FAR: ALL: 2/12/2018 Flashcards
Cott, Inc. prepared an interest amortization table for a 5-year lease payable with a bargain purchase option of $2,000, exercisable at the end of the lease. At the end of the 5 years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet.
Which of the following statements represents the best explanation for this error?
1) The beginning present value of the lease did not include the present value of the bargain purchase option.
2) Cott subtracted the annual interest amount from the lease payable balance instead of adding it.
3) The present value of the bargain purchase option was subtracted from the present value of the annual payments.
4) Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period.
The beginning present value of the lease did not include the present value of the bargain purchase option.
Cott, Inc. has a lease payable and is therefore the lessee. If the lease contains a bargain purchase option, the lessee records the lease obligation at the present value of minimum lease payments plus the present value of the bargain purchase option. If the present value of the bargain purchase option is included (as it should be), at the end of the lease period the amount of the bargain purchase will remain as an obligation until it is exercised/paid. If the present value of the bargain purchase option is not included (an error), at the end of the lease period the obligation will be zero, when it should show the amount of the bargain purchase option.
In Soan County’s General Fund Statement of Revenues, Expenditures, and Changes in Fund Balances, which of the following has an effect on the excess of revenues over expenditures?
1) Purchase of fixed assets
2) Payment to a Debt-Service Fund
3) Special items
4) Proceeds from the sale of capital assets
Purchase of fixed assets
Under the modified accrual basis of accounting, the purchase of fixed assets are classified as Capital Expenditures and is one of the expenditure types included in determining the excess (deficiency) of revenues over expenditures. The other three answers are items that appear in different sections of the Statement of Revenues, Expenditures, and Changes in Fund Balance. The payment to a debt service (i.e., a transfer out) is in the Other Financing Sources and Uses section of the statement. Special items include proceeds from the sale of capital assets, which appear below the section for Other Financing Sources and Uses of the statement.
How is an impairment loss recognized on the financial statements for a cost method equity investment?
1) In other comprehensive income
2) In current earnings
3) Deferred until recoverable
4) Impairment losses are not recognized on cost method investments.
Impairment losses on equity investments carried at cost are recognized in current earnings.
Smith College, a private, not-for-profit college, received the following cash inflows:
Cash contributions of $200,000 to be permanently invested
Cash dividends and interest of $10,000 restricted for long-term purposes
How would these cash inflows be disclosed on the Smith College cash flow statement?
1) $10,000 from operations and $200,000 from financing activities
2) $210,000 from operating activities
3) $210,000 from investing activities
4) $210,000 from financing activities
$210,000 from financing activities
The $200,000 cash contribution is a financing activity because it has been donor restricted for the long term. Related interest and dividends that are donor restricted for long-term purposes are also shown as cash receipts from financing activities.
How should an unusual event not meeting the current criteria for an extraordinary item be disclosed in the financial statements?
1) Shown as a separate item in operating revenues or expenses and supplemented by a footnote if deemed appropriate.
2) Shown in operating revenues or expenses but not shown as a separate item.
3) Shown after ordinary net earnings but before extraordinary items.
4) Shown after extraordinary items net of income tax but before net earnings.
Shown as a separate item in “operating revenues or expenses” and supplemented by a footnote if deemed appropriate
Items unusual in nature or infrequent in occurrence are to be disclosed separately in the operating section of the income statement and also may be supplemented by a footnote. Note that such items should not be shown net of income taxes.
On December 1, 20X4, Line Corp. received a donation of 2,000 shares of its $5 par value common stock from a stockholder. On that date, the stock’s market value was $35 per share. The stock was originally issued for $25 per share.
By what amount would this donation cause total stockholders’ equity to decrease?
1) $70,000
2) $50,000
3) $20,000
4) $0
$0
The shares are considered donated treasury shares. Treasury stock and a gain or revenue account are increased by the market value of the stock received in donation (FAS 116). The increase in the treasury stock account decreases the owners’ equity, but the gain or revenue increases the owners’ equity by the same amount. Therefore, there is no net effect on the owners’ equity.
Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in a purchase-business combination. The market value of Sayon’s common stock is $12. Legal and consulting fees incurred in relationship to the purchase are $110,000. Registration and issuance costs for the common stock are $35,000. What should be recorded in Sayon’s additional paid-in capital account for this business combination?
1) $1,545,000
2) $1,400,000
3) $1,365,000
4) $1,255,000
$1,365,000
In a business combination accounted for as an acquisition, costs of registering securities and issuing common stock are netted against the proceeds and reduce the additional paid-in capital account. Acquisition costs are expensed in the year the costs are incurred or the services are received, and the acquisition is recorded at the fair value of consideration given. Therefore, this answer is correct because the amount recorded in the additional paid-in capital account should be $1,365,000 [(200,000 shares × $7 per share) – $35,000 registration and issue costs]
Under IFRS, which of the following would not be recognized as part of a business combination?
1) Contingent asset
2) Contingent liability
3) Goodwill
4) Fair value of the consideration transferred
Contingent asset
Under IFRS, contingent assets are not recognized. Under U.S. GAAP, contingent assets are recognized if the item meets the criteria of the definition of an asset.
On December 30, 2005, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, 2005, all cash was used to reduce accounts payable.
How did these cash payments affect the ratios?
Current ratio Quick ratio
1) Increased Decreased
2) Increased No effect
3) Decreased Increased
4) Decreased No effect
Current ratio Quick ratio
Increased Decreased
The numerator and denominator of both ratios are reduced by $200,000 as a result of the transaction. Cash is included in both current and quick assets (current assets that are highly liquid), the numerators of the two ratios. Accounts payable is a part of current liabilities, which is the denominator of both ratios.
The current ratio exceeds 1.00 before the transaction. Reducing the numerator and denominator the same amount causes the denominator to fall a greater percentage than the numerator. Thus, the ratio increases. Example: if the ratio were $900,000/$600,000 before the transaction; after the transaction, the ratio is $700,000/$400,000, a higher ratio. The quick ratio is less than 1.00 before the transaction. Thus, the ratio decreases. Example: if the ratio were $300,000/$600,000 before the transaction, after the transaction the ratio is $100,000/$400,000, a lower ratio.
The following data pertain to Ruhl Corp.’s operations for the year ended December 31, 2005:
Operating income $800,000 Interest expense 100,000 Income before income tax 700,000 Income tax expense 210,000 Net income $490,000
The times interest earned ratio is
1) 8.0 to 1.
2) 7.0 to 1.
3) 5.6 to 1.
4) 4.9 to 1.
8.0 to 1.
The times interest earned ratio is: (income before interest expense and income tax/interest expense).
For Ruhl, this ratio is: $800,000/$100,000 = 8. This means that the firm has earnings that would support interest eight times the current level. In other words, the firm could pay its current level of interest eight times.
If interest expense were $800,000, net income would be zero and no tax would be due. $800,000 of interest could be paid from resources earned in the current period.
