FAR - Chapter 4 Flashcards
Balance Sheet Reporting : Liabilities
On April 1st Extra Inc. issued 5%, 10-year $100,000 bonds at its par value. The terms of the bonds state that interest is to be payable semiannually on July 1st and December 31st. What amount will Extra report as its proceeds in the year of issuance?
Par value $100,000
April 1st $100,000 x 5% x 1/2 = $2,500
$2,500 semi-annual interest / 6 x 3 = $1,250
$100,000 + $1,250 = $101,250
On March 1, Year 1, Somar Co. issued 20-year bonds at a discount. By September 1, Year 6, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. The amount is material and considered to be unusual in nature and infrequently occurring with respect to Somar Co. How should Somar report the bond retirement on its Year 6 income statement under U.S. GAAP?
A loss to other comprehensive income
A loss to continuing operations
A gain to continuing operations
A gain to other comprehensive income
A loss to continuing operations
On March 15, Year 1, Ashe Corp. adopted a plan to accumulate $1,000,000 by September 1, Year 5. Ashe plans to make four equal annual deposits to a fund that will earn interest at 10% compounded annually. Ashe made the first deposit on September 1, Year 1. Future value and future amount factors are as follows:
Future value of 1 at 10% for 4 periods: 1.46
Future amount of ordinary annuity of 1 at 10% for 4 periods: 4.64
Future amount of annuity in advance of 1 at 10% for 4 periods: 5.11
Ashe should make four annual deposits (rounded) of:
$1,000,000 / 5.11 = $195,695
4 equal installments = annuity
payment made at the beginning of each period = annuity in advance
On December 1, year 2, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, year 3. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. Money does not elect the fair value option to record this financial asset. What amount of income from this loan should Money report in its year 2 income statement?
$194,000 x 12.4% = $24,056 / 12 = $2004.66 = $2005
Only $194,000 was loaned so use 12.4% at a present value
Also look at the dates
On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable?
$1,000,000 x 9% = $90,000 annual interest / 4 = $22,500 quarterly interest
$264,200 - $22,500 = $241,700 principal amount paid on December 30th
$1,000,000 - $241,700 = $758,300
On January 1 of the current year, Lean Co. made an investment of $10,000. The following is the present value of $1.00 discounted at a 10% interest rate:
Periods
Present value of $1.00
discounted at 10%
1 0.909
2 0.826
3 0.751
What amount of cash will Lean accumulate in two years?
$10,000 / 0.826 = $12,107
Acme Co.’s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information:
At December 31, Acme has a $50,000 debit balance in its accounts payable resulting from a payment to a supplier for goods to be manufactured to Acme’s specifications.
Goods shipped F.O.B. destination on December 20 were received and recorded by Acme on January 2, the invoice cost was $45,000.
In its December 31 balance sheet, what amount should Acme report as accounts payable?
AP balance (unadjusted) $850,000
+ Debit balance $50,000
AP adjusted balance $900,000
Goods shipped F.O.B. destination on December 20 were received and recorded by Acme on January 2, the invoice cost was $45,000 and are not adjusted.
Blippy Ventures had the following payroll amounts for the month ended March 31st of the current year:
Total wages: $200,000
Wages subject to FICA: $160,000
Wages subject to unemployment tax: $40,000
FICA payroll tax (employer and employee): 7%
Unemployment tax rate: 3%
In the company’s March 31st balance sheet, what amount should Blippy accrue as its share of payroll taxes?
$160,000 x 7% = 11,200
$40,000 x 3% = 1,200
Total $12,400
A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position?
At the face amount with a separate deferred asset for the discount calculated at the imputed interest rate
At the face amount with a separate deferred credit for the discount calculated at the imputed interest rate
At the face amount
At the face amount minus a discount calculated at the imputed interest rate
At the face amount minus a discount calculated at the imputed interest rate
House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, Year 1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also, on December 31, Year 1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, Year 2. On its December 31, Year 1 balance sheet, what amount should House report as note-payable-contest winner, net of current portion?
$468,250, $418,250, $0, or $1,000,00
$418,250
remember to use the present value
$950,000 in the expected future amount
On October 1, year 1, Gold Co. borrowed $900,000 to be repaid in three equal, annual installments. The note payable bears interest at 5% annually. Gold Co. paid the first installment of $300,000 plus interest on September 30, Year 2. What amount should Gold Co. report as a current liability on December 31, Year 2?
10/1 year 1 $900,000
9/30 year 2 $300,000 principal payment
12/31 year 2 $900,000 - $300,000 = $600,000 x 5% x 1/4 = $7,500
$600,000 - $300,000 (long term liability) + $7,500 = $307,500
Nu Corp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machine’s original cost was $140,000. The note’s face amount was $110,000. On the date of the agreement:
The note’s carrying amount was $105,000 and its present value was $96,000
The machine’s carrying amount was $109,000 and its fair value was $96,000
What amount of net gain (or losses) should Nu recognize?
($13,000), ($4,000), $0, or $9,000
($4,000)
This is a settlement, not modification of terms
CV of note $105,000
- FMV of machine $96,000
= Gain on debt restructuring $9,000
FMV of machine $96,000
- CV of machine $109,000
= Loss on asset ($13,000)
Gain on debt restructuring $9,000
+ Loss on asset ($13,000)
= Net loss on restructuring ($4,000)
Peach Technology owes Strawberry Ventures $100,000 that it can’t afford to pay back. The two companies have agreed to modify the terms of the debt agreement so that there is a more feasible plan for Peach to payback Strawberry. The new terms of the agreement state that the sum of the new cash flows are greater than the carrying value of the debt. What amount of gain will company Peach recognize?
difference between the FMV & book value of the old debt
difference between the sum of the cash flows & the CV of the debt
difference between the present value when applying the new interest rate & the CV of the debt
no gain will be recognized by Peach
No gain will be recognized by Peach
This is a modification so when the sum of the cash flows is greater than the carrying value of the debt, no gain is recognized.
On December 30, Year 4, Hale Corp. paid $400,000 cash and issued 80,000 shares of its $1 par value common stock to its unsecured creditors on a pro rata basis pursuant to a reorganization plan under Chapter 11 of the bankruptcy statutes. Hale owed these unsecured creditors a total of $1,200,000. Hale’s common stock was trading at $1.25 per share on December 30, Year 4. As a result of this transaction, Hale’s total stockholders’ equity had a net increase of:
$100,000, $800,000, $1,200,000, or $80,000
$800,000
This is a settlement
CV of note $1,200,000
- Cash $400,000
- FMV of stock (80,000 @ $1.25) $100,000
= Gain on debt restructuring $700,000
Issuance of stock $100,000
Gain on debt restructuring $700,000
+ Issuance of stock $100,000
Net gain on debt restructuring $800,000
For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring?
total future cash payments,
present value of the debt at the modified interest rate,
present value of the debt at the original interest rate, or
amount of future cash payments designed as principal repayments
total future cash payments
