FAR: MC: 7/14/2018 Flashcards
On August 1, year 1, Kern Company leased a machine to Day Company for a 6-year period requiring payments of $10,000 at the beginning of each year. The machine cost $48,000, which is the fair value at the lease date, and has a useful life of 8 years with no residual value. Kern’s implicit interest rate is 10% and present value factors are as follows:
Present value of an annuity due of $1 at 10% for 6 periods 4.791
Present value of an annuity due of $1 at 10% for 8 periods 5.868
Kern appropriately recorded the lease as a direct financing lease. At the inception of the lease, the gross lease receivables account balance should be
$60,000
$58,680
$48,000
$47,910
$60,000
Lease payments receivable is debited for the gross investment in the lease, which includes the minimum lease payments plus any unguaranteed residual value. Since there is no residual value in this problem, gross investment is simply the minimum lease payments (6 rentals at $10,000 each, or $60,000).
Each of the following transactions will cause a decrease in stockholders’ equity except
The sale of treasury stock at less than cost.
The declaration of a cash dividend.
A loss on the sale of a discontinued segment.
A loss from a foreign currency translation adjustment.
The sale of treasury stock at less than cost.
A sale of treasury stock is a debit to cash and a credit to treasury stock. A credit to treasury stock increases equity. It doesn’t matter if the sale is above or below cost. In both cases, equity is increased.
What method does a company use to determine the transaction price for a contract that includes variable consideration when the company has numerous other contracts with similar characteristics and there are more than two possible results?
Expected outcome method
Expected value method
Most likely value method
Most likely amount method
Expected value method
A company should use the expected value method when there are more than two possible outcomes and the company has experience with contracts with similar characteristics. The company can use its experience to appropriately weight the probability of each outcome to calculate the expected value of the variable consideration.
When progress billings are sent on a long-term contract, what type of account should be credited under the completed-contract method and percentage-of-completion method?
Completed-contract
Percentage-of-completion
Revenue
Revenue
Revenue
Contra asset
Contra asset
Revenue
Contra asset
Contra asset
Contra asset
Contra asset
Under the percentage-of-completion method, income is recognized periodically on the basis of the percentage of the job that is complete. The completed-contract method recognizes income from the job only when the contract is completed. This is the only difference in accounting for the two methods. For both methods, when progress billings are sent, “Billings on construction in progress” is credited for the amount billed. This is shown on the balance sheet as a contra account to Construction in progress
Conlon Co. is the plaintiff in a patent-infringement case. Conlon has a high probability of a favorable outcome, and can reasonably estimate the amount of the settlement. What is the proper accounting treatment of the patent infringement case?
A gain contingency for the minimum estimated amount of the settlement.
A gain contingency for the estimated probable settlement.
Disclosure in the notes only.
No reporting is required at this time.
Disclosure in the notes only.
US GAAP does not permit the recognition of contingency gains in the financial statements. Therefore, this answer is correct because the contingency gain would be reported only in the notes to the financial statements.
private, not-for-profit college holds debt securities in current assets and in noncurrent assets. How would these items be reported on the statement of financial position?
Debt securities in current assets Debt securities in noncurrent assets Fair value Fair value Fair value Carrying value Carrying value Fair value Carrying value Carrying value
Row A
Row B
Row C
Row D
ROW A
FASB ASC 958 requires that the assets be reported at fair value.
Which of the following meet the definition of assets and/or liabilities?
Derivative
instruments
G/L on the
fair value of
derivatives
Yes, No
No, Yes
Yes, Yes
No, No
yes, no
Derivatives do meet the definition of assets/ liabilities and, therefore, should be recognized and reported as such on the financial statements. In contrast, gains and losses that result from the change in the fair value of derivatives are not assets/liabilities and should either appear in other comprehensive income or be reported in current earnings.
Paisley Corporation presents its financial statements in accordance with IFRS. What valuation model should Paisley use to value its plant, property, and equipment?
The cost model or the fair value model.
The cost model or the revaluation model.
The cost model or the fair value through profit or loss model.
The revaluation model or the fair value model.
The cost model or the revaluation model.
IFRS allows the use of the cost model or the revaluation model for reporting plant, property, and equipment.
In accounting for a long-term construction contract using the percentage-of-completion method, the progress billings on contracts account is a
Contra current asset account.
Contra noncurrent asset account.
Noncurrent liability account.
Revenue account.
Contra current asset account.
In the construction industry, operating cycles for construction contracts generally exceed one year. Therefore, the predominant practice is to classify all contract-related assets and liabilities as current. On the balance sheet, the Construction in Progress (CIP) account is netted with the contra account, progress billings. If CIP exceeds billings, the excess is reported as a current asset. If billings exceed CIP, the excess is reported as a current liability.
A schedule of machinery owned by Lester Manufacturing Company is presented below.
Total cost Estimated
salvage value
Estimated
life in years
Machine A $550,000 $ 50,000 20
Machine B $200,000 20,000 15
Machine C $ 40,000 — 5
Lester computes depreciation on the straight-line method. Based upon the information presented, the composite life of these assets (in years) should be
13.3
16
18
19.8
16
The solutions approach is to determine the annual SL depreciation and divide the annual depreciation into the total amount to be depreciated. The annual depreciation is $45,000, which when divided into the total depreciation base of $720,000, indicates a composite life of 16 years.
Machine A $500,000 depr. base/20 yrs = $25,000 depr.
Machine B 180,000 depr. base/15 yrs = 12,000 depr.
Machine C 40,000 depr. base/ 5 yrs. = 8,000 depr.
$720,000 total depr. Base = $45,000 total depr.
$720,000/$45,000 = 16 years
Assets can be grouped for composite depreciation purposes. Under this method, major repair/replacement expenditures are charged to an accumulated depreciation account. Related gains (losses) on disposal of individual assets are usually not recognized. The difference between the proceeds received and the asset’s cost is debited to accumulated depreciation.
Which of the following activities is not considered a plan/method to alleviate an entity’s doubt about its ability to continue as a going concern?
Disposals.
Borrowings.
Stock issuances.
Stock purchases.
Stock purchases.
Stock purchases results in more cash outflow. Disposals, borrowings, restructurings, extended payment terms, and increasing ownership equity are considered a method to alleviate an entity’s doubt about its ability to continue as a going concern.
At its date of incorporation, Glean, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Glean acquired 30,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share.
There have been no other issuances or acquisitions of its own common stock.
What effect does the reissue of the stock have on the following accounts?
Retained earnings, Additional paid-in capital
Decrease, Decrease
No effect, Decrease
Decrease, No effect
No effect, No effect
Decrease, No effect
Under the cost method, additional paid-in capital from treasury stock transactions is credited when treasury stock is reissued at a price in excess of cost. This account is to be debited before retained earnings when the opposite occurs: reissue treasury stock at less than cost (as happened in the question).
However, only one treasury stock reissuance has occurred. Therefore, there is no additional paid-in capital from previous treasury stock transactions to draw on so the $4 difference between the purchase price and reissuance price is debited to retained earnings (a decrease). There is no effect on additional paid-in capital. The entry for reissuance is:
DR: Cash $12(30,000) 360,000
DR: Retained earnings 120,000
CR: Treasury stock $16(30,000) 480,000
