FAR: ALL: Practice Exam: 3/4/2018 Flashcards
During year 1, Fox Company made the following expenditures relating to plant machinery and equipment:
* Renovation of a group of machines at a cost of $50,000 to secure greater efficiency in production over their remaining 5-year useful lives. The project was completed on December 31, year 1.
* Continuing, frequent, and low-cost repairs at a cost of $35,000.
* A broken gear on a machine was replaced at a cost of $5,000.
What total amount should be charged to repairs and maintenance in year 1?
1) $35,000
2) $40,000
3) $85,000
4) $90,000
Generally, a cost should be capitalized if it improves the efficiency of the asset or extends its useful life, and expensed if it merely maintains the asset at its current level. The renovation cost ($50,000) improves the production efficiency of the machines and therefore should be capitalized. However, the continuing, frequent, and low-cost repairs ($35,000) and the replacement of a broken gear ($5,000) merely maintain the assets at their current level, and therefore $40,000 should be charged to repairs and maintenance expense.
When equipment held under an operating lease is subleased by the original lessee, the original lessee would account for the sublease as a(n)
1) Operating lease.
2) Sales-type lease.
3) Direct financing lease.
4) Capital lease.
A sublease arises when the lease agreement between the two original parties remains in effect, and the leased property is released to a third party by the original lessee. Per ASC Topic 840, when equipment held under an operating lease is subleased by the original lessee, the sublease is still considered to be an operating lease by the original lessee.
Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill purchases merchandise inventory from Webb at 140% of Webb’s cost. During year 2, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during year 2. In preparing combined financial statements for year 2, Nolan’s bookkeeper disregarded the common ownership of Twill and Webb.
By what amount was unadjusted revenue overstated in the combined income statement for year 2?
1) $16,000
2) $40,000
3) $56,000
4) $81,200
$56,000
The entire amount of the merchandise sold to Twill is an overstatement, not just the difference between the cost and markup on cost.
On July 1, Year 1, Pell Co. purchased Green Corp. 10-year, 8% bonds with a face amount of $500,000 for $420,000. The bonds mature on June 30, Year 9, and pay interest semiannually on June 30 and December 31. Using the interest method, Pell recorded bond discount amortization of $1,800 for the 6 months ended December 31, Year 1. From this long-term investment, Pell should report Year 1 interest revenue of
1) $16,800.
2) $18,200.
3) $20,000.
4) $21,800.
$21,800
When the interest method of amortization is used, interest revenue is computed directly, and the amount of discount amortization is computed indirectly as follows:
Interest revenue – Stated or cash interest = Discount amortizations
In this case, the interest revenue cannot be computed directly because the effective or yield rate is not given. However, the stated or cash interest can be computed ($500,000 × 8% × 6/12 = $20,000), and the discount amortization is given ($1,800). Thus, the interest revenue can be computed indirectly, as indicated below.
Interest revenue – $20,000 = $1,800
Interest revenue = $20,000 + $1,800
Interest revenue = $21,800
Which of the following describes a factor when an entity can invoke the practicability exception to using fair value when reporting an equity security?
1) There are no bid-and-ask quotations available on a securities exchange or in a publicly reported over-the-counter market.
2) There are sales prices available on a securities exchange or publicly reported in the over-the-counter market.
3) There are prices or quotations in a foreign market that has the breadth and scope of the U.S. markets.
4) There are prices or quotations for investments based on the fair value per share as published based on current transactions.
There are no bid-and-ask quotations available on a securities exchange or in a publicly reported over-the-counter market.
If there is a source of fair value, such as prices or quotations for investments based on the fair value per share as published based on current transactions, then the entity must use fair value.
Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard?
1) As dividend revenue at Guard’s carrying value of the stock
2) As dividend revenue at the market value of the stock
3) As a reduction in the total cost of Guard stock owned
4) As a memorandum entry, reducing the unit cost of all Guard stock owned
As a memorandum entry, reducing the unit cost of all Guard stock owned
Total cost of the investment does not change; only the cost per share of stock decreases.
