FAR 4 Flashcards
After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Under IFRS, which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?
Under IFRS impairment losses associated with identifiable intangibles are recoverable. Impairment losses associated with goodwill are NOT recoverable.
Acme Co.’s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information:
At December 31, Acme has a $50,000 debit balance in its accounts payable resulting from a payment to a supplier for goods to be manufactured to Acme’s specifications.
Goods shipped F.O.B. destination on December 20 were received and recorded by Acme on January 2. The invoice cost was $45,000.
In its December 31 balance sheet, what amount should Acme report as accounts payable?
The $50,000 advance is not related to accounts payable, even though it was made to a supplier for which Acme would have accounts payable. It is a prepayment. Removing the $50,000 debit increases the accounts payable balance by that amount. The $45,000 shipment is not part of the inventory of Acme as of December 31 nor is it a liability (accounts payable) because title to the goods did not transfer to Acme until January 2. FOB destination means that title does not transfer until goods reach their destination. Acme treated this item correctly because it was recorded January 2. Therefore, the correct accounts payable balance is $900,000 ($850,000 before adjustment + $50,000).
After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For the year 2002, income for Cone’s branch was $160,000 before income taxes and Cone’s bonus. Cone’s bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone’s bonus for the year 2002?
The following equation expresses the relationship. Let B = bonus.
B = .25($160,000 - $100,000 - B)
B = .25($60,000 - B)
B = $15,000 - .25B
1.25B = $15,000
B = $15,000/1.25 = $12,000
As of December 15, 2002, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for 2002 of $100,000 have not yet been declared. The Board of Directors plans to declare cash dividends on its preferred and common stock on January 16, 2003. Aviator paid an annual bonus to its CEO based on the company’s annual profits. The bonus for 2002 was $50,000, which will be paid on February 10, 2003. What amount should Aviator report as current liabilities on its balance sheet at December 31, 2002?
Only the bonus is a liability of the firm as of 12/31/02. That amount was earned and granted in 2002 and thus is recognized in the 2002 balance sheet because it is not due for payment until 2003. Dividends are not liabilities until declared. There is no unpaid declared dividend at 12/31/02.
Ryan Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $720,000 at December 31, 2005 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, 2005. Outstanding service contracts at December 31, 2005 expire as follows:
During 2006 $150,000
During 2007 225,000
During 2008 100,000
What amount should be reported as unearned service contract revenues in Ryan’s December 31, 2005 balance sheet?
The ending 2005 unearned service contract revenue (liability) balance is the sum of the unexpired contracts at the end of that year. The $180,000 of service expense does not affect the balance of the liability, which is reduced (revenue is recognized) as contracts expire. The liability is not limited to the cost of service rendered.
The total unearned revenue is the sum of contract expirations: Expirations: During 2006 $150,000 During 2007 225,000 During 2008 100,000 Total liability
A company issued a short-term note payable to a bank with a stated 12 percent rate of interest . The bank charged a .5% loan origination fee and remitted the balance to the company.
The effective interest rate paid by the company in this transaction would be
The .5% loan origination fee reduces the proceeds to the borrower AND increases the total interest to be paid by the same amount. The effect is to raise the interest rate above 12.5%.
Assume the loan amount is $1,000 before the loan origination fee. Therefore, the net amount loaned is $995 [1 - .005($1,000)]. However, the full $1,000 must be paid at maturity. The total interest to be paid is thus increased by the $5 origination fee ($1,000 - $995).
For simplicity, assume the loan is for a full year. Then total interest paid is: .12($1,000) + $5 = $125.
The effective rate of interest for the year then is: $125/$995 = .1256. This exceeds 12.5%.
On October 1, 2005, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%.
Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, 2005. Fleur’s 2005 financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due on the note were paid February 1, 2006.
Fleur’s 2005 cost of goods sold for the holiday merchandise wa
The note (and merchandise) should have been recorded at its present value using the market interest rate of 11%. This rate is lower than the stated rate of 16% implying that the present value of the note (face value and interest payments at 16%) using 11% exceeds the face value of the note. Thus, the merchandise was recorded at an amount which understated its market value. All the merchandise was sold before the end of the year causing cost of goods sold to be similarly understated.
On August 21, 2003, Vann Corp.’s $500,000, one-year, noninterest-bearing note due July 31, 2004 was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing bond discounts.
What amount should Vann report for notes payable in its December 31, 2003 balance sheet?
The period from August 21, 2003 to July 31, 2004 is 11 1/3 months. The correct calculation is:
Maturity value (note is noninterest bearing)
$500,000
Less discount to bank $500,000(.108)[(11 1/3 months)/12 months]
( 51,000)
Equals book value at date of discounting = proceeds from bank
449,000
Plus amortization of discount to December 31, 2003
$51,000[(4 1/3 months)/(11 1/3 months)]
19,500
Equals book value at December 31, 2003
$468,500
The bank’s discount represents the total interest to be paid over the 11 1/3 month term. As the note is amortized, the note’s book value increases and interest expense is recognized. At maturity, the note book value is $500,000 and the total interest of $51,000 is paid as part of the single payment of $500,000. Total interest is $51,000 because that is the difference between the maturity value of $500,000 less the $449,000 proceeds.
Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of forty cents on the dollar.
Hale holds a $30,000 noninterest-bearing note receivable from Seco collateralized by an asset with a book value of $35,000, and a liquidation value of $5,000.
The amount to be realized by Hale on this note is
Bankruptcy law specifies that secured creditors are to be satisfied before any assets are paid to unsecured creditors. Hale is a secured creditor for the $5,000 liquidation value. A liquidation value is paid at the liquidation of the firm and thus acts as a secured debt. The remaining claim of $25,000 ($30,000 - $5,000) is unsecured and at the 40% rate yields an additional claim of $10,000, for a total amount to be realized of $15,000.
On March 1, 2004, Fine Co. borrowed $10,000 and signed a two-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2006.
What amount should Fine report as a liability for accrued interest at December 31, 2005?
The accrued interest covers the period from the borrowing to 12/31/94 because no interest has yet been paid. The interest is also compounded (this is a stumbling point easily missed).
The 2005 ending balance in accrued interest payable therefore includes interest on 2004’s accrued interest:
2004: $10,000(.12)(10/12) $1,000
2005: ($10,000 + $1,000)(.12)(12/12) 1,320
Total accrued interest payable, December 31, 2005 $2,320
On January 1, 2005, Korn Co. sold to Kay Corp. $400,000 of its 10% bonds for $354,118 to yield 12%. Interest is payable semiannually on January 1 and July 1.
What amount should Korn report as interest expense for the six months ended June 30, 2005?
Interest expense = $354,118(.12/2) = $21,247
The yield rate is applied to the beginning book value of the bonds. The interest expense is for 1/2 a year. This requires that 1/2 of the yield rate be applied. The beginning book value is used because that is the debt 6 months before the interest is recognized.
Interest is defined as the true yield rate multiplied by the debt balance at the beginning of the interest period
On January 1, a company issued a $50,000 face value, 8% five-year bond for $46,139 that will yield 10%. Interest is payable on June 30 and December 31. What is the bond carrying amount on December 31 of the current year?
This problem requires the calculation of the amount of bond discount amortization through the end of the current year. Journal entries are the best way to do this. The two interest payment entries are as follows. June 30 entry: dr. Interest expense $2,307 ($46,139 x .05), cr. Discount $307, cr. Cash $2,000 ($50,000 x .04). The effective interest method is required (SL method is not mentioned). The discount amortization increases the carrying value of the liability because there is less discount remaining. Dec. 31 entry: dr. Interest expense $2,322 [($46,139 + $307) x .05], cr. Discount $322, cr. Cash $2,000 ($50,000 x .04). Carrying amount is now $46,139 $307 $322 = $46,768.
The following information pertains to Camp Corp.’s issuance of bonds on July 1, 2005:
Face amount $800,000
Term 10 years
Stated interest rate 6%
Interest payment dates Annually on July 1
Yield 9%
At 6% At 9%
Present value of 1 for 10 periods 0.558 0.422
Future value of 1 for 10 periods 1.791 2.367
Present value of ordinary annuity of 1 for 10 periods 7.360 6.418
What should be the issue price for each $1,000 bond?
The issue price for one $1,000 face value bond is the present value of all future payments discounted at the yield rate of 9%.
Issue price = $1,000(.422) + .06($1,000)(6.418) = $807
On January 1 of the current year, Lean Co. made an investment of $10,000. The following is the present value of $1.00 discounted at a 10% interest rate:
Present value of $1.00
Periods Discounted at 10%
1 .909
2 .826
3 .751
What amount of cash will Lean accumulate in two years?
The future value of $1 is the reciprocal of the present value of $1. The $10,000 invested therefore will accumulate to $10,000(1/.826) = $12,107 in two years.
Another calculation leading to the same result is $10,000(1.10)(1.10) = $12,100 (discrepancy due to rounding of the present value factor).
Dixon Co. incurred costs of $3,300 when it issued, on August 31, 2005, 5-year debenture bonds dated April 1, 2005.
What amount of bond issue expense should Dixon report in its income statement for the year ended December 31, 2005?
There are four years and seven months in the bond term (5 years less the 5 months from April 1 to August 31) or a total of 55 months. Thus, the 2005 amortization of bond issue costs, which is capitalized as a deferred charge, is $240 [(4/55)$3,300]. The bonds were outstanding four months in 2005.
