FAR: ALL: 4/17/2018 Flashcards
Under IFRS, convertible bonds issued are
1) Recorded at face value without consideration of a premium or discount.
2) Separated into debt and equity components with the liability component recorded at fair value and the residual assigned to the equity component.
3) Always recorded using the fair value option.
4) Recorded at face value for the liability along with the associated premium or discount
Separated into debt and equity components with the liability component recorded at fair value and the residual assigned to the equity component
Convertible bonds are separated into debt and equity components with the liability component recorded at fair value and the residual assigned to the equity component. The fair value election may be made for the financial liability component.
On September 1, year 3, Bertz, Inc. exchanged a delivery truck for a parcel of land. Bertz bought this truck in year 1 for $10,000. At September 1, year 3, the truck had a book value of $6,500 and a fair market value of $5,000. Bertz gave $6,000 in cash in addition to the truck as part of this transaction. It is expected that the cash flows from the assets will be significantly different. The previous owner of the land had listed the land for sale at $12,000.
At what amount should Bertz record the land?
1) $11,000
2) $11,500
3) $12,000
4) $12,500
$11,000
Per ASC Topic 845, when the cash flows are significantly different, the transaction has commercial substance and is recorded at fair value. Both gains and losses are recognized in the exchange. The solutions approach is to prepare the journal entry to record the trade of the delivery truck for the land.
Land 11,000
Accumulated depreciation 3,500
Loss on exchange 1,500
Delivery truck 10,000
Cash 6,000
The loss on the exchange of the delivery truck for the land is $1,500 ($6,500 book value − $5,000 fair market value). The value assigned to the land is the fair value of the asset(s) given up (i.e., the delivery truck [$5,000] plus cash paid [$6,000], or $11,000).
On January 1, 20X5, Day Corp. entered into a 10-year lease agreement with Ward, Inc. for industrial equipment. Annual lease payments of $10,000 are payable at the end of each year. Day knows that the lessor expects a 10% return on the lease. Day has a 12% incremental borrowing rate.
The equipment is expected to have an estimated useful life of 10 years. In addition, a third party has guaranteed to pay Ward a residual value of $5,000 at the end of the lease.
The present value of an ordinary annuity of $1 at
12% for 10 years is 5.6502 10% for 10 years is 6.1446
The present value of $1 at
12% for 10 years is .3220 10% for 10 years is .3855
In Day’s October 31, 20X5 balance sheet, the principal amount of the lease obligation was
1) $63,374.
2) $61,446.
3) $58,112.
4) $56,502.
$61,446
The $63,374 amount is incorrect because it includes the present value of the third-party guaranteed residual. The lessee is not a party to this agreement; therefore, the guarantee does not affect the amount the lessee capitalizes.
The principal amount of the lease obligation on the date indicated in the question is the same as at the inception of the lease because no lease payment has been made as of the balance sheet date. The lessee uses the lower of the implicit return to the lessor (10%) and its incremental borrowing rate (12%). The third-party guarantee does not affect the lessee. Therefore, the principal amount is 6.1446 × $10,000 = $61,446.
The Plaza Company was organized late in year 1 and began operations on January 1, year 2. Plaza is engaged in conducting market research studies on behalf of manufacturers. Prior to the start of operations, the following costs were incurred:
Attorney’s fees in connection with organization of Plaza $4,000
Improvements to leased offices prior to occupancy 7,000
Meetings of incorporators, state filing fees and other organization expenses 5,000
16,000
Under generally accepted accounting principles, what is the amount of organization costs charged to income for year 2?
1) $9,000
2) $16,000
3) $11,000
4) $5,000
$9,000
Organizational costs include the attorney’s fees and meetings of incorporators, state filing fees, and other organizational expenses. Under generally accepted accounting principles, per ASC Subtopic 720-15, they should be expensed immediately. Leasehold improvements are amortizable assets but do not qualify as organization costs.
Attorney’s fees $4,000
Meetings, etc. 5,000
Total: $9,000
For the year 1 fall semester, Brook University assessed its students $4,000,000 (net of refunds), covering tuition and fees for educational and general purposes. However, only $3,700,000 was expected to be realized because tuition remissions of $80,000 were allowed to faculty members’ children attending Brook and scholarships totaling $220,000 were granted to students who were not required to perform services for the student aid. What amount should Brook include in educational and general current funds revenues from student tuition and fees?
1) $4,000,000
2) $3,920,000
3) $3,780,000
4) $3,700,000
$3,780,000
Tuition remissions for faculty children are considered expenses (compensation).
Which one of the following would be of concern in preparing consolidated financial statements at the end of the operating period following a business combination that would not be a concern in preparing financial statements immediately following a combination?
1) Whether or not there are intercompany accounts receivable/accounts payable.
2) Whether or not goodwill resulted from the business combination.
3) Whether the parent carries its investment in the subsidiary using the cost method or the equity method.
4) Whether or not there is a noncontrolling interest in the subsidiary.
Intercompany accounts receivable/accounts payable would be of concern in preparing consolidated financial statements both immediately after a combination and at the end of the operating period following a combination. At either time, intercompany accounts receivable/accounts payable would have to be eliminated in the preparation of consolidated statements.
Savor Co. had $100,000 in cash-basis pretax income for year 2. At December 31, year 2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, year 2 balances. Compared to the accrual basis method of accounting, Savor’s cash pretax income is
1
1) Higher by $4,000
2) Lower by $4,000
3) Higher by $16,000
4) Lower by $16,000
Lower by $16,000
This question requires the calculation of accrual-based income, as shown below.
Cash-basis pre-tax income $100,000
Increase in accounts receivable + 10,000
Decrease in accounts payable + 6,000
Accrual-basis income $116,000
This cash pretax income is $16,000 ($116,000 – $100,000) lower than the accrual-basis
In January year 1, the Under Mine Corporation purchased a mineral mine for $3,400,000 with removable ore estimated by geological surveys at 4,000,000 tons. The property has an estimated value of $200,000 after the ore has been extracted. The company incurred $800,000 of development costs preparing the mine for production. During year 1, 400,000 tons were removed and 375,000 tons were sold.
What is the amount of depletion that Under Mine should record for year 1?
1) $375,000
2) $393,750
3) $400,000
4) $420,000
$400,000
The $4,000,000 estimated net cost of the mine divided by the 4,000,000 estimated removable tons results in a depletion rate of $1 per ton. Since 400,000 tons were removed, the total depletion cost would be $400,000. Note that depletion cost does not become an expense until the minerals are sold. Since 375,000 tons were sold, there would be an inventory of $25,000 at $1 per ton.
Mine cost $3,400,000
Development cost +800,000
Salvage value – 200,000
Cost to be dep $4,000,000
Depletion rate = $4,000,000 tons/4,000,000 = $1/ton
