A cumulative effect adjustment of $108,000 on the year 3 income statement.
D. An increase in ending retained earnings of $180,000 in year 2.
A. An increase in construction-in-progress for $180,000 in the year 2 balance sheet.
A change in the method of accounting for long-term contracts requires retrospective application to the earliest year practicable. This results in a $180,000 increase in income for year 2. The assets would be adjusted for the earliest period affected, and construction-in-progress would increase by $180,000. Net income for year 2 would increase by $108,000 ($180,000 less 40% tax effects), and the deferred tax liability account would increase in year 2 by $72,000.
Tower Corp. began operations on January 1, Year 1. For financial reporting, Tower recognizes revenues from all sales under the accrual method. However, in its income tax returns, Tower reports qualifying sales under the installment method. Tower’s gross profit on these installment sales under each method was as follows:
Year Accrual method Install. method
Year 1 $1,600,000 $600,000
Year 2 $2,600,000 $1,400,000
The income tax rate is 30% for Year 1 and future years. There are no other temporary or permanent differences. In its December 31, Year 2, balance sheet, what amount should Tower report as a liability for deferred income taxes?
A. $360,000
B. $600,000
C. $660,000
D. $840,000
C. $660,000
In this scenario, no information about the reversal of any of Tower Corp.’s Year 1 DTL is provided; therefore, the full amount remains on the balance sheet. The DTL at December 31, Year 2, is $660,000, calculated as follows:
Year 1 DTL ($1,600,000 − $600,000) × 30% $300,000
Year 2 DTL ($2,600,000 − $1,400,000) × 30% 360,000
Cumulative DTL at December 31, Year 2 $660,000
At the end of Year 1, Rome Inc. held marketable debt securities classified as available-for-sale. The securities were carried at fair value of $57,320. Rome has a $2,500 credit loss and a market risk-related unrealized gain of $8,350. What is the historical cost of the available-for-sale marketable debt securities?
A. $48,970
B. $51,470
C. $59,820
D. $63,170
B. $51,470
In this scenario, the FV carrying value is given as $57,320 and the historical cost must be calculated. Working backward, the cost is $51,470 ($57,320 + $2,500 − $8,350) as shown below.
Original cost ?
Less: allowance for credit losses ($2,500)
Plus: FV adjustment for unrealized gain 8,350
Ending carrying value (FV) $57,320
Cost is $51,470
Welnet Inc. was sued in October of year 8 for breach of contract. Based on the advice of counsel, Welnet recognized a $2 million estimated lawsuit loss and liability at December 31, year 8. The lawsuit was settled in February, year 9 in the amount of $2.2 million, before Welnet’s year 8 financial statements were available to be issued. What is the appropriate accounting procedure for the year 8 statements?
A. Welnet recognizes $0.2 million of lawsuit loss in its year 9 statements.
B. Welnet recognizes the entire $2.2 million loss in its year 8 statements.
C. Welnet reports the $0.2 million amount as a retrospective adjustment to its year 8 statements.
D. Welnet recognizes the entire $2.2 million loss in its year 9 statements.
B. Welnet recognizes the entire $2.2 million loss in its year 8 statements.
The breach of contract occurred before the year 8 balance sheet date. This is a recognized subsequent event. The $0.2 million adjustment is simply part of the entire amount that is known before issuance of the year 8 statements. Note that if the settlement occurred after the issuance or availability of the year 8 statements, only the $2 million loss is recognized in the year 8 statements; the remaining $0.2 million is recognized in year 9.
On December 31, year 2, Rapp Co. changed inventory cost methods to FIFO from LIFO for financial statement and income tax purposes. The change will result in a $175,000 increase in the beginning inventory at January 1, year 3. Rapp does not maintain records to identify the effect of the change on years prior to year 1. Assuming a 30% income tax rate, the cumulative effect of this accounting change reported in the income statement for the year ended December 31, year 3, is
A. $175,000
B. $122,500
C. $ 52,500
D. $0
D. $0
This answer is correct. ASC Topic 250 requires changes in accounting principle to be given retrospective application, and the cumulative effects of the change reflected in the carrying value of assets and period-specific effects on the financial statements for each period presented.
Posy Corp. acquired treasury shares at an amount greater than their par value, but less than their original issue price. Compared to the cost method of accounting for treasury stock, does the par value method report a greater amount for additional paid-in capital and a greater amount for retained earnings?
Additional paid-in capital Retained earnings
A. Yes Yes
B. Yes No
C. No No
D. No Yes
C. No No
There are two methods used to account for T/S transactions: cost and par value.
Cost: T/S is recorded at cost (ie, purchase price), so there is no effect on APIC or retained earnings.
Par value: T/S is recorded at par value and any APIC-C/S from the original issuance is removed (ie, debited). If shares are reacquired for an amount less than the original issue price but more than par value, the difference is credited to APIC-T/S, with no effect on retained earnings.
In this scenario, the par value method results in a net decrease in Posy’s APIC because the debit to APIC-C/S would be greater than the credit to APIC-T/S. Accordingly, APIC is lower than under the cost method. Retained earnings are not affected under either method. Therefore, neither account in this transaction would be greater under the par value method.
Young & Jamison’s modified cash basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual basis operating expenses, what would be the amount of operating expenses?
A. $125,000
B. $135,000
C. $165,000
D. $175,000
C. $165,000
In this scenario, Young & Jamison must adjust the $150,000 operating cash payments for the net increases in the prepaid and payable. Setting up the journal entry shows the accrual basis expense is $165,000.
Operating expense (plug) 165,000
Prepaid accounts (↑) ($10,000 − $15,000) 5,000
Payable accounts (↑) ($5,000 − $25,000)
20,000
Cash (amount paid)
150,000
Red and White formed a partnership in Year 2. The partnership agreement provides for annual salary allowances of $55,000 for Red and $45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of $80,000 for Year 3 before any allowance to partners. What amount of these earnings should be credited to each partner’s capital account?
Red White
A. $40,000 $40,000
B. $43,000 $37,000
C. $44,000 $36,000
D. $45,000 $35,000
B. $43,000 $37,000
You have to take into account the loss 55000+45000 = 100,000 so there is a 20,000 loss. Allocate that by partnership percentages so Red = -12000 and white = -8000. Subtract the losses from each respective partnership salary 55,000-12,000 and 45,000-8,000 and you get 43,000 and 37,000
A company can estimate the amount of loss that will occur if a foreign government expropriates some company assets. After considering all of the facts, the company believes that the fair value of the seized assets will be between $300,000 and $450,000, with $410,000 being the most likely amount. If expropriation is reasonably possible, what amount, if any, should be accrued with respect to the liability?
A. $0
B. $300,000
C. $410,000
D. $450,000
A. $0
Its is asking for accrued, it is only accrued if it is probably. This would be disclosed not accrued.
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
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)
An entity, upon initial recognition of an asset retirement obligation, should not take which of the following actions?
A. Allocate asset retirement cost to expense over the useful life of the related asset.
B. Measure the asset retirement cost at fair value.
C. Capitalize the asset retirement cost by increasing the carrying amount of the related asset.
D. Capitalize the asset retirement cost at its undiscounted cash flow value.
D. Capitalize the asset retirement cost at its undiscounted cash flow value.
An asset retirement liability (ARO) represents a future obligation associated with the retirement of an asset used in operations. Initially, the ARO is recorded at the fair value of the liability, with a corresponding increase to the cost of the asset. An accretion expense is recorded over the asset’s useful life to increase the liability for costs associated with the passage of time until the obligation is satisfied.
Praz Co. had $100,000 in accrual basis pretax income for the year. At year end, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their prior year-end balances. Under the cash basis of accounting, what amount of pretax income should Praz report for the year?
A. $84,000
B. $96,000
C. $104,000
D. $116,000
A. $84,000
Cash basis accounting recognizes revenues and expenses when cash is received or paid. An increase in accounts receivable is not reported as revenue under cash basis. A decrease in accounts payable is reported as an expense under cash basis. Both the increase and decrease would be deducted from accrual basis net income to arrive at cash basis net income.
Selected information from the accounting records of Dalton Company is as follows:
Net sales $1,800,000
COGS 1,200,000
Inventory at January 1 336,000
Inventory at December 31 288,000
Assuming a 365-day year, what is the average days sales in inventory for the year ending December 31?
A. 58
B. 63
C. 88
D. 95
D. 95
DSI is typically calculated by dividing 365 days by inventory turnover. The ratio can also use working days instead of 365 days if management wants to measure efficiency based only on operating days during the year. Unless specified otherwise, 365 days should be used for the calculation.
In this scenario, Dalton Company calculates the DSI assuming a 365-day year as follows:
Average inventory: ($336,000 Beginning inventory + $288,000 Ending inventory) / 2 = $312,000
Inventory turnover: $1,200,000 COGS / $312,000 Average inventory = 3.85
DSI: 365 Days / 3.85= 95 daysrounded
Which of the following items requires a corporation issuing stock to debit retained earnings for the market value of the shares issued?
A. Employee stock bonus.
B. Business combination.
C. 10% stock dividend.
D. 2-for-1 stock split.
C. 10% stock dividend.
Dividends are distributions to stockholders of retained earnings (RE). Small stock dividends (less than 20–25% of outstanding shares) are recorded with a debit to RE for the market value (ie, FV) of the shares issued, a credit to common stock for the par or stated value, and a credit to APIC for the excess.
