FAR 6 Flashcards
On April 1, 2004, Kew Co. purchased new machinery for $300,000. The machinery has an estimated useful life of five years, and depreciation is computed by the sum-of-the-years’-digits method.
The accumulated depreciation on this machinery at March 31, 2006 should be:
$180,000, the correct answer, equals $300,000[(5 + 4)/(5 + 4 + 3 + 2 + 1)].
A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. Compute cost of goods sold under the successful efforts method.
The depletion rate = [$40 + (.25)($100) + $60]/20 = $6.25/ton. Depletion = 2,000,000($6.25/ton) = $12,500,000. Because all the ore removed was sold, cost of goods sold includes the entire amount of depletion and the extraction costs. Cost of goods sold = $12,500,000 $10,000,000 = $22,500,000. Note, that extraction costs is included in inventory (and therefore, cost of goods sold), but not in the deposit (and therefore, not in depletion).
Cantor Co. purchased a coal mine for $2,000,000. It cost $500,000 to prepare the coal mine for the extraction of the coal. It was estimated that 750,000 tons of coal would be extracted from the mine during its useful life. Cantor planned to sell the property for $100,000 at the end of its useful life. During the current year, 15,000 tons of coal were extracted and sold.
What would Cantor’s depletion amount be per ton for the current year?
The depletion rate is the sum of the cost incurred to acquire the mineral rights, find the minerals, and develop the site less the salvage value, all divided by the estimated number of units of resource expected to be removed from the site.
The depletion rate per ton is ($2,000,000 + $500,000-$100,000)/750,000 = $3.20. This rate is applied to the units removed each period to determine depletion for that period.
As such, it allocates the total cost of the obtaining and developing the resource to each unit of resource removed.
On January 1, year one, an entity acquires a new piece of machinery for $100,000 with an estimated useful life of 10 years. The machine has a drum that must be replaced every five years and costs $20,000 to replace. Also included in the cost of the machine is an inspection fee of $8,000. Continued operations of the machine requires an inspection every four years after purchase. The company uses the straight-line method of depreciation. Under IFRS what is the depreciation expense for year one?
Under IFRS the components of the asset must be depreciated over their estimated useful life. Therefore, the $100,000 cost is broken down into the following components:
Depreciable value Life Depreciation $72,000 10 yr. $7,200 20,000 5 yr. 4,000 8,000 4 yr. 2,000 $13,200
Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct?
When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued.
For accounting purposes, how many levels of influence, that an investor may have over an investee, are identified? What are they?
Accounting identifies three levels of influence that an investor may have over an investee. Those levels are: (1) no significant influence, (2) significant influence, but not control, and (3) control.
How are investments in AFS securities reported?
Investments in available-for-sale securities are reported at market value under the fair value method ($28,000). The LCM method is no longer applicable to investments.
On July 1, 2004, York Co. purchased, as a held-to-maturity investment, $1,000,000 of Park, Inc.’s 8% bonds for $946,000, including accrued interest of $40,000.
The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2011 and pay interest annually on January 1. York uses the effective interest method of amortization.
In its December 31, 2004 Balance Sheet, what amount should York report as investment in bonds?
Initial investment cost: $946,000-$40,000 =
$906,000
Interest revenue for 2004: $906,000(.10)(1/2 year) = $45,300
Less cash interest for 6 months: $1,000,000(.08)(1/2) = (40,000)
Equals amortization of discount (increases investment)
5,300
Investment in bonds balance at the end of 2004
$911,300
At the end of year one, Lane Co. held trading securities that cost $86,000 that had a year-end market value of $92,000. During year two, all of these securities were sold for $104,500. At the end of year two, Lane had acquired additional trading securities that cost $73,000 that had a year-end market value of $71,000. What is the impact of these stock activities on Lane’s year two Income Statement?
Gain of $10,500.
In which of the following cases would an unrealized gain or loss on the transfer of an investment (which does not give the investor significant influence) from one classification to another classification not be recognized in current net income?
Transfer from held-to-maturity to available-for-sale.
A transfer of an investment from held-to-maturity to available-for-sale would result in writing off the unamortized cost in the held-to-maturity classification and writing on the investment at fair value in the available-for-sale classification, with any difference being an unrealized gain or loss recognized in comprehensive income, not in current net income.
Anchor Co. owns 40% of Main Co.’s common stock outstanding and 75% of Main’s noncumulative preferred stock outstanding. Anchor exercises significant influence over Main’s operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its Income Statement for the period related to its investment in Main?
Anchor Co. would report 75% of Main’s dividend on its noncumulative preferred stock as dividend income. That calculation would be: .75 x $100,000 = $75,000. Anchor Co. would not report 40% of Main’s dividend on its common stock as dividend income because, since it can exercise significant influence over Main’s operations, it must account for its common stock investment in Main using the equity method of accounting. Under the equity method, common stock dividends received from an investee are recognized as a reduction in the investment in the investee. So, Anchor’s entry to recognize the $80,000 (.40 x $200,000) common stock dividend from Main would be:
DR: Cash $80,000
CR: Investment in Main $80,000
Pare, Inc. purchased 10% of Tot Co.’s 100,000 outstanding shares of common stock on January 2, 2004, for $50,000.
On December 31, 2004, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during 2004. Tot reported earnings of $300,000 for 2004.
What amount should Pare report in its December 31, 2004, Balance Sheet as investment in Tot?
This question is difficult because it is easy to forget that once the investor has acquired a sufficient percentage of the stock to use the equity method, which is retroactively applied to earlier periods for which the holdings were not sufficient to use the equity method. In these earlier periods, only the actual ownership percentage is applied.
In this question, the equity method becomes the required method only at the very end of the year. So, only the 10% is used in applying the equity method for the purpose of recognizing income, which in turn increases the investment account.
The ending balance of the investment account is then: $50,000 (original investment) + $150,000 (second investment) + $30,000 (.10 x $300,000, which is the equity in earnings of the investee) = $230,000.
Under the Fair Value Method, how are liquidating dividends treated compared to normal dividends?
Under the cost method, liquidating dividends are treated as a reduction in the investment account whereas normal dividends are treated as income. The wording of the question implies that dividends are otherwise treated as income. Thus, the equity method could not be the method used by the firm.
Sage, Inc. bought 40% of Adams Corp.’s outstanding common stock on January 2, 2004 for $400,000. The investment gave Sage significant influence over Adams.
The carrying amount of Adams’ net assets at the purchase date totaled $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during 2004. Goodwill, if any, is expected to have a useful life of 40 years. During 2004, Adams reported net income of $120,000 and paid a $20,000 cash dividend.
What amount should Sage report in its Income Statement from its investment in Adams for the year ended December 31, 2004?
This is a question on the full equity method.
Goodwill on the purchase = price of investment - 40%(fair value of Adams net assets)
= $400,000 -.40($900,000 + $90,000 + $10,000)
= $400,000 - $400,000 = 0 (there is no goodwill to amortize)
Investment income:
40% of Adams income: .40($120,000) $48,000
Less 40% of excess of fair value of inventory over book value at acquisition. The inventory is sold, and therefore, the cost of goods sold of the investor must be increased by this amount: .40($10,000) (4,000)
Less depreciation on 40% of the excess of fair value over book value of equipment: .40($90,000)/18 (2,000)
Equals amount Sage reports as investment income $42,000
Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12, 2004. Cobb received a stock dividend of 2,000 shares on March 31, 2004, when the carrying amount per share on Roe’s books was $35 and the market value per share was $40. Roe paid a cash dividend of $1.50 per share on September 15, 2004.
In Cobb’s Income Statement for the year ended October 31, 2004, what amount should Cobb report as dividend income?
Correct!
Cobb has 10,000 + 2,000 or 12,000 shares at the time of the dividend. The 2,000 shares were received from the stock dividend. Thus dividend income is 12,000($1.50) = $18,000. The stock dividend itself is not included in dividend income; rather decreases the cost per share of the investment. However, it does raise the number of shares which receive the cash dividend, which is recognized as income.
