FAR - Misc Flashcards
P Co. purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Co., P’s wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts in the two companies would be:
a. Included as a decrease to retained earnings. b. Reported as a deferred debit to be amortized over the remaining life of the bonds. c. Included as an increase to retained earnings. d. Reported as a deferred credit to be amortized over the remaining life of the bonds.
Explanation
Choice “a” is correct, in a consolidated balance sheet, the difference between the bond carrying amounts would be included as a decrease to retained earnings because a premium was paid to “retire” the bonds.
Rule: When members of a consolidated group have intercompany bond holdings, the bonds are eliminated in consolidation and the difference (gain or loss) between the discounted issue price and the premium on reacquisition would be included in retained earnings.
During Year 2, Dale Corp. made the following U.S. GAAP accounting changes: Method used in Year 1 Method used in Year 2 After-tax effect Sum-of-the-years' digits depreciation Straight-line depreciation $30,000 Last-in, first-out for inventory valuation First-in, first-out for inventory valuation 98,000 What amount should be shown in the Year 2 retained earnings statement as an adjustment to the beginning balance? a. $128,000 b. $30,000 c. $98,000 d. $0
Explanation
Choice “c” is correct. $98,000.
The cumulative effect of a change in accounting principle is shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated. A change from LIFO to FIFO for inventory valuation (costing) is a change in accounting principle.
An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in principle and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings.
Choices “d”, “b”, and “a” are incorrect, per the above explanation.
Sample City has identified the non-major funds within its fund types. In its financial report, Sample City:
a. May include combining financial statements for non-major funds for each fund type in the supplementary information. b. Must include combining financial statements for non-major funds for each fund type in the basic financial statements. c. Must include combining financial statements for non-major funds for each fund type in the required supplementary information. d. Must include combining financial statement disclosures for non-major funds for each fund type in the notes to the financial statements.
Choice “a” is correct. Sample City may report combining non-major individual fund financial statements in the supplementary information. Reporting the combining fund financial statements is optional.
Choices “b”, “c”, and “d” are incorrect. Sample City’s reporting is optional.
Glade Co. leases computer equipment to customers under U.S. GAAP direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?
a. $51,600 b. $129,360 c. $75,000 d. $139,450
Choice “a” is correct. The fair value of the equipment is equal the present value of the future cash flows.
PV = annual rents x annuity due PV factor [n = 5, i = 8%]
$323,400 = annual rents x 4.312
Thus, annual rents = $75,000
Total cash flows = 5 x $75,000 = $375,000 and total interest revenue equals $51,600 [$375,000 total cash flows less $323,400 present value of cash flows].
On March 4, Year 1, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, Year 1, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, Year 2. On September 30, Year 1, LVC’s common stock had a market value, ex-rights, of $95 per share and the stock rights had a market value of $5 each. What amount should Evan report on its September 30, Year 1, balance sheet for investment in stock rights?
a. $5,000 b. $10,000 c. $15,000 d. $4,000
Formula:
Equation ca9e4235e897a92f1c7fe19927d15c9f
Choice “d” is correct. $4,000 investment in stock rights. The purchase price of the stock should be allocated between the stock and the stock rights using a pro rata allocation based on the relative fair values of the stock and the stock rights.
A company’s activities for year 2 included the following:
Gross sales
$ 3,600,000
Cost of goods sold
1,200,000
Selling and administrative expense
500,000
Adjustment for a prior-year understatement of amortization expense
59,000
Sales returns
34,000
Gain on sale of available-for-sale securities
8,000
Gain on disposal of a discontinued business segment
4,000
Unrealized gain on available-for-sale securities
2,000
The company has a 30% effective income tax rate. What is the company’s net income for year 2?
a. $1,273,300
b. $1,267,700
c. $1,314,600
d. $1,316,000
Choice "c" is correct. Net sales $ 3,566,000 = $3,600,000 gross sales - $34,000 sales returns Cost of goods sold (1,200,000) Gross profit 2,366,000 Selling and administrative (500,000) Operating income 1,866,000 Other income (gain on sale) 8,000 Income from continuing operations 1,874,000 Income tax expense (562,200) = $1,874,000 × 30% Income before discontinued operations 1,311,800 Gain from discounted segment (after tax) 2,800 = $4,000 × (1 – 30%) Net income $ 1,314,600 The adjustment for the prior year understatement of amortization expense is a prior period adjustment that will be reflected in beginning retained earnings, not on the income statement. The unrealized gain on the available for sale security will be reported in other comprehensive income.
On January 2, Judd Co. bought a trademark from Krug Co. for $500,000. Judd retained an independent consultant, who estimated the trademark’s remaining life to be 50 years. Its unamortized cost on Krug’s accounting records was $380,000. In Judd’s December 31 balance sheet, what amount should be reported as accumulated amortization?
a. $10,000 b. $9,500 c. $12,500 d. $7,600
Choice “a” is correct. The cost of a trademark is amortized over its economic life.
$500,000 ÷ 50 = $10,000
Choice “d” is incorrect. The cost to Judd is used as the basis, not the seller’s basis.
Choice “b” is incorrect. The cost to Judd is used as the basis, not the seller’s basis, and 40 years is no longer the upper limit over which an intangible asset may be amortized.
Choice “c” is incorrect. 40 years is no longer used as a maximum amortization period
Althouse Co. discovered that equipment purchased on January 2 for $150,000 was incorrectly expensed at the time. The equipment should have been depreciated over five years with no salvage value. What amount, if any, should be adjusted to Althouse’s depreciation expense at January 2, the beginning of the third year, when the error was discovered?
a. $0 b. $150,000 c. $60,000 d. $30,000
Explanation
Choice “a” is correct. The correct answer is $0. At the beginning of Year 3 when the error is discovered, a prior period adjustment is needed. The prior period adjustment would not include an increase to depreciation expense. The debit would be to retained earnings (net of income taxes) and a credit to accumulated depreciation.
Choice “d” is incorrect. $30,000 is the amount of depreciation expense that should be taken in each year of the five year service life. This will be the amount of depreciation expense reported for the end of Year 3 when an adjusting entry is made to record depreciation expense for Year 3, but is not the amount that will be taken at the beginning of the year to correct the error.
Choice “c” is incorrect. $60,000 represents the cumulative amount of depreciation expense that should have been taken in Years 1 and 2, but is not the adjustment to depreciation expense at the beginning of Year 3 when the error is discovered.
Choice “b” is incorrect. Depreciation expense will not be adjusted for $150,000 at the beginning of Year 3. There will be no adjustment to depreciation expense at the beginning of Year 3 because the transaction represents a correction of an error.
The market price of a bond issued at a premium is equal to the present value of its principal amount:
a. Only, at the market (effective) interest rate. b. Only, at the stated interest rate. c. And the present value of all future interest payments, at the stated interest rate. d. And the present value of all future interest payments, at the market (effective) interest rate.
Choice “d” is correct. To determine the market price of a bond, the present value of the principal is added to the present value of all interest payments, using the market interest rate.
Choice “b” is incorrect. The stated interest rate is used to calculate the amount of interest payment, but not the market price of the bond.
Choice “c” is incorrect. The stated interest rate is used to calculate the amount of interest payment, but not the market price of the bond.
Choice “a” is incorrect. The market interest rate is used in calculating the price of the bond; however, all the interest payments must also be taken into consideration
Ian Co. is calculating earnings per share amounts for inclusion in the Ian's annual report to shareholders. Ian has obtained the following information from the controller's office as well as shareholder services: Net income from January 1 to December 31 $ 125,000 Number of outstanding shares: January 1 to March 31 15,000 April 1 to May 31 12,500 June 1 to December 31 17,000 In addition, Ian has issued 10,000 incentive stock options with an exercise price of $30 to its employees and a year-end market price of $25 per share. What amount is Ian's diluted earnings per share for the year ended December 31? a. $4.63 b. $4.85 c. $7.35 d.$7.94
Choice "d" is correct. Ian's diluted earnings per share will be equal to its basic earnings per share because the stock options are out of the money. Out of the money stock options are antidilutive because the exercise price exceeds the market price of the stock. Ian's basic and diluted earnings per share are calculated as follows: Equation 909f55ec64948f7f84323c875895af3e * The weighted-average number of common shares outstanding is: Total Shares Period Outstanding Weighted-Average 15,000 3/12 3,750 12,500 2/12 2,083 17,000 7/12 9,917 Total 15,750 Choices "a", "b", and "c" are incorrect, per the above.
The Jackson Foundation, a not-for-profit organization, received contributions in Year 1 as follows: Unrestricted cash contributions of $500,000. Cash contributions of $200,000 to be restricted to acquisition of property. Jackson's statement of cash flows in Year 1 should include which of the following amounts? Operating activities Investing activities Financing activities a. $700,000 $0 $0 b. $500,000 $200,000 $0 c. $500,000 $0 $200,000 d. $0 $500,000 $200,000
Explanation
Choice “c” is correct. The unrestricted cash contributions totaling $500,000 are reported as increases in operating activities in the statement of cash flows. The $200,000 restricted cash contributions are reported as increases in financing activities since the restriction is the acquisition of property, not general operations.
Lyle, Inc. is preparing its financial statements for the year ended December 31, Year 1. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following:
At December 31, Year 1, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle’s specifications.
Checks in the amount of $100,000 were written to vendors and recorded on December 29, Year 1. The checks were mailed on January 5, Year 2.
What amount should Lyle report as accounts payable in its December 31, Year 1, balance sheet?
a. $510,000
b. $210,000
c. $410,000
d. $310,000
Explanation
Choice “a” is correct, $510,000.
Unadjusted accounts payable at 12/31/Year 1 $ 360,000
Reverse debit balance and record as a prepaid (asset) 50,000
Reverse unmailed checks 100,000
Adjusted accounts payable at 12/31/Year 1 $ 510,000
Reed Co.’s statement of cash flows reported cash provided from operating activities of $400,000. Depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed’s statement of cash flows, what amount was reported as net income?
a. $305,000 b. $595,000 c. $205,000 d. $105,000
Explanation
Choice “c” is correct. Start with cash flows from operating activities and subtract depreciation and impairment expenses. Dividends paid are not included because dividends reduce retained earnings, not net income, and are included in cash flows from financing activities.
Cash flows from operating activities $ 400,000
Depreciation on equipment (190,000)
Impairment of goodwill (5,000)
Net Income $ 205,000
The Turtle Society, a nongovernmental not-for-profit organization, receives numerous contributed hours from volunteers during its busy season. Chris, a clerk at the local tax collector’s office, volunteered ten hours per week for 24 weeks transferring turtle food from the port to the turtle shelter. This task is typically handled in the normal course of business at no charge to the Society, but Chris’ help has been accepted. His rate of pay at the tax office is $10 per hour, and the prevailing wage rate for laborers is $6.50 per hour. What amount of contribution revenue should Turtle Society record for this service?
a. $2,400 b. $840 c. $1,560 d. $0
Explanation
Choice “d” is correct. No expense would be recognized for the work performed.
Donated services should be recorded as contribution revenue and expense at fair value if the services meet the following criteria:
They create or enhance a non-financial asset.
They require specialized skills that the provider possesses and would otherwise have been purchased by the organization.
Contributed services are, therefore, only recognized SOME of the time: when the service is Specialized, Otherwise needed, and Measured Easily.
Chris’s work for the Turtle Society does not meet the criteria for expense recognition. The fact pattern makes a point of describing the work as being different from his normal profession and valued at an amount less that his normal wage. Also, Chris’s work does not replace a cost so, financially, it is not “otherwise needed.”
Choice “b” is incorrect. Chris’s work for the Turtle Society is not sufficiently specialized or required to meet the criteria for expense recognition. The proposed response incorrectly attempts to value his volunteer labor as the difference between his compensation in an unrelated profession and the going rate for the work performed
Choice “c” is incorrect. Chris’s work for the Turtle Society is not sufficiently specialized or required to meet the criteria for expense recognition. The proposed response incorrectly attempts to value his volunteer labor at the going rate the unspecialized work performed.
Choice “a” is incorrect. Chris’s work for the Turtle Society is not sufficiently specialized or required to meet the criteria for expense recognition. The proposed response incorrectly attempts to value his volunteer labor as his compensation in an unrelated profession.
When the fair value of an investment in debt securities exceeds its amortized cost, how should each of the following debt securities be reported at the end of the year? Debt securities classified as Held-to-maturity Available-for-sale a. Fair valueAmortized cost b. Amortized costAmortized cost c. Fair valueFair value d. Amortized cost Fair value
Explanation
Choice “d” is correct. Debt securities (bonds) classified as held-to-maturity are reported at amortized cost (that is, cost adjusted for amortization of premium or discount; approaches face value). Debt securities classified as available-for-sale are reported at fair value.
Choice “b” is incorrect. While amortized cost is the appropriate treatment for debt securities classified as held-to-maturity, this is not the correct treatment for securities classified as available-for-sale.
Choice “c” is incorrect. Fair value is not the appropriate treatment for debt securities classified as held-to-maturity.
Choice “a” is incorrect. Fair value is not the appropriate treatment for debt securities classified as held-to-maturity. Nor is amortized cost the appropriate treatment for debt securities classified as available-for-sale.
