FAR: ALL: 2/14/2018 Flashcards
When should an item that meets the definition of an element be recognized?
1) The item has a cost or value that can be measured reliably.
2) It is highly unlikely that any future economic benefit associated with the item will flow to the entity.
3) Both A and B.
4) Neither A nor B.
The item has a cost or value that can be measured reliably.
Recognition is the process of incorporating an item in the financial statements when it meets the definition of the element and satisfies the criteria for recognition. That criteria states that there is the probability of future economic benefit associated with the item that will flow to or from the entity and that the item has a cost or value that can be measured with reliability. IASB Framework, para. 82-83.
The primary purpose of a statement of cash flows is to provide relevant information about
1) Differences between net income and associated cash receipts and disbursements.
2) An enterprise’s ability to generate future positive net cash flows.
3) The cash receipts and cash disbursements of an enterprise during a period.
4) An enterprise’s ability to meet cash operating needs.
The cash receipts and cash disbursements of an enterprise during a period.
This question provides an example of the need to read each answer alternative very carefully before choosing.
The statement of cash flows is a listing of cash flows for a period in meaningful categories. Thus, it depicts the major cash receipts and disbursements during a period. Although such information may help a user to assess the ability of a firm to generate future cash flows, it does not necessarily say anything about the firm’s ability to do so in the future.
Similarly, the cash flow statement does not directly indicate the firm’s ability to meet future cash operating needs. The reconciliation of income and net operating cash flows does indicate the differences between income and operating cash flows, but this is not the primary purpose of the statement.
Which of the following is not an underlying, according to ASC Topic 815?
1) An interest rate index.
2) A security price.
3) An average daily temperature.
4) The other three choices could each be an underlying.
The other three choices could each be an underlying.
Each of the other choices meets the basic definition of an underlying, which is any financial or physical variable that has either observable changes or objectively verifiable changes.
Lake Corp., a newly organized company, reported pretax financial income of $100,000 for year 1. Among the items reported in Lake’s year 1 income statement are the following:
- Premium on officer’s life insurance with Lake as owner and beneficiary $15,000
- Interest received on municipal bonds 20,000
What is the deferred tax liability as of 12/31/Y1?
1) $28,500
2) $4,500
3) $3,750
4) $0
$0
This answer is correct. A deferred income tax liability is the result of a temporary difference which produces future taxable amounts. The insurance premium ($15,000) and the municipal income ($20,000) are both permanent differences, which do not result in a deferred tax liability. Therefore, the 12/31/Y1 deferred tax liability is $0.
On April 30, 20X5, Carty Corp. approved a plan to dispose of a segment of its business. The disposal loss is $480,000, including severance pay of $55,000 and employee relocation costs of $25,000, both of which are directly associated with the decision to dispose of the segment. The firm is a calendar-fiscal year firm, and the segment’s operating loss for the entire year (20X5) through the date of disposal was $120,000.
Before income taxes, what amount should be reported in Carty’s income statement for the year ended December 31, 20X5, as the total income effect (loss) from discontinued operations?
1) $600,000
2) $480,000
3) $120,000
4) $360,000
$600,000
The $600,000 total loss from discontinued operations is the sum of the operating loss ($120,000) and the loss on disposal ($480,000). The two amounts, $120,000 and $480,000, are disclosed separately but together comprise the total loss on the discontinued operation.
Which statement is true with respect to noncontrolling interest?
1) US GAAP records noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree.
2) IFRS only records noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree.
3) Both US GAAP and IFRS record noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree.
4) IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.
IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.
This answer is correct because IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.
A machine with a 4-year estimated useful life and an estimated 15% salvage value was acquired on January 1, year 1. The increase in accumulated depreciation for year 2 using the double-declining balance method would be
1) Original cost × 85% × 50%.
2) Original cost × 50%.
3) Original cost × 85% × 50% × 50%.
4) Original cost × 50% × 50%.
Original cost × 50% × 50%.
The increase in accumulated depreciation for year 2 is the depreciation expense recorded in year 2. The equation for calculating DDB depreciation is
Book value × 200%
Useful life
The percentage used for DDB is always twice the straight-line rate. Note that salvage value is not used in determining depreciation expense under this method.
In year 1: Original cost × 50% (200%/4 = 50%)
In year 2: (Original cost × 50%) × 50%
In 2003, a personal injury lawsuit was brought against Halsey Co.
Based on counsel’s estimate, Halsey reported a $50,000 liability in its December 31, 2003, balance sheet. In November 2004, Halsey received a favorable judgment, requiring the plaintiff to reimburse Halsey for expenses of $30,000. The plaintiff has appealed the decision, and Halsey’s counsel is unable to predict the outcome of the appeal.
In its December 31, 2004, balance sheet, Halsey should report what amounts of asset and liability related to these legal actions?
Asset Liability
1) $30,000 $50,000
2) $30,000 $0
3) $0 $20,000
4) $0 $0
$0, $0
In year 1, Beech City issued $400,000 of bonds, the proceeds of which were restricted to the financing of a capital project. The bonds will be paid wholly from special assessments against benefited property owners. However, Beech is obligated to provide a secondary source of funds for repayment of the bonds in the event of default by the assessed property owners. In Beech’s basic financial statements, this $400,000 special assessment debt should
1) Not be reported.
2) Be reported in the General Fund.
3) Be reported in the government-wide statements only.
4) Be reported in an agency fund.
Be reported in the government-wide statements only.
According to GASB Codification Section S40, if a government is obligated in some manner to assume the payment of related debt service in the event of default by property owners, all transactions related to capital improvements financed by special assessments should be reported. These transactions should be reported in the same manner, and on the same basis of accounting as any other capital improvement and financing transaction. Therefore, the debt related to Beech’s capital project is treated as general obligation debt and should be reported as any other general obligation debt (i.e., in the government-wide statements only).
