FAR - Personal Flashcards
What is pro-rata?
Pro rata is the term used to describe a proportionate allocation. It is a method of assigning an amount to a fraction according to its share of the whole.
Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $0.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment $50 $100 $200 $900
$100
The intrinsic method is the excess of the market price over the exercise price.
Market price (100 x $10) $1,000
Exercise price (100 x $9) 900
——
Intrinsic value $ 100
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2265 Stock Compensation (Share-Based Payments)
Another way to calculate COGS using sales
COGS = Sales x (1 - Gross Profit Ratio)
Cor-Eng Partnership was formed on January 2, 20X1. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, 20X1, while Eng contributed $20,000 in cash. Drawings by the partners during 20X1 totaled $3,000 by Cor and $9,000 by Eng. Cor-Eng’s net income was $25,000.
Eng’s initial capital balance in Cor-Eng is:
$20,000.
$25,000.
$40,000.
$60,000.
$60,000.
Recall that “each partner has an equal initial capital balance…” Thus, since Cor contributed assets valued at $60,000, Eng’s total contribution must also equal $60,000—goodwill valued at $40,000 in addition to the $20,000 cash. From the partnership perspective, the goodwill may be recorded since it was purchased in the admission of Eng.
Journal entry to form partnership:
Dr. Cr. Cash 20,000 Other Assets (at fair value) 60,000 Goodwill 40,000 Cor (Capital) 60,000 Eng (Capital) 60,000
Garson Co. recorded goods in transit purchased FOB shipping point at year-end as purchases. The goods were excluded from ending inventory. What effect does the omission have on Garson’s assets and retained earnings at year-end
No effect on assets; retained earnings overstated
No effect on assets; retained earnings understated
Assets understated; no effect on retained earnings
Both assets and retained earnings understated
Both assets and retained earnings understated
Garson should have included the goods in inventory (asset) and as ending inventory (not an expense). Title to goods shipped FOB shipping point has passed to the purchaser when the goods are in transit.
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 six months ended December 31, Year 1.
From this long-term investment, Pell should report Year 1 revenue of: $18,200. $21,800. $16,800. $20,000.
$21,800.
The question deals with premium amortization!! You add the $1,800 to $2,000, NOT subtract! (You do that for discount)
If bonds are purchased at a discount, then the discount is immediately recorded as a credit in the acquiring corporation’s books. As the discount is amortized, it is thus debited, to decrease it. When cash is received as interest, the additional debit to amortize the discount adds to the debit to cash to increase the total credit to recognized revenue.
Therefore, the total revenue for the year will be the cash received as interest over the semiannual period, $500,000 (face amount) × 0.08 (8%) × 6/12, or $20,000, plus the $1,800 discount amortized, for a total revenue for the year of $21,800.
Fay Corp. pays its outside salespersons fixed monthly salaries and commissions on net sales. Sales commissions are computed and paid on a monthly basis (in the month following the month of sale), and the fixed salaries are treated as advances against commissions. However, if the fixed salaries for salespersons exceed their sales commissions earned for a month, such excess is not charged back to them. Pertinent data for the month of March for the three salespersons are as follows:
Salesperson Fixed Salary Net Sales Commission Rate
A $10,000 $200,000 4%
B 14,000 400,000 6%
C 18,000 600,000 6%
$42,000 $1,200,000
======= ==========
What amount should Fay accrue for sales commissions payable at March 31 $70,000 $28,000 $68,000 $26,000
$28,000
The amounts earned and payable are based on the fixed salaries and commission rights accrued for the period. To the extent that amounts in excess of the fixed salaries paid by the end of the month are earned, then they are a payable at the end of the month until paid.
Salesperson A has earned a commission of $8,000 ($200,000 × 0.04), Salesperson B has earned a commission of $24,000 ($400,000 × 0.06), and Salesperson C has earned a $36,000 commission (600,000 × 0.06).
Salesperson A has already been paid more than the commission and is not due any more.
Salesperson B was paid $10,000 less than the commission earned and is due a $10,000 commission payable ($24,000 - $14,000 salary).
Salesperson C is due $18,000 more as a commission over the salary already paid ($36,000 - $18,000 salary).
Thus, the commissions due and payable at the end of the month are $28,000 ($10,000 for Salesperson B and $18,000 for Salesperson C).
According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept Current cost Current market value Historical cost Net realizable value
Current cost
SFAC 5, Recognition and Measurement in Financial Statements of Business Enterprises, discusses measurement attributes of assets and liabilities. Current cost, or replacement cost, is discussed in paragraph 67(b):
Quote
- Five different attributes of assets (and liabilities) are used in present practice:
a. Historical cost (historical proceeds). Property, plant, and equipment and most inventories are reported at their historical cost, which is the amount of cash, or its equivalent, paid to acquire an asset, commonly adjusted after acquisition for amortization or other allocations. Liabilities that involve obligations to provide goods or services to customers are generally reported at historical proceeds, which is the amount of cash, or its equivalent, received when the obligation was incurred and may be adjusted after acquisition for amortization or other allocations.
b. Current cost. Some inventories are reported at their current (replacement) cost, which is the amount of cash, or its equivalent, that would have to be paid if the same or an equivalent asset were acquired currently.
c. Current market value. Some investments in marketable securities are reported at their current market value, which is the amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation.
Current market value is also generally used for assets expected to be sold at prices lower than previous carrying amounts. Some liabilities that involve marketable commodities and securities, for example, the obligations of writers of options or sellers of common shares who do not own the underlying commodities or securities, are reported at current market value.
d. Net realizable (settlement) value. Short-term receivables and some inventories are reported at their net realizable value, which is the nondiscounted amount of cash, or its equivalent, into which an asset is expected to be converted in due course of business less direct costs, if any, necessary to make that conversion. Liabilities that involve known or estimated amounts of money payable at unknown future dates, for example, trade payables or warranty obligations, generally are reported at their net settlement value, which is the nondiscounted amounts of cash, or its equivalent, expected to be paid to liquidate an obligation in the due course of business, including direct costs, if any, necessary to make that payment.
e. Present (or discounted) value of future cash flows. Long-term receivables are reported at their present value (discounted at the implicit or historical rate), which is the present or discounted value of future cash inflows into which an asset is expected to be converted in due course of business less present values of cash outflows necessary to obtain those inflows. Long-term payables are similarly reported at their present value (discounted at the implicit or historical rate), which is the present or discounted value of future cash outflows expected to be required to satisfy the liability in due course of business.
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2112 Financial Accounting Standards Board (FASB)
Bee Co. uses the direct write-off method to account for uncollectible accounts receivable. During an accounting period, Bee’s cash collections from customers equal sales adjusted for the addition or deduction of the following amounts:
Accounts written off: deduction; Increase in accounts receivable balance: deduction
Accounts written off: addition; Increase in accounts receivable balance: addition
Accounts written off: deduction; Increase in accounts receivable balance: addition
Accounts written off: addition; Increase in accounts receivable balance: deduction
Accounts written off: deduction; Increase in accounts receivable balance: deduction
This question is asking to convert from sales during the period to cash collections. Since the company uses the direct write-off method, there is no need to consider any allowance account balance. Thus, the sales for the period only have to be adjusted downwards for any accounts written off, and also downwards for any increases in deferred receipts (in the form of additions to accounts receivables).
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2135 Statement of Cash Flows
King, Inc., owns 70% of Simmon Co.'s outstanding common stock. King's liabilities total $450,000, and Simmon's liabilities total $200,000. Included in Simmon's financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements $520,000 $550,000 $590,000 $650,000
$550,000
All intra-entity liabilities must be eliminated when preparing the consolidated financial statements:
King's liabilities $450,000
Simmon's liabilities 200,000
Intra-entity liability (100,000)
---------
Consolidated total $550,000
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2323 Emphasis on Adjusting and Eliminating Entries(…
Lake County received the following proceeds that are legally restricted to expenditure for specified purposes:
Levies on affected property owners to install sidewalks: $500,000
Gasoline taxes to finance road repairs: $900,000
What amount should be accounted for in Lake’s special revenue funds
$500,000
$1,400,000
$900,000
$0
$900,000
Special revenue funds are used to account for resources raised from revenues that are either restricted or committed for expenditure for specific general government purposes other than capital outlay or debt service.
Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays.
The sidewalks are capital in nature and would not be part of a special revenue fund but of a capital fund, whereas the road repairs are not capital but maintenance.
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2412 Fund Accounting Concepts and Application
Rose Co. sells one product and uses the last-in, first-out method to determine inventory cost. Information for the month of January 20X1 follows:
Total Units Unit Cost
----------- --------- Beg inv, 1/1/X1 8,000 $8.20 Purchases, 1/5/X1 12,000 7.90 Sales 10,000
Rose has determined that at January 31, 20X1, the replacement cost of its inventory was $8 per unit and the net realizable value was $8.80 per unit. Rose's normal profit margin is $1 per unit. Rose applies the lower of cost or market rule to total inventory and records any resulting loss. At January 31, 20X1, what should be the net carrying amount of Rose's inventory $79,000 $79,800 $80,000 $81,400
$80,000
The lower of cost or market approach requires comparison of the “designated market” with cost. The designated market is replacement cost ($8.00) as long as it is lower than the net realizable value of the inventory ($8.80) and higher than the net realizable value of the inventory reduced by a normal profit margin ($8.80 - $1.00 = $7.80). The net realizable value (called the ceiling in applying lower of cost or market rules) is the sales price less costs to complete the inventory item and to dispose of it. The net realizable value less normal profit is known as the floor. In this example, replacement cost is between the ceiling and the floor and is used as the designated market.
The cost of ending inventory using the last-in, first-out method requires assigning the oldest available costs to the units in ending inventory. In this example, the 10,000 units in ending inventory (8,000 units in beginning inventory plus 12,000 units purchased less 8,000 units sold) have a cost of:
Total Units Unit Cost Total Cost
----------- --------- ---------- Units beg inv, 1/1/X1 8,000 $8.20 $65,600 Purchases, 1/5/X1 2,000 7.90 15,800
------- Total Cost $81,400
=======
Total market of $80,000 ($8.00 × 10,000 units) is therefore lower than cost.
Jel Co., a consignee, paid the freight costs for goods shipped from Dale Co., a consignor. These freight costs are to be deducted from Jel's payment to Dale when the consignment goods are sold. Until Jel sells the goods, the freight costs should be included in Jel's: cost of goods sold. freight-out costs. selling expenses. accounts receivable.
accounts receivable.
Since the agreement stipulates that Jel may deduct the freight costs from Jel’s payment to Dale, the freight charges will be an expense (payable) to Dale. Until the payment for the goods is made, Jel should include the amount paid for freight in Jel’s accounts receivable.
Duke Co. reported cost of goods sold of $270,000 for 20X1. Additional information is as follows:
December 31 January 1
----------- --------- Inventory $60,000 $45,000 Accounts payable 26,000 39,000
If Duke uses the direct method, what amount should Duke report as cash paid to suppliers in its 20X1 statement of cash flows
$242,000
$268,000
$272,000
$298,000
$298,000
NOTE: It is DIRECT method!! Opposite of indirect method. Duh hahaha :)
Reported cost of goods sold for 20X1 $270,000
Add increase in inv ($60,000 - $45,000) 15,000
Decrease in AP ($39,000 - $26,000) 13,000
——–
Cash paid to suppliers in 20X1 $298,000
========
Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30% stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per share. By what amount will Universe decrease stockholders' equity for the dividend $0 $1,500,000 $4,500,000 $7,500,000
$0
Stock dividends are accounted for by reclassifying a portion of retained earnings as contributed capital. They do not reduce assets or increase liabilities. Therefore, total stockholders’ equity is not changed.
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2134 Statement of Changes in Equity
When Rolan County adopted its budget for the current year ending June 30, $20,000,000 was recorded for estimated revenues control. Actual revenues for the fiscal year amounted to $17,000,000. In closing the budgetary accounts at June 30:
Estimated Revenues Control should be debited for $3,000,000.
Revenues Control should be credited for $20,000,000.
Estimated Revenues Control should be credited for $20,000,000.
Revenues Control should be debited for $3,000,000.
Estimated Revenues Control should be credited for $20,000,000.
As the amounts were estimated in the beginning, it is proper to reverse the estimate and to record the actual revenue. The estimated revenue control acts as a contra account to the estimated revenues actually credited. To reverse the control account, a revenue contra account, would be to credit the account for the full balance and then properly record the correct actual amount.
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2412 Fund Accounting Concepts and Application
On January 1, Year 1, a shipping company sells a boat and leases it from the buyer in a sale-leaseback transaction.
At the end of the 10-year lease, ownership of the boat reverts to the shipping company. The fair value of the boat, at the time of the transaction, was less than its undepreciated cost. Which of the following outcomes most likely will result from the sale-leaseback transaction
The boat will not be classified in property, plant, and equipment of the shipping company.
The shipping company will recognize the total profit on the sale of the boat in the current year.
The shipping company will not recognize depreciation expense for the boat in the current year.
The shipping company will recognize in the current year a loss on the sale of the boat.
The shipping company will recognize in the current year a loss on the sale of the boat.
Since the lease does not meet any of the criteria for capitalization, the lease is accounted for as an operating lease. The shipping company will recognize a loss—amortized based on gross rentals.
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2380 Leases
How should a nongovernmental not-for-profit entity report depreciation expense in its statement of activities
It should not be included.
It should be included as a decrease in unrestricted net assets.
It should be included as an increase in temporarily restricted net assets.
It should be reclassified from unrestricted net assets to temporarily restricted net assets, depending on donor-imposed restrictions on the assets.
It should be included as a decrease in unrestricted net assets.
All expenses reported on the statement of activities by a not-for-profit are reported as decreases in unrestricted net assets. Although not requiring a cash payment, depreciation is an expense.
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2411 Measurement Focus and Basis of Accounting
Zest Co. owns 100% of Cinn, Inc. On January 2, 20X1, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a 5-year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over three years with no residual value.
In Zest's December 31, 20X1, consolidating worksheet, by what amount should depreciation expense be decreased $0 $8,000 $16,000 $24,000
$8,000
When dealing with unrealized gains or losses in a consolidated financial statement setting, the objective is to defer unrealized gains to establish both historical cost balances and recognize appropriate income within the consolidated financial statement. The unrealized gain of the sale of the equipment to Cinn is located in the cost of the equipment on Cinn’s books. Depreciation expense on a consolidated basis should be the depreciation that would have been expensed on Zest’s books if the equipment had not been sold.
Depreciation on Cinn’s books (unrealized gain) (72,000/3) $24,000
Depreciation on Zest’s books (original cost) (80,000/5) 16,000
——-
Difference $ 8,000
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2324 Elimination of Intercompany Profits and Losses(…
Cali, Inc., had a $4,000,000 note payable due on March 15 of the current year. On January 28 of the current year, before the issuance of its prior-year financial statements, Cali issued long-term bonds in the amount of $4,500,000. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its prior-year December 31 financial statements
As a noncurrent liability, with separate disclosure of the note refinancing
As a current liability, with no separate disclosure required
As a current liability, with separate disclosure of the note refinancing
As a noncurrent liability, with no separate disclosure required
As a noncurrent liability, with separate disclosure of the note refinancing
When a debt that is due within the next 12 months is refinanced (repaid with the proceeds of a long-term debt) after the balance sheet date, but prior to balance sheet issuance, the debt that was due in 12 months can be classified as a noncurrent liability, as long as the refinance was intended by management as of the balance sheet date. A disclosure of the details is required in the footnotes to the balance sheet.
IFRS Bond Difference
Under GAAP, bond issue costs are capitalized and then amortized. Under IFRS, debt issue costs reduce any premium or increase any discount.
How should a company report its decision to change from a cash basis of accounting to accrual basis of accounting
As a change in accounting principle, requiring the cumulative effect of the change (net of tax) to be reported in the income statement
Prospectively, with no amounts restated and no cumulative adjustment
As an extraordinary item (net of tax)
As a correction of an error (net of tax), by adjusting the beginning balance of retained earnings
As a correction of an error (net of tax), by adjusting the beginning balance of retained earnings
A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error. The cash basis is not generally accepted. Consequently, the change to accrual basis is a correction of an error. A correction of an error in prior years’ financial statements is reported in the year of correction by restating all prior years affected by the error. The cumulative effect of the error on periods prior to those presented must be reflected in the carrying amounts of the assets and liabilities as of the beginning of the earliest year presented.
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2305 Accounting Changes and Error Corrections
On May 31, 20X1, Quay owned a $10,000 whole-life insurance policy with a cash surrender value of $4,500, net of loans of $2,500. In Quay's May 31, 20X1, personal statement of financial condition, what amount should be reported as investment in life insurance $4,500 $7,000 $7,500 $10,000
$4,500
Per FASB ASC 274-10-35-9, “Investment in life insurance is the cash value of the policy less the amount of loans against it.” Thus, the amount that should be reported in Quay’s personal financial statement is $4,500 (i.e., $7,000 cash surrender value less the $2,500 loan). Note that the $4,500 amount given in the question is already net of the loan and was computed by deducting the $2,500 loan amount from the $7,000 cash surrender value.
The cash surrender value of a whole-life insurance policy is the amount of the insurance premiums not related to the expense for death benefit coverage. It represents an amount that can be recovered if the policy is canceled. Therefore, it is an asset to the individual. The cash surrender value is the current amount available and, therefore, is the current value to be reported on the face of the statement. The cash surrender value has been reduced for the amount of any loans outstanding against the cash value.
Cash surrender value $7,000
Less: Loans against life insurance (2,500)
——-
$4,500
=======
The $10,000 face amount of the policy should also be disclosed.
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2151 Personal Financial Statements
Which of the following risks are inherent in an interest rate swap agreement
The risk of exchanging a lower interest rate for a higher interest rate
The risk of nonperformance by the counterparty to the agreement
Both I and II
I only
II only
Neither I nor II
Both I and II
An interest rate swap agreement is entered into in the hope of additional safety or other benefits, but it carries both the risks identified above, the potential of counterparty nonperformance or an undesirable exchange.
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2355 Derivatives and Hedge Accounting
Included in Lee Corp.’s liability account balances at December 31, Year 3, were the following:
14% note payable issued October 1, Year 3,
maturing September 30, Year 4: $125,000
16% note payable issued April 1, Year 1,
payable in six equal annual installments of
$50,000 beginning April 1, Year 2: 200,000
Lee’s December 31, Year 3, financial statements were issued on March 31, Year 4. On January 15, Year 4, the entire $200,000 balance of the 16% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, Year 4, Lee consummated a noncancelable agreement with the lender to refinance the 14%, $125,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement, and there have been no violations of the agreement’s provisions.
On the December 31, Year 3, balance sheet, the amount of the notes payable that Lee should classify as short-term obligations is: $50,000. $175,000. $125,000. $0.
$0.
When a debt that is due within the next 12 months is refinanced (repaid with the proceeds of a long-term debt) after the balance sheet date, but prior to balance sheet issuance, the debt that was due within 12 months can be classified as a noncurrent liability, as long as the refinance was intended by management as of the balance sheet date. A disclosure of the details is required in the footnotes to the balance sheet.
These rules are applicable as long as the agreement from whence the refinancing funds are received has terms that are readily determinable, the company that is the source of the refinancing funds is capable of honoring its agreement, and no violations of the agreement have occurred. Since both of the notes payable were refinanced long term prior to the issuance of the balance sheet, both can be reclassified as long term, and so nothing remains as short term.
Working Capital (f)
Current Assets - Current Liabilities
This measures the extent to which current assets can cover current liabilities.
Chase City uses an internal service fund for its central motor pool. The assets and liabilities account balances for this fund that are not eliminated normally should be reported in the government-wide statement of net assets as: governmental activities. business-type activities. fiduciary activities. note disclosures only.
governmental activities.
The governmental activity which is the predominant user of the internal service funds absorbs and reports the assets and liabilities of an internal service fund that are not eliminated. In most situations, this will be the governmental activities. (GASB 2200.147–.150)
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2421 Government-Wide Financial Statements
Which of the following statements is correct as it relates to changes in accounting estimates
Most changes in accounting estimates are accounted for retrospectively.
Whenever it is impossible to determine whether a change in an estimate or a change in accounting principle occurred, the change should be considered a change in principle.
Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.
It is easier to differentiate between a change in accounting estimate and a change in accounting principle than it is to differentiate between a change in accounting estimate and a correction of an error.
Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.
FASB ASC 250-10-45-18 states:
Quote
Distinguishing between a change in an accounting principle and a change in an accounting estimate is sometimes difficult. In some cases, a change in accounting estimate is effected by a change in accounting principle. One example of this type of change is a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets (hereinafter referred to as depreciation method). The new depreciation method is adopted in partial or complete recognition of a change in the estimated future benefits inherent in the asset, the pattern of consumption of those benefits, or the information available to the entity about those benefits. The effect of the change in accounting principle, or the method of applying it, may be inseparable from the effect of the change in accounting estimate. Changes of that type often are related to the continuing process of obtaining additional information and revising estimates and, therefore, shall be considered changes in estimates for purposes of applying this Subtopic.
(Emphasis added)
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2305 Accounting Changes and Error Corrections
During 20X1, Orr Co. incurred the following costs:
Research and development services performed by Corp. for Orr $150,000
Design, construction, and testing of preproduction prototypes
and models 200,000
Testing in search for new products or process alternatives 175,000
In its 20X1 income statement, what should Orr report as research and development expense $150,000 $200,000 $350,000 $525,000
$525,000
Each of the costs incurred by Orr Co. is cited in FASB ASC 730-10-55-1 as examples of items that would be considered research and development expenses.
Orr’s 20X1 R and D expense
= $150,000 + $200,000 + $175,000
= $525,000
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2388 Research and Development Costs
Compared to its current-year cash basis net income, Potoma Co.’s current-year accrual basis net income increased when it:
sold used equipment for cash at a gain in the current year.
wrote off more accounts receivable balances than it reported as uncollectible accounts expense in the current year.
declared a cash dividend in the previous year that it paid in the current year.
had lower accrued expenses on December 31 than on January 1 of the current year.
had lower accrued expenses on December 31 than on January 1 of the current year.
All other things being equal, when liabilities decrease, net income increases. Accrued expenses are simply another way to refer to accrued liabilities, payables.
Which of the following is not an item that is required to be disclosed about reportable segments’ profit or loss (assuming that the item was included in the determination of profit or loss) under FASB ASC 280-10-50-22
Depreciation, depletion, and amortization expense
Revenues from transactions with other operating
segments of the same enterprise
Extraordinary items
Rent expense
Rent expense
FASB ASC 280-10-50-22 specifically lists the following as requiring disclosure:
- Revenues from external customers
- Revenues from transactions with other operating segments of the same enterprise
- Interest revenue
- Interest expense
- Depreciation, depletion, and amortization expense
- Unusual items as described in FASB ASC 225-20
- Equity in the net income of investees accounted for by the equity method
- Income tax expense or benefit
- Extraordinary items
- Significant noncash items other than depreciation, depletion, and amortization expense
*Rent expense is not one of the items that require disclosure.
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2390 Segment Reporting
Which of the following statements is correct regarding reporting comprehensive income
Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.
A separate statement of comprehensive income is required.
Comprehensive income must include all changes in stockholders’ equity for the period.
Comprehensive income is reported in the year-end statements but not in the interim statements.
Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.
FASB ASC 220-10-45 requires that accumulated other comprehensive income be reported in the stockholders’ equity section of the balance sheet:
Quote
The total of other comprehensive income for a period shall be transferred to a component of equity that is presented separately from retained earnings and additional paid-in capital in a statement of financial position at the end of an accounting period. A descriptive title such as accumulated other comprehensive income shall be used for that component of equity.
FASB ASC 220-10-45-14
Asp Co. appropriately uses the installment method of revenue recognition to account for its credit sales. The following information was abstracted from Asp’s December 31, Year 2, financial statements:
Year 2 Year 1
---------- ---------- Sales $1,500,000 $1,000,000 Accounts receivable: Year 2 sales 900,000 Year 1 sales 540,000 600,000
Deferred gross profit:
Year 2 sales 252,000
Year 1 sales 108,000 120,000
What was Asp's gross profit percentage for Year 2 sales 20% 25% 28% 40%
28%
The gross profit percentage is Gross profit ÷ Sales:
$252,000 ÷ $900,000 = 0.28 (28%)
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2251 Revenue Recognition
Hospital, Inc., a not-for-profit entity with no governmental affiliation, reported the following in its accounts for the current year ended December 31:
Gross patient service revenue from all services provided
at the established billing rates of the hospital (note
that this figure includes charity care of $25,000) $775,000
Provision for bad debts 15,000
Difference between established billing rates and fees
negotiated with third-party payers (contractual adjustments) 70,000
What amount would the hospital report as net patient service revenue in its statement of operations for the current year ended December 31 $680,000 $665,000 $705,000 $735,000
$680,00
Nongovernmental not-for-profit hospitals do not record charity services as revenue and deduct contractual adjustments from gross patient services revenues. Amounts expected to be uncollectible are generally treated as bad debt expenses to be reported on the operating statement. Government hospitals, on the other hand, deduct the provision for bad debts from revenue to arrive at net revenue. Hospitals required by law to provide services, such as emergency room services, without being able to determine billing or collection status at the time of service, may record revenue reduced by a relatively high bad debts provision at the time of service. This hospital is able to identify the charity care and the billing status at the time of service delivery.
$775,000 - $25,000 - $70,000 = $680,000
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2526 Nongovernment Not-for-Profit Hospital andUniversity …
On March 1, Wag City issued $1,000,000, 10-year, 6% general obligation bonds at par with no bond issue costs. The bonds pay interest September 1 and March 1.
What amount of interest expense and bond interest payable should Wag report in its government-wide financial statements at the close of the fiscal year on December 31
Interest expense, $50,000; interest payable, $20,000
Interest expense, $50,000; interest payable, $0
Interest expense, $60,000; interest payable, $10,000
Interest expense, $30,000; interest payable, $0
Interest expense, $50,000; interest payable, $20,000
Interest on general long-term debt is an expense reported in the government-wide statement of activities. This bond issue pays $60,000 of interest annually ($1,000,000 × 0.06) or $5,000 interest monthly. Under accrual accounting, interest expense is recognized for the 10 months of the year the bond issue was outstanding, from March 1 to December 31 (10 × $5,000 = $50,000). Of these 10 months, 6 months of interest was paid on September 1 and 4 months remained due on December 31 (4 × $5,000 = $20,000). No adjustments to the interest rate or liability amount are needed due to amortization of discount or premium because the bonds were issued at par and the proceeds equaled the face value of the bonds.
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2421 Government-Wide Financial Statements
An extraordinary gain should be reported as a direct increase to which of the following
Net income
Comprehensive income
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Extraordinary items are presented immediately below the discontinued operations section of the income statement. Descriptive captions are used, and the extraordinary items are presented net of the related tax effect.
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2345 Extraordinary and Unusual Items
Wind Co. incurred organization costs of $6,000 at the beginning of its first year of operations. How should Wind treat the organization costs in its financial statements in accordance with GAAP Never amortized Amortized over 60 months Amortized over 40 years Expensed immediately
Expensed immediately
Organization costs are start-up costs and are required to be expensed when incurred.
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2252 Costs and Expenses
A. A. Corporation has a loading dock that is situated next to a local highway. Recently, a new major highway was completed nearby, which bypasses the loading dock, and has thus made the installation of questionable future value to the corporation. The carrying amount of the loading dock is $600,000. However, due to the fact of the loss of the access to the best thoroughfare, the loading dock was written down and an impairment loss was recognized based on the estimated value in use of the dock at present. An impairment loss of $160,000 was recognized, and the loading dock now has a carrying value of $440,000. The next year, however, a local businessman decided to and built an airport near to the loading dock, and the estimated value in use has now been calculated to be $550,000.
Given these facts, and also that A. A. applies IFRS, what would the carrying value of the loading dock be now (ignoring depreciation) $440,000 $600,000 $550,000 $490,000
$550,000
Under IFRS, after an impairment loss has been recognized, if facts change and the estimated value of the asset has increased, the impairment loss can be considered recovered and, to the extent of the recovered loss, the impairment can be undone. Here, the building has recovered some of the loss and can be written back up to the current estimated value in use of $550,000.
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2370 Impairment
An entity authorized 500,000 shares of common stock. At January 1, Year 2, the entity had 110,000 shares of common stock issued and 100,000 shares of common stock outstanding. The entity had the following transactions in Year 2:
March 1 Issued 15,000 shares of common stock
June 1 Resold 2,500 shares of treasury stock
September 1 Completed a 2-for-1 common stock split
What is the total number of shares of common stock that the entity has outstanding at the end of Year 2 117,500 230,000 235,000 250,000
235,000
At the beginning of the year, the number of shares outstanding was 100,000:
***15,000 new shares were issued, giving a new total of 115,000 outstanding
***2,500 of the 10,000 treasury shares were reissued; adding them to the 115,000 gives a new total of 117,500.
***A 2-for-1 split doubles the shares outstanding at that point, for a new total of 235,000 (117,500 × 2).
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2250 Equity
Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan’s adoption. The employees, A, B, C, and D, are expected to retire from the company as follows:
- “A” will retire after three years.
- “B” and “C” will retire after five years.
- “D” will retire after seven years.
What is the amount of prior service cost amortization in the first year $0 $5,000 $20,000 $25,000
$20,000
FASB ASC 715-30-55-95 prescribes the amortization of prior service pension cost over the remaining service period of the employees for whom such costs are incurred. The method used when employees have varying service periods includes the calculation of the weighted-average service period. This method, similar to sum-of-the-years’-digits depreciation, results in a declining amortization expense over the expected service period. The fraction that represents the annual amortization rate has a numerator equal to the current year’s equivalent years of service and a denominator equal to the total future service years for all employees. In this case, amortization of prior service cost would be calculated as follows:
Future Service Year
Employees Years 1 2 3 4 5 6 7
A 3 1 1 1
B 5 1 1 1 1 1
C 5 1 1 1 1 1
D 7 1 1 1 1 1 1 1
20 4 4 4 3 3 1 1
The total number of Future Service Years is 20; the total number in the first year is 4. Year 1 amortized prior service cost is 4/20 × $100,000 = $20,000.
FASB ASC 715-30-55-95 to 55-97
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2264 Retirement Benefits
Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year-end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances.
Compared to the accrual-basis method of accounting, Sanni’s cash-basis pretax income is:
higher by $4,000.
lower by $4,000.
higher by $36,000.
lower by $36,000.
Higher by 36,000
Decrease in accounts receivable $20,000
Increase in accounts payable 16,000
——-
Total increase in cash-basis income $36,000
Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis Going concern Periodicity Monetary unit Economic entity
Monetary unit
The four assumptions that underlie GAAP are the economic entity assumption, the going concern assumption, the periodicity assumption, and the monetary unit assumption.
- The economic entity assumption is the presumption that all economic events can be identified with a particular economic entity and that the activities of a company can be distinguished from those of its owners.
- The going concern assumption is that a business entity will continue to operate indefinitely.
- The periodicity assumption relates to the ability to divide the “life” of a business into shorter, artificial time periods for financial reporting purposes.
- The monetary unit assumption is that the monetary unit (dollars in the U.S.) is the most appropriate common denominator for measuring, reporting, and analyzing economic activity.
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2112 Financial Accounting Standards Board (FASB)
The following trial balance of Mint Corp. on December 31, 20X1, has been adjusted except for income tax expense.
Trial Balance
December 31, 20X1
Dr. Cr.
----------- ----------- Cash $ 600,000 Accounts receivable (net) 3,500,000 Cost in excess of billings on long-term contracts 1,600,000 Billings in excess of costs on long-term contracts $ 700,000 Prepaid taxes 450,000 PP&E (net) 1,480,000 Note payable (noncurrent) 1,620,000 Common stock 750,000 Additional paid-in capital 2,000,000 Retained earnings (unappropriated) 900,000 Retained earnings (restricted for)
note payable 160,000 Earnings from long-term contracts 6,680,000 Costs and expenses 5,180,000
----------- -----------
$12,810,000 $12,810,000
=========== ===========
Other financial data for the year ended December 31, 20X1:
Mint uses the percentage-of-completion method to account for long-term construction contracts for financial statement and income purposes. All receivables on these contracts are considered to be collectible within 12 months.
During 20X1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense.
There were no temporary or permanent differences, and Mint’s effective tax rate is 30%.
In Mint’s December 31, 20X1, balance sheet, what amount should be reported as total noncurrent liabilities
$1,620,000
$1,780,000
$2,320,000
$2,480,000
$1,620,000
The only noncurrent liability appearing on Mint Corp.’s December 31, 20X1, trial balance is the $1,620,000 noncurrent note payable.
Baker Co. issued 100,000 shares of common stock in the current year. On October 1, Baker repurchased 20,000 shares of its common stock on the open market for $50 per share. At that date, the stock’s par value was $1 and the average issue price was $40 per share. Baker uses the cost method for treasury stock transactions. On December 1, Baker reissued the stock for $60 per share.
What amount should Baker report as treasury stock gain at December 31 $0 $200,000 $400,000 $980,000
$0
Treasury stock transactions are equity transactions and result in no gain or loss.
Which of the following items is a required disclosure regarding fair value hedges
The net amount of gains or losses included in the cumulative translation adjustment during the reporting period
The amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge
A description of the transactions or other events that will result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive income
The estimated net amount of the existing gains or losses at the reporting date that is expected to be reclassified into earnings within the next 12 months
The amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge
Of the answer choices listed, only “the amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge” is a disclosure requirement for a fair value hedge.
The other answer choices are disclosure requirements for a cash flow hedge.
FASB ASC 815-10-50-4C
- VIDEO EXPLANATION
- Fair value hedge - everything goes through the income statement. Hedging a market value related to a particular asset or liability
- Cash flow hedge - everything goes through OCI. edging a cash flow related to a particular item
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2355 Derivatives and Hedge Accounting
Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan.
Which of the following statements is correct
Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.
Good Neighbor Financing will assume the responsibility of collecting the receivables.
Milton will retain control of the receivables.
Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.
Milton will retain control of the receivables.
Under a pledge, an account receivable is used as collateral for a loan. Milton continues to collect the receivables and applies the collection to the loan balance.
North Bank is analyzing Belle Corp.’s financial statements for a possible extension of credit. Belle’s quick ratio is significantly better than the industry average. Which of the following factors should North consider as a possible limitation of using this ratio when evaluating Belle’s creditworthiness
Increasing market prices for Belle’s inventory may adversely affect the ratio.
Belle may need to liquidate its inventory to meet its long-term obligations.
Belle may need to sell its available-for-sale investments to meet its current obligations.
Fluctuating market prices of short-term investments may adversely affect the ratio.
Fluctuating market prices of short-term investments may adversely affect the ratio.
A creditor relying on the quick ratio would need to be aware of the quick ratio’s risks. The quick ratio is based on quick assets, such as short-term investments or trading securities, that are measured at fair value, a value that could decline quickly.
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2137 Consolidated and Combined Financial Statements
Reporting inventory at the lower of cost or market is a departure from the accounting principle of: historical cost. consistency. conservatism. full disclosure.
historical cost.
Financial accounting is primarily based on the historical cost principle which specifies that assets be recorded and carried at their historical acquisition cost. When reporting inventory at the lower of cost or market, cost is compared with market (usually some variant of replacement cost) and the lower value is used to reflect the loss of utility (i.e., market value) of the goods. Selection and use of a value other than acquisition cost is clearly a departure from the historical cost principle.
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2112 Financial Accounting Standards Board (FASB)
A nongovernmental not-for-profit entity borrowed $5,000, which it used to purchase a truck. In which section of the organization’s statement of cash flows should the transaction be reported
In cash inflow and cash outflow from investing activities
In cash inflow and cash outflow from financing activities
In cash inflow from financing activities and cash outflow from investing activities
In cash inflow from operating activities and cash outflow from investing activities
In cash inflow from financing activities and cash outflow from investing activities
Raising cash through borrowings is a financing activity. Using cash to purchase fixed assets is an investing activity.
Which of the following statements best describes an operating procedure for issuing a new Financial Accounting Standards Board (FASB) Accounting Standards Update
The emerging issues task force must approve a discussion memorandum before it is disseminated to the public.
The exposure draft is modified per public opinion before issuing the discussion memorandum.
An update is issued only after a majority vote by the members of the FASB.
A new FASB update can be rescinded by a majority vote of the AICPA membership.
An update is issued only after a majority vote by the members of the FASB.
The FASB describes its due process procedures on its web site (http://www.fasb.org) as follows:
The FASB has established the following procedures for developing accounting standards. These procedures are used for major agenda projects. Not all of the steps may be necessary for application and implementation projects. Many other steps are followed during the course of the project that are not specifically required by the Board’s Rules of Procedures.
The Board identifies a financial reporting issues based on requests/recommendations from stakeholders or through other means.
The FASB Chairman decides whether to add a project to the technical agenda, after consultation with FASB members and others as appropriate, and subject to oversight by the Foundation’s Board of Trustees. The Board votes on whether to add the project to its agenda. A simple majority vote is needed.
The Board deliberates at one or more public meetings the various reporting issues identified and analyzed by the staff.
The Board issues the Exposure Draft. (In some projects, the staff may prepare and issue an Invitation to Comment or Preliminary Views prior to the Board issuing an Exposure Draft.)
The Board holds a public roundtable meeting on the Exposure Draft, if necessary.
The staff analyzes comment letters, public roundtable discussion, and any other information and the Board redeliberates the proposed provisions at public meetings.
The Board issues an Accounting Standards Update by simple majority vote, describing amendments to the Accounting Standards Codification.
The Board issues an Accounting Standards Update by simple majority vote. Accounting Standards Updates issued after September 2009 will not be considered authoritative in their own right. Instead, the Accounting Standards Updates will serve only to update the Accounting Standards Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification.
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2112 Financial Accounting Standards Board (FASB)
Timp, Inc., had the following common stock balances and transactions during 20X1:
01/01/X1 Common stock shares outstanding 30,000
02/01/X1 Issued a 10% common stock dividend 3,000
07/01/X1 Issued common stock for cash 8,000
12/31/X1 Common stock outstanding = 41,000
What was Timp's 20X1 weighted-average shares outstanding 41,000 36,750 41,800 37,000
37,000
Shares Fraction Weighted Shares
Outstanding x of Year = Outstanding
----------- -------- ---------------
33,000 (1) x 12/12 = 33,000
8,000 x 6/12 = 4,000
------ Total weighted-average shares outstanding = 37,000
Note
The common stock dividend shares require “retroactive” treatment. They are assumed to be outstanding throughout all periods presented.
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2335 Earnings per Share
A county’s balances in the general fund included the following:
Appropriations $435,000
Encumbrances 18,000
Expenditures 164,000
Vouchers payable 23,000
What is the remaining amount available for use by the county $230,000 $248,000 $253,000 $271,000
$253,000
The appropriations included in the adopted budget of the general fund represent the maximum authorized for expenditure during the period. If $164,000 has already been expended and another $18,000 has been encumbered or committed, then only $253,000 remains available for spending. The vouchers payable represent past expenditures waiting only for cash payment.
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2411 Measurement Focus and Basis of Accounting
Fireworks, Inc., had an explosion in its plant that destroyed most of its inventory. Its records show that beginning inventory was $40,000. Fireworks made purchases of $480,000 and sales of $620,000 during the year. Its normal gross profit percentage is 25%. It can sell some of its damaged inventory for $5,000. The insurance company will reimburse Fireworks for 70% of its loss. What amount should Fireworks report as loss from the explosion $50,000 $35,000 $18,000 $15,000
$15,000
This problem must be solved using the gross profit method:
Goods available for sale = $40,000 + $480,000 = $520,000
Gross profit = $620,000 × 0.25 = $155,000
Cost of goods sold = $620,000 - $155,000 = $465,000
Ending inventory = $520,000 - $465,000 = $55,000
Reimbursement = ($55,000 - $5,000) × 0.70 = $35,000
Loss = $55,000 - $5,000 - $35,000 = $15,000
A company should recognize goodwill in its balance sheet at which of the following points
Costs have been incurred in the development of goodwill.
Goodwill has been created in the purchase of a business.
The company expects a future benefit from the creation of goodwill.
The fair market value of the company’s assets exceeds the book value of the company’s assets.
Goodwill has been created in the purchase of a business.
The FASB Accounting Standards Codification only authorizes the recognition of goodwill in a purchase context.
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2315 Business Combinations
During January 20X1, Metro Co., which maintains a perpetual inventory system, recorded the following information pertaining to its inventory:
Unit Total Units
Units Cost Cost on Hand
----- ------ ------ ------- Balance (Jan 1, 20X1) 1,000 $1 $1,000 1,000 Purchased (Jan 7, 20X1) 600 3 1,800 1,600 Sold (Jan 20, 20X1) 900 700 Purchased (Jan 25, 20X1) 400 5 2,000 1,100
Under the moving-average method, what amount should Metro report as inventory on January 31, 20X1 $2,640 $3,225 $3,300 $3,900
$3,225
Balance on Jan 1, 20X1 (1,000 units at $1) $1,000
Purchase on Jan 7, 20X1 (600 units at $3) + 1,800
——–
Moving average inventory on Jan 7, 20X1 $2,800
Sale of 900 units Jan 20, 20X1 (900 units at $1.75)* - 1,575
——–
Moving avg inv Jan 20, 20X1 (700 units @$1.75) $1,225
Purchase on Jan 25, 20X1 (400 units at $5.00) + 2,000
——–
Moving average inventory on Jan 31, 20X1 $3,225
========
* The $1.75 is from the total cost divided by units available for sale ($2,800 ÷ 1,600) .
New Town’s review of payroll records indicates that employees providing governmental services have accrued $250,000 of vacation pay and employees of the proprietary funds have accrued $100,000 of vacation pay. It is anticipated that 5% of the accrued vacation pay will be claimed by employees within the first 60 days of 20X1. How would the vacation pay liability be recognized on the financial statements issued at December 31, 20X0
Governmental fund liability: $12,500; Proprietary fund liability: $100,000; Governmental activities liability:
$250,000; Business-like activities liability: $100,000
Governmental fund liability: $12,500; Proprietary fund liability: $5,000; Governmental activities liability: $250,000; Business-like activities liability: $100,000
Governmental fund liability: $12,500; Proprietary fund liability: $100,000; Governmental activities liability: $12,500; Business-like activities liability: $100,000
Governmental fund liability: $250,000; Proprietary fund liability: $100,000; Governmental activities liability: $250,000; Business-like activities liability: $5,000
Governmental fund liability: $12,500; Proprietary fund liability: $100,000; Governmental activities liability: $250,000; Business-like activities liability: $100,000
As employees earn the right to claim vacation pay, a compensated absence, the liability is accrued and reported in full in the proprietary fund and government-wide financial statements (governmental activities and business-like activities). The portion reported in the government-wide financial statements as governmental activities is a general long-term liability. The governmental funds, using the modified accrual method, report only the portion of the liability expected to be claimed by employees in the first 60 days of the new fiscal year.
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2411 Measurement Focus and Basis of Accounting
Frame Construction Company’s contract requires the construction of a bridge in 3 years. The expected total cost of the bridge is $2,000,000, and Frame will receive $2,500,000 for the project. The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively, during each of the 3 years. Progress payments received by Frame were $600,000, $1,200,000, and $700,000, respectively.
Assuming that the percentage-of-completion method is used, what amount of gross profit would Frame report during the last year of the project $120,000 $125,000 $140,000 $150,000
$150,000
The first step is to figure the total profit on the contract, as follows:
- Total revenue was $2,500,000.
- Total actual costs are known (since the project has been completed) to be $2,000,000 (made up of $500,000 + $900,000 + $600,000 from the 3 years of work).
- This gives us a profit of $500,000 on the contract ($2,500,000 - $2,000,000).
At the beginning of the third year, Frame had expended a total cost of $1,400,000 ($500,000 from the first year, and $900,000 more from the second year combined). At the start of Year 3, Frame was thus 70% complete (based on total cost expended so far, $1,400,000, divided by total cost estimated to finish, $2,000,000).
Frame would have already recognized 70% of the total contract profit so far ($350,000, or 0.7 × $500,000 total profit).
Thus, Frame has only $150,000 profit remaining to be recognized in Year 3 (Total profit of $500,000 - Profit already recognized of $350,000).
Since the total expected cost was the total actual cost, in this particular case the percentage completed in Year 3 times the total contract profit will also give the correct answer:
$600,000 ÷ $2,000,000 = 0.3
0.3 × $500,000 = $150,000
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2251 Revenue Recognition
An employer sets up a rabbi trust for an employee’s future compensation. The trust funds can be used for:
I. payment of the employer’s creditors in a bankruptcy.
II. payment of the employer’s future compensation.
III. payment of the employer’s personal expenses.
I only
II only
I and II only
I, II, and III
I and II only
A rabbi trust is a grantor trust meeting the requirements of the Internal Revenue Code allowing it to qualify for deferral of the employee compensation paid from it. One of the requirements is that the funds in a rabbi trust are available to pay the creditors of the employer in the case of the employer’s bankruptcy. Thus, items I and II are correct. The trust funds can no longer be used by the employer to pay personal expenses.
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2262 Deferred Compensation Arrangements
On December 30, 20X1, 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, 20X1.
As a result of this transaction, Hale's total stockholder's equity had a net increase of: $1,200,000. $800,000. $100,000. $80,000.
$800,000.
Amount owed to unsecured creditors $1,200,000
Less cash paid $400,000
Common stock issued at fair value*
(80,000 shares x $1.25) 100,000 500,000
——– ———
Gain on restructuring $ 700,000
=========
- Common stock would be increased by $80,000
(80,000 sh x $1 par).
Additional Paid-in Capital would be increased by $20,000
(80,000 sh x ($1.25 - $1)).
The net increase in Hale Corp.’s stockholders’ equity is $800,000, the sum of the $700,000 gain on restructuring plus the $100,000 increase in stockholders’ equity resulting from issuance of the additional shares.
- VIDEO EXPLANATION
- This is a troubled debt restructuring - we can have gains and losses
Gains/Losses in Restructuring =
Total amount previously owed - new amount owed
1,200,000 - (40,000 cash paid + *100,000 equity)
*We have some equities that we issued: 80,000 shares that had a $1.25 fair value = 10
So we owed 1.2 M and settled debt of $500,000
So our gain (cuz we paid more than what we owed) was **700,000 (1,200,00 - 500,000)
700,00 is an equity and is a part of our retained earnings.
When we issued 80,000 shares common stock at par value $1:
Common stock = 80,000 x $1 = 80,000
APIC = 80,000 x ($1.25 - $1) = 20,000
————–
**100,000 stockholder increase
700,000 + 100,000 = total gains of 800,000!!
JOURNAL ENTRY:
Debt 1,200,000
Cash 400,000
C.S. 80,000
APIC 20,000
Gain 700,000
(Cash + APIC + Gain) = all part of stock holder’s equity
On March 21, Year 2, a company with a calendar year-end issued its Year 1 financial statements. On February 28, Year 2, the company’s only manufacturing plant was severely damaged by a storm and had to be shut down. Total property losses were $10 million and determined to be material. The amount of business disruption losses is unknown. How should the impact of the storm be reflected in the company’s Year 1 financial statements
Provide no information related to the storm losses in the financial statements until losses and expenses become fully known
Accrue and disclose the property loss with no accrual or disclosure of the business disruption loss
Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements
Accrue and disclose the property loss and additional business disruption losses in the financial statements
Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements
An entity must not recognize events that arose after the balance sheet date but before the financial statements are issued. One of the events specifically mentioned in FASB ASC 855-10-55-2 is the loss of plant as a result of fire or other natural disaster. However, this event must be disclosed in the notes to the financial statements.
Quote
The following are examples of nonrecognized subsequent events addressed in [FASB ASC] 855-10-25-3:
a. Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
b. A business combination that occurs after the balance sheet date but before financial statements are issued or are available to be issued ([FASB ASC] 805 requires specific disclosures in such cases.)
c. Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued
d. Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued
e. Losses on receivables resulting from conditions (such as a customer’s major casualty) arising after the balance sheet date but before financial statements are issued or are available to be issued
f. Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
g. Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees after the balance sheet date but before financial statements are issued or are available to be issued.
(Emphasis added)
FASB ASC 855-10-55-2
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2392 Subsequent Events
Which of the following types of events must be recognized in the financial statements
Events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date
Events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements
Both events that provide evidence about conditions that did not exist at the date of the balance sheet and events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements
Neither events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date nor events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements
Events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. Under FASB ASC 855-10, there are two types of subsequent events:
The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).
The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events).
FASB ASC 855-10-20
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2392 Subsequent Events
Which of the following would be reported as a decrease in the statement of changes in net assets available for benefits of an employee benefits plan
Contributions from participants, including those transmitted by the sponsor
Benefits paid to participants
Contributions from other identified sources (for example, state subsidies or federal grants)
Contributions from employers, segregated between cash and noncash contributions
Benefits paid to participants
The statement of changes in net assets available for benefits of an employee benefit plan must include the following:
The change in fair value (or estimated fair value) of each significant type of investment, including participant-directed and self-directed investments held in brokerage accounts. Gains and losses from investments sold need not be segregated from unrealized gains and losses relating to investments held at year-end. Realized gains and losses on investments that were both bought and sold during the period should be included. This information may be presented in the accompanying footnotes.
Investment income, exclusive of changes in fair value described above
-Contributions from employers, segregated between cash and noncash contributions (a noncash contribution shall be recorded at fair value; the nature of noncash contributions shall be described either parenthetically or in a note) (This would be an increase.)
-Contributions from participants, including those transmitted by the sponsor (This would be an increase.)
-Contributions from other identified sources (for example, state subsidies or federal grants) (This would be an increase.)
-Benefits paid to participants (This would be a decrease.)
-Payments to insurance entities to purchase contracts that are excluded from plan assets
-Administrative expenses
FASB ASC 962-205-45-7
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2152 Financial Statements of Employee Benefit Plans/Trusts
On January 1, Year 1, Alpha Co. signed an annual maintenance agreement with a software provider for $15,000 and the maintenance period begins on March 1, Year 1. Alpha also incurred $5,000 of costs on January 1, Year 1, related to software modification requests that will increase the functionality of the software. Alpha depreciates and amortizes its computer and software assets over five years using the straight-line method. What amount is the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, Year 1 $5,000 $13,500 $16,000 $20,000
$13,500
The annual expenses would be the $15,000 maintenance contract multiplied by 10/12 of the year covered, or $15,000 × 10/12 = $12,500 from March to the end of the year. Also, expenses would cover 1/5 ($1,000) of the $5,000 from the other costs for one of the five years: $12,500 + $1,000 = $13,500 total.
How would a municipality that uses modified accrual and encumbrance accounting record the transaction of short-term financing received from a bank, secured by the city's taxing power Credit other financing sources Credit expenditures control Debit deferred revenues Credit tax anticipation notes payable
Credit tax anticipation notes payable
In this problem, a city obtained short-term bank financing secured by the city’s taxing power. This is interpreted to mean that (1) the General Fund is involved, since some or all of a city’s tax revenues are normally recorded in that fund, and (2) future tax proceeds will be used to repay the loan. The journal entry to record the transaction will include a debit to cash, of course. In this problem, the loan is short-term and there is no information to suggest that the loan will be refinanced with long-term borrowing. Therefore, the loan represents establishment of a fund liability (not an increase in “other financing sources” as is the case when the General Fund accounts for the proceeds from long-term borrowing). The credit side of the entry then must be to some liability account. The only available response in this problem that increases a liability is “credit tax anticipation notes payable.” Moreover, in view of the information given, this is the ideal response.
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2412 Fund Accounting Concepts and Application
Generally, which inventory costing method approximates most closely the current cost for each of the following
Cost of goods sold: LIFO; Ending inventory: FIFO
Cost of goods sold: LIFO; Ending inventory: LIFO
Cost of goods sold: FIFO; Ending inventory: LIFO
Cost of goods sold: FIFO; Ending inventory: FIFO
Cost of goods sold: LIFO; Ending inventory: FIFO
Because LIFO (last in, first out) counts the most recent purchases as sold items, its cost of goods sold will be closest to current costs. Since FIFO (first in, first out) counts the most recent purchases as still in inventory, the ending inventory under FIFO will be closest to current costs.
Conversion of convertible bonds
Book Value vs. Market Value Method
- BOOK VALUE METHOD: at conversion you just transfer the bond balances to stock accounts and no gain or loss is recorded
- MARKET VALUE METHOD: at conversion the stock accounts are credited for the market value of the stock or bonds, the bond accounts are closed, and a gain or loss is recorded for the difference
IFRS and Intangibles
i. Under GAAP, re-valuation of goodwill is NOT allowed. Under IFRS it is allowed if in an active market
ii. Under GAAP, reversal of impairment loss is NOT allowed. Under IFRS a reversal of an impairment loss is permitted
iii. Under GAAP, goodwill is recognized at the “reporting unit” level. Under IFRS it is recognized at the cash-generating unit level
Orange Township has two general obligation bond issues outstanding. One is for $2,000,000 and the other is for $3,000,000. Cash of $62,500 has been set aside in debt service funds, per the annual budget, to pay the interest due on these issues January 1, 20X2. What is the net liability that must be shown in the fund-based statements prepared as of December 31, 20X1 $5,000,000 $5,062,500 $62,500 $0
$0
The debt is a long-term liability and would not appear on the balance sheets of the governmental funds, although it would be reported in the governmental activities section of the government-wide statement of net position. The interest that is due very early in the following year has been deposited in the debt service funds. The expenditure for debt service would usually be recognized in the year of payment. The expenditure and related liability could be recognized in the debt service fund but is not required in the December 31, 20X1, statements. Therefore, the correct answer is $0.
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2411 Measurement Focus and Basis of Accounting
- VIDEO EXPLANATION
- NOTES 9/27
A corporation issues quarterly interim financial statements and uses the lower of cost or market method to value its inventory in its annual financial statements.
Which of the following statements is correct regarding how the corporation should value its inventory in its interim financial statements
Inventory losses generally should be recognized in the interim statements.
Temporary market declines should be recognized in the interim statements.
Only the cost method of valuation should be used.
Gains from valuations in previous interim periods should be fully recognized.
Inventory losses generally should be recognized in the interim statements.
Under FASB ASC 270-10-45-4, interim financial reports should be based on the principles, practices, and policies used in the preparation of the last annual report. Other-than-temporary market declines in inventory should be recognized. If losses recognized in early interim periods are recovered in the same year, such recoveries are recognized as gains in the appropriate interim periods.
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2375 Interim Financial Reporting
A mandatorily redeemable financial instrument, such as mandatorily redeemable preferred stock, must be classified as a liability unless the redemption is required to occur only:
at the redemption date.
upon the liquidation or termination of the reporting entity.
if the stated dividend rate exceeds current market rate for interest.
if the current market rate for interest exceeds the stated dividend rate.
upon the liquidation or termination of the reporting entity.
A mandatorily redeemable financial instrument, such as mandatorily redeemable preferred stock, must be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.
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2385 Distinguishing Liabilities from Equity
Jen has been employed by Komp, Inc., since February 1, 20X0. Jen is covered by Komp's Section 401(k) deferred compensation plan. Jen's contributions have been 10% of salaries. Komp has made matching contributions of 5%. Jen's salaries were $21,000 in 20X0, $23,000 in 20X1, and $26,000 in 20X2. Employer contributions vest after an employee completes three years of continuous employment. The balance in Jen's 401(k) account was $11,700 at December 31, 20X2, which included earnings of $1,200 on Jen's contributions. What amount should be reported for Jen's vested interest in the 401(k) plan in Jen's December 31, 20X2, personal statement of financial condition $11,700 $8,200 $7,000 $1,200
$8,200
FASB ASC 274-10-35-11 states that nonforfeitable rights to receive future sums that have all the following characteristics shall be presented as assets at their discounted amounts:
The rights are for fixed or determinable amounts.
The rights are not contingent on the holder’s life expectancy or the occurrence of a particular event, such as disability or death.
The rights do not require future performance of service by the holder.
Since the employer’s contributions have not vested and are forfeitable (Jen will not complete three years of employment until February 1, 20X3), the current value of Jen’s 401(k) plan is:
$7,000 Jen's contributions 10% ($21,000 + $23,000 + $26,000) \+ 1,200 Earnings on Jen's contributions ------ $8,200 Total current value ======Vesting is the process by which an employee accrues non-forfeitable rights over employer-provided stock incentives or employer contributions made to the employee's qualified retirement plan account or pension plan.
On December 31 of the previous year, Jason Company adopted the dollar-value LIFO retail inventory method. Inventory data are as follows:
LIFO Cost Retail Inventory, 12/31 previous year $360,000 $500,000 Inventory, 12/31 current year -- 660,000 Increase in price level for current year 10% Cost to retail ratio for current year 70&
Under the LIFO retail method, Jason’s inventory at December 31 of the current year should be: $472,000. $483,200. $462,000. $437,000.
$437,000.
When applying the dollar-value LIFO retail method, you need to (as in dollar-value LIFO) restate ending-year retail to base-year prices:
$660,000 ÷ 1.10 (1 + 10% increase) = $600,000
This is a $100,000 increase in the ending-year retail amount over the retail amount at the beginning of the year (in base-year prices).
Now, determine the ending inventory using dollar-value LIFO retail directly, by adding to the beginning inventory of $360,000 the new layer of $100,000 multiplied by both the new layer’s cost-to-retail percentage and the new layer price level of 1.1:
$360,000 + ($100,000 × 0.7 × 1.1) = $437,000
Cantor Co. purchased a coal mine for $2,000,000. It cost $500,000 to prepare the coal mine for extraction of the coal. It was estimated that 750,000 tons of coal would be extracted from the mine during its useful life. Cantor planned to sell the property for $100,000 at the end of its useful life. During the current year, 15,000 tons of coal were extracted and sold. What would be Cantor's depletion amount per ton for the current year $2.50 $2.60 $3.20 $3.30
$3.20
The costs of the natural resource to be depleted include the purchase price plus the cost incurred to prepare the coal mine for extraction of the coal. This amount, $2,500,000, must be reduced by the $100,000 expected sales price of the land that will be recovered after all the coal has been mined. This difference divided by the 750,000 tons is the depletion charged for each ton of coal mined during the current year.
Aaron Co. issued shares of stock that are required to be redeemed upon the death of the holder for a proportionate share of the book value of Aaron. Which of the following statements is true
The stock is classified as a liability.
Disclosure is required.
The stock is mandatorily redeemable financial instrument.
All of the answer choices are true.
All of the answer choices are true.
FASB ASC 480-10-65-1 requires mandatorily redeemable stock to be classified as a liability, with proper disclosure. Since death is certain to occur at some point, a liability is shown. A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.
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2385 Distinguishing Liabilities from Equity
Notes or accounts receivable from officers, employees, or affiliated entities must be:
included with notes or accounts receivable from the entity’s business.
shown separately and not included under a general heading such as notes receivable or accounts receivable.
included only in disclosure to the financial statements.
shown as a separate class of equity.
shown separately and not included under a general heading such as notes receivable or accounts receivable.
According to FASB ASC 850-10-50-2, notes or accounts receivable from officers, employees, or affiliated entities must be shown separately and not included under a general heading such as notes receivable or accounts receivable.
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2387 Related Parties and Related Party Transactions
Which of the following best describes the general disclosure principle
Certain information may be presented either on the face of the financial statements or in the notes to the financial statements. Disclosure in the notes to the financial statements is needed only when the information required to be disclosed is not displayed on the face of the financial statements and the MD&A.
Certain information may be presented either on the face of the financial statements or in the notes to the financial statements. Disclosure in the notes to the financial statements is needed only when the information required to be disclosed is not displayed on the face of the financial statements.
Disclosure in the notes to the financial statements is needed only when management feels it is necessary to supplement information presented on the face of the financial statements.
Disclosure in the notes to the financial statements is needed only when the meaningful information is not provided elsewhere therein.
Certain information may be presented either on the face of the financial statements or in the notes to the financial statements. Disclosure in the notes to the financial statements is needed only when the information required to be disclosed is not displayed on the face of the financial statements.
Per GASB 2300.103, certain information may be presented either on the face of the financial statements or in the notes to the financial statements. Disclosure in the notes to the financial statements is needed only when the information required to be disclosed is not displayed on the face of the financial statements.
Disclosure in the MD&A or “elsewhere” are not alternatives for disclosure provided by the GASB Codification. Note disclosure includes “essential,” not “supplemental,” information that is not displayed on the face of the financial statements.
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2425 Notes to Financial Statements
Under state law, Acme may pay 3% of eligible gross wages or it may reimburse the state directly for actual unemployment claims. Acme believes that actual unemployment claims will be 2% of eligible gross wages and has chosen to reimburse the state. Eligible gross wages are defined as the first $10,000 of gross wages paid to each employee. Acme had five employees each of whom earned $20,000 during 20X1.
In its December 31, 20X1, balance sheet, what amount should Acme report as accrued liability for unemployment claims $1,000 $1,500 $2,000 $3,000
$1,000
Eligible Number of Expected Liability for unemployment tax = wages x employees x claim rate
= $10,000 x 5 x 2%
= $ 1,000
On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker's tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld $0 $3,000 $10,000 $30,000
$30,000
Feld should recognize $30,000 gain:
Value received ($100,000 value of
tow truck less $10,000) $90,000
Book value of delivery truck:
Cost $140,000
Accumulated depreciation 80,000 60,000
——-
Gain $30,000
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2386 Nonmonetary Transactions (Barter Transactions)
On December 31, 20X1, Bit Co. had capitalized costs for a new computer software product with an economic life of 5 years. Sales for 20X2 were 30% of expected total sales of the software. On December 31, 20X2, the software had a net realizable value equal to 90% of the capitalized cost.
What percentage of the original capitalized cost should be reported as the net amount on Bit's December 31, 20X2, balance sheet 70% 72% 80% 90%
70%
FASB ASC 985-20-35-1 provides that:
Quote
The annual amortization shall be the greater of the amount computed using:
a. The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or
b. The straight-line method over the remaining estimated economic life of the product including the period being reported on.
- Ratio of current to total revenues (given) = 30%
- Straight-line rate = 1/5 = 20%
The greater of these, 30%, would be used in computing 20X2 amortization, leaving a net amount of 70% (100% - 30%) to be shown on Bit’s December 31, 20X2, balance sheet.
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2391 Software Costs
Pitbull Construction Corporation applies IFRS, has equipment that it can reliably measure fair value of, and has chosen to apply the revaluation model to valuing this equipment on its accounting records. The carrying value of this equipment on Pitbull’s books at the end of last year, December 31, 20X1, was $200,000. At the end of this year, December 31, 20X2, due to increased demand for the equipment, even when resold as used, the fair value is $250,000.
For the year 20X2, in relation to this equipment for which Pitbull has chosen to apply the revaluation method, Pitbull must:
increase the operating income for the period 20X2 by the addition to fair value, $50,000.
increase asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.
not account for the addition in fair value of an unsold long-term asset used in operations.
decrease asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.
increase asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.
When a class of assets’ fair value can be reliably measured, a corporation applying IFRS can elect to apply the revaluation model to the class of assets. When the carrying value of the assets differs materially from the fair value of the assets, a revaluation must occur, with any increase being included in asset revaluation surplus, an equity account, like other comprehensive income, and a decrease being accounted for as an other loss included in income from operations.
On its December 31, 20X1, balance sheet, Shin Co. had income taxes payable of $13,000 and a current deferred tax asset of $20,000 before determining the need for a valuation account. Shin had reported a current deferred tax asset of $15,000 at December 31, 20X0. No estimated tax payments were made during 20X1. At December 31, 20X1, Shin determined that it was likely that 10% of the deferred tax asset would not be realized.
In its 20X1 income statement, what amount should Shin report as total income tax expense $8,000 $8,500 $10,000 $13,000
$10,000
Income taxes payable $13,000
Less net deferred tax asset
((0.90 x $20,000) - $15,000) = (3,000)
——–
Total income tax expense $10,000
========
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2270 Income Taxes
Terra Co.’s total revenues from its three business segments were as follows:
Sales to
Unaffiliated Intersegment Total Segment Customers Sales Revenues -------- ------------ ------------ --------- Lion $ 70,000 $ 30,000 $100,000 Monk 22,000 4,000 26,000 Nevi 8,000 16,000 24,000
------- -------- --------- Combined $100,000 $ 50,000 $150,000 Elimination - (50,000) (50,000)
-------- --------- --------- Consolidated $100,000 $ - $100,000
======== ========= =========
Which business segments are deemed to be reportable segments None Lion only Lion and Monk only Lion, Monk, and Nevi
Lion, Monk, and Nevi
If an operating segment’s revenue (sales to unaffiliated customers and intersegment sales) is “10% or more of the combined revenue…of all the enterprise’s industry segments,” it is a reportable segment.
For Terra Co.:
Segment Revenues / Total = Percentage
Lion $100,000 / $150,000 = 66.67%
Monk 26,000 / 150,000 = 17.33%
Nevi 24,000 / 150,000 = 16.00%
All of Terra Co.’s segments are reportable.
Since all these meet the revenue test, it is not necessary to apply the other two tests (asset test and profit/loss test).
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2390 Segment Reporting
Selected information from the accounts of Row Co. on December 31, 20X1, follows:
Total income since incorporation $420,000
Total cash dividends paid 130,000
Total value of property dividends
distributed 30,000
Excess of proceeds over cost of
treasury stock sold, accounted
for using cost method 110,000
In its December 31, 20X1, financial statements, what amount should Row report as retained earnings
$260,000
$290,000
$370,000
$400,000
In its December 31, 20X1, financial statements, what amount should
Explanation
Retained earnings on December 31, 20X1, would be computed:
Total income since incorporation $420,000
Less cash dividends $130,000
Property dividends 30,000 160,000
——– ——–
Retained earnings on December 31, 20X1 $260,000
Note
The excess of proceeds over cost of treasury stock sold would be credited to “additional paid-in capital” under the cost method.
Capital stock
Includes the par or stated value of preferred and common stock. It is sometimes referred to as legal capital.
Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25% interest in capital and profits, for an investment of $30,000. What amount should be recorded as goodwill to the original partners $0 $5,000 $7,500 $20,000
$20,000
*Study your advanced accounting note s for this!!
When a new partner is admitted by investing into the partnership, the total capital of the partnership changes, and the purchase price (amount of new investment) can be equal to, more than, or less than book value. When the purchase price is equal to book value, no goodwill or bonuses are recorded. When the purchase price is more or less than book value, either goodwill or bonuses must be recorded. The total capital of the resulting new partnership determines whether goodwill or bonuses are recorded. Under the goodwill approach, goodwill is recognized on the basis of the total value of the new partnership implied by the new partner’s investment relative to the partners’ total capital. Under the bonus approach, such implied value is not considered. In this problem, the assets are revalued, suggesting that goodwill is being recorded.
Implied value after new investment: $30,000 represents 25% of total value; therefore, the implied total value is $120,000 ($30,000 ÷ .25).
Implied Value $120,000
Total partner’s capital accounts (100,000) (45,000 + $25,000 + $30,000)
———
Goodwill to original partners $ 20,000
Non-Recurring Items
Discontinued operations, extraordinary items and accounting changes are all reported as separate items in the income statement. They are all reported net of taxes and below the tax line, and are not included in income from continuing operations. In some cases, earlier income statements and balance sheets have to be adjusted to reflect changes.
Income (or expense) from discontinued operations - This component is related to income (or expense) generated due to the shutdown of one or more divisions or operations (plants). These events need to be isolated so they do not inflate or deflate the company’s future earning potential. This type of nonrecurring occurrence also has a nonrecurring tax implication and, as a result of the tax implication, should not be included in the income tax expense used to calculate net income from continuing operations. That is why this income (or expense) is always reported net of taxes. The same is true for extraordinary items and cumulative effect of accounting changes (see below).
Extraordinary items - This component relates to items that are both unusual and infrequent in nature. That means it is a one-time gain or loss that is not expected to occur in the future. An example is environmental remediation.
Cumulative effect of accounting changes - This item is generally related to changes in accounting policies or estimations. In most cases, these are non cash-related expenses but could have an effect on taxes.
Unusual or Infrequent Items
Included in this category are items that are either unusual or infrequent in nature but they cannot be both.
Summary of Adjustment for Indirect Method:
- Adjustments for changes in current assets and current liabilities
- Adjustments for operating items not providing or using cash
- Adjustments for non operating items
- Adjustments for changes in current assets and current liabilities:
+Decrease in non cash current asset
-Increase in non cash current asset
+Increase in current liability
-Decrease in current liability
- Adjustments for operating items not providing or using cash
+Depreciation, depletion, amortization and goodwill impairment loss
- Adjustments for non operating items
+Losses from disposal of long-term assets and retirement of debt
-Gains from disposal of long-term assets and retirement of debt
Which of the following is the most correct statement regarding the capitalization of construction-period interest requirement on capital assets used in business-like activities
Interest should be capitalized on qualifying assets.
Interest may not be capitalized on qualifying assets.
Interest capitalization is not an issue addressed by governmental accounting standards.
Interest capitalization is optional.
Interest should be capitalized on qualifying assets.
FASB and AICPA pronouncements dated before November 20, 1989, have been incorporated into the GASB Codification, which indicates that interest should be capitalized for what is termed “qualifying assets” of governments, including the business-like activities. Qualifying assets include assets constructed for the government’s own use. Therefore, the choices that interest may not be capitalized, that capitalization is optional, or that interest capitalization is not addressed in GASB standards are all incorrect.
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2412 Fund Accounting Concepts and Application
- VIDEO EXPLANATION
- notes 9/28
Which of the following is false regarding the reporting of capital assets at the entity-wide perspective
Depreciation of general capital assets, including infrastructure capital assets, should be reported by function.
Depreciation on general capital assets, including infrastructure, is always required.
Depreciation is not taken on infrastructure assets accounted for using the modified approach.
General capital assets, including infrastructure capital assets, should be reported at known or estimated historical cost less any accumulated depreciation.
Depreciation on general capital assets, including infrastructure, is always required.
Under GASB 1400.105, certain infrastructure capital assets are not required to be depreciated under the modified approach. The other three statements are true.
GASB 1400.105
GASB 2200.133
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2427 Required Supplementary Information (RSI) Other Than …
The statistical section of a government’s comprehensive annual financial report is:
considered part of management’s discussion and analysis if it addresses financial trends information.
is always considered part of required supplementary information.
is always considered part of the notes to the financial statements.
is considered part of required supplementary information only if the focus is on the primary government.
is always considered part of required supplementary information.
State and local governments are required to prepare a statistical section that accompanies the basic financial statements. GASB 2800.101 clearly indicates that the statistical section is supplementary information. Financial trends is one of the five categories of statistical information to be presented. Statistical information is not considered part of management’s discussion and analysis, another item of required supplementary information, or part of the notes to the financial statements.
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2420 Format and Content of Comprehensive Annual Financial …
How should plan investments be reported in a defined benefit plan's financial statements At actuarial present value At cost At net realizable value At fair value
At fair value
FASB ASC 962-205-45-2 requires that an employee benefit plan report its net assets at fair value.
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2264 Retirement Benefits
In 20X1, Chain, Inc., purchased a $1,000,000 life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ending December 31, 20X6, follows:
Cash surrender value (01/01/X6) $ 87,000
Cash surrender value (12/31/X6) 108,000
Annual advance premium paid (01/01/X6) 40,000
During 20X6, dividends of $6,000 were applied to increase the cash surrender value of the policy.
What amount should Chain report as life insurance expense for 20X6 $40,000 $25,000 $19,000 $13,000
$19,000
Annual advance premium payment $40,000
Less increase in cash surrender value
($108,000 - $87,000) 21,000
——-
Life insurance expense for 20X6 $19,000
======
Note
The increase in cash surrender value is deducted because cash surrender value of the insurance policy is an asset. Also, the increase in this asset already includes the effect of the $6,000 in dividends applied to it in 20X6.
Civic Town has a number of enterprise funds, some reported as major funds in the basic financial statements and some considered as nonmajor funds, reported in aggregated form. One of these nonmajor funds, the Airport fund, accounts for the operations of a small airport used intermittently by hobbyists. Due the requirements of a grant, Airport fund expenses must be reported in more detail than the other nonmajor enterprise funds with which the Airport fund is aggregated. This information can best be shown in the comprehensive annual financial report by:
including the Airport fund in the combining funds statements of the enterprise funds.
adding information about the Airport fund to the required supplementary information.
including the Airport fund in the combining fund statements of governmental funds.
providing schedules supporting Airport fund information.
providing schedules supporting Airport fund information.
The question makes it clear that the expense categories in the combining enterprise funds statements are not detailed enough for the grant reporting. The additional detail is not one of the items required as supplementary information. The Airport fund would not be included in the combining fund statements of governmental funds because it is an enterprise fund. The additional detail should be shown in a schedule in order to show compliance with finance-related legal and contractual provisions.
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2428 Combining Statements and Individual Fund Statements …
Interest expense
Carrying amount x Effective interest rate
Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell’s truck originally cost $23,000, its accumulated depreciation was $20,000, and its fair value was $5,000. Highway’s truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance.
What amount is the new book value for the truck Campbell received $5,700 $5,000 $3,700 $3,000
$3,700
Generally, a nonmonetary exchange should be based on the fair values of the assets exchanged—resulting in the immediate recognition of a gain or loss.
Exceptions to this treatment include the following:
Fair value is not determinable
Exchange transaction to facilitate sales to customers
Exchange transaction that lacks commercial substance
Under these exceptions, no gains or losses are recognized.
Since this transaction lacks commercial substance, no gain or loss is recognized and the new book value is equal to the book value prior to the exchange:
Original cost $23,000
Accumulated depreciation 20,000
——-
Book value $ 3,000
Additional cash paid 700
——-
New book value $ 3,700
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2386 Nonmonetary Transactions (Barter Transactions)
Nest Co. recorded the following inventory information during the month of January:
Unit Total Units
Units Cost Cost on Hand
----- ---- ------ ------- Balance on 01/01 2,000 $1 $2,000 2,000 Purchased on 01/08 1,200 3 3,600 3,200 Sold on 01/23 1,800 1,400 Purchased on 01/28 800 5 4,000 2,200
Nest uses the LIFO method to cost inventory. What amount should Nest report as inventory on January 31 under each of the following methods of recording inventory Perpetual: $2,600; Periodic: $5,400 Perpetual: $5,400; Periodic: $2,600 Perpetual: $2,600; Periodic: $2,600 Perpetual: $5,400; Periodic: $5,400
Read carefully!! It’s asking for the INVENTORY amount, NOT COGS!!
Perpetual: $5,400; Periodic: $2,600
Under the LIFO method, the last goods in are treated as the first ones included in cost of goods sold.
The perpetual method of LIFO treats units sold as coming from the last units acquired prior to that sale. Thus, the sale on January 23 leaves remaining inventory at 1,400 units at $1 (2,000 + 1,200 - 1,800). The purchase on January 28 adds $4,000 to the inventory for a total of $5,400.
When using the periodic method, the inventory is not valued until the end of the period. Under the periodic method, the ending inventory of 2,200 units is priced at the earlier prices during the year (2,000 at $1 plus 200 at $3) for a total of $2,600.
The following information was obtained from Smith Co.:
Sales $275,000
Beginning inventory 30,000
Ending inventory 18,000
Smith's gross margin is 20%. What amount represents Smith purchases $202,000 $208,000 $220,000 $232,000
$208,000
Cost of goods sold = Sales × (1 - Gross margin ratio)
$220,000 = $275,000 × 0.80
Cost of goods sold = Beginning inventory + Purchases - Ending inventory
$220,000 = $30,000 + Purchases - $18,000 Purchases = $208,000
A foreign subsidiary’s functional currency is its local currency, which has not experienced significant inflation. The weighted-average exchange rate for the current year would be the appropriate exchange rate for translating:
sales to customers.
wages expense.
both sales to customers and wages expense.
neither sales to customers nor wages expense.
both sales to customers and wages expense.
FASB ASC 830-10-55-10 expresses a preference for using the current exchange rate in effect when revenues, expenses, gains, or losses occur. However:
Quote
Because translation at the exchange rates at the dates the numerous revenues, expenses, gains, and losses are recognized is generally impractical, an appropriately weighted-average exchange rate for the period may be used to translate those elements.
Thus, both sales and wages expense may be translated using a weighted-average exchange rate.
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2361 General Concepts
Tara Co. owns an office building and leases the offices under a variety of rental agreements involving rent paid in advance monthly or annually. Not all tenants make timely payments of their rent. Tara’s balance sheets contained the following data:
Year 1 Year 2
Rentals receivable $9,600 $12,400
Unearned rentals 32,000 24,000
During Year 2, Tara received $80,000 cash from tenants. What amount of rental revenue should Tara record for Year 2
$85,200
$69,200
$90,800
$74,800
$90,800
This is a case of converting from cash-basis rent revenue to accrual-basis revenue. Rent received in cash plus the increase in rental receivables, plus the decrease in unearned rent would be rent revenue on an accrual basis. (Cash plus increase in assets and decreases in related liabilities is revenue.)
Thus, the revenue for the year is $80,000 cash received, plus the increase in receivables of $2,800 (from $9,600 to $12,400), adding the decrease in unearned rent of $8,000 (down from $32,000 to $24,000), which adds up to $90,800:
$80,000 + $2,800 + $8,000 = $90,800
The following information pertains to Smith’s personal assets and liabilities on December 31, 20X1:
Historical Est Current Est Current
Cost Value Amounts
---------- ----------------- ----------------- Assets $500,000 $900,000 Liabilities 100,000 $80,000
Smith’s 20X1 income tax rate was 30%. In Smith’s personal statement of financial condition on December 31, 20X1, what amount should be reported as Smith’s net worth
$294,000
$420,000
$694,000
$694,000
Net worth is the excess of the estimated value of assets over the estimated amounts of liabilities, reduced by the tax associated with the difference between the estimated values and the tax basis of assets and liabilities. Smith’s net worth is computed as follows:
Estimated value of assets $900,000
Estimated amount of liabilities (80,000)
Tax on difference between estimated
values and tax basis:
Assets ($900,000 - $500,000) $400,000
Liabilities ($100,000 - $80,000) 20,000
——–
$420,000
Tax rate 30%
——–
Tax (126,000)
———
Net worth $694,000
=========
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2151 Personal Financial Statements
IFRS Difference - Research and Development
Under IFRS, research and costa are expensed, but development costs are capitalized
Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent’s debt-to-equity ratio
- 48
- 52
- 08
- 63
1.08
The debt-to-equity ratio is the relationship between total liabilities and total equity. Thus, here we divide total liabilities by total equity.
Total equity is simply the sum of both retained earnings added to capital stock:
$150,000 + $215,000 = $365,000
Total liabilities can be computed to be $395,000, as it is the total assets less the total equity:
$760,000 – $365,000 = $395,000
To get the debt-to-equity ratio, divide the total liabilities by the total equity:
$395,000 ÷ $365,000 = 1.08
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2137 Consolidated and Combined Financial Statements
Governmental financial reporting should provide information to assist users in which situation(s)
I. Making economic, social, and political decisions
II. Assessing whether current-year citizens received services but shifted part of the payment burden to future-year citizens
I only
II only
Both I and II
Neither I nor II
Both I and II
GASB Concepts Statement 1, Objectives of Financial Reporting, is the basis for this question. Item I is an appropriate response because the Concepts Statement says at paragraph 32: “financial reporting by state and local governments is used in making economic, social, and political decisions and in assessing accountability….”
Item II is also an appropriate response because paragraph 61, in the discussion of accountability, states that “interperiod equity is a significant part of accountability” and thus “financial reporting should help users assess whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume (financial) burdens for services previously provided.”
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2411 Measurement Focus and Basis of Accounting
The controller of Peabody, Inc., has been asked to present an analysis of accounts receivable collections at the upcoming staff meeting. The following information is used:
12/31, Year 2 12/31, Year 1
Accounts receivable $100,000 $130,000
Allowance, doubtful accounts (20,000) (40,000)
Sales 400,000 200,000
Cost of goods sold 350,000 200,000
What is the receivables turnover ratio as of December 31, Year 2
- 5
- 7
- 0
- 6
4.7
Receivables turnover is defined as net credit sales divided by average receivables.
For Year 2, sales were $400,000. To get average receivables, one needs to get the net beginning and net ending receivables balances, add them, and then divide the total by 2.
Beginning balance was $130,000 – $40,000, or $90,000.
Ending balance was $100,000 – $20,000, or $80,000.
The average balance is $85,000: ($80,000 + $90,000) = $170,000; $170,000 ÷ 2 = $85,000.
The receivables turnover is thus 4.7: $400,000 ÷ $85,000 = 4.7.
Cuthbert Industrials, Inc., prepares 3-year comparative financial statements. In Year 3, Cuthbert discovered an error in the previously issued financial statements for Year 1. The error affects the financial statements that were issued in Years 1 and 2.
How should the company report the error
The financial statements for Years 1 and 2 should be restated; an offsetting adjustment to the cumulative effect of the error should be made to the comprehensive income in the Year 3 financial statements.
The financial statements for Years 1 and 2 should not be restated; financial statements for Year 3 should disclose the fact that the error was made in prior years.
The financial statements for Years 1 and 2 should not be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3.
The financial statements for Years 1 and 2 should be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3.
The financial statements for Years 1 and 2 should be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3.
A correction of an accounting error must be reported by restating the financial statements for all prior years. The carrying amounts for assets, liabilities, and beginning retained earnings must be restated for the earliest year presented in the financial statements presented in the year the error is discovered.
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2305 Accounting Changes and Error Corrections
Which of the following activities should be excluded when governmental fund financial statements are converted to government-wide financial statements Proprietary activities Fiduciary activities Government activities Enterprise activities
Fiduciary activities
The government-wide financial statements display information about the reporting government as a whole. The statements would report the governmental activities reported in the governmental funds and the proprietary and enterprise activities accounted for in enterprise funds. The fiduciary activities are not considered part of the operations of the government itself and would not be included in the government-wide financial reports.
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2421 Government-Wide Financial Statements
East Corp. manufactures stereo systems that carry a 2-year warranty against defects. Based on past experience, warranty costs are estimated at 4% of sales for the warranty period. During 20X1, stereo system sales totaled $3,000,000, and warranty costs of $67,500 were incurred. In its income statement for the year ending December 31, 20X1, East should report warranty expense of: $52,500. $60,000. $67,500. $120,000.
$120,000.
Warranty expense for 20X1:
4% of sales = .04 × $3,000,000 = $120,000
Dr. Cr. Warranty expense $120,000 Estimated warranty liability $120,000
The warranty expense is recognized in the year in which the warranted product is sold. The actual warranty expenditures may or may not be made in that same period. The $67,500 warranty expenditures incurred in 20X1 result in a reduction of the estimated warranty liability. Those expenditures may relate to products sold in 20X1 but they also may relate to products sold in a prior period. The entry for the warranty expenditures made in 20X1 is:
Dr. Cr. Estimated warranty liability $ 67,500 Cash $ 67,500
Under current generally accepted accounting principles, which approach is used to determine income tax expense Asset and liability approach “With and without” approach Net of tax approach Periodic expense approach
Asset and liability approach
FASB ASC 740-10-10-1 determines the approach used to determine income tax expense from the periodic expense approach to the asset and liability approach. This method focuses on the calculation of deferred tax assets and liabilities, and calculates the periodic expense or benefit as the change in the asset or liability from the prior balance sheet date.
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2270 Income Taxes
On January 1 of the current year, Lean Co. made an investment of $10,000, with interest of 10% compounded annually. The following is the present value of $1.00 discounted at a 10% interest rate:
Present Value of $1.00
Periods Discounted at 10%
========= ========================
1 .9091
2 .8264
3 .7513
What amount of cash will Lean accumulate in two years $12,000 $12,101 $16,250 $27,002
$12,101
The amount accumulated at the end of two years is the future value of a single payment times the $10,000 deposit. Because future values of single payments and present values of single payments are reciprocals, the amount that will be accumulated at the end of two years is $10,000 ÷ .8264, or $12,101.
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2121 Financial Reporting by Business Entities
During the year, Lake Co. issued 3,000 of its 9%, $1,000 face value bonds at 101½. In connection with the sale of these bonds, Lake paid the following expenses:
Promotion costs $ 20,000
Engraving and printing 25,000
Underwriters’ commissions 200,000
What amount should Lake record as bond issue costs to be amortized over the term of the bonds $0 $245,000 $220,000 $225,000
$245,000
The items listed (promotion costs, engraving and printing, and underwriters’ commissions) would all qualify as bond issuance costs that need to be amortized over the term of the bonds:
$20,000 + $25,000 + $200,000 = $245,000
What is an ordinary annuity?
An ordinary annuity is a series of payments having the following three characteristics:
- All payments are in the same amount (such as a series of payments of $1,000).
- All payments are made at the same intervals of time (such as once a month or quarter, over a period of a year).
- All payments are made at the end of each period (such as payments being made only the last day of the month).
Usually, payments made under the ordinary annuity concept are made at the end of each month, quarter, or year, though other payment intervals are possible (such as weekly or even daily). Examples of ordinary annuity payments are:
Semi-annual interest payments on bonds
Quarterly or annual dividend payments
Because payments are made sooner under an annuity due (where payments are made at the beginning of each period) than under an ordinary annuity, an annuity due has a higher present value than an ordinary annuity.
When interest rates rise, the value of an ordinary annuity is reduced. When interest rates decline, the value of an ordinary annuity is increased. The reason for these variations is that the present value of a stream of future cash payments is dependent on the interest rate used in the present value formula.
Oak Co. offers a 3-year warranty on its products. Oak previously estimated warranty costs to be 2% of sales. Due to a technological advance in production at the beginning of 20X2, Oak now believes 1% of sales to be a better estimate of warranty costs. Warranty costs of $80,000 and $96,000 were reported in 20X0 and 20X1, respectively. Sales for 20X2 were $5,000,000.
What amount should be disclosed in Oak's 20X2 financial statements as warranty expenses $50,000 $88,000 $100,000 $138,000
$50,000
The technological advance applies only to 20X2 production. Therefore:
20X2 Warranty expense = 0.01 × $5,000,000 = $50,000
During 20X1, Beam Co. paid $1,000 cash and traded inventory, which had a carrying amount of $20,000 and a fair value of $21,000, for other inventory in the same line of business with a fair value of $22,000. The exchange of the inventory is to facilitate sales to Beam's customers. What amount of gain (loss) should Beam record related to the inventory exchange $2,000 $1,000 $0 $(1,000)
$0
FASB ASC 845-10-30-1 specifies that the accounting for nonmonetary exchanges generally should be accounted for based on fair values, which is the same basis as that used for monetary transactions. FASB ASC 845-10-30-3 provides three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:
- Fair value is not determinable.
- Exchange transaction is to facilitate sales for customers.
- Exchange transaction lacks commercial substance.
In Beam’s case, exception 2 is met. The exchange of the inventory is to facilitate sales to Beam’s customers. The exchange should be recorded based on carrying amounts with no gain recognized. If the inventory’s carrying amount had been in excess of the fair value of the inventory given up, the inventory given up should have been written down and the loss recognized before the exchange was recorded.
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2386 Nonmonetary Transactions (Barter Transactions)
On February 1, 20X1, Tory began a service proprietorship with an initial cash investment of $2,000. The proprietorship provided $5,000 of services in February and received full payment in March. The proprietorship incurred expenses of $3,000 in February, which were paid in April. During March, Tory drew $1,000 against the capital account. In the proprietorship's financial statements for the two months ending March 31, 20X1, prepared under the cash basis method of accounting, what amount should be reported as capital $1,000 $3,000 $6,000 $7,000
$6,000
Initial capital investment $2,000
Add: Service revenue collected 5,000
——-
Subtotal $7,000
Deduct: Cash withdrawn (1,000)
=======
Capital balance on March 31, 20X1 $6,000
Under the cash method, expenses would be recorded in April when paid.
The following information relates to Jay Co.’s accounts receivable for 20X1:
Accounts receivable (January 1, 20X1) $ 650,000
Credit sales for 20X1 2,700,000
Sales returns for 20X1 75,000
Accounts written off during 20X1 40,000
Collections from customers during 20X1 2,150,000
Est future sales returns on Dec 31, 20X1 50,000
Est uncollectible accounts on Dec 31, 20X1 110,000
What amount should Jay report for accounts receivable, before allowances for sales returns and uncollectible accounts, on December 31, 20X1 $1,200,000 $1,125,000 $1,085,000 $925,000
$1,085,000
AR on January 1, 20X1 $ 650,000
Credit sales for 20X1 + 2,700,000
————
Subtotal $3,350,000
Sales returns for 20X1 $ 75,000
Accounts written off in 20X1 40,000
Collection from customers 2,150,000 2,265,000
——— ————
Ar on December 31, 20X1 $1,085,000
===========
Note
The question concerned the accounts receivable account, not net accounts receivable, so estimated uncollectible accounts were not considered.
During periods of inflation, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory valuation methods FIFO, Yes; LIFO, No FIFO, Yes; LIFO, Yes FIFO, No; LIFO, Yes FIFO, No; LIFO, No
FIFO, Yes; LIFO, No
Under the FIFO inventory method, the ending inventory would consist of the last units purchased under both the perpetual and periodic inventory systems. Under the LIFO inventory method, the periodic inventory system would include in ending inventory the earliest units (beginning inventory and early purchases). Under LIFO, the perpetual inventory system would have expensed some of the beginning inventory and early purchases when sales were made early in the year.
Oak Co., a newly formed corporation, incurred the following expenditures related to land and building:
County assessment for sewer lines $ 2,500
Title search fees 625
Cash paid for land with a building to be demolished 135,000
Excavation for construction of basement 21,000
Removal of old building $21k - salvage of $5k 16,000
At what amount should Oak record the land $138,125 $153,500 $154,125 $175,625
$154,125
The cost of plant assets includes all expenditures necessary to acquire the asset and prepare it for its intended use. The cost of land includes the purchase price, costs incidental to acquisition (such as legal fees, commissions, and title insurance), and the costs of preparing the land for use (such as the costs of surveying, grading, filling, draining, and clearing). The cost of tearing down an existing building is included in the cost of the land.
All of the costs presented other than the excavation should be included in the cost of the land. The excavation for the basement will be included in the cost of the building.
An analysis of Thrift Corp.’s unadjusted prepaid expense account on December 31, 20X1, revealed the following:
An opening balance of $1,500 for Thrift’s comprehensive insurance policy. Thrift had paid an annual premium of $3,000 on July 1, 20X0.
A $3,200 annual insurance premium payment made July 1, 20X1
A $2,000 advance rental payment for a warehouse Thrift leased for one year beginning January 1, 20X2
In its December 31, 20X1, balance sheet, what amount should Thrift report as prepaid expenses $5,200 $3,600 $2,000 $1,600
$3,600
Item Prepaid Amount
—————————————— ————–
Comprehensive insurance policy (1/2 was
expensed in 20X0, remainder expensed
in first half of 20X1) $ 0
Insurance paid July 1, 20X1 (1/2 remains) 1,600
Advance rental payment (applies to 20X2) 2,000
——
Total prepaid expenses on December 31, 20X $3,600
======
On December 31, 20X1, Vey Co. traded equipment with an original cost of $100,000 and accumulated depreciation of $40,000 for similar productive equipment with a fair value (FV) of $60,000. In addition, Vey received $30,000 cash in connection with this exchange. What should be Vey's carrying amount for the equipment received on December 31, 20X1, if the exchange has commercial substance $30,000 $40,000 $60,000 $80,000
$60,000
FASB ASC 845-10-30-1 generally specifies that if fair value is determinable nonmonetary exchanges be recorded based on fair value unless the exchange transaction lacks commercial substance. In that case, the entire amount of any implied gain or loss should be recognized at the time of the exchange. The implied gain in this case is:
Fair value of asset surrendered:
Fair value of equipment received $60,000
Cash received 30,000
——-
90,000
Less book value of asset surrendered
($100,000 - $40,000) 60,000
——-
Implied gain $30,000
=======
The entry to record the exchange is:
Equipment (new) $60,000
Cash 30,000
Accumulated depreciation 40,000
Equipment (old) $100,000
Gain 30,000
This question is addressed from the standpoint of Vey Co. The fair value of the equipment that Vey traded (transferred out) must be the same as the sum of the fair values of everything that Vey Co. received (cash and equipment). Thus, the fair value of the equipment surrendered by Vey Co. must be $30,000 (cash received) plus $60,000 (fair value of equipment received), for a total of $90,000.
The cash received by Vey is taken into consideration in determining the fair value of the equipment surrendered, but is not taken into consideration in determining the fair value of the equipment received.
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2386 Nonmonetary Transactions (Barter Transactions)
Under U.S. GAAP, an exception is allowed for the “impracticality” of calculating the impact of changes in accounting principles. For which category does IFRS allow an exception of “impracticality”
Changes in accounting principles
Changes in accounting estimates
Correction of errors
Changes in accounting principles and correction of errors
Changes in accounting principles and correction of errors
IFRS allows an exception of reporting the impact of both changes in accounting principles and correction of errors.
Unless an individual standard specifies otherwise, a change in accounting principle or an accounting error is applied retrospectively, except to the extent that it is impracticable to determine the effects of the change. In that case, the principle or error change is applied from the earliest date practicable.
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2305 Accounting Changes and Error Corrections
Stock Dividends
A stock dividend does not involve cash. Rather, it is the distribution of more shares of the corporation’s stock. Perhaps a corporation does not want to part with its cash, but wants to give something to its stockholders. If the board of directors approves a 10% stock dividend, each stockholder will get an additional share for each 10 shares held.
II. Large Stock Dividends
Large stock dividend. A stock dividend is considered to be large if the new shares being issued are more than 20-25% of the total value of shares outstanding prior to the stock dividend.
On the declaration date of a large stock dividend, a journal entry is made to transfer the par value of the shares being issued from retained earnings to the paid-in capital section of stockholders’ equity.
To illustrate, let’s assume a corporation has 2,000 shares of common stock outstanding when it declares a 50% stock dividend. This means that 1,000 new shares of stock will be issued to existing stockholders. The stock has a par value of $0.10 per share and the stock has a market value of $12 per share on the declaration date. The following entry should be made on the declaration date:
Retained Earnings (100 x $0.10) 100
C.S. Dividends 100
When the 1,000 shares are distributed to the stockholders, the following journal entry is made:
Common Stock Dividends 100
Common Stock 100
A county acquired equipment through a capital lease agreement dated July 31, 20X1. The lease payments are to be financed with general government resources.
Where should the noncurrent portion of the lease be reported in the June 30, 20X2, financial statements
In the government-wide statement of net position in the governmental activities column
In the proprietary funds statement of net position
In the government-wide statement of net position in the business-type activities column
In the governmental funds balance sheet
In the government-wide statement of net position in the governmental activities column
In the government-wide statement of net position in the governmental activities column
The noncurrent portion of capital leases financed by the general government is reported as general long-term liability. General long-term liabilities should be reported in the governmental activities column in the government-wide statement of net position.
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2421 Government-Wide Financial Statements
Those revenues generated by an entity that it allows to customers on credit, less all sales returns and sales allowances
Net credit sales
Net credit sales do not include any sales for which payment is made immediately in cash.
Relative to accrual basis, a decrease in accounts receivable is a/n ______ in cash
INCREASE in cash because cash must be received to decrease accounts receivable.
According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory Historical cost Replacement cost Net realizable value Present value of future cash flows
Present value of future cash flows
SFAC 5, Recognition and Measurement in Financial Statements of Business Enterprises, discusses each of these measurement attributes. Each of the methods, except present value of future cash flows, would be acceptable in measuring inventory in certain circumstances. The use of present values of future cash flows was said to be useful in reporting long-term receivables.
Inventory is accounted for at lower of (historical) cost or market. Market is measured as replacement cost, net realizable value, or net realizable value less a normal profit margin.
GASB 1600.103 requires governmental entities to issue which two sets of financial statements
The balance sheet and the statement of owner’s equity
The income statement and the statement of cash flows
The statement of net position and the statement of cash flows
The statement of net position and the statement of activities
The statement of net position and the statement of activities
Since budgetary compliance requires governmental entities to prepare cash-basis budgets, GASB 1600.103 requires the issuance of two financial statements:
The balance sheet or statement of net position
The statement of revenue and expenses or statement of activities
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2123 Financial Reporting by State and Local Governmental …
Reporting of general infrastructure assets by all public institutions that report as special-purpose governments either engaged only in governmental activities or engaged in both governmental and business-type activities is:
encouraged but not required.
required using the special provisions of GASB Statement 35 for phase 3 public institutions.
required using the full governmental model.
required beginning with fiscal years ending after June 15, 2006.
required using the full governmental model.
Public institutions that report as special-purpose governments either engaged only in governmental activities or engaged in both governmental and business-type activities should report infrastructure using the provisions of GASB Statement 34 codified as GASB Sp20.104. These provisions include the reporting of capital assets that are defined in GASB 1400.103 to include infrastructure.
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2424 Fiduciary Funds Financial Statements
Barr Co. has total debt of $420,000 and stockholders’ equity of $700,000. Barr is seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in common stock, and is negotiating with a bank to borrow additional funds. The bank is requiring a debt-to-equity ratio of .75. What is the maximum additional amount Barr will be able to borrow
Debt-to-equity ratio = Total debt / Total stockholders’ equity
.75 = Total debt / ($700,000 + $300,000) .75($1,000,000) = Total debt $750,000 = Total debt
Additional debt = Total debt - Present debt
= $750,000 - $420,000
= $330,000
New Town has completed the conversion and consolidation process to prepare its government-wide financial statements. Fund balances of all governmental and enterprise funds have been adjusted to present net position for governmental activities and for business-like activities. Some portion of the resulting net position should be displayed as “restricted.” Restricted net position may result from:
council actions (not imposed by law) to set aside “reserves” for special purposes.
debt covenants requiring resources to be set aside.
enabling legislation identifying certain resources to be used for specific purposes.
Restrictions of net position should be displayed on the face of the financial statements for the following: I and II II and III I and III III only
II and III
Per GASB 2200.119, net position should be reported as restricted if use is constrained either by externally imposed conditions such as from creditors or grantors, or by legislation. The council’s actions do not constitute external constraints or enabling legislation.
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2421 Government-Wide Financial Statements
A company estimates its bad debt expense each year as 4 percent of credit sales. In the current period, one balance of $9,000 from a particular customer is determined to be uncollectible and is written off. Which of the following statements is true?
A. This write-off will increase bad debt exp for the year.
B. This write-off reduces the net amount reported for the receivables on that date.
C. This write-off reduces the allowance for doubtful accounts on that date but not net income.
D. This write-off is recorded as an increase in expense and a decrease in the allowance for doubtful accounts.
This write-off reduces the allowance for doubtful accounts on that date but not net income.
Writing off an account as uncollectible is recorded as a reduction to both accounts receivable and the allowance for doubtful accounts. Thus, the net receivable is unchanged and no income effect is recorded. For example, if the accounts receivable balance is $400,000 and the allowance is $20,000, the net receivable is reported as $380,000. After a $9,000 write off, the receivable is $391,000 and the allowance is $11,000 and the net figure stays at $380,000 (so B cannot be correct). Bad debt expense is 4 percent of sales and, thus, is not impacted by accounts that are written off (meaning that neither A nor D can be correct).
Hunt Community Development Agency (HCDA), a financially independent authority, provides loans to commercial businesses operating in Hunt County. This year, HCDA made loans totaling $500,000.
How should HCDA classify the disbursements of loans on the cash flow statement
Operating activities
Noncapital financing activities
Capital and related financing activities
Investing activities
Operating activities
Normally, loan activities are classified as investing activities. The Development Agency’s loans, however, are not intended to be investments, but are undertaken instead to fulfill a governmental responsibility. Therefore, for cash flow reporting purposes, these loans are the primary operating activity of the governmental enterprise. The related cash flows should be classified as operating activities. All loans made and collected (including interest) should be considered operating cash outflows and inflows, respectively.
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2423 Proprietary Funds Financial Statements
*VIDEO EXPLANATION
Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of $100,000 for the current year. What is the total amount of dividends that should be reported in the December 31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech $10,000 $100,000 $190,000 $200,000
$10,000
Intercompany dividends are eliminated in consolidation. The only dividends that remain after the eliminating entries are dividends paid to noncontrolling shareholders: 10% of Dun’s dividend of $100,000, or $10,000.
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2323 Emphasis on Adjusting and Eliminating Entries(…
How should state appropriations to a state university choosing to report as engaged only in business-type activities be reported in its statement of revenues, expenses, and changes in net position Operating revenues Nonoperating revenues Capital contributions Other financing sources
Non operating revenues
Revenues from state appropriations for other than capital-asset-related purposes are recorded as nonoperating revenues. Capital contributions and other financing sources are reported in other revenues, expenses, and transfers.
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2450 Accounting and Reporting for Governmental Not-for-…
Wolf Co.'s grant of 30,000 stock appreciation rights enables key employees to receive cash equal to the difference between $20 and the market price of the stock on the date each right is exercised. The service period is 20X1 through 20X3, and the rights are exercisable in 20X4 and the following year. The market price of the stock was $25 and $28 on December 31, 20X1 and 20X2, respectively. Assuming that the fair value of the stock appreciation rights was $5 at December 31, 20X1, and $8 at December 31, 20X2, what amount should Wolf report as the liability under the stock appreciation rights plan in its December 31, 20X2, balance sheet $0 $130,000 $160,000 $240,000
$160,000
Stock appreciation rights (SARs) provide a cash bonus to the employee based upon the change in the market value of the stock. In Wolf’s case, each SAR entitles the employee to receive cash equal to the difference between $20 and the market price of the stock on the date each right is exercised. Under FASB ASC 505-50-15-2, the measurement objective for liabilities incurred under share-based compensation arrangements is the same as that for equity instruments awarded to employees; that is, to estimate the fair value of the award at the measurement date. The measurement date for equity awards is the grant date. The measurement date for a liability award, such as Wolf’s, is the date of settlement. Liabilities incurred under share-based payment arrangements, such as Wolf’s SARs, are remeasured at the end of each reporting period until settlement.
Wolf’s liability at December 31, 20X2, would be measured as follows:
Fair value of SARs at 12/31/X2 (30,000 x $8 fair value) $240,000
Percentage to service period through 12/31/X2 2/3
——-
Liability at 12/31/X2 $160,000
=======
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2265 Stock Compensation (Share-Based Payments)
On March 1, Year 1, a company established a sinking fund in connection with an issue of bonds due in Year 8. At December 31, Year 5, the independent trustee held cash in the sinking fund account representing the annual deposits to the fund and the interest earned on those deposits. How should the sinking fund be reported in the company’s balance sheet at December 31, Year 5
The entire balance in the sinking fund account should appear as a noncurrent asset.
The cash in the sinking fund should appear as a current asset.
Only the accumulated deposits should appear as a noncurrent asset.
The entire balance in the sinking fund account should appear as a current asset.
The entire balance in the sinking fund account should appear as a noncurrent asset.
When cash and investments have a specific, intended purpose they will be used for, that will determine whether they are current or noncurrent assets. When assets are set aside and intended by management to be used to pay off a noncurrent liability, then those assets (no matter what form they are in; cash, for example) are tied to a noncurrent item, and are noncurrent assets.
The following is the stockholders’ equity section of Harbor Co.’s balance sheet at December 31:
Common stock $10 par, 100,000 shares authorized,
50,000 shares issued, of which 5,000 have been
reacquired and are held in treasury $ 450,000
Additional paid-in capital common stock 1,100,000
Retained earnings 800,000
———–
Subtotal $2,350,000
Less: Treasury stock (150,000)
———–
Total stockholders’ equity $2,200,000
===========
Harbor has insignificant amounts of convertible securities, stock warrants, and stock options. What is the book value per share of Harbor's common stock $31 $44 $46 $49
$49
Harbor’s book value per share of common stock is $49:
Book value of corporation $2,200,000
Divided by shares of stock outstanding
(50,000 - 5,000) / 45,000
———-
Book value per share $ 49 (rounded)
The cumulative effect of a change in accounting principle should be recorded separately as a component of income after continuing operations, when the change is from the:
cash basis of accounting for vacation pay to the accrual basis.
issuance of a new FASB Statement (SFAS) that requires the use of the new method and specifies that the change be recognized by including cumulative effect (net of income taxes) in net income.
presentation of statements of individual companies to their inclusion in consolidated statements.
completed-contract method of accounting for long-term construction-type contracts to the percentage-of-completion method.
issuance of a new FASB Statement (SFAS) that requires the use of the new method and specifies that the change be recognized by including cumulative effect (net of income taxes) in net income.
FASB ASC 250-10-45-5 mandates that voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented. The only exception is when the FASB issues a new pronouncement and mandates in that pronouncement that a change in accounting principle made to comply with that pronouncement should be made by including the cumulative effect in net income of the year of change.
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2305 Accounting Changes and Error Corrections
A corporation issuing stock should charge retained earnings for the market value of the shares issued in: an employee stock bonus. a purchase of a subsidiary. a 10% stock dividend. a 2-for-1 stock split.
a 10% stock dividend.
FASB ASC 505-20-30-3 provides that for issuances of additional shares less than 20% or 25%, the issuing corporation should transfer from earned surplus (retained earnings) “an amount equal to the fair value of the additional shares issued.” Thus, retained earnings should be charged for an amount equal to the market value of the shares issued in a 10% stock dividend.
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2250 Equity
What are the components of the lease receivable for a lessor involved in a direct financing lease
The minimum lease payments plus any executory costs
The minimum lease payments plus residual value
The minimum lease payments less residual value
The minimum lease payments less initial direct costs
The minimum lease payments plus *residual value
The lessor shall measure the gross investment in a direct financing lease initially as the sum of the following amounts:
The minimum lease payments
The unguaranteed residual value accruing to the benefit of the lessor
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2380 Leases
*Residual value is another name for salvage value, the remaining value of an asset after it has been fully depreciated. The residual value derives its calculation from a base price, calculated after depreciation.
On January 1 of the current year, Tell Co. leased equipment from Swill Co. under a 9-year sales-type lease. The equipment had a cost of $400,000 and an estimated useful life of 15 years. Semiannual lease payments of $44,000 are due every January 1 and July 1. The present value of lease payments at 12% was $505,000, which equals the sales price of the equipment. Using the straight-line method, what amount should Tell recognize as depreciation expense on the equipment in the current year $26,667 $33,667 $44,444 $56,111
$56,111
Tell Co. must treat the lease as a capital lease because the present value of the minimum lease payments exceeds 90% of the fair value (sales price) of the equipment. Tell’s cost equals the present value of $505,000. The question does not indicate or imply that Tell guarantees any residual value or that ownership transfers at the end of the 9-year lease. Therefore, the depreciable cost of $505,000 must be charged to depreciation over the period of use, which is the lease term of 9 years. The depreciation expense for the current year (one full year’s depreciation) is $505,000 ÷ 9 years, or $56,111.
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2380 Leases
A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling (minority) interest balances in the parent company’s consolidated balance sheet
No effect on either retained earnings or noncontrolling interest
No effect on retained earnings and a decrease in noncontrolling interest
Decreases in both retained earnings and noncontrolling interest
A decrease in retained earnings and no effect on noncontrolling interest
No effect on retained earnings and a decrease in noncontrolling interest
The dividend will have no effect on consolidated retained earnings because consolidated retained earnings include only retained earnings of the parent company. However, since the noncontrolling (minority) interest (in this case, 30%) is a percentage of the stockholder equity (including retained earnings) of the subsidiary, any reduction in subsidiary retained earnings (such as dividend declaration) will decrease noncontrolling (minority) interest.
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2323 Emphasis on Adjusting and Eliminating Entries(…
An entity is required to disclose:
a reconciliation of the numerators and denominators of the basic and diluted EPS computations.
the effect given to preferred dividends in income available to common shareholders.
securities that could be diluted in the future that were excluded from the current period’s diluted EPS because they were not dilutive.
All of the answer choices are correct.
All of the answer choices are correct.
FASB ASC 260-10-50 requires disclosure of a reconciliation, effect of preferred dividends, and antidiluted securities.
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2335 Earnings per Share
Each of Potter Pie Co.’s 21 new franchisees contracted to pay an initial franchise fee of $30,000. By December 31, 20X1, each franchisee had paid a non-refundable $10,000 fee and signed a note to pay $10,000 principal plus the market rate of interest on December 31, 20X2, and December 31, 20X3. Experience indicates that one franchisee will default on the additional payments. Services for the initial fee will be performed in 20X2.
What amount of net unearned franchise fees would Potter report on December 31, 20X1 $400,000 $600,000 $610,000 $630,000
$610,000
Total Unearned franchise fees contracted: 21 x $30,000 on December 31, 20X1 $630,000
Less: Doubtful account (future payments from 1 franchise)
(Total fee - prepaid nonrefundable fee)
($30,000 - $10,000) 20,000
——–
Net Unearned franchise fees on Dec 31, 20X1 $610,000
========
Note
The total initial franchise fee is unearned on December 31, 20X1, even the nonrefundable portion, because Potter Pie Co. must perform services to all the franchisees in 20X2. The nonrefundable $10,000 fee merely means if a franchisee defaults on future payments, Potter keeps this portion of the fee. “Nonrefundable” does not mean that Potter has already performed the services to earn the fee.
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2251 Revenue Recognition
Young Co. issues $800,000 of 10% bonds dated January 1, Year 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in five years. The current market for similar bonds is 8%. The entire issue is sold on the date of issue. The following values are given:
Present Value of
Ordinary Annuity Present Value of $1
—————- ——————-
N=10; i=0.04 8.11090 0.67556
N=10; i=0.05 7.72173 0.61391
What amount of proceeds on the sale of bonds should Young report $864,884 $799,997 $849,317 $815,564
$864,884
This question is about the computation of the issue price for a bond. The bonds will pay semiannually, and thus will pay $40,000 twice each year, computed as follows:
Face amount of $800,000 × 10% coupon × 6/12 (half-year) = $40,000
The yield of the bonds is 8% annually, but in half-year periods it is 4% a half-year. The present value of the bonds is thus the $40,000 multiplied by the present value of the ordinary annuity for 10 periods and 4%, plus the $800,000 par value of the bonds multiplied by the present value of $1 at 10 periods, 4%:
Issue price = ($40,000 × 8.11090) + ($800,000 × 0.67556) = $324,436 + $540,448 = $864,884
Rye Co. purchased a machine with a 4-year estimated useful life and an estimated 10% salvage value for $80,000 on January 1, 20X0. In its income statement, what would Rye report as the depreciation expense for 20X2 using the double-declining-balance method $9,000 $10,000 $18,000 $20,000
$10,000
20X2 Depreciation Expense:
Double-declining-balance rate = 2 (1/4 years) = .50/year
20X0 DDB dep. = .50 ($80,000) = $40,000
20X1 DDB dep. = .50 ($80,000-$40,000) = $20,000
20X2 DDB dep. = .50 ($80k-$40k-$20,000)= $10,000
Note
The full amount, $10,000, of depreciation can be taken in 20X2 because the remaining book value of $10,000 ($80,000 - $40,000 - $20,000 - $10,000) exceeds the estimated salvage value of $8,000 (10% of $80,000). However, only $2,000 of depreciation will be available in 20X3.
Salvage value is not used in the depreciation formula, but the plant asset cannot be depreciated below its salvage value.
Single maturity bond
Most CPA problems are this type of bond and it just means a bond with a single maturity date
The following trial balance of Mint Corp. on December 31, 20X1, has been adjusted except for income tax expense.
Trial Balance
December 31, 20X1
Dr. Cr.
----------- ----------- Cash $ 600,000 Accounts receivable (net) 3,500,000 Cost in excess of billings on long-term contracts 1,600,000 Billings in excess of costs on long-term contracts $ 700,000 Prepaid taxes 450,000 PP&E (net) 1,480,000 Note payable (noncurrent) 1,620,000 Common stock 750,000 Additional paid-in capital 2,000,000 Retained earnings (unappropriated) 900,000 Retained earnings (restricted for)
note payable 160,000 Earnings from long-term contracts 6,680,000 Costs and expenses 5,180,000
----------- -----------
$12,810,000 $12,810,000
=========== ===========
Other financial data for the year ended December 31, 20X1:
Mint uses the percentage-of-completion method to account for long-term construction contracts for financial statement and income purposes. All receivables on these contracts are considered to be collectible within 12 months.
During 20X1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense.
There were no temporary or permanent differences, and Mint’s effective tax rate is 30%.
In Mint's December 31, 20X1, balance sheet, what amount should be reported as total retained earnings $1,950,000 $2,110,000 $2,400,000 $2,560,000
$2,110,000
Total retained earnings on December 31, 20X1:
Retained earnings (unappropriated) $900,000
Retained earnings (restricted
for note payable) $160,000
Earnings for 20X1:
Earnings from LT contracts $6,680,000
Less costs and expenses - 5,180,000
---------
Earnings before taxes 1,500,000
Less income taxes (30% x 1.5M) 450,000
---------
Total earnings for 20X1 1,050,000
----------
Total retained earnings (Dec 31, 20X1) $2,110,000
==========
Which of the following statements about the cash basis of determining taxable income is true
There is no current deduction for capital expenditures.
An item is included in gross income for the year in which it is earned.
A deduction can be recognized when all the events have occurred to create the liability, and the amount of the liability can be determined with reasonable accuracy.
None of the answer choices is a true statement regarding the case method.
There is no current deduction for capital expenditures.
Under any basis of accounting for income taxes, expenses are deductible only when paid or accrued. There is no current deduction for capital expenditures. The expense for capital expenditures will be recognized in the form of depreciation, amortization or depletion.
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2160 Special Purpose Frameworks
What type of account is prepaid expense?
It is an ASSET!
Prepaid expenses are future expenses that have been paid in advance. You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired. The amount of prepaid expenses that have not yet expired are reported on a company’s balance sheet as an asset.
Which of the following describes how comprehensive income should be reported
Must be reported in a separate statement, as part of a complete set of financial statements
Should not be reported in the financial statements but should only be disclosed in the footnotes
May be reported in a separate statement or in a combined statement of income and comprehensive income
May be reported in a combined statement of income and comprehensive income or disclosed within a statement of stockholders’ equity; separate statements of comprehensive income are not permitted
May be reported in a separate statement or in a combined statement of income and comprehensive income
FASB ASC 220-10-45-1A states: “An entity reporting comprehensive income in a single continuous financial statement shall present its components in two sections, net income and other comprehensive income.” The financial statement should include a total net income amount and the components for that amount, total other comprehensive income amount and the components for that amount, and total comprehensive income.
What amount should Gum report as estimated warranty liability in its December 31, 20X2, balance sheet $2,500 $4,250 $11,250 $14,250
$14,250
Est warranty exp (20X1 sales) = .06 x $150,000 = $ 9,000
Eat warranty exp (20X2 sales) = .06 x $250,000 = 15,000
——-
Total estimated warranty expense $24,000
Less actual warranty expenditures 9,750
——-
Est warranty liability on December 31, 20X2 $14,250
=======
House Publishers offered a contest in which the winner would receive $1,000,000 payable over 20 years. On December 31, 20X1, 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, 20X1, 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, 20X2.
In its 20X1 income statement, what should House report as contest prize expense $0 $418,250 $468,250 $1,000,000
$418,250
The correct amount of contest prize expense is the current dollar amount needed to satisfy House Publishers’ obligation to the contest winner. This amount is calculated as follows:
January 2, 20X2, installment $ 50,000
Amount required to meet
future installment requirements
(i.e., present value of 19
annual payments of $50,000) 418,250
——–
Total $468,250
Receivables classified as current assets should be reported at net realizable value. What is net realizable value?
The amount expected to be collected.
Single-step income statement
Presents all revenue and gains in the upper part of the statement.
Purchase discounts are shown as deductions in the expense section. Recovery of accounts written off has no effect on the income statement since cash is increased and allowance for doubtful accounts is decreased.
Wall Co. leased office premises to Fox, Inc., for a 5-year term beginning January 2, 20X1. Under the terms of the operating lease, rent for the first year is $8,000 and rent for Years 2 through 5 is $12,500 per annum. However, as an inducement to enter the lease, Wall granted Fox the first six months of the lease rent-free.
In its December 31, 20X1, income statement, what amount should Wall report as rental income $12,000 $11,600 $10,800 $8,000
$10,800
Rent for Year 1 $ 8,000 x 6/12 = $ 4,000
Rent for Years 2-5 $12,500 x 4 = 50,000
——-
Total for five years $54,000
=======
Rent for 1 year (amount to be
reported for 20X1) = $54,000 / 5
= $10,800
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2380 Leases
SFAC 4 suggests what performance indicators for nonbusiness organizations
Net income
Information about the nature and relationship between inflows and outflows of resources
Information about service efforts and accomplishments
Information about both the nature and relationship between inflows and outflows and service efforts and accomplishments
Information about both the nature and relationship between inflows and outflows and service efforts and accomplishments
SFAC 4, Objectives of Financial Reporting by Nonbusiness Organizations, notes that the performance of nonbusiness organizations is usually not subject to direct competition in markets as is that of business enterprises. Thus, other controls have been introduced to ensure efficient and effective operation (i.e., funds, budgets, donor restrictions).
SFAC 4 observes that nonbusiness organizations generally have no single indicator of performance such as profit or net income, and suggests two performance indicators for nonbusiness organizations:
- Information about the nature and relationship between inflows and outflows of resources
- Information about service efforts and accomplishments
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2122 Financial Reporting by Not-for-Profit (Nongovernmental)…
The primary authoritative body for determining the measurement focus and basis of accounting standards for governmental fund operating statements is the:
Financial Accounting Standards Board (FASB).
Government Accounting and Auditing Committee of the AICPA (GAAC).
National Council on Governmental Accounting (NCGA).
Governmental Accounting Standards Board (GASB).
Governmental Accounting Standards Board (GASB).
The Governmental Accounting Standards Board (GASB) was created by the Financial Accounting Foundation (FAF) to specifically address the needs of governmental accounting. The Financial Accounting Standards Board (FASB) is recognized as the proper rule-setting authority for all other types of financial statements, including nonprofits, but no longer for governmental accounting.
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2410 Governmental Accounting Concepts
In September 20X1, West Corp. made a dividend distribution of one right for each of its 120,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's $50 variable rate preferred stock at an exercise price of $80 per share. On March 20, 20X5, none of the rights had been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a result of this redemption, West's stockholders' equity was reduced by: $120. $2,400. $12,000. $36,000.
$12,000.
Summary journal entries for issuance and redemption of rights:
Dr. Cr.
Sep 20X1 Memo entry only
March 20, 20X5, Retained Earnings 12,000
(120,000 x $.10)
Cash 12,000
The result is a reduction of $12,000 in West’s stockholders’ equity.
Nest Co. recorded the following inventory information during the month of January:
Unit Total Units
Units Cost Cost on Hand
----- ---- ------ ------- Balance on 01/01 2,000 $1 $2,000 2,000 Purchased on 01/08 1,200 3 3,600 3,200 Sold on 01/23 1,800 1,400 Purchased on 01/28 800 5 4,000 2,200 Nest uses the LIFO method to cost inventory.
What amount should Nest report as inventory on January 31 under each of the following methods of recording inventory Perpetual: $2,600; Periodic: $5,400 Perpetual: $5,400; Periodic: $2,600 Perpetual: $2,600; Periodic: $2,600 Perpetual: $5,400; Periodic: $5,400
Perpetual: $5,400; Periodic: $2,600
Under the LIFO method, the last goods in are treated as the first ones included in cost of goods sold.
The perpetual method of LIFO treats units sold as coming from the last units acquired prior to that sale. Thus, the sale on January 23 leaves remaining inventory at 1,400 units at $1 (2,000 + 1,200 - 1,800). The purchase on January 28 adds $4,000 to the inventory for a total of $5,400.
When using the periodic method, the inventory is not valued until the end of the period. Under the periodic method, the ending inventory of 2,200 units is priced at the earlier prices during the year (2,000 at $1 plus 200 at $3) for a total of $2,600.
On January 2, 20X1, Smith purchased the net assets of Jones’s Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy’s cash-basis financial statements for the year ending December 31, 20X1, Spiffy reported revenues in excess of expenses of $60,000. Smith’s drawings during 20X1 were $20,000. In Spiffy’s financial statements, what amount should be reported as Capital-Smith
$390,000
$400,000
$410,000
$415,000
$390,000
Capital-Smith balance January 2, 20X1 $350,000
Add: Net income 60,000
———
Subtotal $410,000
Deduct: Withdrawals (20,000)
———
Capital-Smith balance December 31, 20X1 $390,000
Park City uses modified accrual and encumbrance accounting and formally integrates its budget into the general fund’s accounting records. For the year ending July 31, 20X1, the following budget was adopted:
Estimated revenues $30,000,000
Appropriations 27,000,000
Estimated transfer to debt service fund 900,000
When Park's budget is adopted and recorded, Park's budgetary fund balance would be a: $3,000,000 credit balance. $3,000,000 debit balance. $2,100,000 credit balance. $2,100,000 debit balance.
$2,100,000 credit balance.
The complete entry to record the adopted budget is:
Estimated revenues $30,000,000
Appropriations control $27,000,000
Estimated transfer to debt service $ 900,000
Budgetary Fund Balance $ 2,100,000
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2411 Measurement Focus and Basis of Accounting
In October 20X2, Hake paid $375,000 to a former employee to settle a lawsuit out of court. The lawsuit had been filed in 20X1, and on December 31, 20X1, Hake had recorded a liability from lawsuit based on legal counsel’s estimate that the loss from the lawsuit would be between $250,000 and $750,000.
Select the proper financial statement category for recording the gain or loss upon settlement of the lawsuit.
Income from continuing operations
Extraordinary item
Cumulative effect of change in accounting principle
Prior period adjustment to beginning retained earnings
Income from continuing operations
A nongovernmental not-for-profit animal shelter receives contributed services from the following individuals valued at their normal billing rate:
Veterinarian provides volunteer animal care $8,000
Board members volunteer to prepare books for audit 4,500
Registered nurse volunteers as receptionist 3,000
Teacher provides volunteer dog walking 2,000
What amount should the shelter record as contribution revenue $8,000 $11,000 $12,500 $14,500
$12,500
Contribution revenues and assets or expenses should be reported for donated services if:
special skills are required to perform the service,
the individual providing the service has those special skills, and
the organization would have to buy the services if they were not donated.
Therefore, $12,500 would be recorded as contribution revenue ($8,000 + $4,500 = $12,500).
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2521 Support, Revenues, and Contributions
Beach Co. determined that the decline in the fair market value (FMV) of an investment was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach’s books.
The controller would properly record the decrease in FMV by including it in which of the following
Other comprehensive income section of the income statement only
Earnings section of the income statement and writing down the cost basis to FMV
Extraordinary items section of the income statement, net of tax, and writing down the cost basis to FMV
Other comprehensive income section of the income statement and writing down the cost basis to FMV
Earnings section of the income statement and writing down the cost basis to FMV
Available-for-sale securities are recognized on the balance sheet at fair value. Any related unrealized holding gains and losses are excluded from net income and reported as other comprehensive income. However, if a decline in value is not temporary, the cost basis of the individual security should be written down to fair value and the amount of the write-down is included in earnings.
On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600.
What amount did Vole receive upon issuing the bonds $360,000 $367,200 $476,400 $480,000
$360,000
This is a discount so you should subtract the recorded amortization of bond discount of 3,600 from $363,600!!
When bonds are issued at a discount, the carrying value of the bonds is less than the face value. The initial carrying value is the issue price (proceeds received upon issuance). When you pay interest, you amortize the discount, making it smaller. As discount is amortized, the carrying value of the bond comes closer to face value. After the initial interest payment, therefore, the amortization of the bond discount on the first payment date was from the issue price to the present carrying amount. Subtract the discount amortization just added to get the present book value, the $3,600, to get the original book value, the issue price. So, the bond carrying cost after the first payment less the amortization of the first payment is the issue price: $363,600 - $3,600 = $360,000.
Midway Co. had the following transactions during 20X1:
$1,200,000 pretax loss on foreign currency exchange due to a major unexpected devaluation by the foreign government
$500,000 pretax loss from discontinued operations of a component
$800,000 pretax loss on equipment damaged by a hurricane. This was the first hurricane ever to strike in Midway’s area. Midway also received $1,000,000 from its insurance company to replace a building, with a carrying value of $300,000, that had been destroyed by the hurricane.
What amount should Midway report in its 20X1 income statement as extraordinary loss before income taxes $100,000 $1,300,000 $1,800,000 $2,500,000
$100,000
FASB ASC 225-20-45-2 provides two criteria (unusual in nature and infrequent in occurrence) for extraordinary item treatment. Midway Co.’s hurricane loss appears to meet both of these criteria. So, Midway should report:
Extraordinary loss from hurricane (less applicable income taxes of $XXX) $XXXXX
The amount of extraordinary loss before income taxes is $100,000:
(Loss on equipment and building - Proceeds from insurance)
($800,000 + $300,000 - $1,000,000) = $100,000
Note
The foreign currency exchange loss and loss from discontinued operations are specifically excluded from extraordinary treatment by FASB ASC 225-20-45-4.
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2345 Extraordinary and Unusual Items
Which of the following lead(s) to the use of fund accounting by a governmental organization
Financial control: Yes; Legal restrictions: Yes
Financial control: Yes; Legal restrictions: No
Financial control: No; Legal restrictions: No
Financial control: No; Legal restrictions: Yes
Financial control: Yes; Legal restrictions: Yes
A governmental accounting system must make it possible both (a) to present fairly and with full disclosure the financial position and results of financial operations of funds and account groups of the governmental unit in conformity with GAAP and (b) to determine and demonstrate compliance with finance-related legal and contractual provisions (GASB 1100.101).
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2411 Measurement Focus and Basis of Accounting
During the current fiscal year, Foxx, a nongovernmental not-for-profit entity, received unrestricted promises to give of $300,000. Of the promised amount, $200,000 was designated by donors for use during the current year, and $100,000 was designated for next year. Five percent (5%) of the contributions receivable are expected to be uncollectible.
What amount should Foxx report as restricted support (contributions) in the statement of activities for the current year $200,000 $190,000 $100,000 $95,000
$95,000
Of the $300,000 of contributions, $200,000 designated for use during the current year would have been collected in full by the date of the financial statements issued as of the end of the year. This $200,000 would be reported in the statement of activities as unrestricted support. Of the remaining $100,000, 5% or $5,000 is estimated to be uncollectible. Therefore, the $95,000 anticipated to be collected in the subsequent year is reported in the statement of activities as temporarily restricted support.
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2512 Statement of Activities
A storm damaged the roof of a new building owned by K-9 Shelters, a not-for-profit entity. A supporter of K-9, a professional roofer, repaired the roof at no charge. In K-9’s statement of activities, the damage and repair of the roof should:
be reported by note disclosure only.
be reported as an increase in both expenses and contributions.
be reported as an increase in both net assets and contributions.
not be reported.
be reported as an increase in both expenses and contributions.
The contributed services should be recorded as an increase in contributions and the repair to the roof should be reported as an increase in expenses.
Donated services are recorded as donation income if the services received either:
- create or enhance nonfinancial assets, or
- require specialized skills, are provided by individuals possessing those skills, and would need to be purchased if not provided by the donor.
Any other donated services are not recognized. Footnote disclosure of the fair value of contributed services that are not recognized as revenue is encouraged but not required.
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2512 Statement of Activities
Selected information from the separate and consolidated balance sheets and income statements of Para, Inc., and its subsidiary, Shel Co., as of December 31, 20X1, and for the year then ended is as follows:
Pare Shel Consolidated
-------- -------- ------------ Balance sheet accounts Accounts receivable $ 52,000 $ 38,000 $ 78,000
Inventory 60,000 50,000 104,000
Income Statement
accounts
Revenues $400,000 $280,000 $616,000
Cost of goods
sold 300,000 220,000 462,000
——- ——- ——-
Gross profit 100,000 60,000 154,000
Additional Information
During 20X1, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales.
On December 31, 20X1, what was the amount of Shel's payable to Pare for intercompany sales $6,000 $12,000 $58,000 $64,000
$12,000
Total separate accounts receivable = $52,000 + $38,000 = $90,000
Less consolidated accounts receivable $78,000
——-
Accounts receivable eliminated in consolidation $12,000
Intercompany receivables and payables are always eliminated in the consolidation process. Therefore, the $12,000 eliminated must represent the amount Shel owed to Pare for intercompany sales.
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2323 Emphasis on Adjusting and Eliminating Entries(…
The following information is relevant to one of the City of Mullins’ General Fund’s derived tax revenues:
Fiscal year-end June 30
Beginning receivables $450,000
Beginning deferred revenues 100,000
Beg allowance for doubtful accounts 50,000
Receipts 1,250,000
Ending receivables 600,000
Receivables collected 6/30 - 8/30 125,000
End allowance for doubtful accounts 60,000
The City of Mullins considers derived tax receivables collected within 60 days after the close of the fiscal year to be “available.” Furthermore, the City wrote off $30,000 of receivables as uncollectible during the year.
What amount of revenues would be reported at the entity-wide level
$1,090,000
$1,100,000
$1,390,000
$1,400,000
$1,390,000
Governmental entities should recognize assets from derived tax revenue transactions in the period when the exchange transaction on which the tax is imposed occurs or when the resources are received, whichever occurs first. Revenues should be recognized, net of estimated allowances for doubtful accounts in the same period that the assets are recognized. From the entity-wide perspective, “availability” is not a criterion for recognizing revenues, so classification as “deferred” is unnecessary.
Receipts current year $1,250,000
Add ending receivables 600,000
Less end allowance for doubtful accounts (60,000)
———–
1,790,000
Less beginning receivables (450,000)
Add beginning allowance for doubtful accounts 50,000
———–
Current-year revenue $1,390,000
===========
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2446 Nonexchange Revenue Transactions
On July 1, 20X1, Ran County issued realty tax assessments for its fiscal year ending June 30, 20X2. On September 1, 20X1, Day Co. purchased a warehouse in Ran County. The purchase price was reduced by a credit for accrued realty taxes. Day did not record the entire year’s real estate tax obligation, but instead recorded tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes payable, as appropriate. On November 1, 20X1, Day paid the first of two equal installments of $12,000 for realty taxes.
What amount of this payment should Day have recorded as a debit to real estate taxes payable $4,000 $8,000 $10,000 $12,000
$8,000
Dr. Cr. Semi-annual realty tax payment = $12,000 Monthly tax accrual = $12,000 / 6 months = $2,000
September 1, 20X1, entry to purchase
warehouse:
Warehouse xxx
Cash xx
Real estate taxes payable $ 4,000
(2 months x $2,000)
September 30, 20X1, entry to accrue taxes:
Real estate taxes expense $2,000
Real estate taxes payable $ 2,000
October 31, 20X1, entry to accrue taxes:
Same as September 30
November 1, 20X1, entry to pay taxes:
Prepaid real estate taxes $4,000
Real estate taxes payable 8,000
Cash $12,000
The November and December accruals should credit prepaid real estate taxes.
Which of the following costs is unique to postretirement health care benefits Per capita claims Service Prior service Interest
Per capita claims
The easiest way to answer this question is to realize that the pension expense is made up of service cost, interest cost, and sometimes an amortization of unrecognized prior service cost, so all three of these are pension concepts; per capital claims are not. Per capita claims are unique to the health care benefits.
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2263 Nonretirement Postemployment Benefits
Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as a franchisee of one of Baker’s restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year. Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee, which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker.
What amount should Baker report as franchise revenue during the current year $0 $25,000 $59,000 $65,000
$59,000
Baker has earned the initial franchise fee and there is no indication that collectibility of the receivable is not reasonably assured. Therefore, Baker should recognize all the revenue for the initial franchise fee. The amount to be recognized is the cash received ($25,000) plus the present value of the future payments ($34,000). The difference between the $40,000 of future payments and their present value will be recognized as interest revenue over the 4-year period.
Which of the following journal entries should a city use to record $250,000 for fire department salaries incurred during May
Expenditures—salaries, debit 250,000; Salaries payable, credit 250,000
Salaries expense, debit 250,000; Encumbrances, credit 250,000
Salaries expense, debit 250,000; Appropriations, credit 250,000
Encumbrances, debit 250,000; Salaries payable, credit 250,000
Expenditures—salaries, debit 250,000; Salaries payable, credit 250,000
It helps to clarify the terminology used in governmental accounting:
Appropriations is an account created as a restriction of revenues.
Encumbrances, similar to a purchase order, specifically designates funds for a specific future purchase of goods or services.
Expenditures can be for capital or revenue items and means an outflow of resources, usually money.
As the salaries have already benefited the city, but simply have not been paid, the appropriate credit would be to a liability account. The only liability account listed as a credit in the answer choices is salaries payable, thereby eliminating the “Salaries expense, debit 250,000; Appropriations, credit 250,000” and “Salaries expense, debit 250,000; Encumbrances, credit 250,000” answer choices.
The salaries have already been incurred, which, based on the encumbrance definition, would eliminate “Encumbrances, debit 250,000; Salaries payable, credit 250,000” as an appropriate answer choice. “Expenditures—salaries, debit 250,000; Salaries payable, credit 250,000” is the best answer.
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2449 Encumbrances
A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change
Increase in both ending inventory and net income
Increase in ending inventory and decrease in net income
Decrease in both ending inventory and net income
Decrease in ending inventory and increase in net income
Decrease in both ending inventory and net income
In a period of rising prices, changing from FIFO to LIFO will cause ending inventory to decrease because the earlier, lower-cost items will be included.
As a result of the lower-ending inventory, cost of goods sold will be higher. (Less-ending inventory will be subtracted from cost of goods available.) The higher cost of goods sold will produce a decrease in net income.
A measure of time the company can survive (continue to pay operating expenses in cash) using only the quick assets (cash, marketable securities, and net accounts receivable).
Defensive-interval ratio
Thus, it is computed by dividing total quick assets by average daily cash expenditures. This is a LIQUIDITY measure, as it assesses how long a company can continue to keep up with its debts.
Lily City uses a pay-as-you-go approach for funding postemployment benefits other than pensions. The city reports no other postemployment benefits (OPEB) liability at the beginning of the year. At the end of the year, Lily City reported the following information related to OPEB for the water enterprise fund:
Benefits paid $100,000
Annual required contribution 500,000
Unfunded actuarial accrued liability 800,000
What amount of expense for OPEB should Lily City's water enterprise fund report in its fund level statements $100,000 $500,000 $600,000 $1,400,000
$500,000
Although payment of post-employment retirement benefits has often been considered “pay as you go,” each year an actuarily determined expense is recorded and added to the enterprise funds’ long-term obligations. OPEB (other postemployment retirement benefits), benefits other than pensions, do not have to be advanced funded. However, the annual required contribution (ARC) consisting of the present value of the benefits earned due to current service plus amortization of a portion of previously earned benefits is recognized as an expense. The expense therefore is not measured by the payments to retirees. The unfunded actuarial accrued liability is considered in calculating the ARC, but is not the amount of annual expense.
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2412 Fund Accounting Concepts and Application
According to the FASB Accounting Standards Codification, a full set of financial statements for a private not-for-profit college or university would include the following:
Statement of financial position and statement of activities
Statement of financial position and statement of cash flows
Statement of activities and statement of cash flows
Statement of financial position, statement of activities, and statement of cash flows
Statement of financial position, statement of activities, and statement of cash flows
According to FASB ASC 958-205-45-4, a full set of financial statements for a private not-for-profit entity that is not a health and welfare entity, like a college or university, would include a statement of financial position, a statement of activities, and a statement of cash flows. A college or university may choose to incorporate additional classifications such as operating and nonoperating within the changes to each class of net assets on its statement of activities.
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2510 Financial Statements
Ichor Co. reported equipment with an original cost of $379,000 and $344,000, and accumulated depreciation of $153,000 and $128,000, respectively, in its comparative financial statements for the years ending December 31, 20X2 and 20X1. During 20X2, Ichor purchased equipment costing $50,000, and sold equipment with a carrying value of $9,000.
What amount should Ichor report as depreciation expense for 20X2 $19,000 $25,000 $31,000 $34,000
$31,000
In the context of this problem accumulated depreciation is affected by the asset disposal when the carrying value of the asset sold is written off and by depreciation expense for the current period. These two items account for the net increase of $25,000 ($153,000 - $128,000) in the credit balance of the accumulated depreciation account.
The debit change in accumulated depreciation caused by the asset disposal needs to be determined from the facts provided. The equipment account had a beginning balance of $344,000. The $50,000 purchase of new equipment would cause this balance to increase to $394,000. However, the ending balance was $379,000. The only other transaction affecting the equipment account was the disposal of a piece of equipment. Therefore, the original cost of the disposed equipment was $15,000 ($394,000 - $379,000). Since the disposed equipment had a cost of $15,000 and a carrying value of $9,000 (carrying value = cost - accumulated depreciation), the accumulated depreciation associated with the disposed equipment was $6,000 ($9,000 = $15,000 - accumulated depreciation).
The beginning credit balance in the accumulated depreciation control account was $128,000. It would have been decreased (debited) for the $6,000 of accumulated depreciation related to the disposed equipment. That would leave a credit balance of $122,000. However, the ending balance was a credit of $153,000. Depreciation expense for the period would also change (increase or credit) the balance of accumulated depreciation. Since the ending balance was $153,000, and the balance without the effect of depreciation expense was $122,000, the depreciation expense must have been $31,000 ($153,000 - $122,000).
A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company’s annual financial statements
The names and ownership percentages of the other stockholders in the investee company
The reason for the company’s decision to invest in the investee company
The company’s accounting policy for the investment
Whether the investee company is involved in any litigation
The company’s accounting policy for the investment
Accounting policy disclosure includes the selection of accounting principles from existing acceptable methods. This would include the company’s use of the equity method. The equity method must be used if the company has significant influence over the company whose stock has been acquired. Generally, 20% ownership is evidence of significant influence, but it is possible that other factors would indicate otherwise. Consequently, the use of the equity is the selection of an accounting principle from existing alternatives (equity method or cost method).
Which of the following must be done when an entity is required to use the liquidation basis of accounting
Measure assets at fair value
Recognize previously unrecognized items that the entity expects to sell
Recognize costs and income expected to be incurred or earned through liquidation only after the liquidation is complete
Recognize the costs of liquidation only after the liquidation is complete
Recognize previously unrecognized items that the entity expects to sell
“Recognize previously unrecognized items that the entity expects to sell” is correct. Assets must be measured at the estimated amount of cash expected to be collected. Costs and income should be recognized when it becomes apparent that liquidation is imminent.
In Year 2, the Nord Association, a nongovernmental not-for-profit entity, received a $100,000 contribution to fund scholarships for medical students. The donor stipulated that only the interest earned on the contribution be used for the scholarships. Interest earned in Year 2 of $15,000 was used to award scholarships in Year 3.
What amount should Nord report as temporarily restricted net assets in the statement of financial position at the end of Year 2 $115,000 $100,000 $15,000 $0
$15,000
The $100,000 contribution is meant by the donor to remain invested, so the balancing equity in the accounting equation would be permanently restricted net assets. The $15,000 of interest earned is meant by the donor to be used for a specific purpose, to fund scholarships. The scholarships will be awarded in Year 3 although the interest was earned in Year 2. For the statement of financial position, therefore, the $15,000 of interest earnings is considered temporarily restricted net assets. The restriction on use will not be released until Year 3.
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2512 Statement of Activities
Which of the following fund types of a government reports a statement of net position Capital project funds Enterprise funds Special revenue funds Permanent funds
Enterprise funds
The statement of net position reports the financial position of proprietary funds. Enterprise funds are a type of proprietary fund. Capital projects funds, special revenue funds, and permanent funds are all types of governmental funds that report financial position on a balance sheet. The net assets of proprietary funds are called net position. The net assets of a governmental fund are represented by Fund Balance.
GASB 2200.170
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2412 Fund Accounting Concepts and Application
When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accounts receivable and the allowance for uncollectible accounts
Accounts receivable: Increase; Allowance for uncollectible accounts: Decrease
Accounts receivable: Increase; Allowance for uncollectible accounts: No effect
Accounts receivable: No effect; Allowance for uncollectible accounts: Decrease
Accounts receivable: No effect; Allowance for uncollectible accounts: Increase
Accounts receivable: No effect; Allowance for uncollectible accounts: Increase
The entry to record the collection of an account previously written off would be:
Cash XXX
Allowance for uncollectible accounts XXX
- Decreases the allowance!!
- *Allowance for uncollectible accounts is a contra account to accounts receivable.
Accrued Revenues
Dr. Asset xx
Cr. Revenue xx
Fair value option for bonds
- A company can elect to record a bond at fair value
a. The election can never be changed
b. It can apply to one or several bonds
c. The bond is recorded at fair value
d. The amortization of a premium or discount still applies
e. Any change in fair value is recognized in earnings as unrealized gains or losses
i. Increase in fair value means a loss: the company owes more
ii. Decrease in fair value is a gain: the company owes less
A company manufactures and distributes replacement parts for various industries. As of December 31, Year 1, the following amounts pertain to the company’s inventory:
Net Cost to Normal
Replacement Sale Sell or Profit Item Cost Cost Price Dispose Margin ---------- ------- ----------- -------- ------- ------- Blades $41,000 $ 38,000 $ 50,000 $ 2,000 $15,000 Towers 52,000 40,000 54,000 4,000 14,000 Generators20,000 24,000 30,000 2,000 6,000 Gearboxes 80,000 105,000 120,000 12,000 8,000
What is the total carrying value of the company's inventory as of December 31, Year 1, under IFRS $178,000 $191,000 $193,000 $207,000
$191,000
The International Financial Reporting Standards (IFRS) apply a lower of cost and net realizable value, applied on an item-by-item basis. For each item, one must figure out the net realizable value: the sales price less cost to sell.
For blades, net realizable value is $50,000 less $2,000, or $48,000. For blades the cost is less, so blades will be carried at cost, $41,000.
Towers sell for $54,000 less $4,000 to sell, for a net realizable value of $50,000, which is below cost of $52,000. Towers are carried at $50,000.
Generators sell for $30,000 less $2,000 for a net realizable value of $28,000, and cost of $20,000 is below that. Generators will be carried at cost, $20,000.
Gearboxes sell for $120,000 less $12,000, or a net realizable value of $108,000, which is higher than cost of $80,000. Gearboxes will be carried at cost of $80,000.
The total of all four items at lower of cost or net realizable value is thus $41,000 + $50,000 + $20,000 + $80,000 = $191,000.
The Jackson Foundation, a not-for-profit entity, received contributions in 20X1 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 should include which of the following amounts
Operating Activities: $700,000; Investing Activities: $0; Financing Activities: $0
Operating Activities: $500,000; Investing Activities: $200,000; Financing Activities: $0
Operating Activities: $500,000; Investing Activities: $0; Financing Activities: $200,000
Operating Activities: $0; Investing Activities: $500,000; Financing Activities: $200,000
Operating Activities: $500,000; Investing Activities: $0; Financing Activities: $200,000
The Statement of Cash Flows prepared by a not-for-profit entity uses the standard FASB categories. Unrestricted contributions are reported as operating activities while contributions restricted for long-term purposes (i.e., plant acquisitions) are reported as financing activities.
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2513 Statement of Cash Flows
A company that is a large accelerated filer must file its Form 10-Q with the U.S. Securities and Exchange Commission within how many days after the end of the period 30 days 40 days 45 days 60 days
40 days
Form 10-Q is the quarterly report required by the SEC for publicly traded companies. The due date is 40 days after the end of the quarter to which it applies.
Young Corp. purchased equipment by making a down payment of $4,000 and issuing a note payable for $18,000. A payment of $6,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of an ordinary annuity factor for three years at 8% is 2.58, and the present value for the future amount of a single sum of one dollar for three years at 8% is 0.79. Shipping charges for the equipment were $2,000, and installation charges were $3,500.
What is the capitalized cost of the equipment $19,480 $21,480 $24,980 $27,500
$24,980
The capitalized cost of the equipment is $24,980:
Down payment $ 4,000
Present value of note
($6,000 x 2.58) 15,480
Shipping charges 2,000
Installation charges 3,500
——-
Total $24,980
Nola Co. has adopted FASB ASC 320-10-25-1 (Classification of Investment Securities). Nola has a portfolio of marketable equity securities which it does not intend to sell in the near term. How should Nola classify these securities, and how should it report unrealized gains and losses from these securities
Classify as trading securities and report as a component of income from continuing operations
Classify as available-for-sale securities and report as a separate component of other comprehensive income
Classify as trading securities and report as a separate component of stockholders’ equity
Classify as available-for-sale securities and report as a component of income from continuing operations
Classify as available-for-sale securities and report as a separate component of other comprehensive income
FASB ASC 320-10-25-1 defines held-to-maturity securities as debt securities that the company has the intent and ability to hold, while trading securities are debt or equity securities and are securities that are bought and held principally for the purpose of selling them in the near term. It provides that investments “not classified as trading securities or as held-to-maturity securities shall be classified as available-for-sale securities.”
Quote
At acquisition, an entity shall classify debt securities and equity securities into one of the following three categories:
Trading securities. If a security is acquired with the intent of selling it within hours or days, the security shall be classified as trading. However, at acquisition an entity is not precluded from classifying as trading a security it plans to hold for a longer period. Classification of a security as trading shall not be precluded simply because the entity does not intend to sell it in the near term.
Available-for-sale securities. Investments in debt securities and equity securities that have readily determinable fair values not classified as trading securities or as held-to-maturity securities shall be classified as available-for-sale securities.
Held-to-maturity securities. Investments in debt securities shall be classified as held-to-maturity only if the reporting entity has the positive intent and ability to hold those securities to maturity.
FASB ASC 320-10-25-1
In November 20X1, Hake purchased two marketable equity securities (I and II) that it bought and held principally to sell in the near term, and in fact sold on February 28, 20X2. Hake has adopted FASB ASC 320-10-35. Relevant data is as follows:
Fair Value Fair Value
Cost (Dec 31, 20X1) (Feb 28, 20X2)
-------- ----------------- -----------------
I. $125,000 $145,000 $155,000
II. 235,000 205,000 230,000
Select the proper financial statement category for the amount of holding gain or loss on December 31, 20X1.
Income from continuing operations
Extraordinary item
Cumulative effect of change in accounting principle
Prior period adjustment to beginning retained earnings
Income from continuing operations
The holding gain or loss on marketable equity securities bought and held principally to sell in the near term would be included in income from continuing operations. In accordance with FASB ASC 320-10-35, these securities would be classified as trading securities.
Permanent differences between taxable income and pre-tax accounting income affect:
interperiod income tax allocation.
intraperiod income tax allocation.
both interperiod and intraperiod income tax allocation.
neither interperiod nor intraperiod income tax allocation.
neither interperiod nor intraperiod income tax allocation.
FASB ASC 740-10-10-1 notes: “Certain revenues are exempt from taxation and certain expenses are not deductible.”
The items referred to in this passage are commonly called permanent differences. A permanent difference affects only the current reconciliation of book income to taxable income, and the permanent difference has no effect on the computation of deferred taxes. Permanent differences do not affect either interperiod or intraperiod income tax allocation.
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2270 Income Taxes
Mend Co. purchased a 3-month U.S. Treasury bill. Mend’s policy is to treat as cash equivalents all highly liquid investments with an original maturity of three months or less when purchased. How should this purchase be reported in Mend’s statement of cash flows
As an outflow from operating activities
As an outflow from investing activities
As an outflow from financing activities
Not reported
FASB ASC 230-10-45-1 states:
Quote
A statement of cash flows shall report the cash effect during a period of an entity’s operations, its investing transactions, and its financing transactions.
It is further noted that these are the “same amounts as similarly titled line-items or subtotals shown in the statements of financial position as of those dates.” Since Mend’s policy is to treat these investments as cash equivalents, the purchase would not be reported in the statement of cash flows.
Which of the following resources increases the temporarily restricted net assets of a nongovernmental, not-for-profit voluntary health and welfare entity
Refundable advances for purchasing playground equipment
Donor contributions to fund a resident camp program
Membership fees to fund general operations
Participants’ deposits for an entity-sponsored trip
Donor contributions to fund a resident camp program
Of the answer choices presented, only the donor contributions for a specific purpose, to fund a resident camp program, would increase the temporarily restricted net assets. The refundable advances represent an asset of the organization as it had given cash to an equipment provider before the purchase had taken place. The participants’ deposits represent a receipt of cash and a liability to provide the promised activity for participants, a trip. Membership fees are exchange revenues considered unrestricted.
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2512 Statement of Activities
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 should be reported as amortized cost, and debt securities classified as available-for-sale should be reported as fair value.
Debt securities classified as held-to-maturity and available-for-sale should both be reported as amortized cost.
Debt securities classified as held-to-maturity and available-for-sale should both be reported as fair value.
Debt securities classified as held-to-maturity should be reported as fair value, and debt securities classified as available-for-sale should be reported as amortized cost.
Debt securities classified as held-to-maturity should be reported as amortized cost, and debt securities classified as available-for-sale should be reported as fair value.
Since the fair value exceeds the carrying amount of the assets in question, there does not seem to be an impairment concern. The debt securities that are held to maturity are thus carried at amortized cost, and the debt securities that are available for sale are carried at fair value.
Selected data pertaining to Lore Co. for the calendar year is as follows:
Net cash sales $ 3,000
Cost of goods sold 18,000
Inventory at beginning of year 6,000
Purchases 24,000
Accounts receivable at beginning of year 20,000
Accounts receivable at end of year 22,000
What was the inventory turnover for the year
- 0 times
- 0 times
- 5 times
- 2 times
2.0 times
Inventory turnover is the relationship of cost of goods sold to average inventory. Thus, to compute it, one needs the cost of goods sold for the year and the average of the beginning and ending inventory balances.
The cost of goods sold is $18,000. Beginning inventory is $6,000. Ending inventory is the beginning inventory plus purchases, less cost of goods sold, and thus ending inventory is $12,000, computed as follows:
$6,000 (Beginning inventory) + $24,000 (Purchases) – $18,000 (Cost of goods sold) = $12,000
The average of the beginning and ending inventory is $9,000, computed as follows:
$6,000 (Beginning inventory) + $12,000 (Ending inventory) = $18,000
$18,000 ÷ 2 =$9,000; thus, the inventory turnover is $18,000 ÷ $9,000, or 2 times.
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2137 Consolidated and Combined Financial Statements
On December 30, 20X1, Chang Co. sold a machine to Door Co. in exchange for a non-interest-bearing note requiring 10 annual payments of $10,000. Door made the first payment on December 30, 20X1. The market interest rate for similar notes on the date of issuance was 8%. Information on present value factors is as follows:
Present value
of ordinary
Present value annuity of Period of $1 at 8% $1 at 8% ------ ------------- ------------ 9 0.5002 6.2469 10 0.4632 6.7101
On its December 31, 20X1, balance sheet, what amount should Chang report as note receivable $45,000 $46,000 $62,500 $67,100
$62,500
Since one of the 10 payments had been collected on December 31, 20X1, the carrying amount of the note receivable would be the present value of a nine year annuity of $10,000 discounted at 8%.
The computation:
Carrying value of note receivable
= Annual payment x Present value of ordinary annuity factor
= $10,000 x 6.2469
= $62,469 or $62,500 rounded
Which of the following items is not classified as “other comprehensive income”
Extraordinary gains from extinguishment of debt
Foreign currency translation adjustments
Minimum pension liability equity adjustment for a defined benefit pension plan
Unrealized gains for the year on available-for-sale marketable securities
Extraordinary gains from extinguishment of debt
Gains or losses from the extinguishment of debt are included in net income.
Treasury stock
Reflects the reduction in total stockholder’s equity resulting from the corporation reacquiring its own shares of stocks.
The following information pertains to Eagle Co.’s 1995 sales:
Cash sales
Gross $ 80,000
Returns and allowances 4,000
Credit sales
Gross 120,000
Discounts 6,000
On January 1, 20X1, customers owed Eagle $40,000. On December 31, 20X1, customers owed Eagle $30,000. Eagle uses the direct write-off method for bad debts. No bad debts were recorded in 20X1. Under the cash basis of accounting, what amount of net revenue should Eagle report for 20X1 $76,000 $170,000 $190,000 $200,000
$200,000
It’s like indirect method!
Net revenue from cash sales
($80,000 - $4,000) $ 76,000
Cash collected from credit customers
Net credit sales
($120,000 - $6,000) $114,000
Add decrease in AR!
($40,000 - $30,000) 10,000 $124,000
——– ——–
Cash basis net revenue for 20X1 $200,000
($76,000 + $124,000) ========
IFRS Difference - Capital Lease
- Under IFRS, instead of the 75% of the remaining life rule, any “major portion” of the remaining useful life would be a capital lease
- Likewise, instead of the GAAP 90% of cash value rule, under IFRS if the present value of minimum lease payments is
‘substantially all’ of the fair value of the asset, then it’s a capital lease - Another IFRS criteria is that if the asset under lease is specialized or unique to the point that only the lessee could use it without requiring major modifications, then it would be considered a capital lease
Prepaid Expense Adjustment and Entry
Dr. Expense xx
Cr. Asset xx
On January 1, 20X2, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, 20X1, and mature on October 1, 20X1. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, 20X1, to January 1, 20X2, amounted to $8,000. On January 1, 20X2, what amount should Oak report as bonds payable, net of discount $380,300 $388,000 $388,300 $392,000
$388,000
Journal entry to record issuance of bonds on January 1, 20X2:
Dr. Cr.
Cash (400,000 + 8,000 - 12,000) $396,000
Bonds Disc (400 x $1,000 (1.00 - .97)) 12,000
Bonds payable (400 x $1,000) $400,000
Interest payable [(3/12) x (400,000 x .08)] 8,000
Following bond issuance on January 1, 20X2, Oak should report:
Face amount of bonds $400,000
Less: Bond discount 12,000
——–
Bonds payable, net of discount $388,000
========
A. A. Corporation has a loading dock that is situated next to a local highway. Recently, a new major highway was completed nearby, which bypasses the loading dock, and has thus made the installation of questionable future value to the corporation. The carrying amount of the loading dock is $500,000. The undiscounted present value of the future cash flows related to the loading dock is $480,000. The discounted present value of the future cash flows related to the loading dock is $440,000. The loading dock could be sold for $450,000 right now, less a broker’s commission of $16,000.
If A. A. Corporation applies IFRS, how much of an impairment loss does it need to recognize $20,000 $60,000 $50,000 $66,000
$60,000
When an asset may have sustained a loss in value, due to circumstances occurring by the end of the year, it must be tested for impairment. Under IFRS, the test for and measure of an impairment loss is the excess of carrying value ($500,000) above recoverable amount ($440,000). The recoverable amount is the higher of the value in use (present value of discounted future cash flows) or net realizable value (sales proceeds less cost to sell). The recoverable amount here is the value in use of $440,000, which is larger than the net realizable value of $450,000 - $16,000, or $434,000. Thus, a $60,000 impairment loss is recognized.
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2370 Impairment
A not-for-profit voluntary health and welfare entity should report a contribution for the construction of a new building as cash flows from which of the following in the statement of cash flows
FINANCING ACTIVITIES
According to FASB ASC 958-230-55-3, a contribution to a not-for-profit restricted to long-term purposes like construction shall be reported as a cash flow from financing activities. Cash flows received from investment income restricted by donor stipulation to the same purposes also are reported as financing activities, not as operating activities.
Income Statement
Describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.
Hancock Co.’s December 31, Year 1, balance sheet contained the following items in the long-term liabilities section:
UNSECURED:
9.375% registered bonds ($25,000 maturing
annually beginning in Year 5) $275,000
11.5% convertible bonds, callable beginning
in Year 10, due Year 21 125,000
SECURED
9.875% guaranty security bonds, due 2020 $250,000
10.0% commodity-backed bonds ($50,000
maturing annually beginning in Year 6) 200,000
What are the total amounts of serial bonds and debenture bonds
Serial bonds, $200,000; Debenture bonds, $650,000
Serial bonds, $450,000; Debenture bonds, $400,000
Serial bonds, $475,000; Debenture bonds, $125,000
Serial bonds, $475,000; Debenture bonds, $400,000
Serial bonds, $475,000; Debenture bonds, $400,000
Serial bonds mature in installments (only part of the total principal is paid back each year, so only some of the total bonds are paid off each year) and thus are described as maturing annually.
Thus, the serial bonds are the 9.375% bonds and the 10% bonds for a total of $475,000 ($275,000 + $200,000).
Debenture bonds are unsecured debt, and so these are the 9.375% and the 11.5% bonds for a total of $400,000 ($275,000 + $125,000).
A material loss is presented separately as a component of income from continuing operations when it is:
unusual in nature and infrequent in occurrence.
not unusual in nature but infrequent in occurrence.
an extraordinary item.
a cumulative-effect-type change in accounting principle.
not unusual in nature but infrequent in occurrence.
An extraordinary item must be both unusual and infrequent. An item that is only infrequent would be included in continuing operations.
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2345 Extraordinary and Unusual Items
Decreases in noncash current assets are ADDED to net income.
A decrease in a non cash current asset such as AR suggests MORE AVAILABLE CASH at the end of the period compared to the beginning. This is so because a decrease in AR implies HIGHER CASH RECEIPTS than reflected sales.
During the current year, Mill Foundation, a nongovernmental not-for-profit entity, received $100,000 in unrestricted contributions from the general public. Mill’s board of directors stipulated that $75,000 of these contributions would be used to create an endowment.
At the end of the current year, how should Mill report the $75,000 in the net assets section of the statement of financial position Permanently restricted Unrestricted Temporarily restricted Donor restricted
Unrestricted
The three categories of net assets reported for nongovernmental not-for-profit entities are:
-unrestricted net assets,
-temporarily restricted (by donors or grantors) net assets,
-permanently restricted (by donors or grantors) net assets.
FASB ASC 958-210-45-9 states that the amounts for each of the three classes of net assets are based on donor-imposed (not board of directors–imposed) restrictions.
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2511 Statement of Financial Position
Acid or Quick Ratio (f)
(Cash + Current Receivables + Marketable Securities*) / Current Liabilities
This ratio uses the most liquid assets to measure the ability to meet obligations.
*Marketable securities or short-term investments
Number of days in AR (f)
365 / *AR Turnover
*AR Turnover = Net credit sales / Average AR
This measures the average number of days it takes to collect receivables
Pitbull Construction Corporation applies IFRS, has equipment that it can reliably measure fair value of, and has chosen to apply the revaluation model to valuing this equipment on its accounting records. The carrying value of this equipment on Pitbull’s books at the end of last year, December 31, 20X1, was $200,000. At the end of this year, December 31, 20X2, due to decreased demand for the equipment, especially when resold as used, the fair value is $150,000.
For the year 20X2, in relation to this equipment for which Pitbull has chosen to apply the revaluation method, Pitbull must:
decrease the operating income for the period 20X2 by the decrease to fair value, $50,000.
increase asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 decrease to fair value.
not account for the loss in fair value of an unsold long-term asset used in operations.
decrease asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 decrease to fair value.
decrease the operating income for the period 20X2 by the decrease to fair value, $50,000.
When a class of assets’ fair value can be reliably measured, a corporation applying IFRS can elect to apply the revaluation model to the class of assets. When the carrying value of the assets differs materially from the fair value of the assets, a revaluation must occur, with any increase being included in asset revaluation surplus, an equity account, like other comprehensive income, and a decrease being accounted for as an other loss included in income from operations.
The term “tax position” as used in FASB ASC 740-10-20 refers to which of the following
A decision not to file a tax return
An allocation or a shift of income between jurisdictions
The characterization of income or a decision to exclude reporting taxable income in a tax return
All of the answer choices are correct.
All of the answer choices are correct.
All of the listed choices are contained in the FASB ASC 740-10-20 definition:
Quote
A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. The term tax position also encompasses, but is not limited to:
a. A decision not to file a tax return
b. An allocation or a shift of income between jurisdictions
c. The characterization of income or a decision to exclude reporting taxable income in a tax return
d. A decision to classify a transaction, entity, or other position in a tax return as tax exempt
e. An entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity.
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2270 Income Taxes
A company enters into a 3-year operating lease agreement effective January 1, Year 1. The amounts due on the first day of each year are $25,000 in Year 1, $30,000 in Year 2, and $35,000 in Year 3. What amount, if any, is the related liability on the first day of Year 2 $0 $5,000 $60,000 $65,000
$5,000
Non-level lease payments must be expensed on a straight-line basis.
Year 1 $25,000
Year 2 30,000
Year 3 35,000
-------
Total rent payments $90,000
Lease term 3 years
Yearly rent $30,000
The entry for the first payment would be:
Rent expense $30,000
Cash $25,000
Lease liability 5,000
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2380 Leases
Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, Year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, Year 1.
What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, Year 1 $3,000 $9,000 $12,000 $30,000
$3,000
Cash payments to purchase equipment are outflows from investing activities. The $3,000 down payment is an investing activity outflow.
The $27,000 financed and the principal payments are financing activities.
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2135 Statement of Cash Flows
Ocean Corp.’s comprehensive insurance policy allows its assets to be replaced at current value. The policy has a $50,000 deductible clause. One of Ocean’s waterfront warehouses was destroyed in a winter storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling the warehouse and plans to replace it. The following data relate to the warehouse:
Current carrying amount $ 300,000
Replacement cost 1,100,000
What amount of gain should Ocean report as a separate component of income before extraordinary items $1,030,000. $780,000. $730,000. $0.
$730,000.
Since this item would not be considered infrequent, the gain would not be an extraordinary item. The gain would be reported as a separate component of income before extraordinary items (if any).
Proceeds from insurance (replacement cost) $1,100,000
Less: Current carrying amount $300,000
Policy deductible 50,000
Dismantling costs 20,000 370,000
——– ———-
Gain to be reported $ 730,000
==========
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2345 Extraordinary and Unusual Items
Both Curry City and the State have a general sales tax on all merchandise. Curry City’s tax rate is 2% and the State’s rate is 4%. Merchants are required by law to remit all sales tax collected each month to the State by the 15th of the following month. By law, the State has 45 days to process the collections and to make disbursements to the various jurisdictions for which it acts as an agent. Sales tax collected by merchants in Curry total $450,000 in May and $600,000 in June. Both merchants and the State make remittances in accordance with statutes.
What amount of sales tax revenue for May and June is included in the June 30 year-end financial statements of the State and Curry State: $1,050,000; Curry: $0 State: $1,050,000; Curry: $350,000 State: $700,000; Curry: $350,000 State: $300,000; Curry: $150,000
State: $700,000; Curry: $350,000
Sales taxes are classified as a form of derived tax revenue. According to GASB N50.113, revenues should be recognized when the underlying exchange transaction occurs. (On the modified accrual basis of accounting, revenues should be recognized when the underlying exchange has occurred and the resources are available.)
In this question, the underlying sales transactions took place before June 30. Also, the resources are considered to be available because the resources are received in the current year or soon enough thereafter to be used to pay the current year’s bills, i.e., within 60 days of year-end (15 days for remittance to the state plus 45 days for distribution to the city). Thus, the full amount collected, $1,050,000, would be recognized by either the state or the city.
Distribution of the amount:
The total percentage of the tax collected is 6% (4% + 2%).
The amount to Curry City = $1,050,000 × 2/6 = $350,000
The amount to State = $1,050,000 × 4/6 = $700,000
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2446 Nonexchange Revenue Transactions
Cott, Inc., prepared an interest amortization table for a 5-year lease payable with a bargain purchase option of $2,000, exercisable at the end of the lease. At the end of the five years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error
The beginning present value of the lease did not include the present value of the bargain purchase option.
Cott subtracted the annual interest amount form the lease payable balance instead of adding it.
The present value of the bargain purchase option was subtracted from the present value of the annual payments.
Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period.
The beginning present value of the lease did not include the present value of the bargain purchase option.
The liability under capital lease obligation should be equal to the discounted present value of the minimum lease payments, which includes any bargain purchase option. If the calculated liability includes only the discounted present value of the periodic payments to be made over the 5-year lease term, the liability will be shown as paid in full with the last periodic payment. Therefore it appears Cott did not include the amount of its bargain purchase option in the minimum lease payments when calculating its lease liability.
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2380 Leases
A nongovernmental not-for-profit entity received the following donations of corporate stock during the year:
Donation 1 Donation 2
---------- ---------- Number of shares 2,000 3,000
Adjusted basis $ 8,000 $5,500
Fair market v at time of donation 8,500 6,000
Fair market value at year-end 10,000 4,000
What net value of investments will the organization report at the end of the year $12,000 $13,500 $14,000 $14,500
$14,000
The FASB guidance provides that investments in equity securities (stock) with readily determinable market value are reported at market value. The question asks specifically for the end-of-year amount.
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2511 Statement of Financial Position
How should the acquirer recognize a bargain purchase in a business acquisition
As negative goodwill in the statement of financial position
As goodwill in the statement of financial position
As a gain in earnings at the acquisition date
As a deferred gain that is amortized into earnings over the estimated future periods benefited
As a gain in earnings at the acquisition date
In a business acquisition, the acquiring corporation must recognize the assets and liabilities acquired at fair value. If the net assets acquired exceed the purchase price—a bargain purchase—the excess must be recognized as a gain in earnings at the date of the acquisition.
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2315 Business Combinations
At June 30, Almond Co.'s cash balance was $10,012 before adjustments, while its ending bank statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but was erroneously recorded in Almond's general ledger balance as $59. The check was correctly listed in the bank statement at $95. The bank statement also included a credit memo for interest earned in the amount of $35, and a debit memo for monthly service charges in the amount of $50. What was Almond's adjusted cash balance at June 30 $9,598 $9,961 $10,048 $10,462
$9,961
Given the information in the question, the company’s cash balance should be adjusted to determine the adjusted cash balance. It is computed as follows:
Balance per books, June 30 $10,012
Add:
Interest revenue 35
——–
Deduct:
Service charges (50)
Correction of check (36)
——–
Adjusted cash balance $ 9,961
========
During the current year, Knoxx County levied property taxes of $2,000,000, of which 1% is expected to be uncollectible. The following amounts were collected during the current year:
Prior-year taxes collected within the first 60 days of
the current year $ 50,000
Prior-year taxes collected between 60 and 90 days
into the current year 120,000
Current-year taxes collected in the current year 1,800,000
Current-year taxes collected within the first 60 days
of the subsequent year 80,000
What amount of property tax revenue should Knoxx County report in its entity-wide statement of activities $1,800,000 $1,970,000 $1,980,000 $2,000,000
$1,980,000
The timing of collection of revenues does not affect revenue recognition in the entity-wide (government-wide) statement of activities [BECAUSE IT USES ACCRUAL BASIS]. Revenues are recognized after deducting estimated uncollectibles, discounts, etc. Therefore, the amount reported as revenues in the current year will be the net realizable value of the tax levy for the current year. In this question, the amount is the levy amount ($2,000,000) less the estimated uncollectible amount ($2,000,000 × 1%, or $20,000), which equals $1,980,000.
Timing of revenue collection does affect revenue recognition in governmental funds financial statements. When modified accrual accounting is used, revenues must also be “available.”
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2446 Nonexchange Revenue Transactions
Since there is no reasonable basis for estimating the degree of collectibility, Astor Co. uses the installment method of revenue recognition for the following sales:
20X2 20X1
-------- -------- Sales $900,000 $600,000 Collections from: 20X1 sales 100,000 200,000 20X2 sales 300,000 --- Accounts written off: 20X1 sales 150,000 50,000 20X2 sales 50,000 --- Gross profit percentage 40% 30%
What amount should Astor report as deferred gross profit in its December 31, 20X2, balance sheet for the 20X1 and 20X2 sales $150,000 $160,000 $225,000 $250,000
$250,000
20X2 20X1
--------- --------- Sales $900,000 $600,000 Less: Write-offs (50,000) (200,000)
Collections (300,000) (300,000)
---------- ---------
Uncollected sales 12/31/X1 $550,000 $100,000
Times gross profit % x 0.40 x 0.30
——— ———
Deferred gross profit $220,000 $ 30,000
========= =========
Total deferred gross profit on
December 31, 20X2 = $220,000 + $ 30,000 = $250,000
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2251 Revenue Recognition
Neal Corp. entered into a 9-year capital lease on a warehouse on December 31, 20X1. Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 20X2, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal’s incremental borrowing rate is 9%. The rounded factor for the present value of an ordinary annuity for nine years at 9% is 6.
What amount should Neal report as capitalized lease liability at December 31, 20X1 $300,000 $291,200 $450,000 $468,000
$300,000
FASB ASC 840-30-30-1 requires capitalization of the present value of minimum lease payments. This does not include executory costs such as real estate taxes.
Capitalized lease liability at 12/31/X1 = ($52,000 - $2,000) x 6
(for nine years at 9%) = $ 50,000 x 6
= $300,000
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2380 Leases
LIFO = price declines
Bigger inventory costs
Lower COGS than FIFO
Bigger income
Period Inventory System (Purchase)
In periodic inventory system, merchandise inventory and cost of goods sold are not updated continuously. Instead purchases are recorded in Purchases account and each sale transaction is recorded via a single journal entry. Thus cost of goods sold account does not exist during the accounting period. It is determined at the end of accounting period via a closing entry.
A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred:
Dividends paid $300
Proceeds from the issuance of common stock 250
Borrowings under a line of credit 200
Proceeds from the issuance of convertible bonds 100
Proceeds from the sale of a building 150
What is the company’s increase in cash flows provided by financing activities for the
$50
$150
$250
$350
$250
The company’s increase in cash flows is $250, calculated as follows:
Dividends paid $(300)
Proceeds from the issuance of common stock 250
Borrowings under a line of credit 200
Proceeds from the issuance of convertible bonds 100
—–
Net increase from financing activities $250
The proceeds from the sale of a building are included in investing activities.
On January 1, 20X1, Prim, Inc., acquired all the outstanding common shares of Scarp, Inc., for cash equal to the book value of the stock. The carrying amounts of Scarp’s assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. The combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008).
In preparing Prim’s 20X1 consolidated income statement, which of the following adjustments would be made
Depreciation expense would be decreased and goodwill impairment would be assessed.
Depreciation expense would be increased and goodwill impairment would be assessed.
Depreciation expense would be decreased and goodwill impairment would not be assessed.
Depreciation expense would be increased and goodwill impairment would not be assessed.
Depreciation expense would be decreased and goodwill impairment would be assessed.
Goodwill is the excess of the fair value of the consideration given over the fair value of the net identifiable assets acquired. The carrying amounts of Scarp’s assets and liabilities approximated their fair values, except that the fair value of the building is less than its book value. Since Prim paid cash equal to the book value of the stock, the amount paid was greater than the fair value of the net identifiable assets of Scarp, resulting in goodwill being recognized. In this particular case, the amount of the goodwill is equal to the excess of the book value of the building over its fair value.
One could argue that Scarp already should have recognized an impairment loss on its own books with regard to the building. However, there is insufficient information to know if the criteria specified in FASB ASC 360-10-05-4 have been met. The mere fact that the fair value of the building is less than its book value is not necessarily sufficient evidence. Thus, presumably the depreciation expense recorded by Scarp is based on the book value amount. In any event, the building should be included in the consolidated assets at its fair value, which is an amount lower than its book value. The consolidated depreciation should be based on this lower amount. Therefore, the consolidated depreciation expense is less than the sum of the depreciation amounts reported by Prim and Scarp as separate entities (i.e., before the consolidated statements are prepared). Thus, for consolidated financial statement purposes, depreciation is decreased from the amounts reported by the two separate entities.
Regardless of the depreciation issue, FASB ASC 350-20-35-28 requires goodwill to be tested for impairment at least annually, as well as in the year of acquisition. Therefore, goodwill impairment must be assessed in this case.
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2315 Business Combinations
*VIDEO EXPLANATION
Cash paid is > fair value = goodwill
Example: Building
CV: 100; FV: 80
- We’re gonna make an adjustment. We’ll have to reduce the value of building to FV (down to 80 for consolidation purposes)
- If FV is less, we’re gonna make an adjustment to reduce the value of the building which means the depreciation expense will be decreased
- We need to assess goodwill for impairment at least once a year
- Under Acquisition method, all assets & liabilities are recorded at FV
- If cash PP > FV = goodwill
- Goodwill assessed for impairment annually
On July 1, 20X1, Dewey Co. signed a 20-year building lease that it reported as a capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its 20X1 statement of cash flows
An inflow equal to the present value of future lease payments on July 1, 20X1, less 20X1 principal and interest payments
An outflow equal to the 20X1 principal and interest payments on the lease
An outflow equal to the 20X1 principal payments only
The lease payments should not be reported in the financing activities section.
An outflow equal to the 20X1 principal payments only
Cash outflows for financing activities per FASB ASC 230-10-45-15 include “other principal payments to creditors who have extended long-term credit.”
Only the principal portion of the monthly lease payments would be reported as cash outflow for financing activities in Dewey Co.’s 20X1 statement of cash flows.
Note
Interest is a cash outflow that is classified as an operating activity. (FASB ASC 230-10-45-17)
Abbott Co. is preparing its statement of cash flows for the year. Abbott’s cash disbursements during the year included the following:
Payment of interest on bonds payable $500,000
Payment of dividends to stockholders 300,000
Payment to acquire 1,000 shares of
Marks Co. common stock 100,000
What should Abbott report as total cash outflows for financing activities in its statement of cash flows $0 $300,000 $800,000 $900,000
$300,000
Interest payments are included in operating activities. Cash payments to acquire EQUITY INSTRUMENTS are included in INVESTING activities. Only payments of dividends to stockholders are included in financing activities.
Unearned Revenue Adjustment and Entry
Dr. Liability xx
Cr. Revenue xx
Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, 20X1, balance sheet. For 20X2, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for 20X2. At December 31, 20X2, Quinn had cumulative taxable differences of $70,000. Quinn’s effective income tax rate is 30%.
In its December 31, 20X2, income statement, what should Quinn report as deferred income tax expense $12,000 $21,000 $30,000 $60,000
$30,000
Deferred income Temporary Effective
tax expense for 20X2 = differences x tax rate
= $100,000 x 0.30
= $30,000
Note
The temporary difference of $100,000 for 20X2 offset by the temporary asset difference ($9,000 ÷ .30 = $30,000) as of January 1, 20X2, resulted in a cumulative taxable difference of $70,000 on the December 31, 20X2, balance sheet.
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2270 Income Taxes
Inventory turnover (f)
COGS / Average inventory
Ross Co. pays all salaried employees on a Monday for the 5-day workweek ended the previous Friday. The last payroll recorded for the year ended December 31, 20X1, was for the week ended December 26, 20X1. The payroll for the week ended January 2, 20X2, included regular weekly salaries of $80,000 and vacation pay of $25,000 for vacation time earned in 20X1 not taken by December 31, 20X1. Ross had accrued a liability of $20,000 for vacation pay at December 31, 20X0.
In its December 31, 20X1, balance sheet, what amount should Ross report as accrued salary and vacation pay $48,000 $68,000 $79,000 $73,000
$73,000
Employees were paid through Friday, December 26, 20X1. Salaries were unpaid for Monday, December 29 through Wednesday, December 31 (three days).
Accrued salary at 12/31/X1 (3/5 x $80,000) $48,000
Accrued vacation pay for 20X1 25,000
——-
Total Accrual at 12/31/X1 $73,000
=======
Balance at December 31, 20X0, ($20,000) is not used in this computation. The 20X0 accrual amounts would have been used during 20X1.
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2112 Financial Accounting Standards Board (FASB)
An employer's obligation for postretirement health benefits that are expected to be provided to or for an employee must be fully accrued by the date the: benefits are paid. benefits are utilized. employee retires. employee is fully eligible for benefits.
employee is fully eligible for benefits.
FASB ASC 715-60-35-68 requires the obligation for postretirement benefits for an employee to be accrued during the attribution period that applies to the employee. “In all cases, the end of the attribution period shall be the full eligibility date.”
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2263 Nonretirement Postemployment Benefits
Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the creditor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt $0 $3,000 $25,000 $28,000
Read the question carefully! It’s asking for the gain amount!!
$3,000
FASB ASC 470-60-35-4 stipulates that:
Quote
A debtor that issues or otherwise grants an equity interest to a creditor to settle fully a payable shall account for the equity interest at its fair value. The difference between the fair value of the equity interest granted and the carrying amount of the payable settled shall be recognized as a gain on restructuring of payables.
Wood should recognize a gain on restructuring of debt of $3,000 ($28,000 - $25,000).
Under this method, presenting the statement of cash flows presents the specific cash flows associated with items that affect cash flow. Items that typically do so include:
Cash collected from customers Interest and dividends received Cash paid to employees Cash paid to suppliers Interest paid Income taxes paid
Direct Method
The advantage of the direct method over the indirect method is that it reveals operating cash receipts and payments.
In accordance with FASB ASC 860-50, when an entity undertakes an obligation to service financial assets (collecting principal, interest, etc.) it should recognize: a servicing asset. a servicing liability. either a servicing asset or a liability. immediately any expected income or loss.
either a servicing asset or a liability.
FASB ASC 860-50-20 and 50-25-1 require recognition and measurement of servicing assets (total servicing revenue is expected to exceed total servicing costs) or servicing liabilities (total servicing costs are expected to exceed total servicing revenues) when an entity undertakes an obligation to service financial assets.
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2393 Transfers and Servicing of Financial Assets and …
Which of the following fund types of a governmental unit have the income determination orientation
General funds
Fiduciary funds
Both general funds and fiduciary funds
Neither general funds nor fiduciary funds
Neither general funds nor fiduciary funds
The measurement focus of the general fund and other governmental-type funds is flow of current financial resources. This focus provides a measure of the change in current financial resources. The measurement focus of trust funds, including fiduciary funds, is economic resources. The purpose of measurement is change in trust net position reported as additions and deductions. Net income is not determined for governmental or fiduciary fund types.
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2411 Measurement Focus and Basis of Accounting
- VIDEO EXPLANATION
- NOTES 09/30
Perpetual Inventory System
In perpetual inventory system, merchandise inventory and cost of goods sold are updated continuously on each sale and purchase transaction. Some other transactions may also require an update to inventory account for example, sale/purchase return, purchase discounts etc. Purchases are directly debited to inventory account whereas for each sale two journal entries are made: one to record sale value of inventory and other to record cost of goods sold. Purchases account is not used in perpetual inventory system.
Neron Co. has two derivatives related to two different financial instruments, Instrument A and Instrument B, both of which are debt instruments. The derivative related to Instrument A is a fair value hedge, and the derivative related to Instrument B is a cash flow hedge. Neron experienced gains in the value of Instruments A and B due to a change in interest rates. Which of the gains should be reported by Neron in its income statement
Gain in value of both debt Instruments A and B
Gain in value of debt Instrument A only
Gain in value of debt Instrument B only
Neither gain in value of debt Instrument A or B
Gain in value of debt Instrument A only
FASB ASC 815-25-35-1 requires that gains or losses associated with changes in the fair value of the hedging instrument be recognized in net income in the period in which the change in fair value takes place.
The gain or loss resulting from changes in the fair value of a cash flow hedge is included in other comprehensive income.
Consequently, only the gain in the value of Instrument A would be included in net income.
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2355 Derivatives and Hedge Accounting
After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For Year 1, income for Cone’s branch was $160,000 before income taxes and Cone’s bonus. Cone’s bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes.
What is Cone's bonus for Year 1 $12,000 $15,000 $25,000 $32,000
$12,000
Cone’s bonus for Year 1 is $12,000:
Bonus = 0.25 x ($160,000 - $100,000 - Bonus)
Bonus = 0.25 x ($60,000 - Bonus)
Bonus = $15,000 - (.25 x Bonus) Bonus + (0.25 x Bonus) = $15,000 1.25 (125%) x Bonus = $15,000
Bonus = $15,000 / 1.25
Bonus = $12,000
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2252 Costs and Expenses
The following selected financial data pertains to Alex Corporation for the current year ended December 31:
Operating income $900,000
Interest expense (100,000)
Income before income tax 800,000
Income tax expense (320,000)
Net income 480,000
Preferred stock dividends (200,000)
Net income available to common stockholders $280,000
=========
The times preferred dividend earned ratio is
4.0 to 1
1.4 to 1
2.4 to 1
1.7 to 1
2.4 to 1
This particular ratio is the relationship to earnings available to pay preferred stock dividends, net income, divided by the preferred stock dividends total. Thus, here it is $480,000/$200,000, or 2.4 to 1.
A major exception to the general rule of expenditure accrual for governmental units relates to unmatured:
interest on general long-term debt.
neither principal of general long-term debt nor interest on general long-term debt.
principal of general long-term debt and interest on general long-term debt.
principal of general long-term debt.
principal of general long-term debt and interest on general long-term debt.
Governmental units use a modified accrual basis of accounting. Expenditures should be recorded as fund liabilities are incurred or assets are expended. However, the expenditure rules will not apply to the principal or to the interest on debt as specified by the GASB.
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2411 Measurement Focus and Basis of Accounting
The following information pertains to Kane Co.’s defined benefit pension plan for 20X1:
Service cost $40,000
Interest cost 15,000
Expected return on plan assets 12,000
Amort of prior service cost 4,000
Amort of unrecognized (gain)/loss (3,000)
Amort of unrecognized transition
obligation 1,500
Kane should recognize pension expense for 20X1 of: $45,500. $51,500. $75,500. $64,500
$45,500.
Kane’s pension expense for 20X1 is:
Service cost $40,000
Interest cost 15,000
Expected return on plan assets (12,000)
Amort of prior service costs 4,000
Amort of unrecognized (gain) loss (3,000)
Amort of unrecognized transition obligation 1,500
Pension expense - 20X1 $45,500
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2264 Retirement Benefits
Puff Co. acquired 40% of Straw, Inc.'s, voting common stock on January 2, 20X1, for $400,000. The carrying amount of Straw's net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100,000. The equipment has a 5-year life. During 20X1, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its 20X1 income statement $40,000 $52,000 $56,000 $60,000
$52,000
FASB ASC 323-10-05-5 requires the use of the equity method when a company acquires 20% or more of the outstanding stock of another company. Significant influence is assumed. Under the equity method, Puff should report 40% of the $150,000 income of Straw, or $60,000. Because Straw’s equipment has a fair market value exceeding its carrying value, Puff should amortize the difference over the equipment’s 5-year life. Puff should record 40% of $100,000 ($40,000) as equipment subject to amortization (depreciation). Straight-line amortization of $40,000 over five years yields an expense of $8,000. Puff has income of $60,000 less $8,000, or $52,000 for 20X1.
*See Video Explanation under “Investments”
An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception:
embodies an obligation to repurchase the issuer’s equity shares.
requires or may require the issuer to settle the obligation by transferring assets.
Both embodies an obligation to repurchase the issuer’s equity shares and requires or may require the issuer to settle the obligation by transferring assets.
Either embodies an obligation to repurchase the issuer’s equity shares or requires or may require the issuer to settle the obligation by transferring assets.
Both embodies an obligation to repurchase the issuer’s equity shares and requires or may require the issuer to settle the obligation by transferring assets.
An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception (FASB ASC 480-10-25-8):
-embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation and
-requires or may require the issuer to settle the obligation by transferring assets.
Examples of these financial instruments include forward purchase contracts or written put options on the issuer’s equity shares that are to be physically settled or net cash settled.
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2385 Distinguishing Liabilities from Equity
The following data pertain to Thorne Corp. for the current calendar year:
Net income $240,000
Dividends paid on common stock 120,000
Common stock outstanding
(unchanged during year) 300,000 shares
The market price per share of Thorne’s common stock at December 31 was $12. The price-earnings ratio at December 31 was:
30.0 to 1.
10.0 to 1.
15.0 to 1.
9.6 to 1.
15.0 to 1.
The price-to-earnings ratio is the relationship between the stock price per share to the earnings per share. The stock price per share is given as $12, but the earnings per share will have to be computed.
Earnings per share is net income divided by common shares outstanding:
$240,000 ÷ $300,000 = 0.8
Thus, the price-to-earnings ratio is $12 ÷ 0.8, or 15 to 1.
Convertible debt security
The convertibility of debt security to equity has some value so we would pay less interest than non convertible debt (straight debt)
The convertible debt security is an option for businesses to raise money-potentially give up a little bit of equity they can pay a lower rate of interest than the near term so it is a financing mechanism. (how to finance/projects or growth - it’s something to consider)
Opto Co. is a publicly traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers
The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues
The identity of any external customer providing 10% or more of a particular operating segment’s revenue
The identity of any external customer considered to be “major” by management
Information on major customers is not required in segment reporting.
The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues
FASB ASC 280-10-50-42 requires the following with respect to enterprise-wide disclosures about major customers:
“A public entity shall provide information about the extent of its reliance on its major customers. If revenues from transactions with a single external customer amount to 10 percent or more of a public entity’s revenues, the public entity shall disclose that fact, the total amount of revenues from each such customer, and the identity of the segment or segments reporting the revenues. The public entity need not disclose the identity of a major customer or the amount of revenues that each segment reports from that customer.”
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2390 Segment Reporting
The statement of activities of the government-wide financial statements is designed primarily to provide information to assess which of the following
Operational accountability
Financial accountability
Fiscal accountability
Functional accountability
Operational accountability
Governmental fund reporting covers sources, uses, and balances of current financial resources, and budgetary accounting enables financial and fiscal accountability. Both fund-based and government-wide financial reporting facilitate functional accountability as both classify costs by major service or responsibility areas. Only the government-wide statement of activities reports the government’s operations using all economic resources. Thus, the statement of activities is designed primarily to promote the assessment of operational accountability.
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2421 Government-Wide Financial Statements
A voluntary health and welfare entity received a $700,000 permanent endowment during the year. The donor stipulated that the income and investment appreciation be used to maintain its senior center. The endowment fund reported a net investment appreciation of $80,000 and investment income of $50,000. The organization spent $60,000 to maintain its senior center during the year.
What amount of change in temporarily restricted net assets should the organization report as a result of these transactions $50,000 $70,000 $130,000 $770,000
$70,000
The changes in temporarily restricted net assets include increases from investment income ($50,000) and net investment appreciation ($80,000) that the donor restricted to use for the senior center. Temporarily restricted net assets decrease by the amount of resources spent for the restricted purpose. These net assets released from restrictions reduce temporarily restricted net assets and increase unrestricted net assets by $60,000. Therefore, the change in temporarily restricted net assets is $80,000 + $50,000 - $60,000, or $70,000.
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2511 Statement of Financial Position
Prospective financial statements should include which disclosures:
Both summary of significant accounting policies and summary of significant assumptions
The AICPA’s “Statement of Standards for Accountants’ Services on Prospective Financial Information” governs the preparation of prospective financial statements. It requires that accountants provide summaries of the significant accounting policies and the assumptions used to prepare these forward-looking statements. The same full disclosure principle that guides the preparation of historical financial statements applies to the reporting of prospective financial statements.
Inventory must be valued at lower of cost or market when the utility of the inventory is no longer as great as cost. Market is replacement cost unless:
- Replacement cost is more than net realizable value, in which case market will be net realizable value (the ceiling) or
- Replacement cost is less than net realizable value reduced by a normal profit margin, in which case market is net realizable value minus a normal profit margin (the floor).
The statement of net assets available for benefits of an employee benefit plan must include the following, except:
total assets.
total liabilities.
net assets reflecting all investments at cost.
net assets available for benefits.
net assets reflecting all investments at cost.
The statement of net assets available for benefits of the plan must include the following:
Total assets
Total liabilities
Net assets reflecting all investments at fair value
Net assets available for benefits
Green, a calendar-year taxpayer, is preparing a personal statement of financial condition as of April 30, 20X2. Green's 20X1 income tax liability was paid in full on April 15, 20X2. Green's tax on income earned between January and April 20X2 is estimated at $20,000. In addition, $40,000 is estimated for income tax on the differences between the estimated current values and current amounts of Green's assets and liabilities and their tax bases at April 30, 20X2. No withholdings or payments have been made toward the 20X2 income tax liability. In Green's April 30, 20X2, statement of financial condition, what amount should be reported (between liabilities and net worth) as estimated income taxes $0 $20,000 $40,000 $60,000
$40,000
A personal statement of financial condition consists of estimated current values of assets, liabilities, estimated income tax payable, and net worth at a specific date. Income taxes for 20X1 are not included because they were paid in full on April 15, 20X2. Estimated income taxes for any elapsed portion of a current year are included as income tax payable. The estimated tax liability on April 30, 20X2, is $20,000 and is included in current liabilities. For a personal financial statement, the estimated tax associated with the difference between the estimated value of assets and liabilities and their tax bases is shown between liabilities and net worth. That estimated tax for Green is given to be $40,000.
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2151 Personal Financial Statements
*VIDEO EXPLANATION 10/09
Pal Corp.’s 20X1 dividend income included only part of the dividend received from its Ima Corp. investment. The balance of the dividend reduced Pal’s carrying amount for its Ima investment.
This reflects that Pal accounts for its Ima investment by the:
cost method, and only a portion of Ima’s 20X1 dividends represent earnings after Pal’s acquisition.
cost method, and its carrying amount exceeded the proportionate share of Ima’s market value.
equity method, and Ima incurred a loss in 20X1.
equity method, and its carrying amount exceeded the proportionate share of Ima’s market value.
cost method, and only a portion of Ima’s 20X1 dividends represent earnings after Pal’s acquisition.
Pal Corp. recorded the receipt of the dividends received as follows:
Debit Credit
----- ------ Cash XXX
Dividend Income XX
Investment in Ima Corp. XX This is in accord with the discussion in FASB ASC 325-20-35-1 describing application of the cost method:
Quote
Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment.
Burns Corp. had the following items:
Sales revenue $45,000
Loss on early extinguishment of bonds 36,000
Realized gain on sale of available-for-sale securities 28,000
Unrealized holding loss on available-for-sale securities17,000
Loss on write-down of inventory 3,100
Which of the following amounts would the statement of comprehensive income report as other comprehensive income or loss
$11,000 other comprehensive income
$16,900 other comprehensive income
$17,000 other comprehensive loss
$28,100 other comprehensive loss
$17,000 other comprehensive loss
Other comprehensive income includes unrealized holding gains or losses on available-for-sale securities ($17,000). All of the other items presented in the problem are included in net income.
Miller Co. discovered that in the prior year, it failed to report $40,000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 40%. What was the impact of the error on Miller’s financial statements for the prior year
Understatement of accumulated depreciation of $24,000
Understatement of accumulated depreciation of $40,000
Understatement of depreciation expense of $24,000
Understatement of net income of $24,000
Understatement of accumulated depreciation of $40,000
Failure to report depreciation expense would understate depreciation expense and accumulated depreciation by the amount of the depreciation expense not reported. If no other errors were made, income would be overstated by the net of tax amount ($24,000).
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2305 Accounting Changes and Error Corrections
The FASB’s conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income
Physical capital is applied to currently reported net income; financial capital is applied to comprehensive income.
Financial capital is applied to currently reported net income; physical capital is applied to comprehensive income.
Physical capital is applied to both currently reported net income and comprehensive income.
Financial capital is applied to both currently reported net income and comprehensive income.
Financial capital is applied to both currently reported net income and comprehensive income.
SFAC 6, Elements of Financial Statements, contains the following definitions:
Capital maintenance concept: the recovery of cost; separation of return on capital from return of capital.
Financial capital concept: The effects of price changes on assets held and liabilities owed are recognized as “holding gains and losses” and included in return on capital.
Physical capital concept: The effect of price changes are recognized as “capital maintenance adjustments” as a separate element of equity and would not be included in return on capital.
SFAC 6 continues:
Quote
The financial capital concept is the traditional view and is generally the capital maintenance concept in present primary financial statements. Comprehensive income as defined in paragraph 70 is a return on financial capital.
Thus, the financial capital maintenance approach is applied to both currently reported net income and comprehensive income.
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2121 Financial Reporting by Business Entities
The following costs were incurred by Griff Co. a manufacturer, during 20X1:
Accounting and legal fees $ 25,000
Freight-in 175,000
Freight-out 160,000
Officers salaries 150,000
Insurance 85,000
Sales representatives salaries 215,000
What amount of these costs should be reported as general and administrative expenses for 20X1 $260,000 $550,000 $635,000 $810,000
$260,000
Griff Co.’s general and administrative expenses for 20X1 would include:
Accounting& legal fees $ 25,000 Officer salaries 150,000 Insurance 85,000 Total $260,000
(Freight-in would be part of cost of goods sold and/or inventory. Freight-out and sales representative salaries are part of selling expenses.)
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2252 Costs and Expenses
In preparing its cash flow statement for the year ending December 31, 20X1, Reve Co. collected the following data:
Gain on sale of equipment $ (6,000)
Proceeds from sale of equipment 10,000
Purchase of A.S., Inc., bonds
(par value $200,000) (180,000)
Amortization of bond discount 2,000
Dividends declared (45,000)
Dividends paid (38,000)
Proceeds from sale of Treasury
stock (carrying amount $65,000) 75,000
In its December 31, 20X1, statement of cash flows, what amount should Reve report as net cash provided by financing activities $20,000 $27,000 $30,000 $37,000
$37,000
Cash inflows from financing activities:
Proceeds from sale of treasury stock $75,000
Cash outflows from financing activities:
Dividends paid (38,000)
——–
Net cash provided by financing activities $37,000
Dividends declared created a liability, but until they are paid, no cash flows out of the corporation.
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2135 Statement of Cash Flows
Multiple-step Income Statement
Unlike single-step income statements, a multiple-step income statement offers detailed information about the gross profit and operating profit of a company. Operating sections of the statement generally involve revenues and expenses, while nonoperating sections detail the gains and losses of indirect activity. The company’s specific sources of revenue and expense are itemized and presented as different line items, making it easier for investors to digest performance and evaluate financial health. The obvious trade-off to presenting detailed accounting is that it is more complicated and time-consuming to put together.
Belle Co. determined after 4 years that the estimated useful life of its labeling machine should be 10 years rather than 12 years. The machine originally cost $46,000 and had an estimated salvage value of $1,000. Belle uses straight-line depreciation. What amount should Belle report as depreciation expense for the current year $3,200 $3,750 $4,500 $5,000
$5,000
Original cost $46,000
Accu dep [($46,000 - $1,000) / 12] x 4 (15,000)
Book value =$31,000 Salvage value (1,000)
Depreciable cost =$30,000
Remaining useful life / 6 years
Depreciation =$ 5,000
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2305 Accounting Changes and Error Corrections
Karr, Inc., reported net income of $300,000 for 20X1. Changes occurred in several balance sheet accounts as follows:
Equipment $25,000 increase Accu depreciation 40,000 increase Note payable 30,000 increase
Additional Information
During 20X1, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.
In December 20X1, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.
Depreciation expense for the year was $52,000.
In Karr's 20X1 statement of cash flows, net cash used in investing activities should be: $2,000. $12,000. $22,000. $35,000.
$2,000.
Cash paid for purchase of equipment $20,000
Less cash received from sale of
equipment ($25,000 - $12,000 + $5,000 gain) 18,000
——-
Net cash outflow from investing activities $ 2,000
=======
Note
All of the following are cash inflows from investing activities: Receipts from sales of property, plant, and equipment and other productive assets (FASB ASC 230-10-45-12)
All of the following are cash outflows for investing activities: Payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment, and other productive assets. (FASB ASC 230-10-45-13)
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2135 Statement of Cash Flows
The market price of a bond issued at a premium is equal to the present value of its principal amount:
only, at the stated interest rate.
and the present value of all future interest payments, at the stated interest rate.
only, at the market (effective) interest rate.
and the present value of all future interest payments, at the market (effective) interest rate.
the market (effective) interest rate.
FASB ASC 835-30-25-10 requires all long-term receivables and payables to be recorded at present value. Additionally, the present value of all the cash flows (principal and interest) at the beginning of any bond arrangement represents the amount of cash the issuer will receive from the purchaser (i.e., the market price of the bond). The stated rate of interest is used to determine the amount and timing of the cash flows for interest. The market rate is the true rate of interest in the arrangement and is used to determine the present value of all the cash flows.
FASB ASC 740-10-30-7 requires that an entity must initially recognize the effects of a tax position when it is more likely than not that the position will be sustained upon examination. Which of the following is the definition of “more likely than not”
There is a greater than 75% chance that the taxing authority will agree with the entity taking the tax position.
There is a greater than 50% chance that the taxing authority will agree with the entity taking the tax position.
The tax position has been examined and the position was sustained.
None of the answer choices are definitions of “more likely than not.”
There is a greater than 50% chance that the taxing authority will agree with the entity taking the tax position.
FASB ASC 740-10-30-7 defines “more likely than not” as greater than 50% likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information:
“A tax position that meets the more-likely-than-not recognition threshold shall initially and subsequently be measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Measurement of a tax position that meets the more-likely-than-not recognition threshold shall consider the amounts and probabilities of the outcomes that could be realized upon settlement using the facts, circumstances, and information available at the reporting date. As used in this Subtopic, the term reporting date refers to the date of the entity’s most recent statement of financial position.”
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2270 Income Taxes
In the current year, a state government collected income taxes of $8,000,000 for the benefit of one of its cities that imposes an income tax on its residents. The state remitted these collections periodically to the city. The state should account for the $8,000,000 in the: general fund. agency fund. internal service funds. special assessment funds.
agency fund.
When one governmental entity collects revenues for another and has the responsibility to remit the funds to the other entity, the first entity acts as a fiduciary for the second. The state must record the collected taxes in an agency fund. This is a fund which allows the collection and subsequent remission of the monies to be recorded without affecting the funds with which the state itself operates. (GASB 1300.114)
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2411 Measurement Focus and Basis of Accounting
Which of the following is a research and development cost
Development or improvement of techniques and processes
Offshore oil exploration that is the primary activity of a company
Research and development performed under contract for others
Market research related to a major product for the company
Development or improvement of techniques and processes
FASB ASC 730-10-20 defines research and development as follows: “Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique in bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.”
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2388 Research and Development Costs
When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using historical exchange rates
Inventories carried at cost
Marketable equity securities reported at market values
Bonds payable
Accrued liabilities
Inventories carried at cost
FASB ASC 830-10-45-18 provides guidance for the remeasurement (i.e., translation) of the books of record into the functional currency. Specifically, a listing of accounts to be remeasured using historical exchange rates is provided and inventories carried at cost appears in that listing.
Note
Remeasurement using historical rates is the exception to the general guidance of using the current exchange rate for all assets and liabilities. Only those items on this listing are remeasured using historical rates.
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2367 Translation of Foreign Currency Financial Statements
The estimated revenues control account of a governmental unit is debited when:
actual revenues are recorded.
actual revenues are collected.
the budget is recorded.
the budget is closed at the end of the year.
the budget is recorded.
Adoption of the operating budget is recorded in the general ledger of a governmental fund with a budgetary entry that debits estimated revenues and credits appropriations, with the budgetary fund balance account being debited or credited for the difference. The debit balance in estimated revenues is compared periodically with the credit balance in revenues to determine whether actual revenues are behind or ahead of the budgeted (estimated) amount.
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2412 Fund Accounting Concepts and Application
Wilson Corp. experienced a $50,000 decline in the market value of its inventory in the first quarter of its fiscal year. Wilson had expected this decline to reverse in the third quarter, and in fact, the third quarter recovery exceeded the previous decline by $10,000. Wilson’s inventory did not experience any other declines in market value during the fiscal year.
What amounts of loss and/or gain should Wilson report in its interim financial statements for the first and third quarters
First quarter: $0; Third quarter: $0
First quarter: $0; Third quarter: $10,000 gain
First quarter: $50,000 loss; Third quarter: $50,000 gain
First quarter: $50,000 loss; Third quarter: $60,000 gain
First quarter: $0; Third quarter: $0
FASB ASC 270-10-45-1 states that companies should view interim periods as an integral part of the annual reporting period. Therefore, declines in inventory that are temporary need not be reported in interim periods.
Note that Wilson expected the first-quarter decline to reverse later in the same year. However, if it expected the loss to be of an other-than-temporary nature, Wilson should have recognized the loss in the first quarter.
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2375 Interim Financial Reporting
A not-for-profit voluntary health and welfare entity received a $500,000 permanent endowment. The donor stipulated that the income must be used for a mental health program. The endowment fund reported $60,000 net decrease in market value and $30,000 investment income. The organization spent $45,000 on the mental health program during the year. What amount of change in temporarily restricted net assets should the organization report $75,000 decrease. $15,000 decrease. $0 $425,000 increase.
$0
FASB ASC 958-225-45-1 through 45-8 requires that all expenses be reported in the unrestricted category. Only net assets released from restriction reduce temporarily restricted revenue. In this problem the $30,000 investment income would increase temporarily restricted net assets and the release-from-restriction reclassification would reduce it $30,000. The $15,000 additional amount spent would come from unrestricted resources. The decrease in market value would affect only the endowment fund (classified as permanently restricted).
Roro, Inc., paid $7,200 to renew its only insurance policy for three years on March 1, 20X1, the effective date of the policy. On March 31, 20X1, Roro’s unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense.
What amounts should be reported for prepaid insurance and insurance expense in Roro’s financial statements for the 3 months ending March 31, 20X1
Prepaid insurance: $7,000; Insurance expense: $300
Prepaid insurance: $7,000; Insurance expense: $500
Prepaid insurance: $7,200; Insurance expense: $300
Prepaid insurance: $7,300; Insurance expense: $200
Prepaid insurance: $7,000; Insurance expense: $500
This question indicates that on Roro’s unadjusted trial balance the full 3-year premium of $7,200 for the renewal of the policy has been expensed. The prepaid insurance account still contains $300 of unamortized premiums from the old policy. The accountant must make adjusting entries to achieve the following:
Expense the remaining premium of the old policy.
Transfer the premium for the new policy to the prepaid insurance account.
Amortize one month of expense on the new policy.
Calculation of account balances:
Monthly amortization = Policy cost / 36 months
= $7,200 / 36
= $200 / month
Prepaid insurance Policy 1 month
balance on 3/31/X1 = cost - amortization
= $7,200 - $200
= $7,000
======
Insurance expense on 3/31/X1:
Amortization of prior policy $300
March amortization of renewal 200
----
Total expense on 3/31/X1 $500
====
FASB ASC 718-10-30-2 requires a method of accounting for stock-based compensation plans that is based on: book value. discounted value. fair value. par value.
fair value.
FASB ASC 718-10-30-2 requires the use of a fair value based method of accounting for stock-based compensation plans.
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2265 Stock Compensation (Share-Based Payments)
Theoretically, which of the following costs incurred in connection with a machine purchased for use in a company’s manufacturing operations would be capitalized
Insurance on the machine while in transit
Testing and preparation of the machine for use
Both insurance on the machine while in transit and testing and preparation of the machine for use
Neither insurance on the machine while in transit nor testing and preparation of the machine for use
Both insurance on the machine while in transit and testing and preparation of the machine for use
The capitalized cost of a machine would include all costs of acquiring, transporting, installing, and testing of the machine for its intended use, up to the time the machine was placed in use.
This total acquisition cost would, therefore, include insurance during transit and testing and preparation of the machine for use.
Insurance and operating costs incurred subsequent to placing the machine in operation would be treated as product or period costs.
Which of the following disclosures should prospective financial statements include
Summary of significant accounting policies
Summary of significant assumptions
Both summary of significant accounting policies and summary of significant assumptions
Neither summary of significant accounting policies nor summary of significant assumptions
Both summary of significant accounting policies and summary of significant assumptions
The AICPA’s “Statement of Standards for Accountants’ Services on Prospective Financial Information” governs the preparation of prospective financial statements. It requires that accountants provide summaries of the significant accounting policies and the assumptions used to prepare these forward-looking statements. The same full disclosure principle that guides the preparation of historical financial statements applies to the reporting of prospective financial statements.
The debt service fund of a governmental unit is used to account for the accumulation of resources for, and the payment of, principal, and interest in connection with:
a pension trust fund.
a proprietary fund.
both a pension trust fund and a proprietary fund.
neither a pension trust fund nor a proprietary fund.
neither a pension trust fund nor a proprietary fund.
Debt service funds are governmental funds used to account for the accumulation of resources for, and the repayment of, general obligation long-term debt principal and interest. Debt accounted for in a pension trust or a proprietary fund is serviced from that fund and is not general long-term debt.
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2412 Fund Accounting Concepts and Application
Falton Co. had the following first-year amounts related to its $9,000,000 construction contract:
Actual costs incurred and paid $2,000,000
Estimated costs to complete 6,000,000
Progress billings 1,800,000
Cash collected 1,500,000
What amount should Falton recognize as a current liability at year-end, using the percentage-of-completion method $0 $200,000 $250,000 $300,000
$0
At year-end, Falton should record an account receivable of $300,000 (1,800,000 - 1,500,000) and inventory of $2,000,000. However, no current liability exists.
Journal entries:
Construction in Progress 2,250,000
Cash and profit 2,250,000
Accounts Receivable 1,800,000
Progress Billings 1,800,000
Cash 1,500,000
Accounts Receivable 1,500,000
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2251 Revenue Recognition
What does non-monetary assets mean?
They usually mean fixed assets.
In 20X0, $400,000 was donated to Beaty Hospital, a private not-for-profit institution, by a donor who stipulated that the money be used to upgrade research equipment. The new equipment was not acquired until 20X1.
How should the purchase of the equipment be reported in the 20X1 statement of activities
As a decrease in temporarily restricted net assets only
As an increase in unrestricted net assets only
As a decrease in temporarily restricted net assets and an increase in unrestricted net assets
As a program expense
As a decrease in temporarily restricted net assets and an increase in unrestricted net assets
Satisfaction of specific purpose restrictions in 20X1 requires a reclassification from temporarily restricted net assets (where the $400,000 was recorded in 20X0) to unrestricted net assets. The equipment would also be reported as an asset in the statement of financial position.
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2512 Statement of Activities
Halderman County levies an imposed nonexchange form of tax in the year prior to the year of its intended collection and use. An enforceable legal claim does not arise until the period after the period of its intended collection and use. The following facts apply:
• On September 1, 20X1, the county levied $2 million of tax for FY 20X2—50% of the tax is due on January 15, 20X2, and the remainder is due July 15, 20X2.
• It is estimated 5% of the levy will be uncollectible.
• An enforceable legal claim for the September 1, 20X1, levy does not attach until January 15, 20X3.
• It is estimated 90% of the September 1, 20X1, levy will be collected during the period January 1, 20X2, through February 28, 20X3. The balance will be collected at a later date, or go uncollected.
• The County uses an “availability period” equal to two months following the close of the fiscal year, and has a fiscal year-end of December 31.
How much revenue would be reported at the fund level in 20X1
$0
$1,500,000
$1,900,000
$2,000,000
$0
“Governmental entities should recognize revenues from property taxes, net of estimated refunds and estimated uncollectible amounts, in the period for which the taxes are levied, even if the enforceable legal claim arises or the due date for payment occurs in a different period. All other imposed nonexchange revenues should be recognized in the same period that the assets are recognized unless the enabling legislation includes time requirements. If so, revenues should be recognized in the period when the resources are required to be used or when use is first permitted.” (GASB N50.115)
The year taxes are levied is 20X1 for use in 20X2. The due dates for payment of the taxes are January 15, 20X2, and July 15, 20X2. With the schedule of payments, no revenues are recognized in 20X1. (GASB N50.115)
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2446 Nonexchange Revenue Transactions
On October 31, 20X1, Dingo, Inc., had cash accounts at three different banks. One account balance is segregated solely for a November 15, 20X1, payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.
How should these accounts be reported in Dingo’s October 31, 20X1, classified balance sheet
The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.
The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability.
The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft.
The segregated and regular accounts should be reported as current assets net of the overdraft.
The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.
FASB ASC 210-10-20 defines current assets as:
Cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.
According to this pronouncement, cash which is “restricted as to withdrawal or use” should not be included in current assets. Thus, the segregated account should be classified as a noncurrent asset.
The regular account is a current asset.
The overdrawn account is a liability rather than an asset. It should be reported as a current liability.
On December 31 of the current year, Moss Co. issued $1,000,000 of 11% bonds at 109. Each $1,000 bond was issued with 50 detachable stock warrants, each of which entitled the bondholder to purchase one share of $5 par common stock for $25. Immediately after issuance, the market value of each warrant was $4.
On December 31, what amount should Moss record as discount or premium on issuance of bonds $200,000 discount $40,000 premium $110,000 discount $90,000 premium
$110,000 discount
The total amount initially received for the bonds and warrants was $1,090,000 (face multiplied by issue percentage of 1.09): $1,000,000 × 1.09 = $1,090,000.
The number of warrants issued was 50,000 (there were 1,000 $1,000 bonds issued, $1,000 × 1,000 = $1,000,000, and 50 warrants per bond, so 50,000 warrants). The total value of the warrants after issuance was $200,000 (50,000 × $4 per warrant).
Thus, the bonds were issued for $890,000 ($1,090,000 - $200,000). Therefore, the bonds had a discount of $110,000, the difference between the face and issue price ($1,000,000 - $890,000).
Spiro Corp. uses the sum-of-the-years'-digits method to depreciate equipment purchased in January 20X1 for $20,000. The estimated salvage value of the equipment is $2,000 and the estimated useful life is four years. What should Spiro report as the asset's carrying amount as of December 31, 20X3 $1,800 $2,000 $3,800 $4,500
$3,800
The sum-of-the-years’-digits depreciation method entails using a fraction with a numerator equal to the remaining useful life of the asset at the beginning of the year and a denominator equal to the sum of the years’ digits. To calculate annual depreciation expense, this fraction is applied each year to the depreciable basis of the asset, which is the historical cost less any salvage value. For an asset with a 4-year estimated useful life, the denominator is 4 + 3 + 2 +1 = 10. The depreciable basis in Spiro’s equipment is $20,000 less an estimated salvage value of $2,000 = $18,000. Depreciation expense for 20X1 through 20X3 is calculated as follows: 4/10 × $18,000 = $7,200; 3/10 × $18,000 = $5,400; 2/10 × $18,000 = 3,600. At December 31, 20X3, accumulated depreciation is $16,200 and the cost is $20,000, resulting in a net book value of the equipment of $3,800.
Troop Co. frequently borrows from the bank to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable at maturity. Troop repaid each loan on its scheduled maturity date.
Date of Maturity Term of
Loan Amount Date Loan
-------- ------- --------- ---------
11/01/X1 $10,000 10/31/X2 1 year
02/01/X2 30,000 07/31/X2 6 months
05/01/X2 16,000 01/31/X3 9 months
Troop records interest expense when the loans are repaid. Accordingly, interest expense of $3,000 was recorded in 20X2. If no correction is made, by what amount would 20X2 interest expense be understated $1,080 $1,240 $1,280 $1,440
$1,080
Total interest expense recorded when paid with 12% interest:
$10,000 x .12 x 1 year = $1,200 (1 year of interest paid for
11/1/X1 to 10/31/X2)
$30,000 x .12 x 1/2 year = 1,800 (1/2 year from 2/1/X2 to 7/31/X2)
——
Total interest paid/expensed $3,000
======
Total interest accrued:
$10,000 x .12 x 10/12 year = $1,000 (10/12 year from 1/1/X2 to 10/31/X2)
$30,000 x .12 x 6/12 year = 1,800 (6/12 year from 2/1/X2 to 7/31/X2)
$16,000 x .12 x 8/12 year = 1,280 (8/12 year from 5/1/X2 to 12/31/X2)
——
Total interest accrued = $4,080
======
Interest must be recognized as it is accrued, not when it is paid. Therefore:
Interest accrued $4,080
Interest paid (3,000)
-------
Understated interest $1,080
=======
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2112 Financial Accounting Standards Board (FASB)
Factoring WITHOUT Recourse
Without recourse means that the factor or third
party has no recourse against the transferor.
This is usually accounted for as a sale of
receivables because there is no recourse
against the transferor, even if the customers
end up not paying the third party
Fish Road property owners in Sea County are responsible for special assessment debt that arose from a storm sewer project. If the property owners default, Sea has no obligation regarding debt service, although it does bill property owners for assessments and uses the monies it collects to pay debt holders. What fund type should Sea use to account for these collection and servicing activities Agency Debt service Private-purpose trust Capital projects
Agency
This question refers to situations in which a government is not obligated in any manner for the repayment of special assessment debt, but merely acts as a collection and disbursement agent on behalf of the property owners within a special assessment benefit district. In such cases, the government (1) collects special assessment debt payments from property owners, and (2) remits the proceeds to the holders of the special assessment debt—but otherwise has no liability. GASB 1300.107 requires that an agency fund be employed to account for special assessment collection and debt servicing activities in cases where the government is not obligated in any manner for special assessment debt repayment.
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2412 Fund Accounting Concepts and Application
On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year.
What amount will Peace report as dividends declared and paid in its current year's consolidated statement of retained earnings $8,000 $15,000 $21,000 $23,000
$15,000
Only dividends paid to Peace shareholders will be reported as dividends paid. Dividends paid to Peace by Surge will be eliminated in consolidation. Dividends paid to shareholders other than Peace will be reported as an adjustment to the noncontrolling interest account.
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2323 Emphasis on Adjusting and Eliminating Entries(…
Nongovernmental not-for-profit entities are required to provide which of the following external financial statements
Statement of financial position, statement of activities, statement of cash flows
Statement of financial position, statement of comprehensive income, statement of cash flows
Statement of comprehensive income, statement of cash flows, statement of gains and losses
Statement of cash flows, statement of comprehensive income, statement of unrelated business income
Statement of financial position, statement of activities, statement of cash flows
The “statement of comprehensive income” is the term for the change in the net equity of a business entity and would not relate to a not-for-profit organization.
The correct listing of required statements is:
statement of financial position,
statement of activities, and
statement of cash flows.
FASB ASC 958-205-45-4 goes on to state: “In addition, a voluntary health and welfare entity shall provide a statement of functional expenses.”
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2510 Financial Statements
The FASB has jurisdiction over entities with which of the following characteristics
Body corporate and politic
Exempt from federal taxation
Body corporate and politic or exempt from federal taxation
Power to enact and enforce a tax levy
Exempt from federal taxation
The joint FASB/GASB definition of governmental organizations that is included in several AICPA Audit and Accounting Guides, including State and Local Governments (paragraph 1.01), indicates that bodies corporate and politic and entities with the power to enact and enforce a tax levy are governments. Not-for-profit organizations that are not governmental are exempt from federal taxation.
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2410 Governmental Accounting Concepts
Interest cost included in the net pension cost recognized by an employer sponsoring a defined benefit pension plan represents the:
amortization of the discount on unrecognized prior service costs.
increase in the fair value of plan assets due to the passage of time.
increase in the projected benefit obligation due to the passage of time.
shortage between the expected and actual returns on plan assets.
increase in the projected benefit obligation due to the passage of time.
FASB ASC 715-30-35-8 states:
Quote
The interest cost component of net periodic pension cost is interest on the projected benefit obligation, which is a discounted amount. Measuring the projected benefit obligation as a present value requires accrual of an interest cost at rates equal to the assumed discount rates.
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2264 Retirement Benefits
Which of the following is reported as interest expense
Pension cost interest
Amortization of discount of a note
Deferred compensation plan interest
Interest incurred to finance software development for internal use
Amortization of discount of a note
Only the discount amortization is reported as interest expense. Pension cost interest is not directly reported but causes a change in pension expense. Deferred compensation plan interest is not directly reported but causes an increase in the plan. Software production costs are capitalized and eventually amortized or expensed.
Bren Co.’s beginning inventory at January 1 was understated by $26,000, and its ending inventory was overstated by $52,000. As a result, Bren’s cost of goods sold for the year was: overstated by $26,000. understated by $26,000. understated by $78,000. overstated by $78,000.
understated by $78,000.
- If beg inventory is understated = cost of goods available for sale & COGS is understated
- If end inventory is overstated = COGS is understated
The items making up cost of goods sold (based on a periodic inventory model) are:
add beginning inventory to net purchases to get goods available for sale,
then subtract ending inventory from that to get cost of goods sold.
If beginning inventory is understated, then so will goods available for sale, and cost of goods sold also. If ending inventory is overstated, then too much is taken out in computing cost of goods sold, and again cost of goods sold will be understated.
Thus, if both beginning inventory is understated by $26,000 and ending inventory is overstated by $52,000, then cost of goods sold will be understated by both of those amounts together, $26,000 + $52,000, for a total understatement of cost of goods sold of $78,000.
Tuston Township issued the following bonds during the year ended June 30, 20X1:
Bonds issued for the garbage
collection enterprise fund that
will service the debt $700,000
Revenue bonds to be repaid from
admission fees collected by the
Township zoo enterprise fund 500,000
What amount of these bonds should be reported in Tuston's government-wide statement of activities in the governmental activities column $1,200,000 $700,000 $500,000 $0
$0
General long-term liabilities should be reported in the governmental activities column in the government-wide statement of net position, not the government-wide statement of activities. Further, bonds which will be serviced by an enterprise fund should be reported in the business-type activities column of the government-wide statement of net position. The bonds for the garbage collection enterprise fund and the revenue bonds for the zoo would also be reported in each enterprise fund.
GASB 1500.102–.103
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2412 Fund Accounting Concepts and Application
How would a municipality that uses modified accrual and encumbrance accounting record revenues realized from a reimbursement grant which had been previously awarded and received in cash Credit other financing sources. Credit deferred revenues. Debit deferred revenues. Credit interfund revenues.
Debit deferred revenues.
Encumbrance accounting is only one feature of the accounting practices used by municipalities for governmental funds. Accounting for governmental funds is done on the modified accrual basis. There are many instances where a grant is awarded and received in cash prior to the recipient city incurring “qualifying” expenditures. In such instances, receipt of the grant proceeds is recorded with a debit to cash and a credit to a deferred revenues (liability) account. Then, as qualifying expenditures are incurred, the related grant revenues are recognized by debiting deferred revenues and crediting revenues.
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2412 Fund Accounting Concepts and Application
Seafood Trading Co. commenced operations during the year as a large importer and exporter of seafood. The imports were all from one country overseas. The export sales were conducted as drop shipments and were merely transshipped at Seattle. Seafood Trading reported the following data:
Purchases during the year $12.0 million
Shipping costs from overseas 1.5 million
Shipping costs to export customers 1.0 million
Inventory at year-end 3.0 million
What amount of shipping costs should be included in Seafood Trading’s year-end inventory valuation
$0
$250,000
$375,000
$625,000
$375,000
Shipping costs from overseas (freight-in) should be included in the inventory costs. Shipping costs to export customers (freight-out) should not be included in the inventory costs. Ending inventory is 1/4th ($3,000,000 ÷ $12,000,000) of purchases.
Thus, 1/4th of shipping costs from overseas ((0.25 × $1,500,000) = $375,000) should be included in ending inventory.
In 20X1, Citizens’ Health, a voluntary health and welfare entity, received a ll*bequest of a $200,000 certificate of deposit maturing in 20X2. The only stipulations were that the certificate be held until maturity and the interest revenue be used to build a playground for the preschool program. Interest revenue was $16,000 for 20X1 and 20X2 combined. When the certificate matured and was redeemed, the board of trustees adopted a formal resolution designating $40,000 of the proceeds for the future purchase of playground equipment. At the end of 20X2, Citizen had not yet built the playground or purchased any equipment.
What amount should Citizen report in its 20X2 statement of financial position as temporarily restricted net assets as the result of the bequest $0 $16,000 $56,000 $40,000
*Bequest - a property given by by wi
$16,000
The only restriction of the use of the bequest by an external party is that the interest of $16,000 be used to build a playground. The restriction is temporary and will be satisfied when the $16,000 is spent for the specific purpose stipulated. The $200,000 principal from the certificate of deposit is unrestricted, even though a portion of it is designated by the board of trustees, because the board is not an external party.
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2511 Statement of Financial Position
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be *dilutive
Cumulative 8%, $50 par preferred stock
10% convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock
7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock
6%, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock
*Dilutive Securities are securities that are not common stock in form, but allow the owner to obtain common stock upon exercise of an option or a conversion privilege. The most common examples of dilutive securities are: stock options, warrants, convertible debt and convertible preferred stock.
7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock
Dilutive securities reduce earnings per share. To determine dilution, a conversion basis must be stated. Each 7% $1,000 bond yields $49 ($70 - 30% tax) of earnings after tax. The conversion increases the number of shares by 40. The earning per share on the converted bonds is only $1.225 (49/40) thus diluting the basic earnings per share of $1.29.
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2335 Earnings per Share
Single-step Income Statement
Single-step income statements offer a very straightforward accounting of a company’s business activity. All revenues and gains are added together at the top of the statement, while all of the losses and expenses are totaled below them. An example of the equation is represented as:
(Revenues + Gains) - (Expenses + Losses) = Net Income
Retail inventory Method
This is used by retailers to estimate the cost of ending inventory
Basic steps
- Calculate ending inventory at retail prices
- Calculate the cost to retail ratio
- Apply cost to retail ratio to ending inventory at retail prices to get ending inventory at cost
Lang Co. uses the installment method of revenue recognition. The following data pertain to Lang’s installment sales for the years ending December 31, 20X1 and 20X2:
20X1 20X2
------- ------- Installment receivables at year-end on 20X1 sales $60,000 $30,000 Installment receivables at year-end on 20X2 sales - 69,000 Installment sales 80,000 90,000 Cost of sales 40,000 60,000
What amount should Lang report as deferred GP in its December 31, 20X2, balance sheet $23,000 $33,000 $38,000 $43,000
$38,000
Gross profit rates:
20X1 = ($80,000 - $40,000) / $80,000 = 50%
20X2 = ($90,000 - $60,000) / $90,000 = 33.33%
Deferred gross profit on December 31, 20X2:
On 20X1 sales = 50% x $30,000 = $15,000
On 20X2 sales = 33.33% x $69,000 = $23,000
——-
Total deferred gross profit $38,000
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2251 Revenue Recognition
Bake Co.’s trial balance included the following at December 31, 20X1:
Accounts payable $ 80,000
Bonds payable, due 20X2 300,000
Discount on bonds payable 15,000
Deferred income tax liability 25,000
The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in 20X2. What amount should be included in the current liability section of Bake's December 31, 20X1, balance sheet $365,000 $390,000 $395,000 $420,000
$390,000
All of the liabilities are current liabilities because all will be paid within the next year.
Accounts payable $ 80,000
Bonds payable 300,000
Discount on bonds payable (15,000)
Deferred income tax liability 25,000
——–
Total $390,000
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2251 Revenue Recognition
Under the deferred method of accounting for deferred income taxes, a credit balance in the deferred income taxes account that appears on the balance sheet:
represents a payable in the usual sense in which the term “payable” is used in financial statements.
does not represent a payable in the usual sense in which the term “payable” is used in financial statements.
indicates that the amount of expense reported to date for financial reporting purposes is greater than the amount of expense reported to date for tax purposes.
indicates that the amount of revenue reported to date for financial reporting purposes is less than the amount of income reported to date for tax purposes.
does not represent a payable in the usual sense in which the term “payable” is used in financial statements.
A credit balance in the deferred income taxes account does not represent a payable in the usual sense in which the term “payable” is used in financial statements. The term “payable” is normally associated with an amount that is owed to an outside party. A credit balance in the deferred income taxes account results from temporary differences between the amount of income or expense reported for tax purposes and that reported for financial statement purposes. A credit balance indicates that either:
(a) the revenue to-date for financial reporting purposes exceeds the income to-date included in taxable income or
(b) the expense to-date for financial reporting purposes is less than the amount of expense to-date included in taxable income.
The credit balance in the deferred income taxes account represents the tax expense recognized to-date for financial reporting purposes that is expected to be included in taxable income in future years. However, it does not represent an amount “owed” to the federal government at the balance sheet date.
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2270 Income Taxes
On March 31, 20X1, Ashley, Inc.’s, bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashley’s books was less than the market value but greater than the par value of the common stock issued.
If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion Stockholders' equity is increased. Additional paid-in capital is decreased. Retained earnings are increased. An extraordinary loss is recognized.
Stockholders’ equity is increased.
Assume that account balances related to Ashley, Inc.’s, convertible bonds just prior to exchange on March 31, 20X1, are:
Bonds payable 100,000
Premium on bonds payable 1,000
-------
Carrying value of bonds 101,000
=======
If these bonds are exchanged (converted) and the book-value method is used, the carrying value of the bonds ($101,000) will be removed from the bonds accounts and the same amount will be added to common stock (at par) and additional paid-in capital. The result is that stockholders’ equity is increased by $101,000.
Estimates of price-level changes for specific inventories are required for which of the following inventory methods Conventional retail Dollar-value LIFO Weighted-average cost Average cost retail
Dollar-value LIFO
Dollar-value LIFO starts with a base-year layer valued at base-year prices. As subsequent year layers are added, these inventory layers are valued using the specific inventory prices in effect for the year in which the layer is added. Thus, estimates of price-level changes (price indexes) for specific inventories are required in applying dollar-value LIFO.
Frame Co. has an 8% note receivable dated June 30, 20X0, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, 20X1, 20X2, and 20X3. In its June 30, 20X2, balance sheet, what amount should Frame report as a current asset for interest on the note receivable $0 $4,000 $8,000 $12,000
Note receivable balance on June 30, 20X0 $150,000
Principal plus accrued payments collected
in 20X1 - 50,000
——–
Note receivable balance on July 1, 20X1 $100,000
Times interest rate x .08
——–
Interest receivable June 30, 20X2 $ 8,000
========
On July 1, 20X1, after recording interest and amortization, York Co. converted $1,000,000 of its 12% convertible bonds into 50,000 shares of $1 par value common stock. On the conversion date, the carrying amount of the bonds was $1,300,000, the market value of the bonds was $1,400,000, and York's common stock was publicly trading at $30 per share. Using the book value method, what amount of additional paid-in capital should York record as a result of the conversion $950,000 $1,250,000 $1,350,000 $1,500,000
$1,250,000
Under the book value method, the carrying value of the debt (bonds) is removed and is replaced by stockholder equity in exactly the same total amount (i.e., the book value of the debt).
The journal entry to record the conversion:
Bonds payable $1,000,000
Premium on bonds payable 300,000
Common stock ($1 par x 50,000 shares) $ 50,000
Additional paid-in capital 1,250,000
Preferred Stock
It can be:
- callable
- redeemable
- convertible
i. If redeemable, preferred stock has a specified date at a specified price, it is usually classified as debt
1. Dividends are reported as interest expense
ii. When callable or redeemable, stock is called or redeemed, any dividends in arrears are paid first
Metro General is a municipally owned and operated hospital and a component unit of Metro City. Where should the information for Metro General be presented in the government-wide financial statements
In the business-type activities column
It should not appear in the government-wide financial statements.
In the governmental activities column
In the component units column after the primary government totals
In the component units column after the primary government totals
Data of discretely presented component units should be displayed in the government-wide statement of activities and statement of net position in columns to the right or after the primary government information. The focus of the government-wide financial statements should be on the primary government. Separate columns distinguish the primary government and its discretely presented component units. Discretely presented component units are not in substance part of the primary government. This contrasts with the presentation of blended component unit data, which is included within the primary government information because blended component units are, in substance, part of the primary government.
GASB 2600.101 and .107
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2421 Government-Wide Financial Statements
Case Cereal Co. frequently distributes coupons to promote new products. On October 1, 20X1, Case mailed 1,000,000 coupons for $.45 off each box of cereal purchased. Case expects 120,000 of these coupons to be redeemed before the December 31, 20X1, expiration date. It takes 30 days from the redemption date for Case to receive the coupons from the retailers. Case reimburses the retailers an additional $.05 for each coupon redeemed. As of December 31, 20X1, Case had paid retailers $25,000 related to these coupons and had 50,000 coupons on hand that had not been processed for payment.
What amount should Case report as a liability for coupons in its December 31, 20X1, balance sheet $35,000 $29,000 $25,000 $22,500
$35,000
Even though the coupons expired December 31, 20X1, additional coupons can be expected after December 31, 20X1, since the problem states that it takes 30 days from the redemption date for Case to receive the coupons from the retailer. Therefore, the entire estimated redemption of 120,000 should be used to accrue the estimated liability even though only 100,000 coupons have been accounted for on December 31, 20X1 (50,000 coupons have been redeemed and 50,000 are awaiting processing).
Expected liability Coupons expected Cost of
for 20X1 = to be redeemed x redemption
= 120,000 x ($.45 + $.05)
= $60,000
Liability on December 31, 20X1
= Expected liability - Payments made
= $60,000 - $25,000
= $35,000
Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest. What is an installment note’s receivable balance six months after the sale
75% of the original sales price
Less than 75% of the original sales price
The present value of the remaining monthly payments discounted at 12%
Less than the present value of the remaining monthly payments discounted at 12%
The present value of the remaining monthly payments discounted at 12%
The payments include the 12% interest. In order to determine the notes receivable balance six months after the sale, it would be necessary to compute the present value of the 18 remaining monthly payments using a discount rate of 12%.
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2251 Revenue Recognition
Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock on December 31, 20X1. During 20X2, transactions involving Nest’s common stock were as follows:
May 3 - 1,000 shares of treasury stock were sold.
Aug 6 - 10,000 shares of previously unissued stock were sold.
Nov 18 - a 2-for-1 stock split took effect.
Laws in Nest’s state of incorporation protect treasury stock from dilution. On December 31, 20X2, how many shares on Nest’s common stock were issued and outstanding
220,000 shares issued and 212,000 shares outstanding
220,000 shares issued and 216,000 shares outstanding
222,000 shares issued and 214,000 shares outstanding
222,000 shares issued and 218,000 shares outstanding
220,000 shares issued and 212,000 shares outstanding
Shares issued include:
Original shares issued 100,000
Sale of shares on August 6 10,000
Additional shares from stock split 110,000
——-
Total 220,000
Shares outstanding:
Change Outstanding
-------- ----------- Original issue 100,000 100,000 Treasury shares held in 20X1 (5,000) 95,000 Sales of Treasury shares in 20X2 1,000 96,000 Sale of unissued shares 10,000 106,000 Stock split 106,000 212,000
The difference of 8,000 shares is the 4,000 treasury shares plus the additional 4,000 issued treasury shares in the stock split.
On December 30, 20X1, Rafferty Corp. leased equipment under a capital lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment's useful life is 10 years, and the interest rate implicit in the lease is 10%. The capital lease obligation was recorded on December 30, 20X1, at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this capital lease in its December 31, 20X1, balance sheet $6,500 $8,500 $11,500 $20,000
$8,500
Initial lease obligation on December 31, 20X1 $135,000
Less payment made on December 31, 20X1 - 20,000
——–
Lease obligation during 20X2 $115,000
========
Portion of December 31, 20X2, payment that is interest =
rate x obligation x time = 10% x $115,000 x 1 = $11,500
Portion of December 31, 20X2, payment that is related
to lease obligation = payment - interest portion =
$20,000 - $11,500 = $8,500
This amount is a current liability since it is payable within the current period. The remaining lease obligation is noncurrent.
*See video explanation and notes!
Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a result of this transaction. How is this procedure best described
Loan from Ross collateralized by Gar’s accounts receivable
Loan from Ross to be repaid by the proceeds from Gar’s accounts receivable
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross
Sale of Gar’s accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross
Factoring of receivables without recourse is essentially a sale of those receivables because the recipient of the receivables (i.e., Ross Bank) has no recourse if the debtor(s) do(es) not pay amounts owed. All risk of nonpayment is transferred to Ross Bank. (FASB ASC 860-10-55-45)
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2393 Transfers and Servicing of Financial Assets and …
Disclosure is required by publicly held companies if 10% or more of total revenues are derived from:
sales to a single customer.
export sales.
both sales to a single customer and export sales.
neither sales to a single customer nor export sales.
both sales to a single customer and export sales.
FASB ASC 280-10-50-12 requires that public companies disclose if 10% or more of total revenues come from sales to single customers or from export sales.
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2390 Segment Reporting
Cliff Hospital, a private not-for-profit institution, has an endowment fund, the income from which is required to be used for library acquisitions. How should the income be reported in the statement of activities if there have not yet been any library acquisitions
As an increase in temporarily restricted net assets
As an increase in unrestricted net assets
As an increase in permanently restricted net assets
As an increase in deferred revenues
As an increase in temporarily restricted net assets
The endowment fund income has a restriction as to its use. The restriction is temporary because it will be satisfied when the library acquisitions have been made and the temporary restriction can be released at that time.
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2512 Statement of Activities
Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values. Assuming that the exchange does not meet the criteria for commercial substance, Slate should recognize:
a gain equal to the difference between the fair value and the carrying amount of the land given up.
a gain in an amount determined by the ratio of cash received to total consideration.
a loss in an amount determined by the ratio of cash received to total consideration.
neither a gain nor a loss.
a gain in an amount determined by the ratio of cash received to total consideration
FASB ASC 845-10-30-1 specifies that the accounting for nonmonetary exchanges generally should be accounted for based on fair values, which is the same basis as that used for monetary transactions. FASB ASC 845-10-30-3 provides three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:
- Fair value is not determinable.
- Exchange transaction is to facilitate sales for customers.
- Exchange transaction lacks commercial substance.
In Slate’s case, one of the “givens” is that the exchange does not meet the criteria for commercial substance.
Therefore, the exchange should be accounted for based on the recorded amounts of the assets surrendered, except that Slate, as the recipient of cash, must recognize “partial” gain. The gain to be recognized by Slate is an amount determined by the ratio of cash received to fair value of the total consideration received. The “partial” gain would be computed by multiplying this ratio times the total implied gain, which is the difference between the carrying amount and the fair value of the land surrendered.
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2386 Nonmonetary Transactions (Barter Transactions)
A company obtained a $300,000 loan with a 10% interest rate on January 1, Year 1, to finance the construction of an office building for its own use. Building construction began on January 1, Year 1, and the project was not completed as of December 31, Year 1. The following payments were made in Year 1 related to the construction project:
January 1 Purchased land for $120,000
September 1 Progress payment to contractor for $150,000
What amount of interest should be capitalized for the year ended December 31, Year 1 $13,500 $15,000 $17,000 $30,000
$17,000
The capitalized interest is based on the payments made for the land and progress payments to the contractor based on the amount of the year that these payments were outstanding. The land payment of $120,000 was outstanding the entire year for an expenditure amount of $120,000 × 12/12, or $120,000. The progress payment to the contractor was for $150,000 and was made in September, for only the last four months of the year, thus an expenditure of $150,000 × 4/12, or $50,000.
The total weighted-average expenditures was thus $120,000 and $50,000, for a total of $170,000. A larger ($300,000) specifically construction-related debt was outstanding all year, so there is enough interest to capitalize at the 10% rate of the loan.
The capitalized interest is thus $170,000 × 0.10, or $17,000.
On January 2, 20X1, Boulder Co. assigned its patent to Castle Co. for royalties of 10% of patent-related sales. The assignment is for the remaining four years of the patent’s life. Castle guaranteed Boulder a minimum royalty of $100,000 over the life of the patent and paid Boulder $50,000 against future royalties during 20X1. Patent-related sales for 20X1 were $300,000.
In its 20X1 income statement, what amount should Boulder report as royalty revenue $25,000 $30,000 $50,000 $100,000
$30,000
Royalty income of $30,000 ($300,000 × 10%) was both earned and realized in 20X1. The remainder of the $50,000 deposit is unearned royalty revenue.
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2121 Financial Reporting by Business Entities
On January 2, 20X1, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus 24 monthly payments of $5,000 each, for total cash payments of $130,000. The cash equivalent price of the machinery was $110,000. The machinery has an estimated useful life of 10 years and estimated salvage value of $5,000. Lem uses straight-line depreciation. In its 20X1 income statement, what amount should Lem report as depreciation for the machinery $10,500 $11,000 $12,500 $13,000
$10,500
The machinery is recorded at the cash equivalent price of the machinery, $110,000.
Straight-line depreciation for 20X1 = $(110,000 - $5,000) / 10 years
= $ 105,000 / 10 years
= $ 10,500
The total cash payment of $130,000 includes interest of $20,000.
LIFO = rising prices
Smaller inventory costs
Higher COGS than FIFO
Lower income
State and local governments have various sources of revenue. When revenues are received from charges to users for services provided, these revenues are classified as: program revenues. general revenues. general revenues and program revenues. specific revenues.
program revenues.
Program revenues are derived directly from the program itself or from parties outside the reporting government’s taxpayers or citizenry, as a whole; they reduce the net cost of the function to be financed from the government’s general revenues. Revenues derived from those who purchase, use, or directly benefit from the goods or services of a program, even those beyond the reporting government’s boundaries, are always considered program revenues.
GASB 2200.135
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2421 Government-Wide Financial Statements
A company sells $300,000 of its accounts receivable to a bank for $260,000 with recourse. The company must provide a refund to the bank for any amount that the bank fails to collect below $250,000. The company has evaluated the receivables and believes the bank should be able to collect $244,000. What amount of loss should the company recognize on the date of the original sale? $40,000 $46,000 $50,000 $56,000
$46,000
The company making this sale must recognize an estimated liability for $6,000. That is the expected amount that will have to be refunded to the bank. That is the estimated shortfall below the minimum collection level. The company removes its $300,000 in receivables and reports the $260,000 cash that is collected. In addition, the $6,000 liability must be recorded, leaving a loss of $46,000 on the sale of the receivables.
A $100,000 gift was received by Group Home Projects, a nongovernmental not-for-profit organization. Group’s board of directors stipulated that this gift must be invested for a period of four years, with the income to be used for general operations. How should the gift be reported in Group Home’s statement of activities
Deferred revenue
Unrestricted contribution
Unrestricted contribution of $25,000 and restricted contribution of $75,000
Restricted contribution
Unrestricted contribution
In this situation, the board, not the donor, imposes restrictions on use of the gift. When resources are under control of the governing board and not specifically restricted by an outside donor, the resources are considered unrestricted and the resulting income is unrestricted revenue.
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2511 Statement of Financial Position
Blue Township has a number of outstanding bond issues that include a $4,000,000 general obligation bond that financed City Hall, a $2,000,000 revenue bond that financed upgrades to the water treatment plant, a $1,000,000 special assessment bond for sidewalks, and a $3,000,000 general obligation bond used for streets and roads. Revenues of the water fund, a proprietary fund, are expected to pay off the revenue bond.
What should Blue Township report as long-term liabilities in the governmental activities column of the government-wide statement of net position $4,000,000 $7,000,000 $8,000,000 $9,000,000
$8,000,000
The obligations of the proprietary fund, the revenue bonds of $2,000,000, should be shown as a fund liability. The other bonds should be shown in the government-wide statements as a liability relating to governmental activities, but not shown in the fund statements. The general obligation debt consists of the $4,000,000 and $3,000,000 general obligation bonds as well as the special assessment bonds of $1,000,000. Special assessment debt is usually an obligation of the general government, although some costs may be defrayed with special assessments.
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2411 Measurement Focus and Basis of Accounting
- VIDEO EXPLANATION
- NOTES 9/27
XYZ Museum, a not-for-profit entity, received a very important painting three years ago as a donation to its permanent collection. At the time of receipt, the painting was appropriately valued. The museum does not capitalize its collections. Disclosure would be handled by:
disregarding the painting entirely because XYZ Museum opted not to capitalize.
including a line item on the face of the financial statement with disclosures regarding XYZ Museum’s permanent art collection, which includes the painting.
including the value of the painting in the permanently restricted net assets total.
including the value of the painting in the unrestricted net assets total.
including a line item on the face of the financial statement with disclosures regarding XYZ Museum’s permanent art collection, which includes the painting.
A not-for-profit entity may opt not to capitalize works of art, historical treasures, and the like as long as the items meet the definition of collection items: held for exhibition, protected, and preserved, with a policy that requires sales only for acquisition of other collection items. Capitalization means an addition to both sides of the accounting equation, assets and equities. If the collection is not capitalized, there is no amount included in equities or net assets. However, the existence of the collection, including the donated painting, cannot be disregarded and a note describing the collection must be referenced on a line on the face of the financial statement.
FASB ASC 958-360-45-3, 958-605-25-19, and Glossary
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2511 Statement of Financial Position
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 bus 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 $1,267,700 $1,273,300 $1,314,600 $1,316,000
$1,314,600
Net income is computed is follows:
Gross sales $3,600,000
Less: Sales returns 34,000
———–
Net sales $3,566,000
Cost of goods sold 1,200,000
———–
Gross profit $2,366,000
Selling and administrative expenses 500,000
———–
Operating income $1,866,000
Other income:
Gain on sale of available-for-sale securities 8,000
———–
Income before taxes $1,874,000
Provision - income txes ($1,874,000 x .30) (562,200)
———–
Income from continuing operations $1,311,800
Discontinued operations:
Gain from disposal of discontinued business
segment, net of applicable tax savings of
$1,200 ($4,000 x .30) 2,800
(4,000-1,200) ———–
Net income $1,314,600
===========
Unrealized gain on available-for-sale securities is included in comprehensive income, not in net income
Sum-of-the-year’s-digits depreciation method
Use a fraction with a numerator equal to the remaining useful life of the asset at the beginning of the year and a denominator equal to the same of the years’ digits.
A company recently acquired a copyright that now has a remaining legal life of 30 years. The copyright initially had a 38-year useful life assigned to it. An analysis of market trends and consumer habits indicated that the copyrighted material will generate positive cash flows for approximately 25 years. What is the remaining useful life, if any, over which the company can amortize the copyright for accounting purposes 0 years 25 years 30 years 38 year
25 years
FASB ASC 350-30-20 defines the useful life of an intangible as the period over which the asset is expected to contribute to future cash flows.
Smith owns several works of art. At what amount should these art works be reported in Smith's personal financial statements Original cost Insured amount Smith's estimate Appraised value
Appraised value
FASB ASC 274-10-35-1 states:
Quote
Personal financial statements shall present assets at their estimated current values and liabilities at their estimated current amounts at the date of the financial statements.
A set of guidelines for determining estimated current values included in this pronouncement includes “use of appraisals.”
Smith should report the art works at their current values based on appraised value.
*An appraised value is an evaluation of a property’s value based on a given point in time that is performed by a professional appraiser during the mortgage origination process
In general, an enterprise preparing interim financial statements should:
defer recognition of seasonal revenue.
disregard permanent decreases in the market value of its inventory.
allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred.
use the same accounting principles followed in preparing its latest annual financial statements.
use the same accounting principles followed in preparing its latest annual financial statements.
Because the standards generally treat interim periods as “integral parts” of the annual reporting periods, not as discrete periods or separate reporting periods, companies are required to use the same accounting principles for interim periods that they follow in preparing their annual financial statements.
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2375 Interim Financial Reporting
Deck Co. had 120,000 shares of common stock outstanding at January 1, 20X1. On July 1, 20X1, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to calculate 20X1 earnings per share 140,000 150,000 160,000 170,000
140,000
120,000 shares x 6/12 year 60,000
(120,000 shares + 40,000 shares) x 6/12 year 80,000
——-
Weighted-average shares outstanding 140,000
=======
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2335 Earnings per Share
*QUESTION: Why did we multiply 120,00 by 6/12 and not by 12/12
Governmental financial reporting should provide information to assist users in which situation
Making social and political decisions
Assessing whether current-year citizens received services but shifted part of the payment burden to future-year citizens
I only
Both I and II
II only
Neither I nor II
Both I and II
Government reporting should be a means of demonstrating accountability that enables users to assess that accountability. Specifically, the information provided should permit users to determine whether current-year revenues were sufficient to pay for current-year services and/or whether future years’ citizens must assume burdens for services previously provided, demonstrate the government’s budgetary accountability and compliance with other finance-related legal and contractual requirements, and assist users in assessing service efforts, costs, and accomplishments.
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2411 Measurement Focus and Basis of Accounting
How should gains or losses from fair value hedges be recognized
The gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period.
No gain or loss recognition in the period of fair value change, but subsequent recognition of gain or loss in earnings in the period net settlement occurs
As an extraordinary item in the period of fair value change because of the unusual and infrequent nature of derivative contracts
As a component of other comprehensive income in the period of fair value change and subsequently in earnings in the period net settlement occurs
The gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period.
The FASB requires that the following be recognized for fair value hedges:
Changes in the fair value of the fair value hedge
Changes in the fair value of the item being hedged
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2355 Derivatives and Hedge Accounting
Vane Co.’s trial balance of income statement accounts for the current year ended December 31 included the following:
Debit Credit
Sales $575,000
Cost of sales $240,000
Administrative expenses 70,000
Loss on sale of equipment 10,000
Sales commissions 50,000
Interest revenue 25,000
Freight out 15,000
Loss on early retrment LTdebt 20,000
Uncollectible accounts exp 15,000
Totals $420,000 $600,000
======== ========
Vane’s income tax rate is 30%. In Vane’s year-end multiple-step income statement, what amount should Vane report as income after income taxes from continuing operation
$126,000
$147,000
$140,000
$129,500
$126,000
Vane should report $126,000, calculated as follows:
Net income before taxes ($600,000 – $420,000) $180,000
Income taxes ($180,000 x 0.30) 54,000
Net income from continuing operations $126,000
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2132 Income Statement/Statement of Profit or Loss
Winn Co. sells subscriptions to a specialized directory that is published semiannually and shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cutoff dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred subscription revenue. Data relating to 20X1 are as follows:
Deferred subscription rev (Jan 1, 20X1) $ 750,000
Cash receipts from subscribers 3,600,000
In its December 31, 20X1, balance sheet, Winn should report deferred subscription revenue of: $2,700,000. $1,800,000. $1,650,000. $900,000.
$900,000.
Deferred subscription revenue on December 31, 20X1, equals the cash received after the cutoff date (i.e., during the 3 months from October 1 to December 31):
$3,600,000 × 3/12 = $900,000
Perez, Inc., owns 80% of Senior, Inc. During 20X1, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in 20X1. For 20X1 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted
Sales and cost of goods sold should be reduced by the intercompany sales.
Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
Net income should be reduced by 80% of the gross profit on intercompany sales.
No adjustment is necessary.
Sales and cost of goods sold should be reduced by the intercompany sales.
FASB ASC 810-10-45-1 states: “In the preparation of consolidated financial statements, intra-entity balances and transactions should be eliminated. This includes…sales and purchases….Any intra-entity profit…shall be eliminated.”
The income statement adjustment process is greatly simplified because the goods sold to Senior were all subsequently sold to “outside” customers. This means that inventory will not require adjustment. The only adjustment needed is reduction of sales and cost of goods by the total dollar amount of the intercompany sales. Failure to do this would overstate those two items on the consolidated income statement.
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2323 Emphasis on Adjusting and Eliminating Entries(…
A company reported the following information for Year 1:
Net income $34,000
Owner contribution 9,000
Deferred gain on an effective cash-
flow hedge 8,000
Foreign currency translation gain 2,000
Prior service cost not recognized in
net periodic pension cost 5,000
What is the amount of other comprehensive income for Year 1
$14,000
$5,000
$43,000
$15,000
$5,000
Other comprehensive income includes all of comprehensive income not included in net income. Both the deferred gain on effective cash flow hedge and the foreign currency translation gain would have a positive effect on other comprehensive income, comprehensive income for Year 1 equal to 5,000 (8,000 + 2,000 – 5,000).
Mellow Co. depreciated a $12,000 asset over five years, using the straight-line method with no salvage value. At the beginning of the fifth year, it was determined that the asset will last another four years. What amount should Mellow report as depreciation expense for Year 5 $600 $900 $1,500 $2,400
$600
The change in the estimated useful life of a fixed asset is a change in accounting estimate that must be accounted for prospectively. The book value at the end of Year 4 is $2,400 ($12,000 - ($12,000 × 4 years ÷ 5 years)). This $2,400 must be allocated to depreciation expense over the remaining 4-year period ($2,400 ÷ 4 = $600).
Dale City is accumulating financial resources that are legally restricted to payments of general long-term debt principal and interest maturing in future years. At December 31, $5,000,000 has been accumulated for principal payments and $300,000 has been accumulated for interest payments.
These restricted funds should be accounted for in the:
Debt service fund, $0; General fund, $5,300,000
Debt service fund, $5,000,000; General fund, $300,000
Debt service fund, $300,000; General fund, $5,000,000
Debt service fund, $5,300,000; General fund, $0
Debt service fund, $5,300,000; General fund, $0
The debt service fund is a reserve used to account for and report payments of the maturing principal and interest of general government short- and long-term debt. These liabilities are recorded in the General Capital Assets and General Long-Term Liabilities accounts, which are subaccounts of the debt service fund.
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2412 Fund Accounting Concepts and Application
A 15-year bond was issued in Year 1 at a discount. During Year 11, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the Year 11 bond transactions was to increase long-term liabilities by the excess of the 10-year bond’s face amount over the 15-year bond’s:
carrying amount.
carrying amount less the deferred loss on bond retirement.
face amount less the deferred loss on bond retirement.
face amount.
carrying amount.
In order to solve this problem, give the 15-year bonds a face amount, say $100,000. If the bond was issued at a discount, then it was issued and was carried as a debt at a value below $100,000, say $90,000 (if the remaining unamortized discount was $10,000). If the 10-year bond was issued at its face amount, then it would be carried as a debt at its face amount.
If the 10-year bond was issued during Year 11, then the 15-year bond was still a long-term debt, and the new 10-year bond would also be a long-term debt. If the 10-year bond was issued at face and the proceeds paid off the face amount of the 15-year bond, then the 10-year bond would have needed to be at least the face amount of the 15-year bond (they would have the same face amount).
Thus, the new debt would be carried at $100,000, the old debt would be carried at below $100,000 (less the remaining unamortized discount), and the total long-term liabilities would be increased by the discount left, the amount the new 10-year debt carrying value is higher than the carrying value of the 15-year debt.
Which of the following classifications is required for reporting of expenses by all not-for-profit entities
Natural classification in the statement of activities or notes to the financial statements
Functional classification in the statement of activities or notes to the financial statements
Functional classification in the statement of activities and natural classification in a matrix format in a separate document
Functional classification in the statement of activities and natural classification in the notes to the financial documents
Functional classification in the statement of activities or notes to the financial statements
Financial reporting for a not-for-profit should provide information about the service efforts of the entity. Therefore, the FASB Accounting Standards Codification requires expenses to be reported by functional classification (i.e., program services, management, fundraising, etc.). Only those not-for-profits that are voluntary health and welfare entities must augment the functional classification of expenses that appears in the statement of activities with a natural classification of expenses, displayed in a matrix format, that is shown in a separate document, a statement of functional expenses.
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2512 Statement of Activities
In assessing the more-likely-than-not criterion as required by FASB ASC 740-10-25-7, which of the following is required
It shall be presumed that the tax position will be examined by the relevant taxing authority that has all access only to published knowledge concerning the entity.
The tax position must be based on its technical merits and not on whether or not the taxing authority is likely to examine that tax position.
Each tax position must be evaluated with consideration of the possibility of offset or aggregation with other positions.
None of the answer choices are required by FASB ASC 740-10-25-7.
The tax position must be based on its technical merits and not on whether or not the taxing authority is likely to examine that tax position.
FASB ASC 740-10-25-7 requires the presumption that the taxing authority has full knowledge of all relevant information even if not published. Each tax position must be evaluated without consideration of the possibility of offset or aggregation:
Quote
In making the required assessment of the more-likely-than-not criterion:
It shall be presumed that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.
Technical merits of a tax position derive from sources of authorities in the tax law (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. When the past administrative practices and precedents of the taxing authority in its dealings with the entity or similar entities are widely understood, for example, by preparers, tax practitioners and auditors, those practices and precedents shall be taken into account.
Each tax position shall be evaluated without consideration of the possibility of offset or aggregation with other positions.
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2270 Income Taxes
Dollar-Value LIFO
The objective of this method is to state inventory at LIFO cost basis.
Ajax Corp. has an effective tax rate of 30%. On January 1 of the current year, Ajax purchased equipment for $100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will Ajax realize during the year by using the 150%-declining-balance method of depreciation for tax purposes instead of the straight-line method $1,500 $3,000 $4,500 $5,000
$1,500
Ajax will realize $1,500 of current tax benefit using the 150%-declining-balance method:
Tax benefit of 150%-declining-balance
($100,000 x .15 = $15,000;
$15,000 x .30) $4,500
Tax benefit of straight-line
($100,000 / 10 = $10,000;
$10,000 x .30) 3,000
——
Benefit of using 150%-declining-balance $1,500
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2270 Income Taxes
In a statement of activities of the People’s Environmental Protection Association, a voluntary community organization, depreciation expense should:
not be included.
be included as an element of support.
be included as an element of other changes in fund balances.
be included as an element of expense.
be included as an element of expense.
As a voluntary community organization, the People’s Environmental Protection Association is considered a not-for-profit entity as described in the FASB Accounting Standards Codification Glossary. FASB ASC 958-360-35-1 provides that a not-for-profit entity “shall recognize the cost of using up the future economic benefits or service potentials of its long-lived tangible assets (as) depreciation (expenses).”
FASB ASC 958-360-35-1 and Glossary
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2450 Accounting and Reporting for Governmental Not-for-…
FASB ASC 275-10 addresses the disclosures required to facilitate a user’s evaluation of an entity’s risks and uncertainties. One of the situations requiring disclosure is vulnerability to concentrations. Vulnerability to concentrations refers to risk due to the lack of diversification. Disclosure of such risk must be made if, based on management’s information, which of the following criteria are met
The concentration exists at the date of the financial statements.
The concentration makes the entity vulnerable to the risk of a near-term severe impact.
It is at least reasonably possible that the events that could cause the severe impact will occur in the near term.
All of the conditions listed here exist.
All of the conditions listed here exist.
Vulnerability to concentrations refers to risk due to a lack of diversification. Disclosure of such risk must be made if, based on management’s information, the following criteria are met:
-The concentration exists at the date of the financial statements.
-The concentration makes the entity vulnerable to the risk of a near-term severe impact.
-It is at least reasonably possible that the events that could cause the severe impact will occur in the near term.
FASB ASC 275-10-50-16
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2389 Risks and Uncertainties
Which of the following is a false statement
Governments should disclose in their summary of significant accounting policies the length of time used to define available for purposes of revenue recognition in the governmental fund financial statements.
Governments should provide details in the notes to the financial statements about short-term debt activity during the year, even if no short-term debt is outstanding at year-end.
In their disclosure of significant violations of finance-related legal or contractual provisions, governments should identify actions taken to address such violations.
Governments that present their primary government in more than a single column in their basic financial statements should disclose in their summary of significant accounting policies general definitions of each column that could be used to describe any government.
Governments that present their primary government in more than a single column in their basic financial statements should disclose in their summary of significant accounting policies general definitions of each column that could be used to describe any government.
GASB 1300.125 states, “Governments that present their primary government in more than a single column in their basic financial statements should disclose in their summary of significant accounting policies the activities accounted for in each of the following columns—major funds, internal service funds, and fiduciary fund types—presented in the basic financial statements. With the exception of the general fund or its equivalent, the descriptions should be specific to the particular government, rather than general definitions that could describe any government.” (Emphasis added)
The other answer choices should be disclosed in the notes to the financial statements. (GASB 2300.106–.107)
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2425 Notes to Financial Statements
On January 2, 20X1, Jann Co. purchased a $150,000 whole-life insurance policy on its president. The annual premium is $4,000. The company is both the owner and the beneficiary. Jann charged officers’ life insurance expense as follows:
20X1 $ 4,000
20X2 3,600
20X3 3,000
20X4 2,200
-------
Total $12,800
=======
On its December 31, 20X4, balance sheet, what amount should Jann report as investment in cash surrender value of officers' life insurance $0 $3,200 $12,800 $16,000
$3,200
The cash surrender value of a whole-life insurance policy represents an amount that can be recovered if the policy is canceled. If the company is the owner and beneficiary of the policy, it is the amount of the insurance premiums not normally charged to expense for the death benefit coverage and it would be an asset to the company. Since the company is both the owner and beneficiary of the policy in this problem, the cash surrender value is an asset to the company. If the insured officers or their heirs were the beneficiaries, then the cash surrender value would not be an asset to the company and the entire annual premium would be expensed by the company.
20X1 20X2 20X3 20X4
------- ------- ------- ------- Annual Premium $4,000 $4,000 $4,000 $4,000 Expense (4,000) (3,600) (3,000) (2,200)
------- ------- ------- ------- Increase in cash
surrender value $ 0 $ 400 $1,000 $1,800
======= ======= ======= =======
Total increase in cash surrender value
($400 + 1,000 + 1,800) is $3,200.
In its 20X1 income statement, Kilm Co. reported cost of goods sold of $450,000. Changes occurred in several balance sheet accounts as follows:
Inventory $160,000 decrease
Accounts payable-suppliers 40,000 decrease
What amount should Kilm report as cash paid to suppliers in its 20X1 cash flow statement, prepared under the direct method
$250,000
$330,000
$570,000
$650,000
$330,000
The requirement is to determine the current period’s amount of cash paid for goods acquired from suppliers no matter when the goods were acquired. Therefore, the total purchases made during the current period (whether on credit or for cash) and the amount of purchases from the previous period not paid for in the previous period must be examined because they represent the amount that could have been paid to suppliers during the current period. A decrease in inventory during the period indicates that purchases were less than the cost of goods sold. Therefore, the current period’s amount of purchases is determined by subtracting the decrease in inventory from cost of goods sold. The ending accounts payable represents what is still owed to suppliers at the end of the current period for purchases. A decrease in accounts payable during the current period indicates that suppliers were paid an amount of cash greater than the amount of the current period’s purchases. Therefore, adding the decrease in accounts payable to purchases of the period yields the cash paid to suppliers in the current period.
Cost of Goods Sold $450,000
Inventory decrease (160,000)
———
Purchases $290,000
=========
Purchases $290,000
Accounts Payable decrease 40,000
———
Cash paid to suppliers $330,000
=========
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
Since Conlon is the plaintiff (they are suing), a gain contingency exists. Gain contingencies are not recognized since they have not been realized (conservatism).
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2330 Contingencies, Commitments, and Guarantees (Provisions)
Dogwood City's water enterprise fund received interest of $10,000 on long-term investments. How should this amount be reported on the Statement of Cash Flows Operating activities Noncapital financing activities Capital and related financing activities Investing activities
Investing activities
GASB 2450.124 states, in part:
Quote
Cash inflows from investing activities include:
- Receipts from collections of loans (except program loans) made by the governmental enterprise and sales of other entities’ debt instruments (other than cash equivalents) that were purchased by the governmental enterprise.
- Receipts from sales of equity instruments and from returns of investment in those instruments.
- Interest and dividends received as returns on loans (except program loans), debt instruments of other entities, equity securities, and cash management or investment pools.
- Withdrawals from investment pools that the governmental enterprise is not using as demand accounts.
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2423 Proprietary Funds Financial Statements
FASB ASC 805-20-55-4 requires long-term customer-relationship intangible assets to be:
subject to the same impairment loss recognition as other long-lived intangible assets that are held and used.
expensed when acquired.
subject to the same impairment loss recognition as other long-lived intangibles to be disposed of other than by sale.
not subject to impairment.
subject to the same impairment loss recognition as other long-lived intangible assets that are held and used.
FASB ASC 805-20-55-4 includes in its scope long-term customer-relationship intangible assets of financial institutions, such as depositor and borrower relationship intangible assets and credit cardholder intangible assets. Those intangible assets are subject to the same tests and measurements as FASB ASC 360-10 requires for other long-lived assets to be held and used.
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2370 Impairment
Oak County incurred the following expenditures in issuing long-term bonds:
Issue cost $400,000
Debt insurance 90,000
When Oak establishes the accounting for operating debt service, what amount should be deferred and amortized over the life of the bonds $90,000 $490,000 $400,000 $0
$0
The GASB evaluated these debt issuance costs and concluded that, with the exception of prepaid insurance, the costs relate to services provided in the current period and thus they should be expensed in the current period.
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2412 Fund Accounting Concepts and Application
Elm City issued a purchase order for supplies with an estimated cost of $5,000. When the supplies were received, the accompanying invoice indicated an actual price of $4,950. What amount should Elm debit (credit) to the reserve for encumbrances after the supplies and invoice were received $(50) $50 $4,950 $5,000
$5,000
When the purchase order is approved by Elm City, the estimated amount is recorded in the journal entry:
Encumbrances 5,000
Fund Balance–Reserved
for Encumbrances 5,000
When the purchase order is filled for $4,950, the entry is reversed, for the original estimated amount of the purchase order:
Fund Balance–Reserved
for Encumbrances 5,000
Encumbrances 5,000
The actual amount of expenditures may be more or less than the estimated amount, but that does not affect the amount by which the encumbrance or the Budgetary Fund Balance—Reserved for Encumbrances are reversed. Some jurisdictions require a purchase change order to adjust the original purchase order to the actual transaction amount before reversing.
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2412 Fund Accounting Concepts and Application
The following information pertains to Park Township’s general fund at December 31, 20X1:
Total assets, including $200,000 of cash $1,000,000
Total liabilities 600,000
Reserved for encumbrances 100,000
Appropriations do not lapse at year-end and there are no existing restrictions, commitments, assignments, or nonspendable categories of fund balance. At December 31, 20X1, what amount should Park report as unassigned fund balance in its general fund balance sheet $200,000 $300,000 $400,000 $500,000
$300,000
The question states that Park Township’s total fund equity equal to its assets of $1,000,000 less its liabilities of $600,000, or $400,000, has not previously been allocated. This $400,000 of fund equity should be displayed as assigned or committed for $100,000, leaving an unassigned amount of $300,000.
GASB 1700.127
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2411 Measurement Focus and Basis of Accounting
Which of the following should be disclosed as supplemental information in the statement of cash flows
Cash flow per share
Conversion of debt to equity
Both cash flow per share and conversion of debt to equity
Neither cash flow per share nor conversion of debt to equity
Conversion of debt to equity
FASB ASC 230-10-45-3 states very specifically that “Financial statements shall not report an amount of cash flow per share.” And “Information about all investing and financing activities of an enterprise during a period that affects recognized assets or liabilities, but that does not result in cash receipts or cash payments in the period, shall be reported in related disclosures.” (FASB ASC 230-10-50-3)
Converting debt to equity is cited as an example of the latter category of items.
The following information pertains to Park Co. on December 31, 20X1:
Bank statement balance $10,000
Checkbook balance 14,000
Deposit in transit 5,000
Outstanding checks 1,000
In Park's December 31, 20X1, balance sheet, cash should be reported as: $9,000. $10,000. $14,000. $15,000.
$14,000.
Since none of the information provided is an amount that is included in the bank statement balance but not included in the checkbook balance, the December 31, 20X1, checkbook balance of $14,000 is the balance sheet cash amount.
This amount is confirmed by the reconciliation of the bank statement balance:
Statement balance $10,000
Deposit in transit 5,000
Outstanding checks (1,000)
——–
Cash balance (December 31, 20X1) $14,000
========
Ott Company acquired rights to a patent from Grey under a licensing agreement that required an advance royalty payment when the agreement was signed. Ott remits royalties earned and due, under the agreement, on October 31 each year. Additionally, on the same date, Ott pays, in advance, estimated royalties for the next year. Ott adjusts prepaid royalties at year-end. Information for the current year ended December 31 is as follows:
Date Amount
—– ——–
01/01 Prepaid royalties $ 65,000
10/31 Royalty payment (charged to royalty expense) 110,000
12/31 Year-end credit adjustment to royalty expense 25,000
In its December 31 balance sheet, Ott should report prepaid royalties of: $40,000. $25,000. $85,000. $90,000.
$90,000.
Here one needs to convert from the cash method to the accrual method as to the deferred amount of royalty expenses. The royalty payment was charged to (added to) royalty expense, but there was also a year-end credit adjustment downwards to royalty expense. The only reasonable debit to the year-end credit to royalty expense would be to debit (add to) prepaid royalties, as this could only be deferred (not properly accrued this year) royalty expenses.
So far, prepaid royalties have had a debit balance of $65,000, and if one adds an additional debit to prepaid royalties of $25,000, there will be an ending balance of prepaid royalties of $90,000.
Bell Co. is a defendant in a lawsuit that could result in a large payment to the plaintiff. Bell's attorney believes that there is a 90% chance that Bell will lose the suit, and estimates that the loss will be anywhere from $5,000,000 to $20,000,000 and possibly as much as $30,000,000. None of the estimates are better than the others. What amount of liability should Bell report on its balance sheet related to the lawsuit $0 $5,000,000 $20,000,000 $30,000,000
$5,000,000
If it is probable that a liability has been incurred, but no point in the range of estimated loss is more probable than any other, a company must record a loss and liability for the lowest point of the range. The company must also disclose the range of possible loss in accordance with FASB ASC 450-20-30-1.
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2330 Contingencies, Commitments, and Guarantees (Provisions)
In a business combination with goodwill recorded, how should any subsequent impairment of the goodwill be recognized on the income statement or statement of retained earnings
As an extraordinary loss
As a change in accounting principle
As a loss from continuing operations
As a restatement of beginning retained earnings
As a loss from continuing operations
The impairment loss should be recognized in income from continuing operations just as amortization expense would have been recognized in arriving at income from continuing operations. (FASB ASC 350-20-45-1)
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2370 Impairment
Eagle Co. has cosigned the mortgage note on the home of its president, guaranteeing the indebtedness in the event that the president should default. Eagle considers the likelihood of default to be remote. How should the guarantee be treated in Eagle's financial statements Disclosed only Accrued only Accrued and disclosed Neither accrued nor disclosed
Disclosed only
A loss contingency should be accrued if it is probable that a loss will occur and if the amount of such loss can be reasonably estimated. FASB ASC 850-10-50-1 states, “Financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosure shall include:”
- “The nature of the relationship(s) involved.”
- “A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements.”
- “The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period.”
-“Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.”
Eagle should disclose the guarantee, but not make an accrual.
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2387 Related Parties and Related Party Transactions
The debt service fund of a governmental unit is used to account for the accumulation of resources for, and the payment of, principal and interest in connection with:
proprietary funds.
a private-purpose trust fund.
both a private-purpose trust fund and proprietary funds.
neither a private-purpose trust fund nor proprietary funds.
neither a private-purpose trust fund nor proprietary funds.
Debt service funds are used to account for and report payments of the maturing principal of general government long-term debt and related interest and fiscal agent charges. These liabilities are recorded in the General Capital Assets and General Long-Term Liabilities accounts that are reported only in the government-wide financial statements. The debt service fund is designed for the purpose of repaying principal and interest; private-purpose trusts and proprietary funds are not.
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2412 Fund Accounting Concepts and Application
A company is an accelerated filer that is required to file Form 10-K with the U.S. Securities and Exchange Commission (SEC). What is the maximum number of days after the company's fiscal year-end that the company has to file Form 10-K with the SEC 60 days 75 days 90 days 120 days
75 days
Annual 10-K reports are due within 75 days for fiscal years for accelerated filers as defined in 17 CFR 240.12b-2. The requirement is 90 days for other filers. The deadline for filing quarterly reports (10-Q) is 40 days for accelerated filers.
A company’s foreign subsidiary operation maintains its financial statements in the local currency. The foreign operation’s capital accounts would be translated to the functional currency of the reporting entity using which of the following rates
Weighted-average exchange rate
Current exchange rate at the balance sheet date
Historical exchange rate
Functional exchange rate
Historical exchange rate
When translating the capital accounts of a subsidiary, the historical exchange rate is used for the capital stock account and additional paid-in capital. This date cannot be earlier than the date the parent acquired the investment in the subsidiary.
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2367 Translation of Foreign Currency Financial Statements
On December 1, 20X1, Clark Co. leased office space for five years at a monthly rental of $60,000. On the same date, Clark paid the lessor the following amounts:
First month’s rent $ 60,000
Last month’s rent 60,000
Security deposit (refundable at lease expiration) 80,000
Installation of new walls and offices 360,000
What should be Clark's 20X1 expense relating to utilization of the office space $60,000 $66,000 $120,000 $140,000
$66,000
The cost of the installation of walls and offices should be capitalized as a leasehold improvement and amortized over the lease term.
Clark Co.’s December 20X1 office utilization expense consists of:
Monthly rent $60,000
Amortization of walls and offices
($360,000 / 60 months = $6,000/month) 6,000
——-
Total $66,000
=======
Note
The last month’s rent is capitalized as prepaid rent and expensed the last month of the lease term. The refundable security deposit is an asset.
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2380 Leases
Rue Co.’s allowance for uncollectible accounts had a credit balance of $12,000 at December 31, Year 1. During Year 2, Rue wrote off uncollectible accounts of $48,000. The aging of accounts receivable indicated that a $50,000 allowance for uncollectible accounts was required at December 31, Year 2.
What amount of uncollectible accounts expense should Rue report for Year 2 $48,000 $50,000 $60,000 $86,000
$86,000
Rue should report $86,000 as uncollectible accounts expense for Year 2:
Allowance for uncollectible accounts–beginning balance $12,000
Accounts written off during the year (48,000)
Uncollectible accounts expenses ?
——–
Allowance for uncollectible accounts–ending balance $50,000
Required expense = $50,000 + $48,000 - $12,000 = $86,000
Willem Co. reported the following liabilities at December 31, Year 1:
Accounts payable trade $ 750,000
Short-term borrowings 400,000
Mortgage payable, current portion $100,000 3,500,000
Other bank loan, matures June 30, Year 2 1,000,000
The $1,000,000 bank loan was *refinanced with a 20-year loan on January 15, Year 2, with the first principal payment due January 15, Year 3. Willem’s audited financial
statements were issued February 28, Year 2.
What amount should Willem report as current liabilities at December 31, Year 1 $850,000 $1,150,000 $1,250,000 $2,250,000
$1,250,000
The amount to be presented as current liabilities consists of the following:
Accounts payable trade $ 750,000
Short-term borrowings 400,000
Mortgage payable, current portion 100,000
———-
Total $1,250,000
The *refinanced loan is not included in current liabilities. FASB ASC 470-10-45-13 and 45-14, “Short-Term Obligations Expected to Be Refinanced,” addresses this refinanced loan:
Zero-interest-bearing notes
These types of notes issue for the present value of the cash the lender gives to the debtor. Keep in mind that the future value of $1 is assumed to be worth more than the present value of $1.
With that caveat in mind, let’s say Joseph Inc. lends Michael Company $20,000, with payment due in five years. Joseph figures that the present value of the $20,000 is $13,612. The difference between $20,000 and $13,612 of $6,388 is the discount on notes receivable.
Notes Receivable 20,000
Discounts on Notes Receivable 6,388
Cash 13,612
How did Joseph get the present value of $13,612?
Joseph has an effective interest rate of 8 percent. Going to the present value of 1 table, the factor at the intersection of 8 percent and five periods is .6806. $20,000 x .6806 is $13,612.
The discount on notes receivable account is a contra-asset account. It follows the note receivable, amortized over the five-year life. It moves from the balance sheet to the income statement via interest revenue using the effective-interest method.
Journalize the first year by debiting discounts on notes receivable for $1,089 and crediting interest revenue for the same amount.
13,612 x .08 = 1,089
The initial test in FASB ASC 360-10-35 for determining whether an impairment of the carrying amount of a long-lived asset is indicated is:
carrying amount exceeds the fair value.
fair value exceeds carrying amount.
carrying amount exceeds undiscounted future cash flows.
carrying amount exceeds book value.
carrying amount exceeds undiscounted future cash flows.
FASB ASC 360-10-35-17 indicates that an impairment loss exists when the asset’s carrying amount exceeds its undiscounted future cash flows. Carrying amount exceeding the fair value is used to measure the amount of the impairment loss, not to identify the existence of such a loss. Assets subject to assessment for impairment under FASB ASC 805-20-55-4 are also subject to the same undiscounted cash flow recoverability test.
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2370 Impairment
*VIDEO EXPLANATION
If it’s investments - compare it to FV
If it’s inventory - there’s some notion of market value that we are comparing it to
However, with a LONG-LIVED ASSET, we care about whether the cost or carrying value is recoverable
-we don’t care about FV because we’ll keep using these assets (not held for sale)
-special category: fixed assets that are long-term
-if the amount of income exceeds CV, then FV is irrelevant
If we bought a fixed asset for $1,000,00 and we expect to use it for 10 years, then we do an estimation that only $750,000 will be profitable in 10 years, then we have a potential impairment that we need to record
*carrying amount = book value (same thing)
What does factoring a receivable mean?
It means it is a sale of the receivable.
*Subtract allowance for doubtful account and any commission that might be included.
Pahn, a nongovernmental not-for-profit organization, received an unconditional promise to give $50,000. The donor stipulated that the donation must be used in the next fiscal year. Pahn received and spent the $50,000 in the next year.
For the current fiscal year, what element of Pahn's statement of financial position will increase as a result of the unconditional promise to give Deferred contributions Cash and cash equivalents Unrestricted support Contribution receivables
Contribution receivables
A promise to give (sometimes referred to as a “pledge,” though this term is discouraged by the FASB) is recognized as receivable when it is unconditional or any conditions on the promise are met. Contributions receivables and contributions revenues are recognized in the period that unconditional contributions are made. Unrestricted contributions to be collected in the subsequent period or periods are reported as changes in temporarily restricted net assets because they are considered to have a time restriction. (This restriction is presumed unless the donor specified that the contribution was intended to finance current-period activities.)
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2511 Statement of Financial Position
Hann School, a nongovernmental not-for-profit entity, spent $1 million of temporarily restricted cash to acquire land and building. How should this be reported in the statement of activities
Increase in unrestricted net assets
Increase in temporarily restricted net assets
Increase in permanently restricted net assets
Decrease in permanently restricted net assets
Increase in unrestricted net assets
When resources are used according to donor limitations, assets are released from restriction. In this case, an increase in temporarily restricted net assets is not correct because a release of assets from temporary restriction would reduce the amount of temporarily restricted net assets. An increase in permanently restricted net assets is incorrect because there are no new permanently restricted resources being added. A decrease in permanently restricted net assets is incorrect because permanent donor limitations would not allow use of the donated resources.
When assets are released from restriction, the unrestricted category of net assets increases as the temporarily restricted category decreases.
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2512 Statement of Activities
Baker Co. sells consumer products that are packaged in boxes. Baker offered an unbreakable glass in exchange for two box tops and $1 as a promotion during the current year. The cost of the glass was $2. Baker estimated at the end of the year that it would be probable that 50% of the box tops will be redeemed. Baker sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year for the glasses. What amount should Baker accrue as an estimated liability at the end of the current year, related to the redemption of box tops $0 $5,000 $20,000 $25,000
$5,000
Quote
Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.
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2330 Contingencies, Commitments, and Guarantees (Provisions)
Kent Co.’s advertising expense account had a balance of $292,500 on December 31, 20X1, before any necessary year-end adjustment relating to the following:
Included in the $292,500 is the $30,000 cost of printing catalogs for a sales promotional campaign in January 20X2.
Radio advertising spots broadcast during December 20X1 were billed to Kent on January 2, 20X2. Kent paid the $17,500 invoice on January 11, 20X2.
What amount should Kent report as advertising expense in its income statement for the year ending December 31, 20X1 $310,000 $280,000 $262,500 $245,000
$280,000
The printing cost for the January catalogues is a 20X2 expense and should be deferred. The cost of the December radio spots was incurred in 20X1 (although paid in 20X2) and should be accrued:
Unadjusted advertising expense balance $292,500
Deduct prepaid advertising (catalogs) (30,000)
Add cost of December radio spots 17,500
———
Adjusted balance of advertising expense $280,000
=========
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2112 Financial Accounting Standards Board (FASB)
Ichor Co. reported equipment with an original cost of $379,000 and $344,000, and accumulated depreciation of $153,000 and $128,000, respectively, in its comparative financial statements for the years ending December 31, 20X2 and 20X1. During 20X2, Ichor purchased equipment costing $50,000, and sold equipment with a carrying value of $9,000.
What amount should Ichor report as depreciation expense for 20X2 $19,000 $25,000 $31,000 $34,000
$31,000
In the context of this problem accumulated depreciation is affected by the asset disposal when the carrying value of the asset sold is written off and by depreciation expense for the current period. These two items account for the net increase of $25,000 ($153,000 - $128,000) in the credit balance of the accumulated depreciation account.
The debit change in accumulated depreciation caused by the asset disposal needs to be determined from the facts provided. The equipment account had a beginning balance of $344,000. The $50,000 purchase of new equipment would cause this balance to increase to $394,000. However, the ending balance was $379,000. The only other transaction affecting the equipment account was the disposal of a piece of equipment. Therefore, the original cost of the disposed equipment was $15,000 ($394,000 - $379,000). Since the disposed equipment had a cost of $15,000 and a carrying value of $9,000 (carrying value = cost - accumulated depreciation), the accumulated depreciation associated with the disposed equipment was $6,000 ($9,000 = $15,000 - accumulated depreciation).
The beginning credit balance in the accumulated depreciation control account was $128,000. It would have been decreased (debited) for the $6,000 of accumulated depreciation related to the disposed equipment. That would leave a credit balance of $122,000. However, the ending balance was a credit of $153,000. Depreciation expense for the period would also change (increase or credit) the balance of accumulated depreciation. Since the ending balance was $153,000, and the balance without the effect of depreciation expense was $122,000, the depreciation expense must have been $31,000 ($153,000 - $122,000).
On January 1, a company issued a $50,000 face value, 8% 5-year bond for $46,139 that will yield 10%. Interest is payable on June 30 and December 31. What is the bond carrying amount on December 31 of the current year $46,139 $46,446 $46,768 $47,106
$46,768
The bond carrying amount on December 31 of the current year is $46,768:
Initial carrying value $46,139
Discount amortization at 6/30:
Interest expense ($46,139 x .10 x 1/2) $2,307
Cash payment ($50,000 x .08 x 1/2) 2,000 307
——-
Carrying value at 7/1 $46,446
Discount amortization at 12/31:
Interest expense ($46,446 x .10 x 1/2) $2,322
Cash payment ($50,000 x .08 x 1/2) 2,000 322
——-
Carrying value at 12/31 $46,768
Red and White formed a partnership in 20X1. The partnership agreement provides for annual salary allowances of $55,000 for Red and $45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of $80,000 for 20X1 before any allowance to partners. What amount of these earnings should be credited to each partner's capital account Red: $40,000; White: $40,000 Red: $43,000; White: $37,000 Red: $44,000; White: $36,000 Red: $45,000; White: $35,000
Red: $43,000; White: $37,000
Salaries are paid (as an expense) to the partners before partnership earnings are allocated:
Allocation
-------------------------------- Earnings
To Red To White Total Balance
--------- --------- -------- ---------
$80,000 Salary allowance $55,000 $45,000 $100,000 (20,000) Loss allocation To Red (.6 x $20k) (12,000) (12,000) ( 8,000) To White (.4 x $20k) (8,000) (8,000) 0
-------- -------- --------- ======== Totals $43,000 $37,000 $ 80,000
======== ======== =========
On January 2 of the current year, LTTI Co. entered into a three-year, noncancelable contract to buy up to 1,000,000 units of a product each year at $.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year-end, LTTI had only purchased 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year $0 $8,000 $12,000 $52,000
$52,000
LTTI had a purchase commitment for 600,000 units (200,000 × 3) and purchased 80,000 units. By canceling sales of the product, LTTI has a loss of $52,000 (520,000 units × .10).
A business combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). Which of the following expenses related to the business combination should be included, in total, in the determination of net income of the combined corporation for the period in which the expenses are incurred
Fees of finders and consultants: Yes; Issuance fees for equity securities issues: Yes
Fees of finders and consultants: Yes; Issuance fees for equity securities issues: No
Fees of finders and consultants: No; Issuance fees for equity securities issues: Yes
Fees of finders and consultants: No; Issuance fees for equity securities issues: No
Fees of finders and consultants: Yes; Issuance fees for equity securities issues: No
Business combinations accounted for as an acquisition should treat expenses related to the combination as follows:
-Out-of-pocket costs such as fees of finders and consultants are expensed.
-Issuance costs such as SEC filing fees are charged to the paid-in-capital account.
FASB ASC 805-20-25-2 states the following:
Quote
Recognition Conditions
To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements, at the acquisition date. For example, costs the acquirer expects but is not obligated to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognize those costs as part of applying the acquisition method. Instead, the acquirer recognizes those costs in its postcombination financial statements in accordance with other applicable generally accepted accounting principles (GAAP).
FASB ASC 805-10-25-23 states the following
Quote
Acquisition-Related Costs
Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.
(Emphasis added)
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2315 Business Combinations
The following changes in Vel Corp.’s account balances occurred during 20X1:
Increase
-------- Assets $89,000 Liabilities 27,000 Capital stock 60,000 APIC 6,000
Except for a $13,000 dividend payment and the year's earnings, there were no changes in retained earnings for 20X1. What was Vel's net income for 20X1 $4,000 $9,000 $13,000 $17,000
$9,000
Increase in Assets $89,000
Increase in Liabilities (27,000)
——–
Increase in stockholder’s equity $62,000
Add back: Dividend Payment 13,000
——–
Increase in stockholders’ equity
BEFORE dividends $75,000
Less increase-new capital stock issued:
Capital Stock $60,000
Additional Paid-in Capital 6,000 66,000
——- ——–
20X1 Net Income $ 9,000
========
How can forfeited nonvested accounts of an employee benefit plan be used
To reduce future employer contributions
For expenses
To be reallocated to participant’s accounts
Forfeited nonvested accounts could be used for any of the other answer choices, in accordance with plan documents.
Forfeited nonvested accounts could be used for any of the other answer choices, in accordance with plan documents.
Required disclosure includes, among other items, the amount and disposition of forfeited nonvested accounts—specifically, identification of those amounts that are used to reduce future employer contributions, expenses, or reallocated to participant’s accounts, in accordance with plan documents.
In Baer Food Co.’s 20X2 single-step income statement, the section titled “Revenues” consisted of the following:
Net sales revenue $187,000
Results from discontinued operations:
Loss from operations of component
(net of $1,200 tax effect) $(2,400)
Gain on disposal of component (net of
$7,200 tax effect) 14,400 12,000
Interest revenue ——– 10,200
Gain on sale of equipment 4,700
Cumulative change in 20X0 and 20X1 income
due to change in inventory method
(net of $750 tax effect) 1,500
——-
Total Revenues $215,400
========
In the revenues section of the 20X2 income statement, Baer Food should have reported total revenues of:
$216,300.
$215,400.
$203,700.
$201,900.
$201,900.
Items to be included in the revenue section of the 20X2 income statement:
Net sales revenue $187,000
Interest revenue 10,200
Gain on sale of equipment 4,700
--------
Total revenues $201,900
========
Note
Generally accepted accounting principles require that the other items listed appear in other sections of the income statement or in another financial statement.
Arlen City’s fiduciary funds contained the following cash balances at June 30, 20X1:
Contributions and investment earnings
from Arlen’s employee retirement plan $500,000
Sales taxes collected by Arlen to be
distributed to other governmental units 300,000
What amount of cash should Arlen report in an agency fund at June 30, 20X1 $0 $300,000 $500,000 $800,000
$300,000
An agency fund should be used to report resources held in a purely custodial capacity. The $300,000 in sales taxes is not an asset of Arlen City and would be reported in an agency fund. The retirement plan should be reported in a pension trust fund where the resources are held in trust for the members and beneficiaries.
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2412 Fund Accounting Concepts and Application
Comprehensive income includes all of the following, except: dividends to shareholders. revenues from external customers. interest expense to bondholders. extraordinary loss from tornado.
Dividends to shareholders.
Comprehensive income is defined in the FASB’s conceptual framework as “the change in equity (assets - liabilities) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources.” Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The FASB concluded in its conceptual framework that comprehensive income should be reported in a full set of financial statements. However, prior to FASB ASC 220-10-20, the FASB had not issued a standard that required the presentation of comprehensive income or recommended a format for displaying comprehensive income.
Secured and unsecured bonds
A secured bond has a claim to specific assets.
Unsecured has no such claim and the bondholders are unsecured creditors
Clover City’s government-wide financial statements should:
not distinguish between governmental and business-type activities.
be prepared using the modified accrual basis of accounting.
include information about fiduciary activities.
report information about the overall government without displaying individual funds or fund types.
report information about the overall government without displaying individual funds or fund types.
The government-wide financial statements consist of a statement of net position and a statement of activities. Those statements should “report information about the overall government without displaying individual funds or fund types” (GASB 2200.110). The statements should be prepared using the accrual basis of accounting and distinguish between governmental and business-type activities. Information about fiduciary funds should not be included in the statements.
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2421 Government-Wide Financial Statements
Basic accounting equation: Assets = Equity + Liabilities.
Assets are paid for by equity and/or liability —you cannot have one without the other. So if you complete a transaction that increases assets (and you debit the asset account), you must also increase the equity or liability (by crediting the equity or liability account) so that Assets remain equal to Equity and/or Liability.
The FASB’s conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income
Physical capital is applied to currently reported net income; financial capital is applied to comprehensive income.
Financial capital is applied to currently reported net income; physical capital is applied to comprehensive income.
Physical capital is applied to both currently reported net income and comprehensive income.
Financial capital is applied to both currently reported net income and comprehensive income.
Financial capital is applied to both currently reported net income and comprehensive income.
SFAC 6, Elements of Financial Statements, contains the following definitions:
Capital maintenance concept: the recovery of cost; separation of return on capital from return of capital.
Financial capital concept: The effects of price changes on assets held and liabilities owed are recognized as “holding gains and losses” and included in return on capital.
Physical capital concept: The effect of price changes are recognized as “capital maintenance adjustments” as a separate element of equity and would not be included in return on capital.
SFAC 6 continues:
Quote
The financial capital concept is the traditional view and is generally the capital maintenance concept in present primary financial statements. Comprehensive income as defined in paragraph 70 is a return on financial capital.
Thus, the financial capital maintenance approach is applied to both currently reported net income and comprehensive income.
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2121 Financial Reporting by Business Entities
Brandon County’s general fund had the following transactions during the year:
Transfer to a debt service fund $100,000
Payment to a pension trust fund 500,000
Purchase of equipment 300,000
What amount should Brandon County report for the general fund as other financing uses in its governmental funds statement of revenues, expenditures, and changes in fund balances $100,000 $400,000 $800,000 $900,000
$100,000
GASB 1800.102 states that an interfund transfer without requirement for repayment must be recorded as other financing uses (or sources to the recipient). The payment to a pension trust fund and purchase of equipment are expenditures.
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2411 Measurement Focus and Basis of Accounting
Uncollectible AR
i. There has to be some estimate of AR that won’t be collected, because not all AR will be collected realistically
1. Direct write-off method
a. This is rarely used and doesn’t conform to GAAP
b. When the account becomes uncollectible, it is written off to bad debt expense and AR is reduced by the same amount
Which of the following is a component of other comprehensive income:
Minimum accrual of vacation pay
Foreign currency-translation adjustments
Changes in market value of inventory
Unrealized gain or loss on trading securities
Foreign currency-translation adjustments
FASB ASC 220-10-25-1 links to the definition of comprehensive income:
Quote
The change in equity (net assets) of a business entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income comprises both of the following:
All components of net income
All components of other comprehensive income.
FASB ASC 220-10-20
Some items included in comprehensive income include (FASB ASC 220-10-45-10A):
- Foreign currency translation adjustments
- Unrealized holding gains and losses that result from a DEBT security (NOT a TRADING security)
- Prior service costs or credits associated with pension or other post retirement benefits
It is important to note that comprehensive income is a change amount and not a cumulative amount. The amounts reported as direct charges or credits in the equity section of a balance sheet are cumulative amounts, similar to the way that retained earnings is a cumulative amount.
Which of the following are included in a local government’s government-wide financial statements
Statement of net position and statement of revenues, expenditures, and changes in fund balances
Statement of activities
Statement of net position and statement of activities
Statement of net position; statement of revenues, expenditures, and changes in fund balances; and statement of activities
Statement of net position and statement of activities
The government-wide financial statements consist of a statement of net position and a statement of activities. A statement of revenues, expenditures, and changes in fund balances is a required financial statement for the governmental funds, but not a government-wide financial statement.
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2421 Government-Wide Financial Statements
Note section disclosures in the financial statements for pensions do not require inclusion of which of the following
The components of period pension costs
The amount of net prior service cost or credit in accumulated other comprehensive income
The company’s best estimate of contributions expected to be paid into the plan in the next fiscal year
A detailed description of the plan, including employee groups covered
A detailed description of the plan, including employee groups covered
FASB ASC 715-20-50-1 requires extensive disclosures regarding pensions. Among these are the components of net periodic pension cost and the estimated plan contributions for the year following the latest year reported in the statement of financial position.
FASB ASC 715-20-50-1 requires, for each annual statement of financial position presented, “the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost, showing separately the net gain or loss, net prior service cost or credit, and net transition asset or obligation.”
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2264 Retirement Benefits
FASB ASC 505-50-15-2 establishes a fair value approach for stock-based employee compensation plans. The fair value methodology is also extended to cover issuance of:
bonds for certain types of assets.
cash dividends to shareholders.
equity instruments for goods and services.
long-term debt for goods and services.
equity instruments for goods and services.
FASB ASC 505-50-15-2 applies to:
Quote
All share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments or by incurring liabilities to a goods or service provider that is not an employee in amounts based, at least in part, on the price of the entity’s shares or other equity instruments or that require or may require settlement by issuing the entity’s equity shares or other equity instruments.
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2265 Stock Compensation (Share-Based Payments)
On July 31, 2005, Dome Co. issued $1,000,000 of 10%, 15-year bonds at par and used a portion of the proceeds to call its 600 outstanding 11%, $1,000 face value bonds, due on July 31, 2014, at 102. On that date, unamortized bond premium relating to the 11% bonds was $65,000.
In its 2005 income statement, what amount should Dome report as gain or loss, before income taxes, from retirement of bonds $53,000 gain $0 $(65,000) loss $(77,000) loss
$53,000 gain
This is premium so you add the $65,000 to the carrying value!!
Carrying value of 11% bonds $600k + $65k = $665,000
Less: Call price 600,000 x 102% = 612,000
——–
Pretax gain from retirement of bonds $ 53,000
A not-for-profit voluntary health and welfare entity should report a contribution for the construction of a new building as cash flows from which of the following in the statement of cash flows:
Operating activities
Financing activities
Capital financing activities
Investing activities
Financing activities
According to FASB ASC 958-230-55-3, a contribution to a not-for-profit restricted to long-term purposes like construction shall be reported as a cash flow from financing activities. Cash flows received from investment income restricted by donor stipulation to the same purposes also are reported as financing activities, not as operating activities.
Karr, Inc., reported net income of $300,000 for 20X1. Changes occurred in several balance sheet accounts as follows:
Equipment $25,000 increase Accumulated depreciation 40,000 increase Note payable 30,000 increase
Additional Information
During 20X1, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.
In December 20X1, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.
Depreciation expense for the year was $52,000.
In Karr's 20X1 statement of cash flows, net cash provided by operating activities should be: $340,000. $347,000. $352,000. $357,000.
$347,000.
Using the indirect method, Karr computes cash flow from operating activities as follows:
Reported 20X1 net income $300,000
Add depreciation expense 52,000
Deduct gain on sale of equipment ( 5,000)
———
Net Cash flow from operating activities $347,000
=========
Note
All items that are included in net income that do not affect net cash provided from, or used for, operating activities such as depreciation of property, plant, and equipment and amortization of finite-life intangible assets. This includes all items whose cash effects are related to investing or financing cash flows, such as gains or losses on sales of property, plant, and equipment and discontinued operations (which relate to investing activities), and gains or losses on extinguishment of debt (which relate to financing activities). (FASB ASC 230-10-45-28)
In January 20X1, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore estimated at 1,200,000 tons. Vorst believes it will be able to sell the property afterwards for $300,000. During 20X1, Vorst incurred $540,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its 20X1 income statement, what amount should Vorst report as depletion $135,000 $144,000 $150,000 $159,000
$144,000
Mineral Depletion Rate and Total Depletion
Cost of ore deposit:
Purchase price $2,640,000
Development cost 540,000
———-
Subtotal 3,180,000
Less expected disposal value 300,000
———
Net cost of ore deposit $2,880,000
Depletion cost per ton = $2,880,000 / 1,200,000 tons
= $2.40/ton
20X1 depletion = 60,000 tons x $2.40
= $144,000
Asp Co. was organized on January 2, 20X1, with 30,000 authorized shares of $10 par common stock. During 20X1 the corporation had the following capital transactions:
January 5 - issued 20,000 shares at $15 per share.
July 14 - purchased 5,000 shares at $17 per share.
December 27 - reissued the 5,000 shares held in treasury at $20 per share.
Asp used the par value method to record the purchase and re-issuance of the treasury shares. In its December 31, 20X1, balance sheet, what amount should Asp report as additional paid-in capital in excess of par $100,000 $125,000 $140,000 $150,000
$125,000
Summary journal entries:
Dr. Cr.
Jan. 5 Cash (20,000 x $15) 300,000
APIC (20,000 x ($15 - $10)) 100,000
Common stock (20,000 x $10) 200,000
July 14 Treasury stock (5,000 x $10) 50,000
APIC (5,000 x ($15 - $10)) 25,000*
R.E. (5,000 x ($17 - $15)) 10,000
Cash (5,000 x $17) 85,000
Dec. 27 Cash (5,000 x $20) 100,000
APIC (5,000 x ($20 - $10)) 50,000
Treasury stock (5,000 x $10) 50,000
Balance of additional paid-in capital 12/31/X1 =
$100,000 - $25,000 + $50,000 = $125,000
- (5,000 shares / 20,000 shares) x $100,000 = 25% x $100,000 = $25,000OR
- 5,000 shares x ($15 original issue price per share -
$10 par value share) = $25,000
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2250 Equity
In which of the following funds of a government are interfund transfers reported as “other financing sources or uses”
Governmental funds
Proprietary funds
Both governmental funds and proprietary funds
Neither governmental funds nor proprietary funds
Governmental funds
In governmental funds, interfund transfers should be reported as “other financing uses” in the fund making the transfer and as “other financing sources” in the fund receiving the transfer. In proprietary funds, which use full accrual accounting, transfers should be reported separately after nonoperating revenues and expenses. “Other financing sources and uses” is not an appropriate category for proprietary funds.
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2411 Measurement Focus and Basis of Accounting
Reed Co.’s 20X1 statement of cash flows reported cash provided from operating activities of $400,000. For 20X1, depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed’s 20X1 statement of cash flows, what amount was reported as net income
$105,000
$205,000
$305,000
$595,000
$205,000
Dividends paid are reported as financing activities. The reconciliation of net income and cash provided by operating activities would reflect both of the other items as they are noncash expenses and losses.
Net income X
+ Depreciation expense 190,000
+ Goodwill impairment loss 5,000
= Cash provided by operating activities
X = $205,000
INTEREST CAPITALIZATION
i. When a company is constructing a significant asset, interest on the project can be capitalized. The rationale is that interest on the construction costs is deferred by adding it to the cost of the asset, and will eventually be expensed through depreciation
1. 3 things have to be happening at the same time in order for interest to be capitalized:
a. Interest cost is being incurred
b. Construction activities are taking place
c. Construction expenses are occurring
The City of Smithville enters into securities lending transactions. The costs of these transactions should be:
reported as increases in the carrying value of the collateral.
reported as expenditures or expenses.
netted with interest revenue from investment of cash collateral.
reported as intangible assets.
reported as expenditures or expenses.
“The costs of securities lending transactions should be reported as expenditures or expenses in the operating statement.” They should not be netted with interest revenue or the income from the investment of any cash collateral (GASB I60.106).
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2441 Net Position and Components Thereof
If a computer software arrangement has an agreement to deliver software that requires significant production, modification, or customization of software, what method of accounting should be used to recognize the revenue from the contract
Accrual (in the period of the sale)
Contract accounting (percentage of completion)
Installment method (recognized as cash is received)
All of the answer choices are correct.
Contract accounting (percentage of completion)
Percentage of completion must generally be used if:
the company can make reasonably dependable estimates of the extent of progress toward the completion, contract revenues, and contract costs, and
both the buyer and seller can be expected to satisfy their obligations under the contract.
FASB ASC 605-35-05-4
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2391 Software Costs
Stanton College, a not-for-profit entity, received a building with no donor stipulations as to its use. Stanton does not have an accounting policy implying a time restriction on donated assets.
What type of net assets should be increased when the building was received Unrestricted Temporarily restricted Permanently restricted I only II only III only II or III
I only
FASB ASC 958-605-45-6 states that gifts of long-lived assets should be reported as unrestricted support unless the organization has an accounting policy that implies a time restriction that expires over the useful life of a donated asset.
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2511 Statement of Financial Position
A state had general obligation bonds outstanding that required payment of interest on July 1 and January 1 of each year. State law allowed for the general fund to make debt payments without the use of a fiscal agent. The fiscal year ended June 30.
Which of the following accounts would have decreased when the state paid the interest due on July 1 Interest expenditures Interest payable Interest expense Fund balance
Fund balance
The use of a debt service fund to account for the payment of bond interest may be required by law. Otherwise, the general fund is used for transactions not required to be reported in another fund. In this case, state law allows the interest payment to be recorded in the general fund. Paying interest would increase, not decrease, expenditures, so interest expenditures is not correct. In a governmental fund, the interest would not have been accrued, so the payable would not be decreased, and interest payable would not be correct. In a governmental fund, expense (the expiration of resources matched to the earning of revenue) is not measured, so interest expense would not be correct.
The correct answer is fund balance, which would be decreased when expenditures, a temporary account, is closed at the end of the period.
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2412 Fund Accounting Concepts and Application
In testing for impairment of long-lived assets, Nale Co. determined the following:
Cost of asset $100,000 Accumulated depreciation 60,000 Future cash flows 20,000 Fair value 30,000 The impairment loss is: $20,000. $30,000. $10,000. $70,000.
$10,000.
Carrying value = 100,000 - 60,000 = 40,000
Fair value = 30,000
40,000 - 30,000 = 10,000
If the carrying amount exceeds the future cash flows, an impairment loss should be recognized. The loss is the excess of the asset’s carrying amount over its fair value.
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2370 Impairment
Which of the following information is needed to prepare the budgetary comparison schedules for a local government
Computation of variances from budget to actual
Original budget
Description of the local government’s budgeting process
Explanation of variances
Original budget
A budgetary comparison statement is required only for the General Fund and for each major special revenue fund. Additionally, this statement may be presented as a schedule in required supplementary information instead of as a basic financial statement. The statement must (1) be presented using the budgetary basis of accounting and (2) include columns for the original budget adopted, the final budget, and for actual amounts on the budgetary basis of accounting. The variance column, based on actual versus the revised budget, is optional.
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2422 Governmental Funds Financial Statements
During 20X1, Pard Corp. sold goods to its 80%-owned subsidiary, Seed Corp. At December 31, 20X1, one-half of these goods were included in Seed’s ending inventory. Reported 20X1 selling expenses were $1,100,000 and $400,000 for Pard and Seed, respectively. Pard’s selling expenses included $50,000 in freight-out costs for goods sold to Seed.
What amount of selling expenses should be reported in Pard's 20X1 consolidated income statement $1,500,000 $1,480,000 $1,475,000 $1,450,000
$1,450,000
Since freight-out costs are paid by the seller (Pard), they are not included in the value of inventory by the buyer (Seed). Also, since they were paid on an intercompany sale, these costs should be eliminated from Pard’s consolidated income statement. Thus, consolidated selling expenses for 20X1 are:
Pard total - intercompany + Seed's total
($1,100,000 - $50,000) + $400,000
$1,050,000 + $400,000 = $1,450,000
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2323 Emphasis on Adjusting and Eliminating Entries(…
Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs
Litigation costs would be capitalized regardless of the outcome of the litigation.
Litigation costs would be expensed regardless of the outcome of the litigation.
Litigation costs would be capitalized if the patent right is successfully defended.
Litigation costs would be capitalized only if the patent was purchased rather than internally developed.
Litigation costs would be capitalized if the patent right is successfully defended.
When a patent is purchased, it is accounted for at its cost. When a patent is internally generated, its cost is generally its legal filing fees. Legal expenses to successfully defend a patent’s rights are considered an added cost to acquire and maintain the rights the patent represents. The successful legal defense costs of the patent help ensure that the patent will continue to be useful throughout its legal (useful) life. These costs benefit future periods (the remaining legal life of the patent) and should be capitalized, added to the patent’s cost, and amortized over its remaining life.
If legal costs are expended in an unsuccessful patent defense, these should be expensed since they do not benefit future periods.
On January 2, 20X1, Blake Co. sold a used machine to Cooper, Inc., for $900,000, resulting in a gain of $270,000. On that date, Cooper paid $150,000 cash and signed a $750,000 note bearing interest at 10%. The note was payable in three annual installments of $250,000 beginning January 2, 20X2. Blake appropriately accounted for the sale under the installment method. Cooper made a timely payment of the first installment on January 2, 20X2, of $325,000 which included accrued interest of $75,000.
What amount of deferred gross profit should Blake report on December 31, 20X2 $150,000 $172,500 $180,000 $225,000
$150,000
Gross profit rate = $270,000 ÷ $900,000 = 30%
Cash collected prior to December 31, 20X2:
January 2, 20X1 $150,000
January 2, 20X2 250,000
——–
Total $400,000
========
Cash remaining to be collected = $900,000 - $400,000 = $500,000
Deferred gross profit to be reported on December 31, 20X2 = 30% × $500,000 = $150,000
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2251 Revenue Recognition
During 20X1, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad’s $25 par common stock at the option of the preferred shareholder. On December 31, 20X2, when the market value of the common stock was $40 per share, all of the preferred stock was converted.
What amount should Brad credit to common stock and to additional paid-in capital common stock as a result of the conversion
Common stock: $375,000; Additional paid-in capital: $175,000
Common stock: $375,000; Additional paid-in capital: $225,000
Common stock: $500,000; Additional paid-in capital: $50,000
Common stock: $600,000; Additional paid-in capital: $0
Common stock: $375,000; Additional paid-in capital: $175,000
Summary journal entry to record 20X1 issuance of convertible preferred stock:
Dr. Cr. Cash (5,000 x $110) $550,000 Convertible preferred stock (5,000 x $100) $500,000 APIC preferred ($550,000 - $500,000) 50,000
Summary journal entry to record 12/31/X2 conversion of preferred shares:
Dr. Cr.
Convertible preferred stock $500,000
APIC preferred 50,000
Common stock (5,000 x 3 x $25) $375,000
APIC common ($550,000 - $375,000) 175,000
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2250 Equity
Gross Profit
Net sales - COGS
In a not-for-profit entity, which of the following should be included in total expenses
Grants to other organizations and depreciation
Grants to other organizations
Depreciation
Neither grants to other organizations nor depreciation
Grants to other organizations and depreciation
Per FASB ASC 720-25-25-1, contributions made by a business are considered expenses of the period. Not-for-profit entities recognize expenses the same way as businesses, so the contribution would be considered an expense with the other expenses of the period. FASB ASC 958-720-45-15 lists depreciation as an expense.
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2524 Expenses, Including Depreciation and Functional …
During 20X1, both Raim Co. and Cane Co. suffered losses due to the flooding of the Mississippi River. Raim is located two miles from the river and sustains flood losses every two to three years. Cane, which has been located 50 miles from the river for the past 20 years, has never before had flood losses. How should the flood losses be reported in each company’s 20X1 income statement
Raim: As a component of income from continuing operations; Cane: As an extraordinary item
Raim: As an extraordinary item; Cane: As a component of income from continuing operations
Both Raim and Cane: As a component of income from continuing operations
Both Raim and Cane: As an extraordinary item
Raim: As a component of income from continuing operations; Cane: As an extraordinary item
FASB ASC 225-20-45-2 provides two criteria for extraordinary item classification—events or transactions must be both unusual in nature and occur infrequently.
Based on this, Cane’s losses would be considered an extraordinary item, but Raim’s would not. Raim Co. would classify its losses as a component of income from continuing operations.
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2345 Extraordinary and Unusual Items
Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, 20X1, its first year of operations:
Pre-tax financial income $160,000
Nontaxable interest received on
municipal securities (5,000)
Long-term loss accrual in excess
of deductible amount 10,000
Depreciation in excess of financial
statement amount (25,000)
———
Taxable income $140,000
=========
Zeff's tax rate for 20X1 is 40%. In its 20X1 income statement, what amount should Zeff report as income tax expense—current portion $52,000 $56,000 $62,000 $64,000
$56,000
Income tax expense:
Current portion = Taxable income x Tax rate
= $140,000 x 0.40
= $56,000
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2270 Income Taxes
An enterprise fund must be used when which of the following criteria are met
The activity is financed with debt that is secured solely by a pledge of the net revenues from fees of the activity.
Goods or services are provided on a cost-reimbursement basis.
Laws require that the cost of providing services be recovered with fees and charges, rather than with taxes. I only I and II II and III I and III
I and III
Activities are required to be reported as enterprise funds if either I or III is true. In addition, if pricing policies of the activity establish fees and charges designed to recover costs, an enterprise fund must be used. The language describing funds as providing goods and services “on a cost-reimbursement basis” applies to internal service funds.
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2412 Fund Accounting Concepts and Application
A. A. Corporation sells t-shirts displaying humorous sayings or pictures of popular artists. As such, they often have to deal with permanent writedowns of inventories that may only be able to be sold at reduced prices. A particular item, Shirt G, of which A. A. has 1,000 units on hand at the end of the year, has the following characteristics:
Cost of Shirt G $12
Replacement cost of Shirt G 10
Net realizable value of Shirt G 11
Normal profit margin for Shirt G 2
Assuming that A. A. Corporation writes its inventory items down on an individual item basis, and further, that A. A. Corporation applies the rules of IFRS, what would the unit price of Shirt G be after the writedown $12 $11 $10 $9
$11
IFRS applies an inventory valuation rule of lower of cost or net realizable value, which is defined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Replacement cost and normal profit margin are not used in IFRS. Since net realizable value is less than cost, the inventory item is written down to $11 per unit.
A combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). Which of the following would be considered part of the acquisition cost of an acquired entity in a business combination
Costs incurred by the acquiring entity that are directly related to the acquisition
Costs incurred by the acquired entity that are directly related to the acquisition
Indirect acquisition costs incurred by the acquiring entity
I only
I and II only
I and III only
None of these items would be part of the acquisition cost.
None of these items would be part of the acquisition cost.
FASB ASC 805-10-25-21 requires that acquisition-related costs be charged to expense. All of these costs are acquisition-related costs and should be expensed in the period incurred.
FASB ASC 805-10-25-23 states the following:
Quote
Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.
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2315 Business Combinations
Reid Partners, Ltd., which began operations on January 1, 20X1, has elected to use cash-basis accounting for tax purposes and accrual-basis accounting for its financial statements. Reid reported sales of $175,000 and $80,000 in its tax returns for the years ending December 31, 20X2 and 20X1, respectively. Reid reported accounts receivable of $30,000 and $50,000 in its balance sheets as of December 31, 20X2 and 20X1, respectively.
What amount should Reid report as sales in its income statement for the year ending December 31, 20X2 A. $145,000 B. $155,000 C. $195,000 D. $205,000
$155,000
When converting from cash-basis sales to accrual-basis sales, sales must be adjusted for the net change in accounts receivable. There has been a net decrease in receivables of $20,000 over the course of the year from $50,000 to $30,000. Thus, accrual sales would decline by $20,000 as compared to cash sales (which included the additional receivables collected). Therefore, this response of $155,000 ($175,000-$20,000) is correct.
BEG AR
+ Sales
- Collections
=END AR
Rearrange formula to get sales: END AR 30,000 -BEG AR (50,000) \+Collections 175,000 =SALES =155,000
On December 31, 20X1, Roth Co. issued a $10,000 face value note payable to Wake Co. in exchange for services rendered to Roth. The note, made at usual trade terms, is due in 9 months and bears interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%. The compound interest factor of $1 due in 9 months at 8% is .944. At what amount should the note payable be reported in Roth's December 31, 20X1, balance sheet $10,300 $10,000 $9,652 $9,440
$10,000
The Roth Co. note is due in 9 months. FASB ASC 835-30 (Interest on Receivables and Payables) does not require any special treatment for notes maturing in less than one year. Wake Co. should report the Roth Co. note at its face amount, $10,000.
Statement of Retained Eearnings
Reports info about how RE changes over the reporting period.
This statement shows beginning RE, events that increase it (NI), and events that decrease it (dividends and net loss).
Ending RE is computed in this statement and is carried over and reported on the BS.
Steam Co. acquired equipment under a capital lease for six years. Minimum lease payments were $60,000 payable annually at year-end. The interest rate was 5% with an annuity factor for six years of 5.0757. The present value of the payments was equal to the fair market value of the equipment. What amount should Steam report as interest expense at the end of the first year of the lease $0 $3,000 $15,227 $18,000
$15,227
The initial obligation would be capitalized at $60,000 × 5.0757 = $304,542.
Initial obligation $304,542
Interest rate (5%) x .05
——–
Interest expense $ 15,227
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2380 Leases
According to the principles concerning the use of fund accounting, a governmental entity should have only one: pension trust fund. internal service fund. capital projects fund. general fund.
general fund.
According to the principles concerning the use of fund accounting specified by GASB 1300.116, “a government shall report only one general fund.”
Although “the general rule is to establish the minimum number of funds consistent with legal specifications, operational requirements, and the principles of fund accounting,” a governmental entity could have a need for more than one pension trust fund, internal service fund, or capital projects fund.
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2411 Measurement Focus and Basis of Accounting
During periods of rising prices, when the FIFO inventory method is used, a perpetual inventory system results in an ending inventory cost that is:
the same as in a periodic inventory system.
higher than in a periodic inventory system.
lower than in a periodic inventory system.
higher or lower than in a periodic inventory system, depending on whether physical quantities have increased or decreased.
the same as in a periodic inventory system.
The FIFO perpetual inventory method will produce the same ending inventory as the FIFO periodic method. This is due to the fact that the “first-in” units are removed first under both methods. The only difference is that the units sold are removed immediately under the perpetual approach but only at the end of the period under the periodic approach. The flow and amounts are the same. This is not true for any other inventory method (other than specific identification).
The following information pertains to Gali Co.’s defined benefit pension plan for 20X1:
Fair value of plan assets (beginning of yea) $350,000
Fair value of plan assets (end of year) 525,000
Employer contributions 110,000
Benefits paid 85,000
What is Gali's actual return on plan assets $65,000 $150,000 $175,000 $260,000
$150,000
Fair value of plan assets at end of year $525,000
Explained changes:
Fair value of plan assets at beg of yr $350,000
Contributions during year 110,000
Benefits paid during year (85,000)
Total explained changes 375,000
Unexplained changes (return on plan assets) $150,000
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2264 Retirement Benefits
Lease M does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease P does not transfer ownership of the property to the lessee at the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. How should the lessee classify these leases
Lease M as a capital lease and Lease P as an operating lease
Lease M as an operating lease and Lease P as a capital lease
Both Lease M and Lease P as a capital lease
Both Lease M and Lease P as an operating lease
Both Lease M and Lease P as a capital lease
FASB ASC 840-10-25-1 established four criteria for classifying leases:
Ownership of asset is transferred at end of lease.
Lease contains bargain purchase option.
Lease term is 75% or more of economic life of asset.
Present value of lease payments is 90% or more of fair value of leased assets.
If one or more of these conditions are present, the lease is a capital lease.
Lease M is a capital lease because the lease term is greater than 75% of the economic life of the property.
Lease P is also a capital lease for the same reason.
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2380 Leases
A company finances the purchase of equipment with a $500,000 5-year note payable. The note has an interest rate of 12% and a monthly payment of $11,122.
After two payments have been made, what amount should the company report as the note payable balance in its December 31 balance sheet $477,756 $490,061 $487,695 $487,756
$487,695
This is a question involving the amortization of a loan: with two payments made, what is the remaining payable carrying value?
Beginning principal of $500,000 × 0.12 (Interest rate) × 1/12 (because they are monthly payments) for only one month’s interest = $5,000.
The principal amortized from the first payment is thus the payment amount less the $5,000 interest, or $11,122 – $5,000 = $6,122.
The interest on the second payment is $500,000 less $6,122 for the principal of $493,878, × 0.12 × 1/12 (as before, covering one month) for a total interest charge of $4,939.
Thus, the remaining principal balance on December 31 is the principal after the first payment of $493,878 less the principal paid with the second payment (after interest, $11,122 – $4,939) of $6,183, thus $493,878 – $6,183 = $487,695.
On January 1, 20X1, Dallas, Inc., purchased 80% of Style, Inc.’s, outstanding common stock for $120,000. On that date, the carrying amounts of Style’s assets and liabilities approximated their fair values. During 20X1, Style paid $5,000 cash dividends to its stockholders. Summarized balance sheet information for the two companies follows:
Dallas Style
12/31/X1 12/31/X1 01/01/X1
-------- -------- -------- Invest in Style (equity method) $132,000 Other assets $138,000 $115,000 $100,000 Common stock 50,000 20,000 20,000 APIC 80,250 44,000 44,000 Retained earnings 139,750 51,000 36,000
The combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008).
What amount should Dallas include from Style as part of consolidated net income in its 20X1 income statement $12,000 $15,000 $16,000 $20,000
$20,000
Style, Inc., the subsidiary, reported 20X1 earnings of $20,000 (see below):
Retained Earnings (01/01/X1) $36,000
Plus 20X1 Income ?
Less 20X1 Dividends (5,000)
--------
Retained Earnings (12/31/X1) $51,000
======== Dallas, Inc., the parent, includes 100% of Style's earnings: $20,000. The noncontrolling interest in the subsidiary net income $4,000 (20% of $20,000) is then subtracted from the combined entity's consolidated net income to derive the parent's interest in consolidated net income.
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2322 Fundamentals of Consolidated Worksheets(Acquisition …
Flint Corporation has adopted FASB ASC 205-20 (Presentation of Financial Statements—Discontinued Operations). On February 2, Flint Corp.’s board of directors voted to discontinue operations of its frozen food division and to sell the division’s assets on the open market as soon as possible. The division, which qualifies as a component under FASB ASC 205-20, reported net operating losses of $20,000 in January and $30,000 in February. On February 26, sale of the division’s assets resulted in a gain of $90,000.
What amount of gain from disposal of a component should Flint recognize in its income statement for the three months ended March 31 $0 $40,000 $60,000 $90,000
$40,000
Gain from sale of assets $90,000
Less: Net operating loss 50,000
——-
Gain from disposal of component to be reported $40,000
=======
Note
When an entity has been disposed of or is classified as held for sale, the income statement should report in discontinued operations, the results in the period(s) in which they occur.
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2345 Extraordinary and Unusual Items
Weir Co. uses straight-line depreciation for its property, plant, and equipment, which, stated at cost, consisted of the following:
Dec 31, 20X2 Dec31, 20X1
—————– —————–
Land $ 25,000 $ 25,000
Buildings 195,000 195,000
Machinery & equip + 695,000 + 650,000
——— ———
915,000 870,000
Accu depr - 400,000 - 370,000
——— ———
$515,000 $500,000
========= =========
Weir's depreciation expense for 20X2 and 20X1 was $55,000 and $50,000, respectively. What amount was debited to accumulated depreciation during 20X2 because of property, plant, and equipment retirements $40,000 $25,000 $20,000 $10,000
$25,000
$ 370,000 December 31, 20X1, accumulated depreciation
+ $55,000 20X2 depreciation
———
$ 425,000 12/31/X2 bal disregarding any retirements in 20X2
- 400,000 Actual accumulated depreciation balance on 12/31/X2
———
$25,000 20X2 depreciation adjustments because of retirements
=========
OR
Beg Balance + Additions - Deductions = End balance
12/31/X1 Accum. Dep. + 20X2 Dep. Exp - Retirements = 12/31/X2 Balance
$370,000 + $55,000 - $25,000 = $400,000
(Deprec. Associated
with Retirements)
Which of the following items is not subject to the application of intraperiod income tax allocation Discontinued operations Income from continuing operations Extraordinary gains and losses Operating income
Operating income
Operating income is a subtotal well before income tax expense. Income tax expenses during the period are specifically allocated to the other three answer choices (discontinued operations, income from continuing operations, and extraordinary gains and losses).
The following items are subject to the application of intraperiod income tax allocation:
Discontinued operations Extraordinary items Cumulative effects of accounting changes Prior-period adjustments Direct adjustments to capital accounts
In 20X1, Wildlife Rescue, a not-for-profit entity that works with injured wild animals, received donations of $5,200 for supplies. In 20X2, $600 was spent for this purpose and another $2,100 was spent and all supplies used by the end of 20X3. What should Wildlife Rescue report in the statement of financial position for 20X3 regarding the donation
Unrestricted net assets $0, temporarily restricted net assets $0, permanently restricted net assets $5,200
Unrestricted net assets $600, temporarily restricted net assets $2,100, permanently restricted net assets $2,500
Unrestricted net assets $0, temporarily restricted net assets $2,500, permanently restricted net assets $0
Unrestricted net assets $2,100, temporarily restricted net assets $2,500, permanently restricted net assets $0
Unrestricted net assets $0, temporarily restricted net assets $2,500, permanently restricted net assets $0
The donation was earmarked for a specific purpose, not to be held indefinitely. Therefore, there would be no impact on permanently restricted net assets. As of the date of the statement of financial position for 20X3, the unspent donation amounted to $2,500 that would be reflected in temporarily restricted net assets. The 20X3 supplies purchase and use of supplies would be reported in the statement of activities as both an increase at the time of purchase (reclassification from temporarily restricted to unrestricted net assets) and a decrease (expense) at the time of use with a zero net effect on unrestricted net assets by the end of 20X3.
FASB ASC 958-210-45-1
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2511 Statement of Financial Position
Depreciable base
Purchase price - Salvage Value
During 20X1, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows:
FIFO Weighted-Average
------- ---------------- January 1, 20X1 $71,000 $77,000 December 31, 20X1 79,000 83,000
Orca's income tax rate is 30%. In its 20X1 financial statements, what amount should Orca report as the cumulative effect of this accounting change to be included in 20X1 net income $2,800 $4,000 $0 $6,000
$0
FASB ASC 250-10-45-5 mandates that voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented. The only exception is when the FASB issues a new pronouncement and mandates in that pronouncement that a change in accounting principle made to comply with that pronouncement should be made by including the cumulative effect in net income of the year of change.
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2305 Accounting Changes and Error Corrections
A DECREASE in inventory means
more CASH is received.**
Hall Co.'s allowance for uncollectible accounts had a credit balance of $24,000 on December 31, 20X1. During 20X2, Hall wrote off uncollectible accounts of $96,000. The aging of accounts receivable indicated that a $100,000 allowance for doubtful accounts was required on December 31, 20X2. What amount of uncollectible accounts expense should Hall report for 20X2 $172,000 $120,000 $100,000 $96,000
$172,000
Uncollectible accounts balance on 01/01/X2 $24,000 Cr.
Uncollectible accounts written off in 20X2 -96,000
——-
Uncollectible accounts balance on 12/31/X2 72,000 Dr.
Add: Allowance balance required on 12/31/X2 100,000
——-
Uncollectible/accounts expense for 20X2 $172,000
========
New Town has completed the conversion and consolidation process to prepare its government-wide financial statements. Fund balances of all governmental and enterprise funds have been adjusted to present net position for governmental activities and for business-like activities. A portion of the net position should be displayed as “net investment in capital assets,” at an amount calculated as:
the total of capital assets less depreciation, outstanding mortgages or bonds, and otherwise restricted net position.
the total of capital assets less depreciation and all long-term debt.
the total of capital assets less depreciation and outstanding mortgages or bonds reduced by any significant unspent proceeds.
the total of capital assets less depreciation and outstanding mortgages or bonds related to the assets.
the total of capital assets less depreciation and outstanding mortgages or bonds reduced by any significant unspent proceeds.
The best answer calculates the displayed amount by considering capital assets reduced by depreciation and directly related debt. Any amount of significant unspent debt proceeds or deferred inflows should not be included in the calculation of “net investment in capital assets.” It would be displayed as “restricted” or “unrestricted” and reduced by that portion of the debt or deferred inflow. Not all long-term debt is directly associated with the capital assets.
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2441 Net Position and Components Thereof
A private not-for-profit hospital’s performance indicator, which reports the results of operations, includes additional classifications. Which of the following normally would be included in the other operating revenues classification
Revenues from educational programs
Revenues from unrestricted gifts
Revenues from both educational programs and unrestricted gifts
None of the answer choices are correct.
Revenues from educational programs
The statement of operations for not-for-profit entities includes a performance indicator such as operating results. Operating results are reported among the total changes in unrestricted net assets. This indicator is analogous to income from continuing operations of a for-profit enterprise. Additional classifications such as operating/nonoperating may be included within the performance indicator. For a hospital’s performance indicator, revenues other than patient service revenues, such as revenues from educational programs, would be considered “other revenues.” Gifts and contributions would not be considered operating revenues.
FASB ASC 954-225-45-4 and 45-5
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2450 Accounting and Reporting for Governmental Not-for-…
SEC Regulation S-X provides guidance for the issuer regarding:
nonfinancial forms and disclosures required by the SEC.
instructions on electronically filing the forms required by the SEC.
the use of EDGAR by SEC registrants.
format and content of financial information submitted to the SEC.
format and content of financial information submitted to the SEC.
Regulation S-X contains information regarding the financial statements that must be submitted to the SEC.
Regulation S-K contains the instructions for filing the nonfinancial statement forms required by the SEC. Regulation S-T contains instructions for the electronic filing of required SEC forms. Both Regulation S-K and S-T should be read together, as some parts of Regulation S-X may supersede the instructions in Regulation S-K.
With regard to infrastructure, how should a change from depreciation to the modified approach be reported
As a change in accounting estimate, requiring restatement of prior periods
As a change in accounting estimate, not requiring restatement of prior periods
As a change in accounting principle, not requiring restatement of prior periods
As a change in accounting principle, requiring restatement of prior periods
As a change in accounting estimate, not requiring restatement of prior periods
According to GASB 1400.107, footnote 9, a change from depreciation to the modified approach should be reported as a change in an accounting estimate, and this change would not require a restatement of prior periods.
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2427 Required Supplementary Information (RSI) Other Than …
For the budgetary year ending December 31, 20X1, Maple City’s general fund expects the following inflows of resources:
Property taxes, licenses, and fines $9,000,000
Proceeds of debt issue 5,000,000
Interfund transfers for debt service 1,000,000
In the budgetary entry, what amount should Maple record for estimated revenues $9,000,000 $10,000,000 $14,000,000 $15,000,000
$9,000,000
In Maple City’s General Fund budgetary entry, the amount that is debited to the account “Estimated Revenues” would consist only of those financial resource inflows expected to be recorded as revenues. The property taxes, licenses, and fines would be recorded as revenues.
Proceeds of the debt issue would be recorded either as a liability, if short-term debt, or as proceeds of bonds (an other financing source) if long-term debt, not as revenues.
Also, the interfund transfers would not be recorded as revenues. Therefore, the correct answer is $9,000,000 of property taxes, licenses, and fines.
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2411 Measurement Focus and Basis of Accounting
Tomson Co. installed new assembly line production equipment at a cost of $175,000. Tomson had to rearrange the assembly line and remove a wall to install the equipment. The rearrangement cost $12,000 and the wall removal cost $3,000. The rearrangement did not increase the life of the assembly line, but it did make it more efficient. What amount of these costs should be capitalized by Tomson $175,000 $178,000 $187,000 $190,000
$190,000
The rearrangement cost and wall removal cost were reasonable and necessary costs to put the equipment “in a location and condition” for its use. These costs benefit future periods and should be capitalized along with the equipment cost.
Kell Corp.’s $95,000 net income for the quarter ended September 30, 20X1, included the following after-tax items:
A $60,000 extraordinary gain, realized on April 30, 20X1, was allocated equally to the second, third, and fourth quarters of 20X1.
A $16,000 cumulative-effect loss resulting from a change in inventory method was recognized on August 2, 20X1.
In addition, Kelly paid $48,000 on February 1, 20X1, for 20X1 calendar-year property taxes. Of this amount, $12,000 was allocated to the third quarter of 20X1.
For the quarter ended September 30, 20X1, Kell should report net income of: $91,000. $103,000. $111,000. $115,000.
$91,000.
FASB ASC 270-10-45-1 provides the guidelines for the preparation of interim financial statements: “each interim period should be viewed primarily as an integral part of the annual period” and specifies the following:
Costs not directly associated with interim revenues (such as property taxes) are allocated equally—so the $12,000 allocation of the property tax expense is properly included in third-quarter net income.
Extraordinary items should be recognized totally in the period in which they occur—so the extraordinary gain of $60,000 should have been recognized totally in the second quarter without being allocated to the balance of the year; the $20,000 should not be included in Quarter 3.
Cumulative-effect losses resulting from a change in accounting principles are reported by restating the pre-change interim periods; the $16,000 cumulative loss from the change in inventory method should not be included in the third quarter net income.
Thus, Kell Corp.’s third quarter net income should be:
$95,000 - $20,000 + $16,000 = $91,000
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2375 Interim Financial Reporting
Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices.
Which of the following would alter the timing of Red’s cash flows for the $3 million in receivables already recorded on its books
Change the due date of the invoice
Factor the receivables outstanding
Discount the receivables outstanding
Demand payment from customers before the due date
Factor the receivables outstanding
Factoring arrangements are a means of discounting accounts receivable on a nonrecourse, notification basis. Accounts receivable are sold outright, usually to a transferee (the factor) that assumes the full risk of collection, without recourse to the transferor in the event of a loss. Debtors are directed to send payments to the transferee. Red Co. will have its cash immediately upon the sale, whereas the other methods may accelerate the receipt of cash but will not result in a great deal of cash being received immediately.
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2393 Transfers and Servicing of Financial Assets and …
An entity with preferred stock that has a preference in involuntary liquidation “considerably” in excess of par shall:
disclose the liquidation preference in the equity section of the statement of financial position.
not be required to disclose the liquidation preference.
disclose the liquidation preference in the event of a qualified audit opinion.
disclose the liquidation preference in its SEC-filed documents.
disclose the liquidation preference in the equity section of the statement of financial position.
Liquidation preferences must be disclosed.
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2250 Equity
A. A. Corporation sells t-shirts displaying humorous sayings or pictures of popular artists. As such, they often have to deal with writedowns of inventories to present net realizable value that may only be able to be sold at reduced prices. A particular item, Shirt S, of which A. A. has 1,000 units, which originally cost $25, was written down to its net realizable value at the end of the prior year of $20, since it featured an artist that had not been producing any new material for some time. At the beginning of the new year, this artist introduced a new CD that was very popular, and the Shirt S item has also been selling at a price above what it had been selling for before. The present replacement cost to buy another unit of Shirt S now is $27.
Since the item now has a net realizable value of $35, which is greater than its original cost, and since A. A. Corporation applies IFRS, it must carry the value of its inventory of Shirt S at:
the original cost of $25.
the net realizable value for this new year of $35.
the net realizable value of the item last year of $20, since an inventory writedown cannot be reversed.
the replacement cost of $27.
the original cost of $25.
IFRS requires that inventories be valued at lower of cost or net realizable value. If net realizable value falls below cost, then inventory must be written down to net realizable value. If net realizable value increases back up above cost, then a recovery of the writedown must occur, and the inventory must be written back up to cost, which is now the lower of cost and net realizable value. Replacement cost is not used in this procedure.
The billings for transportation services provided to other governmental units are recorded by the internal service fund as: transportation appropriations. operating revenues. interfund exchanges. intergovernmental transfers.
operating revenues.
Internal service funds are established to account for activities that one department within a government undertakes for the benefit of (1) other departments within that same government (usual case), and (2) (sometimes) other governments, at prices approximating their external exchange value.
This question illustrates an exchange-like reciprocal interfund activity. Interfund services provided and used should be reported as revenues in seller funds and expenditures or expenses in purchaser funds (GASB 1800.102). Transportation appropriations is a budgetary account. The term “exchange” describes interfund transactions, but is not used as an account title. Intergovernmental resource flows between different governments would be recognized as revenues or expenses/expenditures.
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2412 Fund Accounting Concepts and Application
What effect would the sale of a company’s trading securities at their carrying amounts for cash have on each of the following ratios
An increase in both current ratio and quick ratio
An increase in current ratio and no effect on quick ratio
No effect on current ratio and an increase in quick ratio
No effect on current ratio or quick ratio
No effect on current ratio or quick ratio
Trading securities (short-term investments) are included in both current assets and quick assets along with cash and other items. The conversion of the trading securities to cash would not alter the total amount of either current or quick assets (because the trading securities are carried at current market value). Therefore, the respective ratios would show no effect.
Bonds with detachable stock warrants were issued by Flack Co. Immediately after issue, the aggregate market value of the bonds and the warrants exceeds the proceeds. Is the portion of the proceeds allocated to the warrants less than their market value, and is that amount recorded as contributed capital
Less than warrants’ market value, yes; Contributed capital, no
Less than warrants’ market value, no; Contributed capital, yes
Less than warrants’ market value, yes; Contributed capital, yes
Less than warrants’ market value, no; Contributed capital, no
Less than warrants’ market value, yes; Contributed capital, yes
The amount of the proceeds from the bonds and the warrants is allocated to the bonds and the warrants based on their relative fair value at the issue date. The portion of the proceeds allocated initially to the stock warrants is credited to contributed capital from stock warrants. However, if the stock warrants are worth more than they were worth at the issue date, then the market value of the stock warrants will now exceed the portion of the sales proceeds allocated to the warrants at the issue date.
Which of the following uses the straight-line depreciation method
Group depreciation
Composite depreciation
Both group depreciation and composite depreciation
Neither group depreciation nor composite depreciation
Both group depreciation and composite depreciation
Group depreciation applies an average (straight-line depreciation) rate to an entire group of similar assets, hence the term group depreciation.
Composite depreciation applies an average (straight-line depreciation) rate to an entire group of dissimilar assets.
Note
Both methods use the straight-line depreciation method.
Dex Co. has entered into a joint venture with an affiliate to secure access to additional inventory. Under the joint venture agreement, Dex will purchase the output of the venture at prices negotiated on an arm’s-length basis. Which of the following are required to be disclosed about the related party transaction
I. The amount due to the affiliate at the balance sheet date
II. The dollar amount of the purchases during the year
I only
II only
Both I and II
Neither I nor II
Both I and II
FASB ASC 850-10-50-1 requires the following disclosures:
- The nature of the relationship(s) involved
- A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements
- The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period
- Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement
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2387 Related Parties and Related Party Transactions
Cott Co.’s four operating segments have revenues and identifiable assets expressed as percentages of Cott’s total revenues and total assets as follows:
Revenues Assets
(%) (%)
-------- ------
Fain 64 66
Ebon 14 18
Gel 14 4
Hak 8 12
---- ----
100 100
==== ====
Which of these operating segments are deemed to be reportable operating segments Ebon only Ebon and Fain only Ebon, Fain, and Gel only Ebon, Fain, Gel, and Hak
Ebon, Fain, Gel, and Hak
All four of Cott Co.’s operating segments are deemed to be reportable segments. Ebon, Fain, and Gel qualify as reportable segments because they each have revenues that are 10% or more of combined revenues.
Hak qualifies as a reportable segment because its identifiable assets are 10% or more of the combined assets of all operating segments.
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2390 Segment Reporting
Average cost method
Cost of goods available for sale / Number of units available for sale
A company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods. This type of commitment is:
A. recorded and reported on the balance sheet at the present value of the future required payments.
B. recorded and reported on the balance sheet at the fair value of the goods to be received.
C. not reported on the balance sheet but disclosed in the notes to the financial statements.
D. not reported or disclosed in the financial statements.
not reported on the balance sheet but disclosed in the notes to the financial statements.
When a company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods, it has an unconditional purchase commitment. Such an obligation is not reported on the balance sheet but is disclosed in the notes to the financial statements at the present value of the future required payments.
Video explanation:
Normally, if you have a contract with a supplier then you take a delivery of the contracted goods and you have a liability:
Dr. Inventory
Cr. Accounts Payable
The trigger to record a liability on the balance sheet is we take delivery when goods are shipped or we cancel the contract. So we’re not recording anything on the balance sheet because we have a purchase commitment (A & B is not our option)
But we do disclose it because this is an important information for investors we know how much have we committed ourselves, how much cash outflows we have committed ourselves to in the upcoming few years.
Remember that if it’s a contract to receive goods or purchases goods or services, our trigger is we when we take delivery on those goods or services or we’ve breached the contract and we actually owe that amount to the vendor.
Upon the death of an officer, Jung Co. received the proceeds of a life insurance policy held by Jung on the officer. The proceeds were not taxable. The policy’s cash surrender value had been recorded on Jung’s books at the time of payment. What amount of gain should Jung report in its statements
Proceeds received
Proceeds received less cash surrender value
Proceeds received plus cash surrender value
None
Proceeds received less cash surrender value
The cash surrender value of the policy was carried in Jung Co.’s accounts as an asset. The proceeds received less the carrying amount (i.e., the cash surrender value) should be reported by Jung as a gain.
During the year, Smith University’s board of trustees established a $100,000 fund to be retained and invested for scholarship grants. The fund earned $6,000 which had not been disbursed at December 31. What amount should Smith report in a quasi-endowment fund’s net assets at December 31 $106,000 $6,000 $100,000 $0
$106,000
Since the principal of the endowment and the income from investment of endowment funds are both restricted to the purpose of funding scholarships, and the investment income remained undisbursed at the end of the fiscal year, the principal and income both contribute to the net assets of this specific fund.
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2512 Statement of Activities
Rice Co. was incorporated on January 1, 20X1, with $500,000 from the issuance of stock and borrowed funds of $75,000. During the first year of operations, net income was $25,000. On December 15, 20X1, Rice paid a $2,000 cash dividend. No additional activities affected owner’s equity in 20X1. On December 31, 20X1, Rice’s liabilities had increased to $94,000. In Rice’s December 31, 20X1, balance sheet, total assets should be reported at:
$598,000.
$600,000.
$617,000.
$692,000.
$617,000
Rice Co. was incorporated on January 1, 20X1, with $500,000 from the issuance of stock and borrowed funds of $75,000. During the first year of operations, net income was $25,000. On December 15, 20X1, Rice paid a $2,000 cash dividend. No additional activities affected owner's equity in 20X1. On December 31, 20X1, Rice's liabilities had increased to $94,000. In Rice's December 31, 20X1, balance sheet, total assets should be reported at: $598,000. $600,000. $617,000. $692,000.
Stockholders' equity (January 1, 20X1) $500,000
Add net income 25,000
Deduct dividends (2,000)
---------
Stockholders' equity (December 31, 20X1) $523,000
=========
Total assets = Total liabilities + Stockholders' equity
= $94,000 + $523,000
= $617,000
Nack City received a donation of a valuable painting. Nack planned to add the painting to its collection and display it in the protected exhibition area of city hall. Nack had a policy that if such donated art works were sold, the proceeds would be used to acquire other items for its collections. Which of the following would be correct regarding the donated painting
Must be capitalized and depreciated
Must be capitalized but not depreciated
May be capitalized, but it is not required, and it must be depreciated
May be capitalized, but it is not required, and depreciation is not required
May be capitalized, but it is not required, and depreciation is not required
The donated painting in this situation meets the three conditions that make capitalization optional for government-wide reporting: it is to be held for public exhibition and not gain, it is to be protected and preserved, and a policy is in place requiring proceeds from any potential sale to be used to acquire other collection items. As artwork is considered “inexhaustible,” governments are not required to depreciate them.
GASB 1400.109–.111
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2441 Net Position and Components Thereof
Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter $3,500 $5,000 $6,000 $7,500
$6,000
Income tax expense for the second quarter is the total income for quarters one and two times the effective rate, less the income tax expense recorded at the end of the first quarter.
Income before tax expense (10k + 20k) $30,000
Tax rate x 0.25
——–
Total expense for second quarter $ 7,500
Less: Expense reported 1st quarter (1,500)
——–
Income tax expense, 2nd quarter $ 6,000
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2375 Interim Financial Reporting
The funded status of a defined benefit pension plan for a company should be reported in the: income statement. statement of cash flows. statement of financial position. notes to the financial statements only.
statement of financial position.
The over- or underfunded status of a defined benefit pension plan must be shown as an asset or a liability on the balance sheet, the statement of financial position.
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2264 Retirement Benefits
Cy City’s Municipal Solid Waste Landfill Enterprise Fund was established when a new landfill was opened January 3, 2006. The landfill is expected to close December 31, 2027. Cy’s 2006 expenses would include a portion of which of the year 2027 expected disbursements
Cost of a final cover to be applied to the landfill
Cost of equipment to be installed to monitor methane gas buildup
I only
II only
Both I and II
Neither I nor II
Both I and II
GASB L10.103 states that both the costs of a final cover to be applied to the landfill, and costs of postclosing monitoring equipment should be included in the estimated total current cost of landfill closure and postclosure care. GASB L10.106 states that for landfills using proprietary fund accounting, a portion of the estimated total current cost of landfill closure and postclosure care should be recognized as an expense and liability in each period that the landfill accepts solid waste.
GASB L10.103 and .106
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2412 Fund Accounting Concepts and Application
In 20X1, Seda Corp. acquired 6,000 shares of its $1 par value common stock at $36 per share. During 20X2, Seda issued 3,000 of these shares at $50 per share. Seda uses the cost method to account for its treasury stock transactions.
What accounts and amounts should Seda credit in 20X2 to record the issuance of the 3,000 shares
Treasury stock: $102,000; Additional paid-in capital: $42,000; Retained earnings: $6,000
Treasury stock: $144,000; Retained earnings: $6,000
Treasury stock: $108,000; Additional paid-in capital: $42,000
Treasury stock: $108,000; Common stock: $42,000
Treasury stock: $108,000; Additional paid-in capital: $42,000
The cost method of accounting for treasury stock treats the acquisition and reissue of the shares as two parts of one transaction. Thus, Seda Corp. would make the following entries:
Dr. Cr. Acquisition: Treasury stock (at cost) $216,000
(6,000 sh x $36/sh)
Cash $216,000
Reissue: Cash (3,000 sh x $50/sh) $150,000
Treasury stock (at cost)
(3,000 sh x $36/sh) $108,000
Additional paid-in-capital
(3,000 sh x ($50/sh - $36/sh)) $42,000
Which of the following is not disclosed on the statement of cash flows when prepared under the direct method, either on the face of the statement or in a separate schedule
The major classes of gross cash receipts and gross cash payments
The amount of income taxes paid
A reconciliation of net income to net cash flow from operations
A reconciliation of ending retained earnings to net cash flow from operations
A reconciliation of ending retained earnings to net cash flow from operations
A reconciliation of ending retained earnings to net cash flow from operations would serve no useful purpose and is not required to be disclosed on the statement of cash flows. Each of the other items mentioned would be disclosed under the direct method.
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2135 Statement of Cash Flows
Which of the following is used in calculating the income recognized in the fourth and final year of a contract accounted for by the percentage-of-completion method
Actual total costs
Income previously recognized
Both actual total costs and income previously recognized
Neither actual total costs nor income previously recognized
Both actual total costs and income previously recognized
Final year income would be calculated:
Total contract revenue XXX
Less actual total costs - XX
—-
Total income from contract XX
Less income previously recognized - X
—-
Income recognized in final year X
Note
Both actual total costs and income previously recognized are used in calculating final-year income.
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
The total future cash payments
The present value of the debt at the original interest rate
The present value of the debt at the modified interest rate
The amount of future cash payments designated as principal repayments
The total future cash payments
This question relates to the debtor’s gain on troubled debt restructuring. FASB ASC 310-40-40-1 has changed the treatment of creditor’s losses on a restructuring to include the use of present values. Debtor’s gains, however, continue to follow FASB ASC 470-60-35-6. Debtor’s gains are calculated based on undiscounted amounts. The total future cash payments, including interest, are used to compute the gain on troubled debt restructuring.
During 20X1, Young and Zinc maintained average capital balances in their partnership of $160,000 and $100,000, respectively. The partners receive 10% interest on average capital balances, and residual profit or loss is divided equally. Partnership profit before interest was $4,000. What amount should Zinc's capital account change for the year $1,000 decrease $2,000 increase $11,000 decrease $12,000 increase
$1,000 decrease
Alloc. to Alloc. to Total
Young Zinc Allocated
--------- --------- --------- Profit before interest $ 4,000 Interest allocation To Young (10% x $160k) $16,000 (16,000) To Zinc (10% x $100k) $10,000 (10,000)
-------- Residual allocation (1) (22,000) To Young (50% x $22k) (11,000) 11,000 To Zinc (50% x $22k) -- (11,000) 11,000
-------- -------- -------- Increase in Young capital $ 5,000 Decrease in Zinc capital (1,000)
1 Residual is $4,000 - $16,000 - $10,000 = $(22,000)
A company gets started in Year One and makes credit sales of $200,000 each year as well as cash collections of $150,000. In addition, a total of $10,000 in bad accounts is written off each year. If 6 percent of sales are estimated to be uncollectible each year, what is the net accounts receivable balance at the end of Year Two? $56,000 $66,000 $76,000 $86,000
$76,000
Accounts receivable has $200,000 less $150,000 less $10,000 in each year. That means the balance at the end of the first year is $40,000 and then $80,000 at the end of the second year. The allowance for doubtful accounts is $12,000 ($200,000 times 6 percent) less $10,000 (write-offs) each year. This means that the balance at the end of the first year is $2,000 and then $4,000 at the end of the second year for a $76,000 ($80,000 receivable less $4,000 allowance) net accounts receivable.
The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob’s liability to Mene.
Carrying amount of liability liquidated $150,000
Carrying amount of real estate transferred 100,000
Fair value of real estate transferred 90,000
At what amount should Mene record the real estate transferred
$90,000
$150,000
$60,000
$100,000
When a creditor receives property as partial payment in settlement of a debt, the creditor should recognize the property received at the fair value of the property received. Mene is the creditor and the fair value of the real estate is $90,000.
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2245 Troubled Debt Restructurings by Debtors
Miller Co. incurred the following computer software costs for the development and sale of software programs during the current year:
Planning costs $ 50,000
Design of the software 150,000
Substantial testing of the project’s initial stages 75,000
Production and packaging costs for the first
month’s sales 500,000
Costs of producing product masters after
technology feasibility was established 200,000
The project was not under any contractual arrangement when these expenditures were incurred. What amount should Miller report as research and development expense for the current year $200,000 $275,000 $500,000 $975,000
$275,000
FASB ASC 730-10-20 defines research and development as the planned search and critical investigation aimed at the discovery of new knowledge and ultimately a new product. Computer software costs follow this definition. Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. After feasibility has been established, all software costs are capitalized.
Based on the definition, research and development expense includes planning, design and testing of $275,000 ($50,000 + 150,000 + 75,000).
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2391 Software Costs
On January 2, 20X1, Nast Co. issued 8% bonds with a face amount of $1,000,000 that mature on January 2, 20X7. The bonds were issued to yield 12%, resulting in a discount of $150,000. Nast incorrectly used the straight-line method instead of the effective interest method to amortize the discount.
How is the carrying amount of the bonds affected by the error
December 31, 20X1: Overstated; January 2, 20X7: Understated
December 31, 20X1: Overstated; January 2, 20X7: No effect
December 31, 20X1: Understated; January 2, 20X7: Overstated
December 31, 20X1: Understated; January 2, 20X7: No effect
December 31, 20X1: Overstated; January 2, 20X7: No effect
Carrying amount on 1/2/X1 = $1,000,000 - $150,000 = $850,000
Amortization of discount:
Using straight-line = $150,000 / 6 yrs
= $25,000 / yr.
Using effective interest = (0.12 x $850,000) - (.08 x $1,000,000)
= $22,000
Carrying amount on 12/31/X1:
Using straight-line = $850,000 + $25,000
= $875,000
Using effective interest = $850,000 + $22,000
= $872,000
Overstatement of carrying
value when using straight-line = $875,000 - $872,000
= $3,000
Over the 6-year life of the bonds, the same total discount amortization will occur under each method. The bond carrying amount on January 2, 20X7, will be the maturity value regardless of the amortization method.
Thus, on December 31, 20X1, the bond carrying value will be overstated if straight-line amortization of discount is used but on January 2, 20X7, there will be no effect from its use.
*VIDEO EXPLANATION
Original Journal Entry:
Cash 850,000
Discount 150,000
Bonds Payable 1,000,000
Issued year 1, matures in year 7 = amortized over 6 years
150,000/6 yrs= 25,000/yr
Amortization at the end of the year:
Discount 150,000-25,000 = 125,000
A company reports the following information as of December 31:
Sales revenue $800,000
Cost of goods sold 600,000
Operating expenses 90,000
Unrealized holding gain on available-
for-sale securities, net of tax 30,000
What amount should the company report as comprehensive income as of December 31 $30,000 $110,000 $140,000 $200,000
$140,000
Other comprehensive income is computed as follows:
Sales revenue $800,000
Cost of goods sold 600,000
--------
Gross profit $200,000
Operating expenses 90,000
--------
Net income $110,000
Unrealized holding gain 30,000
--------
Comprehensive income $140,000
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2133 Statement of Comprehensive Income
A not-for-profit entity receives $150 from a donor. The donor receives two tickets to a theater show and an acknowledgment in the theater program. The tickets have a fair market value of $100. What amount is recorded as contribution revenue $0 $50 $100 $150
$50
The amount of contribution revenue recognized in an exchange transaction is reduced by the fair market value of the consideration given by the organization to the donor. The $150 received is reduced by the $100 fair market value of the theater tickets for total contribution revenue of $50.
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2512 Statement of Activities
During 20X1, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses the units of production depletion method. As a result of the change, which of the following should be reported in Krey’s 20X1 financial statements
Cumulative effect of a change in accounting principle
Pro forma effects of retroactive application of new depletion base
Both cumulative effect of a change in accounting principle and pro forma effects of retroactive application of new depletion base
Neither cumulative effect of a change in accounting principle nor pro forma effects of retroactive application of new depletion base
Neither cumulative effect of a change in accounting principle nor pro forma effects of retroactive application of new depletion base
An increase in the estimated quantity of copper recoverable from its mine represents a change in accounting estimate.
FASB ASC 250-10-45-17 provides that a change in accounting estimate be accounted for in the period of change or the period of change and future affected periods if both are affected by the change. Also:
Quote
A change in an estimate should not be accounted for by restating amounts reported in financial statements of periods or by reporting pro forma amounts for prior periods.
Therefore, no is the appropriate answer for both suggested treatments.
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2305 Accounting Changes and Error Corrections
*VIDEO EXPLANATION
What type of change is this? Error, change in accounting principle, or do we have a change in accounting estimate.
It is a change in estimate! Similar to depreciation (looking at fixed asset). These are recorded prospectively.
Cumulative effect is a change in accounting principle. We don’t have a change in accounting principle.
The following changes in Vel Corp.’s account balances occurred during 20X1:
Increase
-------- Assets $89,000 Liabilities 27,000 Capital stock 60,000 Additional paid-in capital 6,000
Except for a $13,000 dividend payment and the year's earnings, there were no changes in retained earnings for 20X1. What was Vel's net income for 20X1 $4,000 $9,000 $13,000 $17,000
$9,000
Increase in Assets $89,000
Increase in Liabilities (27,000)
——–
Increase in stockholder’s equity $62,000
Add back: Dividend Payment 13,000
——–
Increase in stockholders’ equity
BEFORE dividends $75,000
Less increase-new capital stock issued:
Capital Stock $60,000
Additional Paid-in Capital 6,000 66,000
——- ——–
20X1 Net Income $ 9,000
========
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2132 Income Statement/Statement of Profit or Loss
On January 2, 20X1, Farm Co. granted an employee an option to purchase 1,000 shares of Farm’s common stock at $40 per share. The option became exercisable on December 31, 20X2, after the employee had completed two years of service, and was exercised on that date. The fair value of the option on January 2, 20X1, was $10 per option.
What amount should Farm recognize as compensation expense for 20X1 $0 $5,000 $10,000 $40,000
$5,000
FASB ASC 718-10-30-2 requires that the fair value method be used. Except in very rare circumstances, the intrinsic value method is no longer acceptable. Accordingly, total compensation cost for Farm Co. is the $10,000 fair value of the options on the grant date (1,000 options × $10 fair value per option on January 2, 20X1). The $10,000 total compensation cost should be amortized over Farm’s 2-year service period at the rate of $5,000 per year ($10,000 ÷ 2 years = $5,000). The compensation expense for 20X1 therefore is $5,000.
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2264 Retirement Benefits
*VIDEO EXPLANATION
State and local governments must report budgetary comparisons showing both the original and final appropriated budgets for the reporting period as well as actual inflows, outflows, and balances stated on the government’s budgetary basis. If the budgetary perspective does not significantly differ from the fund reporting perspective, this budgetary comparison statement:
must be included in the basic financial statements.
must be included in required supplementary information (RSI).
may be included in the basic financial statements or in the required supplementary information (RSI).
may be included in the management’s discussion and analysis (MD&A), the basic financial statements, or the required supplementary information (RSI).
may be included in the basic financial statements or in the required supplementary information (RSI).
Governments with significant budgetary perspective differences that preclude providing budgetary comparisons for the general fund and each major specific revenue fund are required to present budgetary comparison schedules as required supplementary information (RSI). Other governments are encouraged to provide the budgetary comparison statement as RSI but may include it as part of the basic financial statements. Budgetary comparison statements are not listed among the items to be included in management’s discussion and analysis (MD&A).
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2413 Budgetary Accounting
Venus Corp.’s worksheet for calculating current and deferred income taxes for 20X1 follows:
20X1 20X2 20X3
------- ------- ------- Pretax income $1,400 0 0 Temporary differences: Depreciation (800) (1,200) $2,000 Warranty costs 400 (100) (300)
------- ------- ------- Taxable income $1,000 (1,300) 1,700
Loss carryback (1,000) 1,000
Loss carryforward 300 (300)
——- ——- ——-
$ 0 $ 0 $1,400
======= ======= ======
Enacted rate 30% 30% 25%
Deferred tax liability
(asset):
Current $ (300)
=======
Noncurrent $ 350
=======
Venus had no prior deferred tax balances. In its 20X1 income statement, what amount should Venus report as current income tax expense $420 $350 $300 $0
$300
Current tax expense is defined in FASB ASC 740-10-20 as:
Quote
The amount of income taxes paid or payable (or refundable) for a year is determined by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues for that year.
Thus:
Current income tax expense = 30% × $1,000 = $300
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2270 Income Taxes
Pitbull Construction Corporation applies IFRS, has equipment that it can reliably measure fair value of, and has chosen to apply the revaluation model to valuing this equipment on its accounting records. The carrying value of this equipment on Pitbull’s books at the end of last year, December 31, 20X1, was $200,000. At the end of this year, December 31, 20X2, due to increased demand for the equipment, even when resold as used, the fair value is $250,000.
For the year 20X2, in relation to this equipment for which Pitbull has chosen to apply the revaluation method, Pitbull must:
increase the operating income for the period 20X2 by the addition to fair value, $50,000.
increase asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.
not account for the addition in fair value of an unsold long-term asset used in operations.
decrease asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.
increase asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.
When a class of assets’ fair value can be reliably measured, a corporation applying IFRS can elect to apply the revaluation model to the class of assets. When the carrying value of the assets differs materially from the fair value of the assets, a revaluation must occur, with any increase being included in asset revaluation surplus, an equity account, like other comprehensive income, and a decrease being accounted for as an other loss included in income from operations.
The following selected financial data pertains to Alex Corporation for the current year ended December 31:
Operating income $900,000
Interest expense (100,000)
Income before income tax 800,000
Income tax expense (320,000)
Net income 480,000
Preferred stock dividends (200,000)
Net income available to common stockholders $280,000
=========
The times preferred dividend earned ratio is
4.0 to 1
1.4 to 1
2.4 to 1
1.7 to 1
2.4 to 1
This particular ratio is the relationship to earnings available to pay preferred stock dividends, net income, divided by the preferred stock dividends total. Thus, here it is $480,000/$200,000, or 2.4 to 1.
Markson Co. traded a concrete-mixing truck with a book value of $10,000 to Pro Co. for a cement-mixing machine with a fair value of $11,000. Markson needs to know the answer to which of the following questions in order to determine whether the exchange has commercial substance
Does the book value of the asset given up exceed the fair value of the asset received?
Is the gain on the exchange less than the increase in future cash flows?
Are the future cash flows expected to change significantly as a result of the exchange?
Is the exchange nontaxable?
Are the future cash flows expected to change significantly as a result of the exchange?
Nonmonetary exchanges are generally recorded at fair value.
One of the exceptions to the exchange being recorded at fair value is an exchange transaction that lacks commercial substance. The main issue in determining commercial substance is whether the entity’s future cash flows are expected to significantly change.
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2386 Nonmonetary Transactions (Barter Transactions)
In Year 2, Ajax, Inc., reported taxable income of $400,000 and pretax financial statement income of $300,000. The difference resulted from $60,000 of nondeductible premiums on Ajax’s officers’ life insurance and $40,000 of rental income received in advance. Rental income is taxable when received. Ajax’s effective tax rate is 30%.
In its Year 2 income statement, what amount should Ajax report as income tax expense—current portion $90,000 $102,000 $108,000 $120,000
$120,000
Income tax expense—current is the tax currently payable ($400,000 × 0.30 = $120,000).
Journal Entry:
Tax expense-current 120,000
Tax payable 120,000
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2270 Income Taxes
Wall Corp.’s employee stock purchase plan specifies the following:
For every $1 withheld from employees’ wages for the purchase of Wall’s common stock, Wall contributes $2.
The stock is purchased from Wall’s treasury stock at market price on the date of purchase.
The following information pertains to the plan’s 20X1 transactions:
Employee withholding for the year—$350,000
Market value of 150,000 share issued—$1,050,000
Carrying amount of treasury stock issued (cost)—$900,000
Before payroll taxes, what amount should Wall recognize as expense in 20X1 for the stock purchase plan $1,050,000 $900,000 $700,000 $550,000
$700,000
Since Wall Corp. contributes $2 for every $1 the employees contribute, Wall Corp.’s expense in 20X1 for the employee stock purchase plan is:
2 × Employee withholding = 2 × $350,000 = $700,000
The gain on the treasury stock issued does not affect the expense. It is recorded separately as “Contributed Capital from Treasury Stock Transactions.”
FASB ASC 718-10-30-2
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2265 Stock Compensation (Share-Based Payments)
Goodwill should be tested for value impairment at which of the following levels Each identifiable long-term asset Each reporting unit Each acquisition unit Entire business as a whole
Each reporting unit
Goodwill is to be tested for impairment at the level of the reporting unit or at one level below an operating segment.
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2370 Impairment
On March 4, 20X1, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, 20X1, 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, 20X2. On September 30, 20X1, 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, 20X1, balance sheet for investment in stock rights $4,000 $5,000 $10,000 $15,000
$4,000
The investor receiving stock rights must allocate a portion of the purchase price of the investment that “carried” the rights. Here, although the stock rights were received 6 months after the purchase, the rights still “ride” with the purchase. Thus, the stock rights are allocated a portion of the purchase price based on the market value of the rights as a percentage of the total market value of the stock investment plus the rights at the balance sheet date:
Cost of shares acquired = 1,000 x $80 = $80,000 Cost allocated to stock rights = $80,000 ($5 / ($95 + $5))
= $80,000 ($5 / $100)
= $4,000
*See video explanation under “Investments”
Town, Inc., is preparing its financial statements for the year ending December 31, 20X1. On December 1, 20X1, Town was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received in January 20X2, prior to the issuance of the financial statements. What is the reporting requirement Disclosure only Accrual only Both accrual and disclosure Neither accrual nor disclosure
Both accrual and disclosure
Town, Inc., has a legally enforceable right to the settlement from the lawsuit on December 1, 20X1, so it would be reported in 20X1. The circumstances of the accrual of the gain should be disclosed in the interest of full disclosure.
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2330 Contingencies, Commitments, and Guarantees (Provisions)
It is inappropriate to record depreciation expenses in: an enterprise fund. an internal service fund. a private-purpose trust fund. a capital projects fund.
a capital projects fund.
Depreciation expense is not recorded in any governmental fund since governmental funds account for neither depreciable assets nor expenses (the measurement focus of governmental funds is on expenditures, not expenses). Capital assets and related depreciation expenses are accounted for in proprietary funds and fiduciary funds. The only governmental fund type listed in the responses to this question is the capital projects fund, so this is the appropriate response.
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2411 Measurement Focus and Basis of Accounting
On January 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit operations for the remainder of the calendar year.
What amount of these expenses should Tree include in its third-quarter interim financial statements for the three months ended September 30 $0 $15,000 $75,000 $95,000
$95,000
Under FASB ASC 270-10-45-4, interim financial reports should be based on the principles, practices, and policies used in the preparation of the last annual report.
Property taxes ($60,000 x 3/12) $15,000
Major repairs ($240,000 x 3/9) 80,000
——-
Total $95,000
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2375 Interim Financial Reporting
An unrestricted cash contribution should be reported in a nongovernmental not-for-profit entity’s statement of cash flows as an inflow from:
Operating activities
As illustrated in FASB ASC 958-205-55-18, unrestricted contributions are reported as operating activities.
Cash received from contributions restricted by donors for noncurrent purposes such as fixed asset construction, acquisition or improvement, term endowments, or permanent endowments are classified as FINANCING activities in the statement of cash flows. Cash received from investment income restricted by donor stipulation to the same purposes also are reported as financing activities, not as operating activities.
Douglas Co. leased machinery with an economic useful life of six years. For tax purposes, the depreciable life is seven years. The lease is for five years, and Douglas can purchase the machinery at fair market value at the end of the lease. What is the depreciable life of the leased machinery for financial reporting Zero Five years Six years Seven years
Five years
Douglas Co. should capitalize the lease because the lease term (five years) is equal to 83% (equal to or more than 75%) of the economic life (six years). Under a capital lease, the lease is depreciated using the life of the lease if the 75% or 90% of fair market value criteria are met. If the lease transfers ownership or has a bargain purchase, the life of the asset is used to determine depreciation. (FASB ASC 840-30-35-1)
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2380 Leases
On January 2, Year 4, Raft Corp. discovered that it had incorrectly expensed a $210,000 machine purchased on January 2, Year 1. Raft estimated the machine’s original useful life to be 10 years and its salvage value at $10,000. Raft uses the straight-line method of depreciation and is subject to a 30% tax rate.
In its December 31, Year 4, financial statements, what amount should Raft report as an adjustment to the opening balance of retained earnings of the earliest year presented (Assume that only one year is presented.) $102,900 $105,000 $165,900 $168,000
$105,000
A correction of an error in prior years’ financial statements is reported in the year of correction by restating all prior years affected by the error. The cumulative effect of the error on periods prior to those presented must be reflected in the carrying amounts of the assets and liabilities as of the beginning of the earliest year presented in the current period’s financial report. In addition, the offsetting amount of this cumulative effect must be reported as an adjustment to the opening balance of retained earnings of the earliest year presented in the current period’s financial report. (FASB ASC 250-10-45-23 to 45-24)
Depreciation of $20,000 should have been recognized in Years 1–4, as well as each of the remaining six years of the asset’s life after Year 4. However, no depreciation was recorded in any of the years up to Year 4. Rather, an expense of $210,000 was recognized in Year 1.
(210,000 - 10,000) / 10 years = 20,000
Correct Expensed Cumulative Cumulative
Depreciation Depreciation (Before Tax) (After Tax)
------------ ------------ ------------ ----------- Year 1 $20,000 $210,000 $190,000 $133,000 Year 2 20,000 0 170,000 119,000 Year 3 20,000 0 150,000 105,000
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2305 Accounting Changes and Error Corrections
3 categories of impaired assets
- Assets to be disposed of other than a sale
Continue to treat as a regular asset
It’s depreciated like normal
Apply impairment if applicable
The Governmental Funds Balance Sheet is classified as: basic financial statement. required supplementary schedule. other. All of the answer choices are correct.
basic financial statement.
The Governmental Funds Balance Sheet is a basic financial statement.
The balance sheet includes a separate column for each major governmental fund and a column with aggregated information for all other (nonmajor) governmental funds as well as a total column for all governmental funds.
Basic financial statements are:
government-wide statement of net position,
government-wide statement of activities,
governmental funds balance sheet,
governmental funds statement of revenues, expenditures, and change in fund balances,
proprietary funds statement of net position,
proprietary funds statement of revenues, expenses, and changes in fund net position,
proprietary funds statement of cash flows,
fiduciary funds statement of net position,
fiduciary funds statement of changes in fiduciary net position, and
notes to financial statements.
GASB 2200.105 and .156
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2420 Format and Content of Comprehensive Annual Financial …
Which event(s) should be included in a statement of cash flows for a governmental entity
I. Cash inflow from issuing bonds to finance city hall construction
II. Cash outflow from a city utility representing payments in lieu of property taxes
I only
II only
Both I and II
Neither I nor II
II only
The basic government-wide financial statements include the statement of net position and the statement of activities, but not a cash flow statement. The fund financial statements include statements of cash flows for proprietary funds but not for governmental funds. The proprietary funds, except for the internal service funds, make up the business-type operations of a government. A city-owned utility is a prototypical example of a business-type activity that would be recorded in a proprietary fund. In contrast, construction of a city hall building is a general government operation that would be recorded in a governmental fund.
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2421 Government-Wide Financial Statements
When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off would:
increase the allowance for uncollectible accounts.
increase net income.
decrease the allowance for uncollectible accounts.
have no effect on the allowance for uncollectible accounts.
increase the allowance for uncollectible accounts.
Journal entries to:
Debit Credit
------ ------ (1) Write an account off:
Allowance for Uncollectibles xx
Accounts Receivable xx (2) Reinstate account previously written off:
Accounts Receivable xx
Allowance for Uncollectibles xx (Entry (2) reverses entry (1) to the extent
of cash subsequently collected) (3) Collect the account:
Cash xx
Accounts Receivable xx (Entry (2), the reinstatement, credits or increases the allowance for uncollectible accounts)
The following information pertains to Spruce City’s liability for claims and judgments:
Current liability at January 1, 20X1 $100,000
Claims paid during 20X1 800,000
Current liability at December 31, 20X1 140,000
Noncurrent liability at December 31, 20X1 200,000
What amount should Spruce report for 20X1 claims and judgments expenditures $1,040,000 $940,000 $840,000 $800,000
$840,000
Because the question asks for the amount of “expenditures,” it is clear that the question refers to the governmental fund reporting and not the government-wide reporting. The current liability of $100,000 at the start of year 20X1 relates to expenditures of the prior year. The 20X1 payment of $800,000 liquidated that liability of $100,000 remaining from the prior year and recognized $700,000 of 20X1 expenditures. At the end of 20X1, another $140,000 of 20X1 claims and judgments expenditures were waiting to be liquidated with current resources. Thus, the 20X1 claims and judgments expenditures were $840,000.
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2445 Interfund Activity, Including Transfers
A company decided to sell an unprofitable division of its business. The company can sell the entire operation for $800,000, and the buyer will assume all assets and liabilities of the operations. The tax rate is 30%. The assets and liabilities of the discontinued operation are as follows:
Buildings $5,000,000
Accumulated depreciation 3,000,000
Mortgage on buildings 1,100,000
Inventory 500,000
Accounts payable 600,000
Accounts receivable 200,000
What is the after-tax net loss on the disposal of the division $140,000 $200,000 $1,540,000 $2,200,000
$140,000
The after-tax loss from the discontinued operation is computed as follows:
Sale proceeds $ 800,000
Accounts receivable $ 200,000
Inventory 500,000
Buildings $5,000,000
Accu dep 3,000,000 2,000,000
Mortgage on buildings -1,100,000
Accounts payable -600,000
Net book value 1,000,000
———-
Loss $ 200,000
Taxes ($200,000 x .30) 60,000
———-
After-tax loss $ 140,000
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2345 Extraordinary and Unusual Items
Alpha Hospital, a large not-for-profit entity, has adopted an accounting policy that does not imply a time restriction on gifts of long-lived assets. Alpha’s board designates $1,000,000 to purchase investments whose income will be used for capital improvements. Income from these investments, which were not previously accrued, is received.
Indicate the manner in which this transaction affects Alpha’s financial statements.
Increase in unrestricted revenues, gains, and other support
Increase in temporarily restricted net assets
Increase in permanently restricted net assets
No required reportable event
Increase in unrestricted revenues, gains, and other support
When resources are under control of the governing board and not specifically restricted by an outside donor, the resources are considered unrestricted and the resulting income is unrestricted revenue.
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2511 Statement of Financial Position
Which of the following financial instruments is not considered a derivative financial instrument Interest-rate swaps Currency futures Stock-index options Bank certificates of deposit
Bank certificates of deposit
One of the characteristics of a derivative instrument is that it derives its value or cash flow from some other security or index, called an underlying. FASB ASC 815-10-20 defines an underlying as follows:
“An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself.”
Bank certificates of deposit clearly do not have this characteristic.
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2355 Derivatives and Hedge Accounting
Lion Co.’s income statement for its first year of operations shows pretax income of $6,000,000. In addition, the following differences existed between Lion’s tax return and records:
Tax Accounting
Return Records
Uncollectible accounts exp $220,000 $250,000
Depreciation expense 860,000 570,000
Tax-exempt interest revenue - 50,000
Lion's current-year tax rate is 30% and the enacted rate for future years is 40%. What amount should Lion report as deferred tax expense in its income statement for the year $148,000 $124,000 $104,000 $78,000
$104,000
The permanent difference from tax-exempt interest does not produce deferred taxes.
Uncollectible accts ($220,000 - $250,000 $(30,000) Depreciation exp ($860,000 - $570,000) 290,000
Net temporary differences =$260,000
Tax rate x .40
Deferred tax expense $104,000
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2270 Income Taxes
For which of the following funds do operating transfers affect the results of operations
Governmental funds, no; Proprietary funds, no
Governmental funds, yes; Proprietary funds, yes
Governmental funds, no; Proprietary funds, yes
Governmental funds, yes; Proprietary funds, no
Governmental funds, yes; Proprietary funds, yes
Consider that if an item impacts operations, then it should be a factor in the final results of operations. Governmental and proprietary funds require a statement of revenues and expenditures; fiduciary funds do not.
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2422 Governmental Funds Financial Statements
Redwood Co.’s financial statements had the following information at year-end:
Cash $ 60,000
Accounts receivable 180,000
Allowance for uncollectible acts 8,000
Inventory 240,000
Short-term marketable securities 90,000
Prepaid rent 18,000
Current liabilities 400,000
Long-term debt 220,000
What was Redwood’s quick ratio
- 81 to 1
- 83 to 1
- 94 to 1
- 46 to 1
- 81 to 1
* Don’t forget to subtract allowance for uncollectible accounts from AR!! NET Accounts Receivable is a current asset, meaning AR - allowance.
Quick ratio = Current assets (excluding Inventories and Prepaid assets) ÷ Current liabilities:
(Cash + Net accounts receivable + Short-term marketable securities) ÷ Current liabilities
($60,000 + ($180,000 - $8,000) + $90,000) ÷ $400,000 = 0.81 (rounded)
All of the assets listed are current liabilities. Inventory and prepaid rent are excluded from the quick ratio.
On December 31, 20X1 and 20X2, Carr Corp. had outstanding 4,000 shares of $100 par value 6% cumulative preferred stock and 20,000 shares of $10 par value common stock. On December 31, 20X1, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in 20X2 totaled $44,000.
Of the $44,000, what amounts were payable on each class of stock
Preferred stock: $44,000; Common stock: $0
Preferred stock: $36,000; Common stock: $8,000
Preferred stock: $32,000; Common stock: $12,000
Preferred stock: $24,000; Common stock: $20,000
Preferred stock: $36,000; Common stock: $8,000
Dividends in arrears on preferred stock $12,000
Preferred stock dividend requirement
for 20X1 (4,000 shares x $100 x 6%) 24,000
——-
Dividends allocable to preferred shares $36,000
=======
Dividends allocable to common shares
($44,000 - $36,000) $ 8,000
=======
Remember
Dividends in arrears and current dividends on cumulative preferred stock must be paid before any dividend can be paid to common. Since the preferred stock is not participating, the total amount remaining after the current and in arrears amount is paid to preferred goes to common.
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2250 Equity
Whitestone, a nongovernmental not-for-profit entity, received a contribution in December of Year 1. The donor restricted use of the contribution until March of Year 2. How should Whitestone record the contribution
Footnote the contribution in Year 1 and record as income when it becomes available in Year 2
No entry required in Year 1 and record as income in Year 2 when it becomes available
Report as income in Year 1
Report as deferred income in Year 1
Report as income in Year 1
Contribution revenues from gifts, grants, and bequests are reported in the period they are unconditionally promised or received, whichever is earlier. They are reported as temporarily or permanently restricted to reflect donor wishes as to use. Since the revenue will be realized within a year, the amount recorded as revenue would be the full amount of the contribution. Otherwise, the contribution would be recorded at net present value.
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2521 Support, Revenues, and Contributions
As an inducement to enter a lease, Graf Co. a lessor, granted Zep, Inc., a lessee, 12 months of free rent under a 5-year operating lease. The lease was effective on January 1, 20X1, and provides for monthly rental payments to begin January 1, 20X2. Zep made the first rental payment on December 30, 20X1.
In its 20X1 income statement, Graf should report rental revenue in an amount equal to:
zero.
cash received during 20X1.
one-fourth of the total cash to be received over the life of the lease.
one-fifth of the total cash to be received over the life of the lease.
one-fifth of the total cash to be received over the life of the lease.
The timing of the cash payments is not relevant in the situation described. What is important is that Graf will collect four years of payments for a 5-year lease.
Each year Graf should recognize 1/5th (1/life of lease) of the total lease payment as rental revenue for that year.
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2380 Leases
According to the installment method of accounting, gross profit on an installment sale is recognized in income:
on the date of sale.
on the date the final cash collection is received.
in proportion to the cash collection.
after cash collections equal to the cost of sales have been received.
in proportion to the cash collection.
Installment method calculations of annual gross profit:
-Compute total expected gross profit by subtracting cost of goods sold from the installment sale amount.
-Compute the percentage gross profit rate by dividing total gross profit by sale amount.
-For each period, multiply cash collected times the gross profit percentage in the period the sales were made to get that period’s gross profit.
The net result is that gross profit is recognized in proportion to cash collected.
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2251 Revenue Recognition
In a compensatory stock option plan for which the grant, vesting, and exercise dates are all different, the additional paid-in capital—stock options account should be reduced at the: date of grant. vesting date. beginning of the service period. exercise date.
exercise date.
Total compensation cost is determined at the date of grant, based on the fair value of the award at that date. This total compensation cost is recognized over the service period by recording the following type of entry (ignoring, for simplicity, the income tax effect):
Compensation expense XXX
Additional paid-in capital–stock options XXX
When the stock options are exercised, the following type of entry is recorded:
Cash (for any amounts the employees must pay) XXX
Additional paid-in capital–stock options XXX
C.S. (par or stated value of shares issued) XXX
Capital in excess of par–common XXX
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2265 Stock Compensation (Share-Based Payments)
In preparing Chase City’s reconciliation of the statement of revenues, expenditures, and changes in fund balances to the government-wide statement of activities, which of the following items should be subtracted from changes in fund balances
Capital assets purchases
Payment of long-term debt principal
Internal service fund increase in net position
Book value of capital assets sold during the year
Book value of capital assets sold during the year
GASB requires a summary reconciliation between fund financial statements and government-wide financial statements. To adjust the total changes to governmental fund balances to the total change to the government-wide net position, additions and subtractions are needed.
Capital asset purchases and payments of long-term debt principal would be considered expenditure reductions of governmental fund balances and would be added back, as asset acquisitions are not considered an expense reduction of net position. In preparing government-wide financial statements, internal service fund assets and liabilities would be added to those of governmental activities, requiring an addition, not subtraction, to net position. When capital assets were sold, the entire sales price would have been an increase to governmental fund balances, but only the gain on sale would be an addition to net position. Therefore, the book value of capital assets sold during the year is the only item requiring a subtraction to reconcile to the changes in net position.
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2429 Deriving Government-Wide Financial Statements and …
- VIDEO EXPLANATION
- NOTES 10/01
Cost of Goods Sold
Cost of Goods Available for Sale - Ending Inventory
The following computations were made from Clay Co.’s current-year-end books:
Number of days’ sales in inventory 61
Number of days’ sales in trade accounts receivable 33
What was the number of days in Clay’s current-year operating cycle
33
94
61
47
94
The operating cycle is the approximate time from investment in inventory to receipt of cash from sales of inventory. The operating cycle is the time that inventory is kept prior to sale added to the time from sale to cash collection (days in accounts receivables).
Thus, the company’s operating cycle is simply the total of both of these times given in the question: days’ sales in inventory plus days’ sales in accounts receivable:
61 days + 33 days = 94 days
Which of the following describes how comprehensive income should be reported
Must be reported in a separate statement, as part of a complete set of financial statements
Should not be reported in the financial statements but should only be disclosed in the footnotes
May be reported in a separate statement or in a combined statement of income and comprehensive income
May be reported in a combined statement of income and comprehensive income or disclosed within a statement of stockholders’ equity; separate statements of comprehensive income are not permitted
May be reported in a separate statement or in a combined statement of income and comprehensive income
FASB ASC 220-10-45-1A states: “An entity reporting comprehensive income in a single continuous financial statement shall present its components in two sections, net income and other comprehensive income.” The financial statement should include a total net income amount and the components for that amount, total other comprehensive income amount and the components for that amount, and total comprehensive income.
Which of the following comprise functional expense categories for a nongovernmental not-for-profit entity
Program services, management and general, and fundraising
Membership dues, fundraising, and management and general
Grant expenses, program services, and membership development
Membership development, professional fees, and program services
Program services, management and general, and fundraising
The functional categories for expense reporting by a private not-for-profit are program services and supporting services. Within the supporting services category, specific subcategories are management and general activities, fundraising activities, and membership development activities. Program services, management and general, and fundraising are choices from this list.
Membership dues are not an expense. Grant expenses would be accounted for within the program activities category. Depending on their nature, professional fees could be included in any of the categories.
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2512 Statement of Activities
Recovery (Reinstatement) of Account under Allowance Method
After a seller has written off an accounts receivable, it is possible that the seller is paid part or all of the account balance that was written off. Under the allowance method, if such a payment is received (whether directly from the customer or as a result of a court action) the seller will take the following two steps:
- Reinstate the account that was written off by reversing the write-off entry. If we assume that the $1,400 written off on Aug 24 is collected on October 10, the reinstatement of the account looks like this:
Oct 10 Accounts Receivable 1,400
Allowance for Doubtful Accounts 1,400
- Allowance for DA is a contra-asset to AR so crediting it means increasing it!!
2. Process the $1,400 received on October 10:
Oct 10 Cash 1,400
Accounts Receivable 1,400
Which of the following factors determines whether an identified segment of an enterprise should be reported in the enterprise’s financial statements under FASB ASC 280-10-50-12 (Quantitative Thresholds)
The segment’s assets constitute more than 10% of the combined assets of all operating segments.
The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments. I only II only Both I and II Neither I nor II
I only
FASB ASC 280-10-50-12 establishes three primary criteria for determining reportable segments:
Quote
A public entity shall report separately information about an operating segment that meets any of the following quantitative thresholds…:
a. Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10 percent or more of the combined revenue, internal and external, of all operating segments.
b. The absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount, of either:
1. The combined reported profit of all operating segments that did not report a loss
2. The combined reported loss of all operating segments that did report a loss.
c. Its assets are 10 percent or more of the combined assets of all operating segments.
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2390 Segment Reporting
Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share, and recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share, and recognized a $50,000 gain on its income statement on May 20.
Which of the following statements is correct
Murphy’s comprehensive income for the current year is correctly stated.
Murphy’s net income for the current year is overstated.
Murphy’s net income for the current year is understated.
Murphy should have recognized a $50,000 loss on its income statement for the current year.
Murphy’s net income for the current year is overstated.
Gains and losses do not result from buying and selling your own equity shares. Therefore, no gain should have been reported on the resale of the treasury stock. Net income was overstated as a result.
On December 31, 20X1, Roth Co. issued a $10,000 face value note payable to Wake Co. in exchange for services rendered to Roth. The note, made at usual trade terms, is due in 9 months and bears interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%. The compound interest factor of $1 due in 9 months at 8% is .944.
At what amount should the note payable be reported in Roth's December 31, 20X1, balance sheet $10,300 $10,000 $9,652 $9,440
$10,000
The Roth Co. note is due in 9 months. FASB ASC 835-30 (Interest on Receivables and Payables) does not require any special treatment for notes maturing in less than one year. Wake Co. should report the Roth Co. note at its face amount, $10,000.
On the first day of each month, Bell Mortgage Co. receives from Kent Corp. an escrow deposit of $2,500 for real estate taxes. Bell records the $2,500 in an escrow account. Kent's 20X2 real estate tax is $28,000, payable in equal installments on the first day of each calendar quarter. On December 31, 20X1, the balance in the escrow account was $3,000. On September 30, 20X2, what amount should Bell show as an escrow liability to Kent $1,500 $4,500 $8,500 $11,500
$4,500
Use a T-account for escrow liability to Kent:
Deposits from Kent Corp. are credits ($2,500 per month).
Payments to the taxing authority ($28,000 ÷ 4 = $7,000 per quarter are debits)
Escrow Liability to Kent Corp.
------------------------------ Balance on December 31, 20X1 | $3,000 Quarter 1 deposits (3 x $2,500) | 7,500
payment $7,000 |
| Quarter 2 deposits | 7,500
payment 7,000 |
| Quarter 3 deposits | 7,500
payment 7,000 |
------------------------------
| $4,500
======
The billings for transportation services provided to other governmental units are recorded by the internal service fund as: other financing sources. nonoperating revenues. transportation appropriations. operating revenues.
operating revenues.
Internal service funds are established to account for activities that one department within a government undertakes for the benefit of (1) other departments within that same government (usual case) and (2) (sometimes) other governments, at prices approximating their external exchange value. This question illustrates an exchange-like reciprocal interfund activity. Interfund services provided and used should be reported as revenues in seller funds and expenditures or expenses in purchaser funds (GASB 1800.102).
Other financing sources are used to record operating transfers-in for governmental funds. Nonoperating revenues include earnings tangential to the purpose of the fund, e.g., interest and miscellaneous revenue. Transportation appropriations is a budgetary account.
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2412 Fund Accounting Concepts and Application
In Year 1, a company reported in other comprehensive income an unrealized holding loss on an investment in available-for-sale securities. During Year 2, these securities were sold at a loss equal to the unrealized loss previously recognized.
The reclassification adjustment should include which of the following
The unrealized loss should be credited to the investment account.
The unrealized loss should be credited to the other comprehensive income account.
The unrealized loss should be debited to the other comprehensive income account.
The unrealized loss should be credited to beginning retained earnings.
The unrealized loss should be credited to the other comprehensive income account.
The related unrealized holding loss (losses are usually debits) on an available-for-sale security is a debit balance (lowering) in other comprehensive income (equity account, normal credit balance).
When the asset is sold, the related accounts are removed, including this unrealized holding loss in other comprehensive income. A credit to other comprehensive income will remove it.
The corresponding debit in the entry is to a realized loss.
Which of the following would be an example of a special-purpose fund
Petty Cash Fund
Payroll Cash Account
Sinking Fund
All of the funds listed are considered special-purpose funds.
All of the funds listed are considered special-purpose funds.
Enterprises will sometimes set aside cash for special purposes, such as a sinking fund for the retirement of bonds. Some of these funds are placed under the control of an external trustee, whereas others are managed by internal personnel.
Blythe Corp. is a defendant in a lawsuit. Blythe's attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency Accrued and disclosed Accrued but not disclosed Disclosed but not accrued No disclosure or accrual
Disclosed but not accrued
If the possibility that a company will be required to pay a contingent liability is reasonably possible, the liability is not required to accrue the liability. However, the nature of the liability and an estimate of the loss (or range of loss) must be disclosed.
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2330 Contingencies, Commitments, and Guarantees (Provisions)
Tinsel Co.'s balances in allowance for uncollectible accounts were $70,000 at the beginning of the current year and $55,000 at year-end. During the year, receivables of $35,000 were written off as uncollectible. What amount should Tinsel report as uncollectible accounts expense at year-end $15,000 $20,000 $35,000 $50,000
$20,000
The allowance account had a credit balance of $70,000 to begin with. It will be debited, decreased by the $35,000 written off accounts, and would thus have a balance of a $35,000 credit. Since at the end of the year it had a higher credit balance of $55,000, it must have been credited by $20,000 in the bad debt expense adjusting entry, so the bad debt must have been $20,000.
A company has the following liabilities at year-end:
Mortgage NP; $16,000 due within 12 months $355,000
Short-term debt that the company is refinancing
with long-term debt 175,000
Deferred tax liability arising from depreciation 25,000
What amount should the company include in the current liability section of the balance sheet $0 $16,000 $41,000 $191,000
$16,000
Only the current portion of the mortgage is included in current liabilities.
In a classified statement of financial position, an entity shall separate deferred tax liabilities and assets into a current amount and a noncurrent amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. (FASB ASC 740-10-45-4)
The refinanced loan is not included in current liabilities. FASB ASC 470-10-45-13 and 45-14, “Short-Term Obligations Expected to Be Refinanced,” addresses this refinanced loan:
Quote
Short-term obligations arising from transactions in the normal course of business that are due in customary terms shall be classified as current liabilities. A short-term obligation shall be excluded from current liabilities only if the conditions in the following paragraph are met. Funds obtained on a long-term basis before the balance sheet date would be excluded from current assets if the obligation to be liquidated is excluded from current liabilities.
A short-term obligation shall be excluded from current liabilities if the entity intends to refinance the obligation on a long-term basis (see [FASB ASC] 470-10-45-12B) and the intent to refinance the short-term obligation on a long-term basis is supported by an ability to consummate the refinancing demonstrated in either of the following ways:
Post-balance-sheet-date issuance of a long-term obligation or equity securities. After the date of an entity’s balance sheet but before that balance sheet is issued or is available to be issued (as discussed in [FASB ASC] 855-10-25), a long-term obligation or equity securities have been issued for the purpose of refinancing the short-term obligation on a long-term basis. If equity securities have been issued, the short-term obligation, although excluded from current liabilities, shall not be included in owners’ equity.
Financing agreement. Before the balance sheet is issued or is available to be issued (as discussed in [FASB ASC] 855-10-25), the entity has entered into a financing agreement that clearly permits the entity to refinance the short-term obligation on a long-term basis on terms that are readily determinable, and all of the following conditions are met:
The agreement does not expire within one year (or operating cycle) from the date of the entity’s balance sheet and during that period the agreement is not cancelable by the lender or the prospective lender or investor (and obligations incurred under the agreement are not callable during that period) except for violation of a provision with which compliance is objectively determinable or measurable. For purposes of this Subtopic, violation of a provision means failure to meet a condition set forth in the agreement or breach or violation of a provision such as a restrictive covenant, representation, or warranty, whether or not a grace period is allowed or the lender is required to give notice. Financing agreements cancelable for violation of a provision that can be evaluated differently by the parties to the agreement (such as a material adverse change or failure to maintain satisfactory operations) do not comply with this condition.
No violation of any provision in the financing agreement exists at the balance sheet date and no available information indicates that a violation has occurred thereafter but before the balance sheet is issued or is available to be issued (as discussed in [FASB ASC] 855-10-25), or, if one exists at the balance sheet date or has occurred thereafter, a waiver has been obtained.
The lender or the prospective lender or investor with which the entity has entered into the financing agreement is expected to be financially capable of honoring the agreement.
FASB ASC 470-10-45-13 and 45-14
Interest Expense
Principal × Interest rate × Time
A company has the following accrual-basis balances at the end of its first year of operation:
Unearned consulting fees $ 2,000
Consulting fees receivable 3,500
Consulting fee revenue 25,000
The company's cash-basis consulting revenue is what amount $19,500 $23,500 $26,500 $30,500
$23,500
The company’s cash-basis consulting revenue is $23,500:
Accrual basis consulting fee revenue $25,000
Unearned consulting fee–
cash received with no revenue 2,000
Consulting fees receivable–
revenue with no cash received (3,500)
——–
Cash basis revenue $23,500
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2135 Statement of Cash Flows
Fenn Stores, Inc., had sales of $1,000,000 during December 20X1. Experience has shown that merchandise equaling 7% of sales will be returned within 30 days and an additional 3% will be returned within 90 days. Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value.
What amount should Fenn report for net sales in its income statement for the month of December 20X1 $900,000 $850,000 $780,000 $750,000
$900,000
Sales should be adjusted for the expected returns (7% + 3% = 10%) only (as an allowance reducing sales.) The sales related to expected exchanges for merchandise of equal or greater value are recognized as revenue in the period in which the original sale is made with no adjustment for the expected exchanges because the entire amount of the original sale is expected to result in an inflow of assets.
Sales reported for month of Dec 20X1 $1,000,000
Less expected returns (10% x $1,000,000) -100,000
Net sales for December 20X1 $ 900,000
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2251 Revenue Recognition
When a purchase order is issued, a commitment is made by a governmental unit to buy a computer to be manufactured to specifications for use in property tax administration. This commitment should be recorded in the general fund as: an appropriation. an encumbrance. an expenditure. a fixed asset.
an encumbrance.
Encumbrances represent commitments to purchase goods or services. They are recorded for budgetary control purposes to prevent overexpenditure of appropriations, especially in General and Special Revenue Funds.
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2411 Measurement Focus and Basis of Accounting
Bach Co. adopted the dollar-value LIFO inventory method as of January 1, 20X0. A single inventory pool and an internally computed price index are used to compute Bach’s LIFO inventory layers. Information about Bach’s dollar value inventory follows:
Inventory:
at Base- at Current- Date Year Cost Year Cost ---------- --------- ----------- 01/01/X0 $90,000 $90,000 20X0 layer 20,000 30,000 20X1 layer 40,000 80,000
What was the price index used to compute Bach’s 20X1 dollar-value LIFO inventory layer
- 09
- 25
- 33
- 00
2.00
To determine the ending inventory using dollar-value LIFO, a separate price index is used for each layer of inventory. Under dollar-value LIFO, the price index for the 20X1 inventory layer is determined by dividing the 20X1 inventory layer at the current (end of the year) cost of $80,000 by the inventory at the base-year cost of $40,000. The price index used was 2.00.
When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as:
no par common stock.
additional paid-in capital when the subscription is recorded.
additional paid-in capital when the subscription is collected.
additional paid-in capital when the common stock is issued.
additional paid-in capital when the subscription is recorded.
Journal entry to record subscription for no par common stock with stated value:
Dr. Cr.
Stock subscriptions receivable XXX
Common stock subscribed (for shares
subscribed x stated value per share) XX
Additional paid-in capital X
Note
Additional paid-in capital is recorded when the subscription is recorded.
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2250 Equity
Brand Co. incurred the following research and development project costs at the beginning of the current year:
Equipment purchased for current and future projects $100,000
Equipment purchased for current projects only 200,000
Research and development salaries for current project 400,000
Equipment has a 5-year life and is depreciated using the straight-line method. What amount should Brand record as depreciation for research and development projects at December 31 $0 $20,000 $60,000 $140,000
$20,000
Only the equipment that has an alternative use is capitalized and depreciated. The depreciation is $100,000 ÷ 5 = $20,000. The other expenditures should be expensed immediately.
Quote
Elements of costs shall be identified with research and development activities as follows (see [FASB ASC] 350-50 for guidance related to website development):
a. Materials, equipment, and facilities. The costs of materials (whether from the entity’s normal inventory or acquired specially for research and development activities) and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs. However, the costs of materials, equipment, or facilities that are acquired or constructed for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred.
FASB ASC 730-10-25-2
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2388 Research and Development Costs
Sun Co. is a wholly owned subsidiary of Star Co. Both companies have separate general ledgers and prepare separate financial statements. Sun requires stand-alone financial statements. Which of the following statements is correct
Consolidated financial statements should be prepared for both Star and Sun.
Consolidated financial statements (including the financial information of both corporations) should only be prepared by Star and not by Sun.
After consolidation, the accounts of both Star and Sun should be changed to reflect the consolidated totals for future ease in reporting.
After consolidation, the accounts of both Star and Sun should be combined together into one general-ledger accounting system for future ease in reporting.
Consolidated financial statements (including the financial information of both corporations) should only be prepared by Star and not by Sun.
A company that controls another company must prepare consolidated financial statements. Star owns 100% of Sun and must consolidate the financial statements of the two companies.
FASB ASC 805-10-05-2
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2305 Accounting Changes and Error Corrections
Child Care Centers, Inc., a not-for-profit entity, receives revenue from various sources during the year to support its day care centers. The following cash amounts were received during 20X1:
$2,000 restricted by the donor to be used for meals for the children
$1,500 received for subscriptions to a monthly child care magazine with a fair market value to subscribers of $1,000
$10,000 to be used only upon completion of a new playroom that was 75% complete at December 31, 20X1
What amount should Child Care Centers record as contribution revenue in its 20X1 Statement of Activities $2,000 $2,500 $10,000 $11,000
$2,500
Restricted contributions are recognized as revenue when received or promised. The $2,000 restricted for meals is recognized as temporarily restricted revenue. Conditional promises to give are not recognized as revenue until all conditions are met. The $10,000 represents a conditional promise since it may not be used until completion of a new playroom. Therefore, none of the $10,000 is recognized as revenue currently.
Exchange transactions represent actions that involve a reciprocal transfer between the organization and the donor. In these situations, the amount given by the donor that is recognized as contribution revenue is reduced by the fair market value of the consideration given by the organization to the donor. The $1,500 received for subscriptions represents a $1,000 payment for the subscription and a $500 unrestricted contribution.
Total contribution revenue is:
Restricted $2,000
Unrestricted 500
------
Total revenue $2,500
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2511 Statement of Financial Position
In 20X1, a tornado completely destroyed a building belonging to Holland Corp. The building cost $100,000 and had accumulated depreciation of $48,000 at the time of the loss. Holland received a cash settlement from the insurance company and reported an extraordinary loss of $21,000.
In Holland's 20X1 cash flow statement, the net change reported in the cash flows from investing activities section should be a: $10,000 increase. $21,000 decrease. $31,000 increase. $52,000 decrease.
$31,000 increase.
According to FASB ASC 230-10-45-12, cash inflows from investing activities include receipts from sales of property, plant, and equipment. These receipts include directly related proceeds of insurance settlements.
Cash proceeds from “sale” of destroyed building:
BV of building $100,000 - $48,000 = $52,000
Less amount of loss 21,000
——-
Cash proceeds $31,000
=======
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2135 Statement of Cash Flows
Lemu Co. and Young Co. are under the common management of Ego Co. Ego can significantly influence the operating results of both Lemu and Young. While Lemu had no transactions with Ego during the year, Young sold merchandise to Ego under the same terms given to unrelated parties.
In the notes to their respective financial statements, should Lemu and Young disclose their relationship with Ego
Both Lemu and Young should disclose their relationship.
Only Lemu should disclose its relationship.
Only Young should disclose its relationship.
Neither Lemu nor Young should disclose its relationship.
Both Lemu and Young should disclose their relationship.
Since Ego can influence both Lemu and Young, and Lemu and Young are under the common management of Ego, Lemu and Young are part of the consolidated entity of Ego. Therefore, that fact should be disclosed in both (subsidiaries) Lemu’s and Young’s financial statements.
FASB ASC 850-10-05-5
FASB ASC 850-10-50-6
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2387 Related Parties and Related Party Transactions
Which of the following assets or transactions is an element of comprehensive income
Sales revenue
Investments by owners
Distributions to owners
Deferred revenue
Sales revenue
The statement of comprehensive income includes all revenues and expenses contained in the income statement/statement of profit and loss. Consequently, it would include sales revenue but would not include investments or distributions by owners or deferred revenue.
Which of the following does not affect an internal service fund’s net income Temporary transfers Residual equity transfers Depreciation expense on its fixed assets Operating transfer sources
Temporary transfers
Internal service funds are used to account for in-house business enterprise activities (i.e., to account for the financing of goods or services provided by one government department or agency to other departments or agencies of the government and perhaps to other governments also) on a cost-reimbursement basis. By the very nature of “temporary,” the implication is to undo the transfer at some point in time, and it should not impact the net income of the fund.
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2412 Fund Accounting Concepts and Application
Loeb Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable at maturity. Loeb repaid each loan on its scheduled maturity date.
Date of Loan Amount Maturity Date Term of Loan
———— ——- ————- ————
11/01/X1 $ 5,000 10/31/X2 1 Year
02/01/X2 15,000 07/31/X2 6 Months
05/01/X2 8,000 01/31/X3 9 Months
Loeb records interest expense when the loans are repaid. As a result, interest expense of $1,500 was recorded in 20X2. If no correction is made, by what amount would 20X2 interest expense be understated $540 $620 $640 $720
$540
Correct 20X2 Interest:
Loan 1 $ 5,000 x 12% x 10/12 = $500
Loan 2 $15,000 x 12% x 6/12 = 900
Loan 3 $ 8,000 x 12% x 8/12 = 640
------
Total interest expense $2,040
Recorded to date 1,500
------
Understatement $ 540
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2112 Financial Accounting Standards Board (FASB)
The lower of cost or market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application generally results in the lowest inventory amount
All applications result in the same amount.
Total inventory
Groups of similar items
Separately to each item
Separately to each item
When applying the lower of cost or market inventory method, the lowest total inventory amount is obtained when the lower of cost or market determination is made on an item by item basis because the lower value for each item is selected.
Cancer Educators, a not-for-profit entity, incurred costs of $10,000 when it combined program functions with significant fundraising functions. Which of the following cost allocations might Cancer report in its statement of activities
Program services: $0; Fundraising: $0; General services: $10,000
Program services: $0; Fundraising: $6,000; General services: $4,000
Program services: $6,000; Fundraising: $4,000; General services: $0
Program services: $10,000; Fundraising: $0; General services: $0
Program services: $6,000; Fundraising: $4,000; General services: $0
FASB ASC 958-720-45-29 through 45-37 states that joint costs should be allocated between fundraising and the appropriate program or management and general function if three criteria are met. Otherwise, all of the joint costs should be considered fundraising costs (not one of the answer choices given). The criteria are purpose, audience, and content. The purpose of the joint activity must include accomplishing program or management and general functions, with a specific activity by the audience and a specific activity by the recipient to that end. If the criteria are not met, all the costs are considered fundraising costs. Fundraising activities that are incidental to program or management and general activities would not require all costs to be considered fundraising costs or to be allocated.
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2512 Statement of Activities
*VIDEO EXPLANATION
Could current cost financial statements report holding gains for goods sold during the period and holding gains on inventory at the end of the period Goods sold: Yes; Inventory: Yes Goods sold: Yes; Inventory: No Goods sold: No; Inventory: Yes Goods sold: No; Inventory: No
Goods sold: Yes; Inventory: Yes
Goods sold: Yes; Inventory: No
Holding gains may be realized or unrealized. Realized holding gains equal the difference between the current cost and the historical cost of assets sold or consumed during the period. Unrealized holding gains equal the difference between the current cost and the historical cost of assets still on hand at the end of the period.
Holding gains for cost of goods sold are realized. Holding gains for inventory on hand at the end of the period are unrealized.
Halderman County levies an imposed nonexchange form of tax in the year prior to the year of its intended collection and use. An enforceable legal claim does not arise until the period after the period of its intended collection and use. The following facts apply:
On September 1, 20X1, the county levied $2 million of tax for FY 20X2—50% of the tax is due on January 15, 20X2, and the remainder is due July 15, 20X2.
It is estimated 5% of the levy will be uncollectible.
An enforceable legal claim for the September 1, 20X1, levy does not attach until January 15, 20X3.
It is estimated 90% of the September 1, 20X1, levy will be collected during the period January 1, 20X2, through February 28, 20X3. The balance will be collected at a later date, or go uncollected.
The County uses an “availability period” equal to two months following the close of the fiscal year, and has a fiscal year-end of December 31.
How much revenue would be recognized at the entity-wide level for FY 20X2 $1,500,000 $1,800,000 $1,900,000 $2,000,000
$1,900,000
At the entity-wide level Halderman County accounts for the revenue using accrual-based accounting, net of any allowance for doubtful accounts in the period for which the taxes were levied ($2,000,000 × 0.95 = $1,900,000).
The availability requirement does not apply.
GASB N50.113
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2446 Nonexchange Revenue Transactions
Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated
The current-year dividends and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should not be included in the calculation.
The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should not be included in the calculation.
The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.
The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
In determining basic earnings per share, cumulative preferred dividends reduce the amount available for common shareholders. Consequently, net income should be reduced or net loss increased for the amount of the cumulative dividend.
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2335 Earnings per Share
On July 1, 2005, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2005, and mature on April 1, 2015. Interest is payable semiannually on April 1 and October 1. What amount did Eagle receive from the bond issuance $579,000 $594,000 $600,000 $609,000
$609,000
Eagle received $609,000:
Sales price = 600 x $1,000 x 0.99 = $594,000
Accrued interest = 600 x $1,000 x 0.10 x (3/12) = 15,000
——–
Total amount received $609,000
========
The fair value of an impaired asset may be determined by all of the following except:
quoted market prices in active markets for the impaired asset.
market prices for similar assets.
the carrying amount of similar assets of competitors.
appropriate valuation techniques (e.g., present value of expected future cash flows).
the carrying amount of similar assets of competitors.
Quoted market prices in active markets and market prices for similar assets are methods of determining fair value. The carrying amount of similar assets would usually not be known and would not necessarily indicate an impairment loss, even if it were known. Appropriate valuation techniques can be used in determining the fair value of an impaired asset. Examples of such techniques include present value of expected future cash flows, option-pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis.
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2370 Impairment
Brock Co. adopted the dollar-value LIFO inventory method as of January 1, 20X1. A single inventory pool and an internally computed price index are used to compute Brock’s LIFO inventory layers. Information about Brock’s dollar value inventory follows:
INVENTORY
At Base At Current At Dollar
Date Year Cost Year Cost Value LIFO
———- ——— ——— ———-
January 1, 20X1 $40,000 $40,000 $40,000
20X1 layer 5,000 14,000 6,000
——— ——— ———
Dec 31, 20X1 45,000 54,000 46,000
20X2 layer 15,000 26,000
——— ——— ———
Dec 31, 20X2 $60,000 $80,000
========= ========= =========
What was Brock's dollar value LIFO inventory on December 31, 20X2 $80,000 $74,000 $66,000 $60,000
$66,000
20X2 index = Inventory at current-year cost / Inventory at
base-year cost
= $80,000 / $60,000
= 1.333
20X2 layer = 20X2 index x 20X2 layer at base-year cost
= 1.333 x $15,000
= $20,000
Dollar value LIFO inventory on December 31, 20X2
= 12/31/X1 valuation + 20X2 layer
= $46,000 + $20,000
= $66,000
The Dunstown County general fund received a notice of a federal grant award for an expenditure-driven (reimbursement) grant in the amount of $1,000,000. Included with the notice was an advance of $250,000. During the year, the County incurred $400,000 of qualifying eligible grant expenditures, and no additional money had been received from the grantor.
What would be the amount of deferred revenues reported at the end of the year by the general fund $0 $600,000 $750,000 $150,000
$0
Resources provided before that period of qualifying activity should be recognized as deferred revenues. Since the amount of qualifying expenditures exceeded the amount of the advance, there would be no deferred revenues reported at year-end.
GASB N50.116
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2412 Fund Accounting Concepts and Application
IFRS Inventory differences
- Under IFRS inventory is valued at lower of cost or NRV. GAAP is lower of cost or market.
- LIFO is NOT allowed at all under IFRS.
- Reversal of inventory write-down IS allowed under IFRS. This is NOT allowed under GAAP.
ABC Foundation, a not-for-profit entity, has, over the years, received a number of donations that the donors wish to be held permanently. Although most of these were donations of cash and investments, the organization also received two parcels of land with buildings on them. The donors’ wishes were that the real estate not be sold but be used by the organization or rented with the income used for any organizational purpose.
Which of the following is false regarding the reporting for these permanently restricted net assets
The real estate holdings would be included with the other permanently restricted net assets with additional information included in the notes to the statements.
The real estate holdings would be included with the other permanently restricted net assets with no other details offered.
The real estate holdings would be included with the other permanently restricted net assets with additional information shown on the face of the statements.
The real estate holdings would be included with the other permanently restricted net assets with additional information shown on the face of and in the notes to the financial statements.
The real estate holdings would be included with the other permanently restricted net assets with no other details offered.
Restorations of carrying value for long-lived assets are permitted if an asset’s fair value increases subsequent to recording an impairment loss for which of the following
Both held for use and held for disposal
Held for use
Held for disposal
Neither held for use nor held for disposal
Held for disposal
A long-lived asset classified as held for sale (disposal) must be measured at the lower of its carrying amount or fair value less cost to sell.
A loss should be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain should be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized for a write-down to fair value less cost to sell.
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2370 Impairment
*VIDEO EXPLANATION
Held for disposal - lower of carrying value OR NRV (price - cost to sell)
For an asset held for sale - we write it down to NRV or carrying value (if it’s lower) but we’re not going to change that value.
- not depreciated
- we can’t write it up over our carrying value
- but we can write it up to the extent of the impairment that we have previously recognized
- Held for disposal falls under a different accounting theory than normal fixed asset for used for impairment
- more of a notion of F.V. than it is of recoverability using the asset
Godart Co. issued $4,500,000 notes payable as a scrip dividend that matured in five years. At maturity, each shareholder of Godart’s three million shares will receive payment of the note principal plus interest. The annual interest rate was 10%. What amount should be paid to the stockholders at the end of the fifth year $2,250,000 $6,750,000 $4,500,000 $450,000
$6,750,000
The note does not compound the interest due; the payment here is a simple interest computation. The total interest is the principal multiplied by the rate, multiplied by the total time outstanding:
$4,500,000 × 0.10 × 5 years = $2,250,000
Add this to the principal of $4,500,000 to get the total payment of principal and interest:
$4,500,000 + $2,250,000 = $6,750,000
A not-for-profit hospital issued long-term tax-exempt bonds for the hospital’s benefit. The hospital is responsible for the liability. Which fund may the hospital use to account for this liability General Specific purpose Enterprise General long-term debt account group
General
Unless specifically designated for a defined purpose, hospital debt is used for the general benefit of the entity and is secured with a pledge of collateral (such as a building or major equipment) that would have the item classified as a general fund obligation rather than a specific-purpose obligation. Debt for an enterprise fund can only be classified in such a fund if the debt incurred for that enterprise activity is secured solely by the revenues of that fund.
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2412 Fund Accounting Concepts and Application
Government C sponsors a public entity risk pool in which Government C is also a participant. However, Government C is not the predominant participant in the pool. For the situation described, indicate the fund(s) Government C must use to account for the risk pool. Agency Special revenue Internal service Enterprise
Enterprise
The proper accounting and financial reporting for this risk pool depends on whether the sponsoring government is also the predominant participant.
If Government C is not the predominant participant, the pool would be treated as a stand-alone pool in substance and thus be accounted for in an enterprise fund and Government C’s participation in the pool would be considered incidental.
GASB Po20.110 and .115
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2412 Fund Accounting Concepts and Application
Which of the following is information required by GAAP that governments must disclose related to debt and lease obligations
Principal and interest requirements to maturity, presented separately, for the subsequent fiscal year and in 5-year increments thereafter
Principal and interest requirements to maturity, presented separately, for each of the three subsequent fiscal years and in 5-year increments thereafter
Principal and interest requirements to maturity, presented separately, for each of the five subsequent fiscal years and in 5-year increments thereafter
Principal and interest requirements to maturity, presented separately, for each of the four subsequent fiscal years and in 5-year increments thereafter
Principal and interest requirements to maturity, presented separately, for each of the five subsequent fiscal years and in 5-year increments thereafter
GASB 1500.129 requires disclosure of principal and interest requirements to maturity, presented separately, for each of the five subsequent fiscal years and in 5-year increments thereafter.
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2425 Notes to Financial Statements
Depletion
The allocation of the natural resource to inventory.
Depletion is debited to inventory and credited to a contra account for the natural resource asset.
Which statements are usually included in a set of personal financial statements
A statement of net worth and an income statement
A statement of financial condition and a statement of changes in net worth
A statement of net worth, an income statement, and a statement of cash flows
A statement of financial condition, a statement of changes in net worth, and a statement of cash flows
A statement of financial condition and a statement of changes in net worth
Personal financial statements are financial statements of individuals (or families). They are generally prepared to organize and plan financial affairs. The basic set of personal financial statements includes (1) a statement of financial condition that presents assets and liabilities at estimated current values on an accrual basis where personal net worth is the difference between total assets and liabilities, and (2) a statement of changes in net worth (optional) that shows sources of increases and decreases in net worth.
In 20X1, a personal injury lawsuit was brought against Halsey Co. Based on counsel’s estimate, Halsey reported a $50,000 liability in its December 31, 20X1, balance sheet. In November 20X2, Halsey received a favorable judgment, requiring the plaintiff to reimburse Halsey for expenses of $30,000. The plaintiff has appealed the decision, and Halsey’s counsel is unable to predict the outcome of the appeal.
In its December 31, 20X2, balance sheet, Halsey should report what amounts of asset and liability related to these legal actions Asset: $30,000; Liability: $50,000 Asset: $30,000; Liability: $0 Asset: $0; Liability: $20,000 Asset: $0; Liability: $0
Asset: $0; Liability: $0
FASB ASC 450-20-25-2 provides for:
accrual of a loss if such loss is probable and can be reasonably estimated, and
no accrual of gains.
FASB ASC 450-20-55-12 indicates:
Quote
If the underlying cause of the litigation, claim, or assessment is an event occurring before the date of an enterprise’s financial statements, the probability of an outcome unfavorable to the enterprise must be assessed to determine whether the condition in paragraph 8(a) is met. Among the factors that should be considered are the nature of the litigation, claim, or assessment, the progress of the case (including progress after the date of the financial statements but before those statements are issued or are available to be issued, with the appropriate date determined in accordance with Statement 165), the opinions or views of legal counsel and other advisers, the experience of the enterprise in similar cases, the experience of other enterprises, and any decision of the enterprise’s management as to how the enterprise intends to respond to the lawsuit, claim, or assessment (for example, a decision to contest the case vigorously or a decision to seek an out-of-court settlement).
Since the outcome of the appeal cannot be predicted, no asset (gain) should be reported. Since Halsey received a favorable judgment, the liability accrued in 20X1 is no longer appropriate. (And the legal costs have probably already been expensed.) However, the lawsuit and appeal should be disclosed in a footnote.
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2330 Contingencies, Commitments, and Guarantees (Provisions)
Reed Co.'s 20X1 statement of cash flows reported cash provided from operating activities of $400,000. For 20X1, depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed's 20X1 statement of cash flows, what amount was reported as net income $105,000 $205,000 $305,000 $595,000
$205,000
*The question is asking for the NET INCOME amount, not the operating activities amount (which is already given!)
Dividends paid are reported as financing activities. The reconciliation of net income and cash provided by operating activities would reflect both of the other items as they are noncash expenses and losses.
Net income + Depreciation expense + Goodwill impairment loss = Cash provided by operating activities
X + $190,000 + $5,000 = $400,000
X = $205,000
The following information pertains to Ali Corp. as of and for the current year ended December 31:
Liabilities $ 60,000
Stockholders’ equity 500,000
Shares of common stock issued and outstanding 10,000
Net income 30,000
During the year, Ali’s officers exercised stock options for 1,000 shares of stock at an option price of $8 per share. What was the effect of exercising the stock options?
Debt-to-equity ratio decreased to 12%.
The information presented is at the end of the year. The option exercise occurred during the year, resulting in these numbers.
The ratio after the transaction is:
$60,000 ÷ $500,000 = 0.12 (12%)
The following items were included in Opal Co.’s inventory account on December 31, 20X1:
Merchandise out on consignment at sales price, including
40% markup on selling price $40,000
Goods purchased in transit, shipped FOB shipping point 36,000
Goods held on consignment by Opal 27,000
By what amount should Opal's inventory account on December 31, 20X1, be reduced $103,000 $67,000 $51,000 $43,000
$43,000
Goods owned by Opal, which are out on consignment, and goods in transit FOB shipping (title to goods passed to Opal upon shipment) are included in year-end inventory. Goods held by Opal on consignment for another entity are not included.
Opal’s inventory should be reduced by:
Markup on merchandise out on consignment:
(40% x $40,000) 16,000
Goods held on consignment by Opal: 27,000
——-
Total reduction $43,000
=======
If this question indicated that the markup included was of cost**, you would divide $40,000 by 1.4. However, since the question states that markup is equal to 40% of the selling cost, you multiply.
Quantitative criteria for identifying reportable segments include all of the following, except:
the segment uses 10% or more of the company’s assets.
the segment is responsible for 10% or more of the company’s revenues.
the segment is responsible for 10% or more of the company’s operating profit or loss.
the segment has 10% or more of the company’s long-term debt.
the segment has 10% or more of the company’s long-term debt.
An operating segment is a reportable segment if it meets one or more of the following quantitative criteria:
- Its revenue (both internal and external) is 10% or more of the combined revenue of all operating segments.
- The amount of its reported profit or loss is 10% or more of the greater of the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss. (In making these determinations, the absolute value of all figures is used.)
- Its assets make up 10% or more of the combined assets of all operating segments.
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2390 Segment Reporting
On January 1, 20X1, Point, Inc., purchased 10% of Iona Co.’s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona’s common stock outstanding on August 1, 20X1. During October 20X1, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point’s 20X1 income statement report
10% of Iona’s income for January 1 to July 31, 20X1, plus 40% of Iona’s income for August 1 to December 31, 20X1
40% of Iona’s income for August 1 to December 31, 20X1, only
40% of Iona’s 20X1 income
Amount equal to dividends received from Iona
10% of Iona’s income for January 1 to July 31, 20X1, plus 40% of Iona’s income for August 1 to December 31, 20X1
When Point increased its ownership in Iona to 40% on August 1, Point became subject to the use of the equity method in accounting for this investment. Stated simply, Point should include its proportional share of Iona’s income in Point’s 20X1 income statement. This would include:
10% of Iona’s income from January 1 to July 31 and
40% of Iona’s income for the remainder of the year.
(The dividends received in October are not income to Point. Under the equity method, dividends are treated as a form of return of investment.)
Income tax-basis financial statements differ from those prepared under GAAP in that income tax-basis financial statements:
do not include nontaxable revenues and nondeductible expenses in determining income.
include detailed information about current and deferred income tax liabilities.
contain no disclosures about capital and operating lease transactions.
recognize certain revenues and expenses in different reporting periods.
recognize certain revenues and expenses in different reporting periods.
Both income tax-basis and GAAP-basis financial statements recognize all the financial activities of a company’s business. However, it is the timing of this recognition that differs between the two methods. For income tax-basis financial statements, taxable revenues and tax-deductible expenses are recognized in the financial statements in the same period they are reported in the tax return. For financial statements prepared in accordance with GAAP, all revenues and expenses are recognized using the full accrual method of accounting.
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2160 Special Purpose Frameworks
Brill Co. made the following expenditures during 20X1:
Costs to develop computer software
for internal use in Brill’s general
management information system $100,000
Costs of market research activities 75,000
What amount of these expenditures should Brill report in its 20X1 income statement as research and development expenses $175,000 $100,000 $75,000 $0
$0
Neither of these costs meets the definition of research and development cost:
- Development of software for internal use is likely excluded from the applicability of FASB ASC 730-10-15-5.
- Marketing research is specifically excluded from the definition of research and development by FASB ASC 730-10-15-4.
Research and development costs are defined as the “planned research…for new knowledge” and “the translation of research findings…into a…design for a new product or process.” (FASB ASC 730-10-20)
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2388 Research and Development Costs
XYZ, a not-for-profit organization dedicated to animal welfare, received a $70,000 contribution at the start of 20X1 with donor instructions to maintain the original principal as a permanent endowment and use income and net gains for wildlife rehabilitation. The endowment principal was invested in a number of equity securities and mutual funds using an investment management firm. Investment performance and transactions were as follows in 20X1 and 20X2:
Dividends Securities Rehabilitation Year-End Year Received Sold Expense Value ---- --------- ---------- -------------- -------- 20X1 $3,000 $1,000 $3,500 $72,000 20X2 2,500 0 3,500 69,000
XYZ believes that the donor intended for the endowment to remain at least at the original contributed value. What net asset values would be reported on the statement of financial affairs for 20X2 in relation to this endowment
Unrestricted net assets $(500), temporarily restricted net assets $0, permanently restricted net assets $70,000
Unrestricted net assets $0, temporarily restricted net assets $(1,500), permanently restricted net assets $70,000
Unrestricted net assets $(1,500), temporarily restricted net assets $0, permanently restricted net assets $69,000
Unrestricted net assets $0, temporarily restricted net assets $(500), permanently restricted net assets $69,000
Unrestricted net assets $(500), temporarily restricted net assets $0, permanently restricted net assets $70,000
FASB ASC 958-205-45-14 directs that each source of an endowment fund—original amount, gains and loss, and dividends and interest—must be evaluated separately in light of the donor’s wishes and relevant law. Unless contravened by law or donor instruction, net losses shall reduce temporarily restricted net assets to the degree any remain from previous gains or investment earnings and then reduce unrestricted net assets. In this case, the donor’s wishes indicate that the principal amount should not fall below $70,000. The excess of expenses and losses over revenues would be shown as a reduction in unrestricted net assets. The investments are being managed by an outside firm, so any mid-year investment transactions would not be recorded directly by the not-for-profit. XYZ would record the dividends received and the ending investment value as reported by the management firm.
FASB ASC 958-205-45-14, 958-205-45-17, and Glossary
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2512 Statement of Activities
For a capital lease, the amount recorded initially by the lessee as a liability should normally:
exceed the total of the minimum lease payments.
exceed the present value of the minimum lease payments at the beginning of the lease.
equal the total of the minimum lease payments.
equal the present value of the minimum lease payments at the beginning of the lease.
equal the present value of the minimum lease payments at the beginning of the lease.
FASB ASC 840-30-30-1, in a discussion of accounting and reporting by lessees, notes that:
Quote
The lessee shall measure a capital lease asset and capital lease obligation initially at an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease term.
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2380 Leases
According to the FASB’s conceptual framework, the objectives of financial reporting for business enterprises are based on:
generally accepted accounting principles.
reporting on management’s stewardship.
the need for conservatism.
the needs of the users of the information.
the needs of the users of the information.
SFAC 8, chapter 1 (“The Objective of General Purpose Financial Reporting”), paragraph OB2, states:
Quote
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. These decisions involve buying, selling or holding equity and debt instruments and providing or settling loans and other forms of credit. (Emphasis added)
Thus, the objective of financial reporting is based on user needs.
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2121 Financial Reporting by Business Entities
On January 2 of the current year, Cruises, Inc. borrowed $3,000,000 at a rate of 10% for three years and began construction of a cruise ship. The note states that annual payments of principal and interest in the amount of $1,300,000 are due every December 31. Cruises used all proceeds as a down payment for construction of a new cruise ship that is to be delivered two years after start of construction.
What should Cruise report as interest expense related to the note in its income statement for the second year $0 $300,000 $600,000 $900,000
$0
The cruise ship qualifies for interest capitalization. Qualifying assets, per FASB ASC 835-20-15-5, include “assets that are constructed or otherwise produced for an entity’s own use (including assets constructed or produced for the entity by others for which deposits or progress payments have been made).”
The down payment means that the weighted-average accumulated expenditures each year will be at least $3,000,000. Therefore, all of the interest on the note is capitalized during each year of construction. No interest expense related to the note should be reported in the income statement during the construction period.
IFRS Bond Difference - Bond Issue Costs
Under GAAP, bond issue costs are capitalized and then amortized. Under IFRS, debt issue costs reduce any premium or increase any discount
In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:
in which the subsidiary maintains its accounting records.
of the country in which the subsidiary is located.
of the country in which the parent is located.
of the environment in which the subsidiary primarily generates and expends cash.
of the environment in which the subsidiary primarily generates and expends cash.
FASB ASC 830-10-45-2 states that the functional currency is the currency of the primary economic environment in which the entity operates or the currency in which most of the subsidiary’s transactions are denominated.
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2361 General Concepts
Which of the following not-for-profit entities is required to prepare a statement of functional expense showing natural expense classifications An art museum A shelter for the homeless A private foundation A public golf course
A shelter for the homeless
Health and welfare entities have expense reporting requirements beyond other not-for-profit entities. They are required to report their expenses in natural or object classes such as salaries, interest expense, and depreciation expense in an additional financial statement using a matrix format, which is called the statement of functional expense. Of the answer choices presented in this question, only a homeless shelter is a health and welfare organization subject to this additional reporting requirement. All of the organizations are required to disclose the functional categories of their expenses in the statement of activities or in the notes to the financial statements. The functional categories consist of program services and supporting activities, with supporting activities further classified as management and general, fundraising, and membership development.
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2514 Statement of Functional Expenses
For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that will not be recorded in its accounting records until next year. There were no other differences between its taxable and financial statement income. Cable’s effective tax rate for the current year is 45%, but a 40% rate has already been passed into law for next year.
In its year-end balance sheet, what amount should Cable report as a deferred tax asset (liability) $40,000 asset $40,000 liability $45,000 asset $45,000 liability
$40,000 liability
The recognition of the $100,000 expense for tax purposes in advance of the point it is recognized under GAAP allows the company to defer payment of taxes on $100,000 of GAAP income for the current year. The tax expense, from a GAAP perspective, is incurred because of current-year income and should be matched to the current year. This means that a current-year tax expense is not paid in the current year, but will be paid in the future. (Next year the company will have to pay tax on $100,000 more income than earned per GAAP.) Therefore, the amount is a deferred tax liability.
The GAAP rules for measuring the amount of the liability are designed to report the “best” estimate of the amount of tax that actually will be paid in the future on this income. Therefore, the amount of the liability is measured using enacted tax rates. Because the 40% rate has been enacted into law by year-end, it will be used to measure the deferred tax liability. This makes the balance a $40,000 liability ($100,000 × 40%).
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2270 Income Taxes
Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes for National’s mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee’s account and used to reduce future escrow payments. Additional information follows:
Escrow accounts liability, January 1, 20X1 $ 700,000
Escrow payments received during 20X1 1,580,000
Real estate taxes paid during 20X1 1,720,000
Interest on escrow funds during 20X1 50,000
What amount should Kent report as escrow accounts liability in its December 31, 20X1, balance sheet $510,000 $515,000 $605,000 $610,000
$605,000
Use the basic accounting equation:
Beginning balance + Additions - Deductions = Ending balance
Escrow accounts liability on January 1, 20X1 $ 700,000
Add: Escrow payments received in 20X1 1,580,000
Net interest credited ($50,000 - 10% of $50,000) 45,000
———
Subtotal $2,325,000
Less: Real estate taxes paid in 20X1 1,720,000
———-
Escrow accounts liability on December 31, 20X1 $ 605,000
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Frome City signed a 20-year office property lease for its general staff. The lease meets the criteria for a capital lease. In which financial statement should the noncurrent portion of the lease be reported
Government-wide statement of net position
Governmental funds balance sheet
Both the governmental funds balance sheet and the government-wide statement of net position
Neither the governmental funds balance sheet nor the government-wide statement of net position
Government-wide statement of net position
The noncurrent portion of general government capital leases are reported as a general long-term liability. General long-term liabilities should be reported in the governmental activities column of the government-wide statement of net position. They should not be reported as liabilities in governmental funds.
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2421 Government-Wide Financial Statements
On January 1, Year 1, Frost Co. entered into a 2-year lease agreement with Ananz Co. to lease 10 new computers. The lease term begins on January 1, Year 1, and ends on December 31, Year 2. The lease agreement requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the minimum lease payments is $13,000.
Which of the following circumstances would require Frost to classify and account for the arrangement as a capital lease
The economic life of the computers is three years.
The fair value of the computers on January 1, Year 1, is $14,000.
Frost Co. does not have the option of purchasing the computers at the end of the lease term.
Ownership of the computers remains with Ananz Co. throughout the lease term and after the lease ends.
The fair value of the computers on January 1, Year 1, is $14,000.
For a lease to be treated as a capital lease and given formal recognition in the financial statements of the lessor and lessee, only one of these criteria must be met. One of the criteria is that the present value of the minimum lease payments (excluding that portion which represents executory costs) equals or exceeds 90% of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor.
The present value of the lease payments ($13,000) exceeds 90% of the fair value of the computers (90% of $14,000 is $12,600).
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2380 Leases
Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders’ equity and the book value per common share
Increase in both total stockholders’ equity and book value per share
Increase in total stockholders’ equity and decrease in book value per share
Decrease in total stockholders’ equity and increase in book value per share
Decrease in both total stockholders’ equity and book value per share
Decrease in total stockholders’ equity and increase in book value per share
The entry to record the treasury stock is:
Dr. Cr. Treasury stock XXX Cash XXX
Treasury stock is a deduction from total stockholders’ equity; therefore total stockholders’ equity decreases. Since the price paid for the reacquired shares is less than their book value, the book value per share of the remaining outstanding shares must increase. Before the reacquisition of the shares, the book value per share is the same for all shares (i.e., those that will be reacquired and those that will not be). The reduction in total book value of the entity is equal to the total cost of the shares reacquired, which is less than the total book value of those shares. Thus, the percentage reduction in total book value was less than the percentage reduction in the number of outstanding shares. Therefore, the book value per share of the remaining shares must increase. For example, assume that an entity has total stockholders’ equity of $1,000,000 and 10,000 shares outstanding. The book value is $1,000,000 ÷ 10,000 shares = $100.
If 1,000 shares are reacquired at $60 per share (an amount less than the $100 book value per share), the entry would be:
Dr. Cr. Treasury stock (1,000 x $60) 60,000
Cash 60,000
After the reacquisition of the shares, total stockholders’ equity is $1,000,000 - $60,000, or $940,000. The book value per share of the remaining outstanding shares is $940,000 ÷ 9,000 outstanding shares, or $104.44. Therefore, the reacquisition of outstanding shares at a price less than their book value per share causes the book value per share of the remaining outstanding shares to increase.
A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year-end. The loan was refinanced through issuance of long-term bonds after year-end but before issuance of financial statements.
How should these liabilities be recorded in the balance sheet
Long-term liabilities of $130,000
Current liabilities of $130,000
Current liabilities of $30,000, long-term liabilities of $100,000
Current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan
Current liabilities of $30,000, long-term liabilities of $100,000
The accounts payable will be paid with current assets, so it is considered a current liability.
The refinanced loan is not included in current liabilities. FASB ASC 470-10-45-13 and 45-14, “Short-Term Obligations Expected to Be Refinanced,” addresses this refinanced loan:
Bonds with warrants
- A company can issue bonds that also give the bond purchaser stock warrants (stock rights).
- Both the bonds and the warrants need to be allocated a value
a. If the fair value of both the bonds and the warrants is known (this will be given to you in the problem), then you allocate the total bond price in proportion to the fair values
b. If only one fair value is known, you assign the fair value to that security and allocate the remaining bond price to the other security
c. When allocating a value to the warrants, this is recorded in equity, not debt
Assuming constant inventory quantities, which of the following inventory costing methods will produce a lower inventory turnover ratio in an inflationary economy FIFO (first in, first out) LIFO (last in, first out) Moving average Weighted average
FIFO (first in, first out)
In an inflationary period, rising prices will cause LIFO cost of goods sold to be highest (from recent purchases) and LIFO ending inventory to be lowest (earliest purchases). FIFO will give opposite results, with a lowest cost of goods sold (from earliest purchases) and highest ending inventory (from recent purchases). Average costing will be in the middle of the other two on both measures.
Inventory turnover is the division of cost of goods sold by average inventory.
Since FIFO gives the lowest cost of goods sold and a relatively high ending inventory amount going into the denominator average, FIFO will produce the lowest inventory turnover ratio.
Lower numerators and higher denominators yield lower ratios.
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2137 Consolidated and Combined Financial Statements
A company records items on the cash basis throughout the year and converts to an accrual basis for year-end reporting. Its cash-basis net income for the year is $70,000. The company has gathered the following comparative balance sheet information:
Beginning of Year End of Year
----------------- ----------- Accounts payable $ 3,000 $ 1,000 Unearned revenue 300 500 Wages payable 300 400 Prepaid rent 1,200 1,500 Accounts receivable 1,400 600
What amount should the company report as its accrual-based net income for the current year $68,800 $70,200 $71,200 $73,200
$71,200
Accrual-basis net income is computed as follows:
Beginning Effect on
of Year End of Year Accrual Net Income
--------- ----------- ------------------ Cash-basis net income $70,000 Accounts payable $ 3,000 $ 1,000 2,000 Unearned revenue 300 500 -200 Wages payable 300 400 -100 Prepaid rent 1,200 1,500 300 Accounts receivable 1,400 600 -800
------- Accrual net income $71,200
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2135 Statement of Cash Flows
Which of the following financial categories are used in a nongovernmental not-for-profit entity’s statement of financial position
Net assets, income, and expenses
Income, expenses, and unrestricted net assets
Assets, liabilities, and net assets
Changes in unrestricted, temporarily restricted, and permanently restricted net assets
Assets, liabilities, and net assets
The statement of financial position is the term for the balance sheet reported by private not-for-profit (NFP) entities. Balance sheets report the balances of permanent accounts on a specific date. Therefore, income, expenses, or changes in net asset categories are not reported. The FASB recommends that the financial statements of an NFP focus on the entity as a whole. The NFP account equation uses the term “net assets” for equity. Its accounting equation is assets equal liabilities plus net assets.
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2501 Not-for-Profit (Nongovernmental) Accounting and …
Depreciation Methods
i. Non Accelerated methods
- Straight line: (cost - salvage value)/number of years
- Service hours method:
(cost - salvage / total service hours) x hours used - Units of output:
(cost - salvage/total units) x units produced
A company is completing its annual impairment analysis of the goodwill included in one of its cash generating units (CGUs). The recoverable amount of the CGU is $32,000. The company noted the following related to the CGU:
Other
Goodwill Patents Assets Total
-------- ------- ------- ------- Historical cost $15,000 $10,000 $35,000 $60,000 Dear and amort 0 3,333 11,667 15,000
------- ------- ------- ------- Carrying amount, December 31
$15,000 $ 6,667 $23,333 $45,000
Under IFRS, which of the following adjustments should be recognized in the company’s consolidated financial statements
Decrease goodwill by $13,000
Decrease goodwill by $15,000
Decrease goodwill by $3,250, patents by $2,167, and other assets by $7,583
Decrease goodwill by $4,333, patents by $1,926, and other assets by $6,741
Decrease goodwill by $13,000
Under IFRS, impairment is measured at the level of the cash generating unit.
Total carrying amount $45,000
Recoverable amount 32,000
——-
Impairment $13,000
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2370 Impairment
On December 31, 20X1, Dahlia, a nongovernmental not-for-profit entity, purchased a vehicle with $15,000 unrestricted cash and received a donated second vehicle having a fair value of $12,000. Dahlia expects each vehicle to provide it with equal service value over each of the next five years and with no residual value. Dahlia has an accounting policy implying a time restriction on gifts of long-lived assets.
In Dahlia's 20X2 statement of financial position, what amount of temporarily restricted net assets would relate to the donated vehicle $0 $5,400 $9,600 $12,000
$9,600
Nongovernmental not-for-profit entities may adopt an accounting policy recognizing a time restriction on assets provided by donors for the entity’s use. The residual value of the asset, after annual depreciation, would therefore be recognized as temporarily restricted assets. The annual depreciation is recognized as an expense, shown as a reduction of unrestricted assets. Annual depreciation is also shown as a reduction in the value of the asset. As the asset is reduced in value, the amount of associated temporarily restricted net assets is also reduced. This requires a reduction of temporarily restricted net assets shown as “net assets released from restrictions” on the statement of activities.
Therefore, one year’s depreciation of the donated vehicle ($12,000 ÷ 5 years, or $2,400) would reduce its residual value to $9,600 ($12,000 - $2,400).
FASB ASC 958-360-45-1 and 45-2
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2511 Statement of Financial Position
Which of the following statements about the accrual basis of determining taxable income is true
Increases in accounts receivable are not included in gross income.
An item is included in gross income for the year in which it is earned.
Property or services received are included in gross income when actually or constructively received.
None of the answers choices are true statements regarding the accrual method.
An item is included in gross income for the year in which it is earned.
The accrual method for tax purposes is, for the most part, the same as the accrual method required by GAAP. An item is included in gross income for the year in which it is earned. A deduction can be recognized when:
all the events have occurred to create the liability and
the amount of the liability can be determined with reasonable accuracy.
Which of the following would a nongovernmental not-for-profit educational institution report as program services Fundraising expenses Teacher salaries Management salaries Publicity costs
Teacher salaries
Program services expenses are incurred in carrying out the primary mission of an organization, in this case the provision of educational services by teachers. All other expense classifications in this question pertain to supporting services (management, general, or fundraising).
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2512 Statement of Activities
At the beginning of the current year, Paxx County's enterprise fund had a $125,000 balance for accrued compensated absences. At the end of the year, the balance was $150,000. During the year, Paxx paid $400,000 for compensated absences. What amount of compensated absences expense should Paxx County's enterprise fund report for the year $375,000 $400,000 $425,000 $550,000
$425,000
An enterprise fund is a proprietary fund that uses the economic resources measurement focus and accrual accounting. Therefore, the compensated absences long-term liability would be decreased when employees use their promised leave time and increased when employees accrue additional leave. The newly accrued leave would be recognized as an expense of the period. Therefore, analysis of the liability account indicates that $400,000 of compensated absence liability was extinguished during the year and $425,000 of additional liability incurred to explain the ending liability balance of $150,000.
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2412 Fund Accounting Concepts and Application
Treasury stock
i. Treasury stock is when a company purchase its own stock. It does not represent ownership and it lowers cash and owners’ equity.
ii. Treasury stock is a contra- owners’ equity account
iii. It is not an asset or an investment, income is never affected, earnings per share is increase, and retained earnings can be decreased but not increased by treasury stock
iv. 2 methods of accounting for treasury stock
1. cost method: this debits the treasury stock account at cost
a. when treasury stock is purchased, cash is credited and ‘treasury stock’ is credit for the same amount
- par method: this debits the treasury stock account at par
a. when treasury stock is purchased, common stock is reduced pro-rata for the # of treasury shares purchased
A balance in the Fund Balance—Reserved for Encumbrances account in excess of a balance of encumbrances account indicates:
an excess of vouchers payable over encumbrances.
an excess of purchase orders over invoices received.
an excess of appropriations over encumbrances.
a recording error.
a recording error.
A recording error must have been made if the balance in the Fund Balance—Reserved for Encumbrances account exceeds the amount of encumbrances. For example, when a purchase order is approved, the estimated amount is recorded in the journal entry:
Encumbrances XX
Fund Balance–Reserved
for Encumbrances XX
When the purchase order is filled, the entry is reversed, for the amount estimated, and the actual expenditure is recorded. The actual amount of expenditures may be more or less than the estimated amount, but that would not affect the encumbrance accounts.
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2411 Measurement Focus and Basis of Accounting
Disclosure of information about significant concentrations of credit risk is required for:
all financial instruments.
financial instruments with off-balance-sheet credit risk only.
financial instruments with off-balance-sheet market risk only.
financial instruments with off-balance-sheet risk of accounting loss only.
FASB ASC 815-10-20 defines credit risk as the risk of changes in the hedged item’s fair value attributable to both of the following:
Changes in the obligor’s creditworthiness
Changes in the spread over the benchmark interest rate with respect to the hedged item’s credit sector at inception of the hedge
As for disclosure of credit risk:
Note
An entity shall disclose all significant concentrations of credit risk arising from all financial instruments, whether from an individual counterparty or groups of counterparties. An entity must also recognize all of its derivatives as an asset or liability.
In short, credit risk for all financial instruments should be disclosed.
Which of the following activities typically would be considered research and development
Engineering activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready for manufacture
Troubleshooting in connection with breakdowns during commercial production
Seasonal or other periodic design changes to existing products
Routine design of tools, jigs, molds, and dies
Engineering activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready for manufacture
FASB ASC 730-10-20 defines research and development as follows:
Quote
Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique in bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
Costs incurred after commercial production has begun are not research and development costs.
FASB ASC 730-10-55-1 provides examples of activities included in research and development:
- Laboratory research aimed at discovery of new knowledge
- Searching for applications of new research findings or other knowledge
- Conceptual formulation and design of possible product or process alternatives
- Testing in search for or evaluation of product or process alternatives
- Modification of the formulation or design of a product or process
- Design, construction, and testing of pre-production prototypes and models
- Design of tools, jigs, molds, and dies involving new technology
- Design, construction, and operation of a pilot plant that is not of a scale economically feasible to the enterprise for commercial production
- Engineering activity required to advance the design of a product to the point that it meets specific functional and economic requirements and is ready for manufacture
FASB ASC 730-10-55-2 gives examples of those types of activities that are not research and development activities:
- Engineering follow-through in an early phase of commercial production
- Quality control during commercial production including routine testing of products
- Troubleshooting in connection with breakdowns during commercial production
- Routine, ongoing efforts to refine, enrich, or otherwise improve upon the qualities of an existing product
- Adaptation of an existing capability to a particular requirement or customer’s need as part of a continuing commercial activity
- Seasonal or other periodic design changes to existing products
- Routine design of tools, jigs, molds, and dies
- Activity, including design and construction engineering, related to the construction, relocation, rearrangement, or start-up of facilities or equipment other than (1) pilot plants and (2) facilities or equipment whose sole use is for a particular research and development project
- Legal work in connection with patent applications or litigation, and the sale or licensing of patents
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2388 Research and Development Costs
At the end of Year 1, Lane Co. held trading securities that cost $86,000 and which had a year-end market value of $92,000. During Year 2, all of these securities were sold for $104,500. At the end of Year 2, Lane had acquired additional trading securities that cost $73,000 and which had a year-end market value of $71,000. What is the impact of these stock activities on Lane's Year 2 income statement Loss of $2,000 Gain of $10,500 Gain of $16,500 Gain of $18,500
Gain of $10,500
Trading securities are recognized on the balance sheet at fair value. Unrealized holding gains and losses for trading securities are included in earnings.
The sale of the first securities was
$104,500 - $92,000 $12,500
The unrealized loss of the second securities
was $73,000 - $71,000 (2,000)
——–
Net effect on income statement $10,500
Cash receipts from grants and subsidies to decrease operating deficits should be classified in which of the following sections of the statement of cash flows for governmental not-for-profit entities Operating Noncapital financing Capital and related financing Investing
Noncapital financing
According to GASB 2450.118, footnote 6, cash inflows from noncapital financing activities include cash receipts from grants or subsidies to finance operating deficits. A governmental entity would prepare statements of cash flows for proprietary funds and business-type activities that account for activities whose goal is self-support rather than making a profit. A governmental not-for-profit entity may report as a special-purpose government engaged only in business-type activities.
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2423 Proprietary Funds Financial Statements
Bond Issuance
When a bond is issued at its face amount, the issuer receives cash from the buyers of the bonds (investors) and records a liability for the bonds issued. The liability is recorded because the issuer is now liable to pay back the bond.
The entry is:
Cash xxx
Bonds payable xxx
Larkin Co. reported a taxable loss of $10,000 in 20X1, its first year of operations, and taxable income of $0 in 20X2. Larkin had no temporary or permanent differences in either 20X1 or 20X2. At the end of 20X1 Larkin believed that 30% of the operating loss carryforward would not be realized; therefore, a valuation allowance of $1,200 (30% of $10,000 NOL × 40% tax rate) was necessary. At the end of 20X2, Larkin believes that the valuation allowance is no longer necessary.
Assuming a tax rate of 40%, Larkin should report total income tax expense (benefit) in 20X1 and 20X2 of: $0 in 20X1 and $0 in 20X2. $(4,000) in 20X1 and $0 in 20X2. $(2,800) in 20X1 and $0 in 20X2. $(2,800) in 20X1 and $(1,200) in 20X2.
$(2,800) in 20X1 and $(1,200) in 20X2.
In 20X1, Larkin should recognize a deferred tax asset and the related deferred tax benefit of $4,000 ($10,000 NOL × 40% tax rate). However, Larkin also must recognize a $1,200 valuation allowance in 20X1. Thus, in 20X1 Larkin should recognize a net tax expense (benefit) of $(4,000) + $1,200 = $(2,800). Note that the recognition of the valuation allowance reduces the net tax benefit recognized in 20X1. The decision in 20X2 that the valuation allowance is no longer necessary means that the valuation allowance should be eliminated, as shown in the following entry in 20X2:
Valuation allowance $1,200
Tax expense/benefit - deferred $1,200
Therefore, tax expense (benefit) in 20X2 has a credit balance of $(1,200), indicating a deferred tax benefit. This $(1,200) tax benefit recognized in 20X2 is the change in deferred tax expense/benefit arising from changed circumstances causing a change in judgment as to the amount of valuation.
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2270 Income Taxes
A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. Assuming that the transaction has commercial substance, what is the gain on the exchange $0 $5,000 $30,000 $35,000
$30,000
Nonmonetary exchanges are generally recorded at fair value.
Value of property exchanged $50,000
Original cost 20,000
——-
Gain on exchange $30,000
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2386 Nonmonetary Transactions (Barter Transactions)
A balance arising from the translation or remeasurement of a subsidiary’s foreign currency financial statements is reported in the consolidated income statement when the subsidiary’s functional currency is:
neither the foreign currency nor the U.S. dollar.
the U.S. dollar.
the foreign currency.
both the foreign currency and the U.S. dollar.
the U.S. dollar.
The objective of translation or remeasurement is to report the subsidiary’s income statement results in the U.S. parent’s currency—which is the U.S. dollar.
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2367 Translation of Foreign Currency Financial Statements
In analyzing a company’s financial statements, which financial statement would a potential investor primarily use to assess the company’s liquidity and financial flexibility
BALANCE SHEET
Evaluation of a company’s liquidity would necessitate computation of liquidity ratios such as the current ratio and acid-test ratio. Financial flexibility would be evaluated using debt and equity ratios.
The data used in computation of each of the above-mentioned ratios would be obtained from the balance sheet.
On April 1, 20X1, Ivy began operating a service proprietorship with an initial cash investment of $1,000. The proprietorship provided $3,200 of services in April and received full payment in May. The proprietorship incurred expenses of $1,500 in April which were paid in June. During May, Ivy drew $500 against her capital account.
What was the proprietorship’s income for the two months ending May 31, 20X1, under the following methods of accounting
Cash basis: $1,200; Accrual basis: $1,200
Cash basis: $1,700; Accrual basis: $1,700
Cash basis: $2,700; Accrual basis: $1,200
Cash basis: $3,200; Accrual basis: $1,700
Cash basis: $3,200; Accrual basis: $1,700
*This question is asking for NET INCOME! The initial cash investment and the capital account is not included in the calculations.
Cash Basis Accrual Basis
---------- ------------- Revenue $3,200 $3,200 Less: Expenses - (1,500)
------ ------- Net Income $3,200 $1,700
====== =======
With respect to the statement of comprehensive income, what are U.S. GAAP and IFRS differences
IFRS does not allow a separate statement of comprehensive income.
IFRS does not allow a combined statement of net income and comprehensive income.
Both U.S. GAAP and IFRS allow a separate statement of comprehensive income or a combined statement.
IFRS does not require a statement of comprehensive income.
Both U.S. GAAP and IFRS allow a separate statement of comprehensive income or a combined statement.
Both U.S. GAAP and IFRS (International Financial Reporting Standards) allow either a separate statement of comprehensive income or a combined statement of net income and comprehensive income. Also, operating activities would include interest and dividends under IFRS.
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2133 Statement of Comprehensive Income
Regarding noncompliance with donor-imposed restrictions, FASB ASC 958-450-50-2 requires disclosure of which of the following
I. Noncompliance with donor-imposed restrictions if there is a reasonable possibility that a material contingent liability has been incurred
II. Noncompliance with donor-imposed restrictions if there is a reasonable possibility the noncompliance could lead to a material loss of revenue
III. Noncompliance with donor-imposed restrictions if the noncompliance could cause the inability to continue as a going concern I only I and II only I, II, and III I and III only
I, II, and III
According to FASB ASC 958-450-50-2, noncompliance “with donor-imposed restrictions should be disclosed if there is a reasonable possibility that a material contingent liability has been incurred at the date of the financial statements or there is at least a reasonable possibility that the noncompliance could lead to a material loss of revenue or could cause an entity to be unable to continue as a going concern.”
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2521 Support, Revenues, and Contributions
Nomar Co. shipped inventory on consignment to Seabright Co. that cost $20,000. Seabright paid $500 for advertising that was reimbursable from Nomar. At the end of the year, 70% of the inventory was sold for $30,000. The agreement states that a commission of 20% will be provided to Seabright for all sales. What amount of net inventory on consignment remains on the balance sheet for the first year for Nomar $0 $6,000 $6,500 $20,000
$6,000
Inventory on consignment is inventory of the consignor, not of the consignee. The 30% of the inventory that was not sold is Nomar’s inventory, not Seabright’s inventory. Therefore, Nomar’s inventory cost is 30% of $20,000, or $6,000.
What expenses and/or losses result from the development and production of software to be sold or leased
Research and development expense
Amortization expense
Impairment loss
All of the answer choices are possible expenses or losses.
All of the answer choices are possible expenses or losses.
Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model.
After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized computer software costs are amortized on the basis of current and future revenue for each product with the minimum annual amortization equal to the straight-line amortization over the remaining estimated economic life of the product.
An impairment loss would be recognized if the net realizable value was determined to be less than the amortized cost.
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2391 Software Costs
Fixed Assets GAAP/IFRS Differences
i. Under GAAP, you cannot reverse impairment of assets. Under
IFRS reversal of impairment is permitted if circumstances change-
but not on goodwill
ii. Under IFRS, an annual review of the estimated useful life and
depreciation method is required. Under GAAP this is only required
if circumstances change or there is a reason to re-evaluate
iii. IFRS uses component depreciation: different components of an
asset that has different useful lives should be depreciated by their
respective useful lives
Of the 125,000 shares of common stock issued by Vey Corp., 25,000 were held as treasury stock on December 31, 20X1. During 20X2, transactions involving Vey’s common stock were as follows:
- *January 1 through October 31: 13,000 treasury shares were distributed to officers as part of a stock compensation plan.
- *November 1: A 3-for-1 stock split took effect.
- *December 1: Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not retired.
On December 31, 20X2, how many shares of Vey’s common stock were issued and outstanding
375,000 shares issued and 334,000 shares outstanding
375,000 shares issued and 324,000 shares outstanding
334,000 shares issued and 334,000 shares outstanding
324,000 shares issued and 324,000 shares outstanding
375,000 shares issued and 334,000 shares outstanding
Effect on Shares Effect on Shares Date Transac Shares Issued Issued Shares os os -------------------------------------------------------------------------------
Before
treasury
shares -- 125,000 -- 125,000
purchased
12/31/X1 Treas shares – 125,000 (25,000) 100,000
held
01/01/X2- Treas shares
10/31/X2 distributed – 125,000 (12,000) 113,000
11/01/X2 3-for-1 split – 375,000 (36,000) 339,000
12/01/X2 Treas shares
purchased – 375,000 (41,000) 334,000
After 13,000 of the shares are reissued, only the remaining 12,000 (25,000 - 13,000) are treasury stock and the rest of the issued shares (125,000 - 12,000, or 113,000) are outstanding.
The stock split affects all outstanding stock. Afterwards, there are 375,000 issued, 36,000 treasury stock (12,000 × 3) and 339,000 outstanding (375,000 - 36,000, or 339,000).
The repurchase of the 5,000 shares increases treasury stock to 41,000 (36,000 + 5,000) and decreases outstanding stock to 334,000 (339,000 - 5,000). Issued shares are not affected.
Note
Only the stock split affects the number of shares issued. Treasury stock transactions affect only the number of shares outstanding.
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2250 Equity
Envoy Co. manufactures and sells household products. Envoy experienced losses associated with its small appliance group. Operations and cash flows for this group can be clearly distinguished from the rest of Envoy’s operations. Envoy plans to sell the small appliance group with its operations. What is the earliest point at which Envoy should report the small appliance group as a discontinued operation
When Envoy classifies it as held for sale
When Envoy receives an offer for the segment
When Envoy first sells any of the assets of the segment
When Envoy sells the majority of the assets of the segment
When Envoy classifies it as held for sale
Discontinued operations are presented in a separate section of the income statement between income from continuing operations and income before extraordinary items. The discontinued operations section reflects the results of operations of an entity that is classified for sale or has actually been disposed of.
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2345 Extraordinary and Unusual Items
Loft Co. reviewed its inventory values for proper pricing at year-end. The following summarizes two inventory items examined for the lower of cost or market:
Inventory Item #1 Inventory Item #2
----------------- ------------------ Original cost $210,000 $400,000 Replacement cost 150,000 370,000 Net realizable value 240,000 410,000 Net realizable value less profit margin 208,000 405,000
What amount should Loft include in inventory at year-end, if it uses the total of the inventory to apply the lower of cost or market $520,000 $610,000 $613,000 $650,000
$610,000
nventory must be valued at lower of cost or market when the utility of the inventory is no longer as great as cost. Market is replacement cost unless:
replacement cost is more than net realizable value, in which case market will be net realizable value (the ceiling) or
replacement cost is less than net realizable value reduced by a normal profit margin, in which case market is net realizable value minus a normal profit margin (the floor).
Total original cost $210,000 + $400,000 = $610,000
Total replacement cost $150,000 + $370,000=$520,000
Total net realizable value $240,000+ $410,000=$650,000
Total net realizable value less profit margin $208,000 + $405,000 = $613,000
Since replacement cost is less than realizable value less profit margin, market is the floor of $613,000. The lower of cost or market is then the cost of $610,000.
During the current year, Fuqua Steel Co. had the following unusual financial events occur:
Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly.
A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location.
A segment of Fuqua’s operations, steel transportation, was sold at a net loss of $350,000. This was Fuqua’s first divestiture of one of its operating segments.
Before income taxes, what amount of gain (loss) should be reported separately as a component of income from continuing operations $5,000 $260,000 $(255,000) $(350,000)
$5,000
Neither the bond maturity nor the frequently occurring loss from a hurricane are extraordinary. Neither are unusual and infrequent. The sale of a segment would be a discontinued operation since its disposition represents a strategic shift.
Gain on bond maturity $260,000
Hurricane damage (255,000)
Income from continuing operations $ 5,000
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2345 Extraordinary and Unusual Items
During its fiscal year ended June 30, 20X1, Cliff City issued purchase orders totaling $5,000,000, which were properly recorded as encumbrances at that time. Cliff received goods and related invoices at the encumbered amounts totaling $4,500,000 before year-end. The remaining goods of $500,000 were not received until after year-end. Cliff paid $4,200,000 of the invoices received during the year.
What amount of Cliff's encumbrances was outstanding at June 30, 20X1 $0 $300,000 $500,000 $800,000
$500,000
When Cliff City approved the purchase orders, the estimated amount is recorded in the (summary) journal entry:
Encumbrances 5,000,000
Fund Balance–Reserved for Encumbrances 5,000,000
When the portion of the purchase orders were filled, the entry was reversed for the estimated cost amount of the portion of the purchase orders filled:
Fund Balance–Reserved for Encumbrances 4,500,000
Encumbrances 4,500,000
The actual amount of expenditures may be more or less than the estimated amount and the amount paid may differ from the encumbered amount. However, that does not affect the encumbrance or the Fund Balance—Reserved for Encumbrances amounts. Therefore, the amount outstanding at June 30, 20X1, was $500,000. In the closing process, the outstanding Encumbrances and Fund Balance—Reserved for Encumbrances of $500,000 would be removed, and $500,000 of the post-closing Fund Balance would be displayed as “committed” or “assigned.”
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2411 Measurement Focus and Basis of Accounting
The following information pertains to Spee Co.’s 20X1 sales:
Cash Sales Gross $40,000 Returns and allowances 2,000 Credit Sales Gross 60,000 Discounts 3,000
On January 1, 20X1, customers owed Spee $20,000. On December 31, 20X1, customers owed Spee $15,000. Spee uses the direct write-off method for bad debts. No bad debts were recorded in 20X1. Under the cash basis of accounting, what amount of revenue should Spee report for 20X1 $100,000 $95,000 $85,000 $38,000
$100,000
Cash collected from cash sales ($40,000 - 2,000) =$38,000
Cash collected from credit sales:
Net credit sales for 20X1 ($60,000 - 3,000) $57,000
January 1, 20X1, accounts receivable 20,000
——-
Subtotal $77,000
Less December 31, 20X1, accounts receivable 15,000 62,000
——- ——–
Cash basis revenue for 20X1 $100,000
========
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2135 Statement of Cash Flows
Which of the following subsequent events must be recognized in the financial statements
Loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued
Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued
Loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued
The correct answer is “loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued.” An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet.
The other answer choices are incorrect because an entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued.
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2392 Subsequent Events
Which of the following items requires a prior period adjustment to retained earnings
Purchases of inventory this year were overstated by $5 million.
Available-for-sale securities were improperly valued last year by $20 million.
Revenue of $5 million that should have been deferred was recorded in the previous year as earned.
The prior year’s foreign currency translation gain of $2 million was never recorded.
Revenue of $5 million that should have been deferred was recorded in the previous year as earned.
Prior period adjustments to retained earnings are only reported for errors in prior-year financial statements that resulted in an incorrect balance in retained earnings at the beginning of the year. These adjustments are not required for errors that affect the current year because these errors do not affect prior-year balances, and current-year income should be corrected if current-year errors are detected before the financial statements are published. Prior-year errors in reporting other comprehensive income do not affect the beginning balance of retained earnings. Rather, they result in erroneous balances in accumulated other comprehensive income.
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2305 Accounting Changes and Error Corrections
A county’s balances in the general fund included the following:
Appropriations $745,000
Encumbrances 37,250
Expenditures 298,000
Vouchers payable 55,875
What is the remaining amount available for use by the county $353,875 $391,125 $409,750 $447,000
$409,750
The appropriations included in the adopted budget constitute the maximum authorized for expenditure during the period, and cannot legally be exceeded unless subsequently amended by the legislative body. In this question, the appropriation was established at $745,000; expenditures incurred to date were $298,000 and $37,250 was encumbered. Only $409,750 remains available for spending. The vouchers payable represent past expenditures waiting only for cash payment.
Appropriation $745,000
Expenditures (298,000)
Encumbrances (37,250)
———
Funds available $409,750
=========
GASB 1700.105 and .127
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2411 Measurement Focus and Basis of Accounting
Statement of Cash Flows Differences
i. Interest paid can be operating OR financing under IFRS. It is only operating under GAAP
ii. Interest received can be operating OR investing under IFRS, it is only operating under GAAP
iii. Dividends received can be operating OR *investing under IFRS and GAAP
iv. Dividends paid can be operating OR financing under IFRS, it is only financing under GAAP
On December 31, 20X1, Date Co. awaits judgment on a lawsuit for a competitor’s infringement of Date’s patent. Legal counsel believes it is probable that Date will win the suit and indicated the most likely award together with a range of possible awards.
How should the lawsuit be reported in Date’s 20X1 financial statements:
In note disclosure only
By accrual for the most likely award
By accrual for the lowest amount of the range of possible awards
Neither in note disclosure nor by accrual
In note disclosure only
If Date Co. wins the lawsuit, the award paid to Date will be a gain.
FASB ASC 450-30-50-1 provides that gain contingencies should not be reflected in the accounts (i.e., accrued) but that adequate disclosure should be made in notes to the financial statements.
A loss contingency would be reported by accrual for the most likely award or for the lowest amount of the range of possible awards if no amount can be considered most likely. (FASB ASC 450-20-25-4)
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2330 Contingencies, Commitments, and Guarantees (Provisions)
In December 20X1, Mill Co. began including one coupon in each package of candy that it sells and offering a toy in exchange for 50 cents and five coupons. The toys cost Mill 80 cents each. Eventually 60% of the coupons will be redeemed. During December, Mill sold 110,000 packages of candy and no coupons were redeemed.
In its December 31, 20X1, balance sheet, what amount should Mill report as estimated liability for coupons $3,960 $10,560 $19,800 $52,800
$3,960
Expected redemption = .60 x 110,000
= 66,000 coupons
Toys required = 66,000 coupons / 5
= 13,200 toys
Cost of toys = 13,200 x $.80 = $10,560
Less payment to be received = 13,200 x $.50 = 6,600
——-
Estimated liability for coupons $ 3,960
A company has available-for-sale investments that cost $50,000 and were valued at $45,000 at the beginning of the current period during which the investments were sold for $48,000. Which of the following best reflects the impact of these events on the elements of comprehensive income of the current year:
Impact on net income: $3,000 gain; Other comprehensive income (reclassification): $5,000 loss; Comprehensive income: $2,000 loss
Impact on net income: $2,000 loss; Other comprehensive income (reclassification): $5,000 gain; Comprehensive income: $3,000 gain
Impact on net income: $4,000 gain; Other comprehensive income (reclassification): $6,000 loss; Comprehensive income: $2,000 loss
Impact on net income: $5,000 loss; Other comprehensive income (reclassification): $5,000 gain; Comprehensive income: $3,000 gain
Impact on net income: $2,000 loss; Other comprehensive income (reclassification): $5,000 gain; Comprehensive income: $3,000 gain
The relationship of net income and comprehensive income can be shown as follows:
Net Income
+ Other comprehensive income
= Comprehensive income
Ignoring any tax effects, these transactions and events affect comprehensive income as follows:
Net income:
Realized loss ($48,000 - $50,000) $(2,000)
Other comprehensive income:
Reclassification adjustment gain 5,000
--------
Comprehensive income $ 3,000
======== A realized loss of $2,000 is recognized because investments costing $50,000 were sold for $48,000. That realized loss is included in net income. The $5,000 reclassification gain is required to offset the previously recognized unrealized loss ($50,000 - $45,000).
FASB ASC 220-10-20 defines “other comprehensive income” as “all revenues, expenses, gains, and losses that under generally accepted accounting principles (GAAP) are included in comprehensive income but excluded from net income.” Currently, existing GAAP specifies that unrealized holding gains and losses on available-for-sale securities should be reported as direct charges or credits to equity. Thus, these gains and losses constitute other comprehensive income.
To prevent including certain items in the determination of comprehensive income twice, reclassification adjustments are required for a transaction or event that has been included as a component of other comprehensive income and later becomes a component of net income.
Impact Impact
Years Before Year of
Sale Sale
------------ -------- Net income -0- $(2,000)
Other comprehensive income:
Unrealized gain/(loss) $(5,000)
Reclassification -0- 5,000
——– ——–
Comprehensive in $(5,000) $ 3,000
======== ========
FASB ASC 220-10-20
In hospital accounting, restricted funds are:
not available for current operating use; however, the income generated by the funds is available for current operating use.
restricted as to use by the donor, grantor, or other source of the resources.
restricted as to use only for board-designated purposes.
not available unless the board of directors removes the restrictions.
restricted as to use by the donor, grantor, or other source of the resources.
Donor and grantor restrictions may be time restrictions or use restrictions. Restrictions that can be satisfied by the passage of time or by using the resources for a certain purpose (to finance expenses of a specific program or to construct a building, for example) are called temporary restrictions. Restrictions that cannot be fulfilled by either the passage of time or actions of the organization are known as permanent restrictions.
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2522 Types of Restrictions on Resources
When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of: faithful representation. materiality. legal entity. economic entity.
economic entity.
FASB ASC 810-10-10-1 summarizes the purpose of consolidated statements as follows:
Quote
The purpose of consolidated statements is to present…the results of operations and the financial position of a parent and all its subsidiaries essentially as if the consolidated group were a single economic entity.
Thus, consolidated statements reflect the economic entity concept.
FASB ASC 810-10-10-1
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2321 Introduction and Overview
The Dunstown County general fund received a notice of a federal grant award for an expenditure-driven (reimbursement) grant in the amount of $1,000,000. Included with the notice was an advance of $250,000. During the year, the County incurred $400,000 of qualifying eligible grant expenditures, and no additional money had been received from the grantor.
What would be the amount of intergovernmental receivables reported by the general fund at the close of the fiscal year $0 $150,000 $600,000 $750,000
$150,000
The receivable would equal the difference between the amount of the advance and the revenues of $400,000 (the amount spent on qualifying expenditures).
Revenues $400,000
Less advance received (250,000)
———
Intergovernmental receivable $150,000
=========
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2412 Fund Accounting Concepts and Application
Effective interest
Effective interest = Carrying value of the bonds × Effective interest rate × Time period
How to calculate effective interest rate:
Effective interest / (Carrying value x Time Period)
Carrying value
Cost - accumulated depreciation = Carrying value
The FASB believes that, as a general policy, there is a maximum number of reportable segments about which information should be provided. What is the number 10 20 5 15
10
- If an operating segment becomes reportable because it meets one or more of the quantitative criteria in the current period but did not meet those criteria previously, prior-period segment information that is presented for comparative purposes should be restated, unless it is not practicable to do so.
- Information about operating segments that do not meet any of the quantitative criteria, and that are not combined with other operating segments to create reportable segments, are combined and presented in an “all other” category.
- As a practical limit, more than 10 reportable segments is a recommended level at which management should consider whether its presentation of segment information has become overly detailed.
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2390 Segment Reporting
On December 31, Year 1, Moon, Inc., authorized Luna Co. to operate as a franchisee for an initial franchise fee of $100,000. Luna paid $40,000 on signing the agreement and signed an interest-free note to pay the balance in three annual installments of $20,000 each, beginning December 31, Year 2. On December 31, Year 1, the present value of the note, appropriately discounted, is $48,000. Services for the initial fee will be performed in Year 2.
In its December 31, Year 1, balance sheet, what amount should Moon report as unearned franchise fees $0 $48,000 $88,000 $100,000
$88,000
Franchise fee revenue is recognized when all material services or conditions relating to the sale have been substantially performed or satisfied by the franchisor. In this case, the services have not been performed. Consequently, the initial fee is still unearned.
Paid at signing $40,000
Present value of note + 48,000
Initial and unearned franchise fee $88,000
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2251 Revenue Recognition
XL Software Company is developing a new software product. During 20X1, monthly costs of the project were $100,000 per month. A detailed program design was completed on August 31. How much of the development costs would be expensed as research and development expenses $0 $400,000 $800,000 $1,200,000
$800,000
Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model.
Since a technological feasibility was established on August 31, all of the costs up to that date (8 × $100,000) would be expensed as research and development expenses.
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2391 Software Costs
How are discontinued operations and extraordinary items that occur at midyear initially reported
Disclosed only in the notes to the year-end financial statements
Included in net income and disclosed in the notes to the year-end financial statements
Included in net income and disclosed in the notes to interim financial statements
Disclosed only in the notes to interim financial statements
Included in net income and disclosed in the notes to interim financial statements
Discontinued operations and extraordinary items should be reported separately, net-of-tax, on the income statement for the interim period. Disclosure in the notes to the interim statements is required.
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2375 Interim Financial Reporting
During January of the previous year, Doe Corp. agreed to sell the assets and product line of its Hart division. The sale on January 15 of the current year resulted in a gain on disposal of $900,000. Not considering any impairment losses, Hart’s operating losses were $600,000 for the previous year and $50,000 for the current-year period January 1 through January 15.
Disregarding income taxes, what amount of net gain (loss) should be reported in Doe’s comparative current and previous years’ income statements
Current year, $0; Previous year, $250,000
Current year, $250,000; Previous year, $0
Current year, $900,000; Previous year, $(650,000)
Current year, $850,000; Previous year, $(600,000)
Current year, $850,000; Previous year, $(600,000)
The sale of a division would be a discontinued operation since its disposition represents a strategic shift. The discontinued operation would be recorded in the year the sale occurred.
Previous Current Net loss from continuing op $(600,000) $(50,000) Gain on sale of discontinued op 900,000 Net income $(600,000) $850,000
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2345 Extraordinary and Unusual Items
Cash and cash equivalents
Cash includes cash in the checking account and the petty cash. Cash equivalents are short-term, highly liquid investments. They must be convertible to known amounts of cash and generally have maturities when purchased of not more than three months. The commercial paper qualifies as a cash equivalent because it is highly liquid and matures within three months of the balance sheet date. The sinking fund would be restricted cash, and the postdated check is still a receivable.
Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, 20X1, its first year of operations:
Pre-tax financial income $160,000
Nontaxable interest received on
municipal securities (5,000)
Long-term loss accrual in excess
of deductible amount 10,000
Depreciation in excess of financial
statement amount (25,000)
———
Taxable income $140,000
=========
Zeff’s average tax rate for 20X1 is 27% and the future average tax rate is estimated to be 30%.
In its December 31, 20X1, balance sheet, what should Zeff report as deferred income tax liability
$2,000
$4,000
$4,500
$10,500
$4,500
Deferred income tax liability = Temporary differences x Tax rate
= ($25,000 - $10,000) x 0.30
= $15,000 x 0.30
= $4,500
FASB ASC 740-10-45-6 states, “For a particular tax-paying component of an enterprise and within a particular tax jurisdiction, (a) all current deferred tax liabilities and assets shall be offset and presented as a single amount, and (b) all noncurrent deferred tax liabilities and assets shall be offset and presented as a single amount. However, an enterprise shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the enterprise or to different tax jurisdictions.”
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2270 Income Taxes
Kale Co. has adopted FASB ASC 320-10 (Investments—Debt and Equity Securities). Kale purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Kale should account for these bonds at: cost. amortized cost. fair value. lower of cost or market.
amortized cost.
Kale Co. should account for the bonds at amortized cost per FASB ASC 320-10, Amortized cost is acquisition cost adjusted for any unamortized premium or discount.
FASB ASC 320-10-25-1 states, “Investments in debt securities shall be classified as held-to-maturity only if the reporting entity has the positive intent and ability to hold those securities to maturity.”
Quote
Trading securities. Investments in debt securities that are classified as trading and equity securities that have readily determinable fair values that are classified as trading shall be measured subsequently at fair value in the statement of financial position. Unrealized holding gains and losses for trading securities shall be included in earnings.
FASB ASC 320-10-35-1(a)
Zinc Co.’s adjusted trial balance on December 31, 20X1, includes the following account balances:
Common stock ($3 par) $600,000 Additional paid-in capital 800,000 Treasury stock (at cost) 50,000 Net unrealized loss on marketable equity securities available-for-sale 20,000 Net unrealized loss on marketable equity trading securities 15,000 Retained earnings appropriated for uninsured earthquake losses 150,000 Retained earnings (unappropriated 200,000
What amount should Zinc report as total stockholders' equity in its December 31, 20X1, balance sheet $1,665,000 $1,680,000 $1,685,000 $1,780,000
$1,680,000
CONTRIBUTED CAPITAL:
Common stock $ 600,000
Additional paid-in capital 800,000
———-
Total contributed capital $1,400,000
Retained E ($150k appropriated) 350,000
———-
Subtotal $1,750,000
Less accumulated comprehensive income
(unrealized loss on available-for-sale
marketable equity securities) $20,000
Less Treasury stock at cost 50,000 70,000
——- ———-
Total stockholders’ equity $1,680,000
==========
Note
Only the unrealized loss from the marketable securities classified as available-for-sale is included in shareholder’s equity as a component of accumulated comprehensive income. The net unrealized loss on marketable trading securities is included in income.
Factoring WITH Recourse
With recourse means the transferor bears the
costs of bad debt- so if customers don’t pay the
transferor is the one losing that money
Were the sales made on a with recourse basis, one additional requirement, the estimation and recognition of a RECOURSE LIABILITY as an additional credit to the transaction, would be necessary, with the additional credit causing an increase to the loss on sale.
“If the maker defaults and ABC has to pay the note, ABC would record the ff entry on the maturity date of the note:
Dishonored Notes Receivable 110,000
Cash 110,000
Treasure stock transaction
Treasure stock is a corporation’s own previously issued and outstanding stock that is reacquired but not retired. After being reacquired, the shares are still considered to be issued but not outstanding.
TWO METHODS:
COST METHOD - refers to a single transaction concept
- views the requisition of the outstanding shares and their subsequent sale as a single transaction
- treasure stock is carried at cost pending the outcome of the subsequent sale as a single transaction
PAR VALUE METHOD - “two transactions” concept
- views the reacquisition of the shares and their subsequent sale as two separate transactions
- the reacquired shares are accounted for in much the same manner as retired shares
- the subsequent shares is accounted for essentially as if the shares were unissued shares
Kern and Pate are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at $15,000 for a 20% capital interest in the new partnership. Grant's cost of the land was $12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant's capital account should be credited for: $12,000. $15,000. $16,000. $19,000.
19,000.
Total capital of new partnership
($60,000 + $20,000 + $15,000) $95,000
Times capital credit percentage to Grant x .20
——-
Equals capital credit allowed to Grant $19,000
=======
Note
Grant is given a “bonus” equal to $4,000, the excess of his $19,000 capital credit over the $15,000 fair value of land invested.
As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Noor Co.’s sole depreciable asset, acquired in 20X1, exceeded its tax basis by $250,000 at December 31, 20X1. The difference will reverse in future years. The enacted tax rate is 30% for 20X1 and 40% for future years. Noor has no other temporary differences.
In its December 31, 20X1, balance sheet, how should Noor report the deferred tax effect of this difference As an asset of $75,000 As an asset of $100,000 As a liability of $75,000 As a liability of $100,000
As a liability of $100,000
This temporary difference will result in additional taxes being paid in future years so the related tax effect will be a liability.
Amount of liability = Temporary difference x Future enacted tax rate
= $250,000 x 0.40
= $100,000
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2270 Income Taxes
A town’s basic financial statements include information for major and nonmajor governmental funds. There were no internal service or enterprise funds. One of the nonmajor funds is the Road Tax fund, which accounts for a share of tax moneys remitted by the state on a prorated basis. Individual fund statements with prior-year comparative data would have to be presented for the Road Tax fund if:
state law requires prior-year comparative data for any individual fund receiving a prorated share of state tax collections.
the town has opted to present budgetary data as required supplementary information rather than as part of the basic financial statements.
the Road Tax fund is the town’s only special revenue fund.
every governmental fund must be reported individually.
state law requires prior-year comparative data for any individual fund receiving a prorated share of state tax collections.
As a nonmajor fund, the financial information for the Road Tax fund is combined with other nonmajor funds in the basic financial statements. Individual fund financial statements would be required to demonstrate compliance with state law in this case. Whether shown in RSI or as part of the basic financial statements, the budgetary data would not otherwise show the details of individual, nonmajor funds. In combining nonmajor funds, it does not matter if only one of the governmental funds was a special revenue fund. Because the focus of fund financial reporting is on major funds, nonmajor funds should be aggregated and do not need to be shown individually.
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2420 Format and Content of Comprehensive Annual Financial …
Topic 275 of the FASB's Accounting Standards Codification is entitled “Risks and Uncertainties.” The primary subject discussed in this topic is: bankruptcy. going concern. disclosure. All of the answer choices are discussed.
disclosure.
One of the purposes of financial statements is to provide information to help users predict the reporting entity’s future cash flows and results of operations. This assessment depends, to some degree, on the users’ knowledge and assessment of the risks and uncertainties involving the entity’s operations. Disclosure of these risks and uncertainties is a critical component of the user’s process of evaluating these variables. FASB ASC 275-10 addresses the disclosures required to facilitate a user’s evaluation of an entity’s risks and uncertainties.
FASB ASC 275-10-05-1
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2389 Risks and Uncertainties
Davis Tire Co. has a deferred compensation plan for several key employees. Each employee’s plan contains an agreement not to compete and has a different set of benefits. How should Davis Co. account for this plan
The plan should be accounted for as a pension plan or as a health and welfare plan.
The plan should be accounted for as a current expense and accrued liability each year of an employee’s service life.
Deferred compensation plans do not need to be reported or disclosed.
A liability, not less than the sum of the nondiscounted future cash flows, should be reported.
The plan should be accounted for as a current expense and accrued liability each year of an employee’s service life.
A deferred compensation plan which is not the equivalent of a pension plan should be reported in accordance with FASB ASC 710-10-25-11. Davis Co. would accrue a liability of not less than the present value of the estimated future payments.
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2262 Deferred Compensation Arrangements
On October 1, 20X1, Velec Co., a U.S. company, contracted to purchase foreign goods requiring payment in francs one month after their receipt at Velec’s factory. Title to the goods passed on December 15, 20X1. The goods were still in transit on December 31, 20X1. Exchange rates were $1 to 22 francs, 20 francs, and 21 francs on October 1, December 15, and December 31, 20X1, respectively.
Velec should account for the exchange rate fluctuation in 20X1 as:
a loss included in net income before extraordinary items.
a gain included in net income before extraordinary items.
an extraordinary gain.
an extraordinary loss.
`a gain included in net income before extraordinary items.
According to terms of the purchase, a liability to make a future payment in francs originated when the sale occurred (i.e., title to the goods passed to Velec Co.) on December 15, not when the order was placed on October 1 or when the payment was due on January 15.
This purchase is a foreign currency transaction because it is denominated in a foreign currency. At December 31, 20X1, the liability from this transaction is remeasured at the exchange rate (spot rate) as of that date. The exchange rate fluctuation from December 15 (20 francs per $1) to December 31 (21 francs per $1) is then recorded in net income before extraordinary items. (Remember, gains or losses from foreign currency transactions are specifically excluded from extraordinary item treatment by FASB ASC 830.)
Assume that at this time Velec agreed to pay 20,000 francs. A dollar settlement at this time would require $1,000 (20,000 ÷ 20 francs per $1 = $1,000). On December 31, only $952.38 (20,000 ÷ 21 francs per $1 = $952.38) would be required for settlement. The difference, a gain, would be included in 20X1 net income.
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2362 Foreign Currency Transactions Other Than Forward …
Luge Co., which began operations on January 2, 20X1, appropriately uses the installment sales method of accounting. The following information is available for 20X1:
Installment accounts receivable, December 31, 20X1
(after reduction for 20X1 cash collections) $800,000
Deferred gross profit, DeC 31, 20X1 (before recognition of realized gross profit for 20X1 $560,000
Gross profit on sales 40%
For the year ended December 31, 20X1, cash collections and realized gross profit on sales should be:
$400,000 (cash collections) and $320,000 (realized gross profit).
$400,000 (cash collections) and $240,000 (realized gross profit).
$600,000 (cash collections) and $320,000 (realized gross profit).
$600,000 (cash collections) and $240,000 (realized gross profit).
$600,000 (cash collections) and $240,000 (realized gross profit).
20X1 Installment sales = 20X1 Deferred gross profit
———————
Gross profit margin
= $560,000 / .40
= $1,400,000
Cash collections in 20X1 = 20X1 Sales - 12/31/X1 Receivables
= $1,400,000 - $800,000
= $600,000
20X1 Realized gross profit = Gross profit margin x Cash collections
= 40% x 600,000
= $240,000
Proof:
End receivables x Gross profit on sales = End deferred gross
profit (after adjustment)
$800,000 x .40 = $320,000
Deferred gross profit - Deferred gross profit
(before adjustment) (after adjustment) = Adjustment
$560,000 - $320,000 = $240,000 = Realized GP
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2251 Revenue Recognition
Which of the following funds of a governmental unit uses the same basis of accounting as the special revenue fund Enterprise funds Internal trust funds Pension trust funds Permanent funds
Permanent funds
Special revenue funds are classified as governmental funds. The other governmental funds are the general fund, capital projects funds, debt service funds and permanent funds. Governmental funds use the modified accrual basis of accounting. Enterprise funds are a type of proprietary fund and investment and pension trust funds are types of fiduciary funds. They use the accrual basis of accounting.
GASB 1300.103–.108
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2411 Measurement Focus and Basis of Accounting
Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During 20X1, 100,000 shares of common stock were outstanding. On April 1, 20X2, 20,000 shares of treasury stock were sold. Net income was $410,000 in 20X2 and $350,000 in 20X1.
What amounts should Strauch report as basic earnings per share in its 20X2 and 20X1 comparative income statements $4.10 (20X2) and $3.50 (20X1) $3.56 (20X2) and $3.50 (20X1) $3.42 (20X2) and $3.50 (20X1) $3.42 (20X2) and $2.91 (20X1)
$3.56 (20X2) and $3.50 (20X1)
Net income - Dividend to preferred stock Basic EPS = ------------------------------------------------- Weighted-average no. of common shares outstanding
20X2: Weighted-average no. shares =
((Beginning shares x Time) + (Treasury shares x Time))
= ((100,000 x 12/12) + (20,000 x 9/12))
= (100,000 + 15,000)
= 115,000 shares
Basic EPS = $410,000 / 115,000 shares = $3.56/share
20X1: Weighted-average no. shares =
(100,000 x 12/12) = 100,000 shares
EPS = $350,000 / 100,000 shares = $3.50/share
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2335 Earnings per Share
Cole Co. began constructing a building for its own use in January 20X1. During 20X1, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was $40,000. What amount of interest cost should Cole capitalize $20,000 $40,000 $50,000 $70,000
$40,000
For qualifying assets being constructed for an entity’s own use, FASB ASC 835-20-30-2 requires interest cost to be capitalized equal to the less of (a) the avoidable interest (based on the weighted-average amount of accumulated expenditures), or (b) the actual interest cost incurred. Cole’s avoidable interest is given to be $40,000. Since the $70,000 actual interest cost incurred ($50,000 + $20,000) is greater than the avoidable interest of $40,000, the amount of interest that Cole can capitalize is $40,000.
Terry, an auditor, is performing test work for a private not-for-profit hospital. Listed below are components of the statement of operations:
Revenue relating to charity care $100,000
Bad debt expense 70,000
Net assets released from restrictions
used for operations 50,000
Other revenue 80,000
Net patient service revenue (includes revenue
related to charity care) 500,000
What amount would be reported as total revenues, gains, and other support on the statement of operations $460,000 $530,000 $580,000 $630,000
$530,000
Total revenues, gain, and other support will include the following:
Net patient service revenue $500,000
Less Charity care 100,000 $400,000
——–
Other revenue 80,000
Net assets released from
restrictions used for
operations 50,000
——–
Total $530,000
========
Charity care does not qualify for recognition as revenues in the financial statements. These are services provided without expectation of payment. The bad debt expense would not affect the patient service revenue reported by a private not-for-profit hospital. In contrast, uncollectible patient accounts would reduce patient services revenues reported by governmental hospitals.
FASB ASC 954-605-25-10
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2512 Statement of Activities
Net Sales
Total Revenue
Less: Sales Return
Allowances
Discounts
Which of the following is included on a statement of changes in equity
Column headings identify individual stockholders’ equity accounts.
Events changing stockholders’ equity accounts are listed chronologically to the left.
The impact of the transactions on the number of shares of stock, if any, is presented in the descriptions to the left.
All of the items listed are included on a statement of changes in equity.
All of the items listed are included on a statement of changes in equity.
A. statement of changes in stockholders’ equity includes the following:
Column headings that identify individual stockholders’ equity accounts
Events changing stockholders’ equity accounts
The body of the statement presented in terms of the dollar impact of various transactions and events
The impact of the transactions on the number of shares of stock, if any
Ending balances that tie to the items presented in the stockholders’ equity section of the balance sheet on the same dates
Which of the following conditions must exist in order for an impairment loss to be recognized
I. The carrying amount of the long-lived asset is less than its fair value.
II. The carrying amount of the long-lived asset is not recoverable.
I only
II only
Both I and II
Neither I nor II
II only
FASB ASC 360-10-35-17 establishes a recoverability test to determine when an impairment loss is to be recognized. If the undiscounted sum of estimated future cash flows from an asset or asset group is less that the asset’s or asset group’s book value, an impairment loss may need to be recognized. The impairment loss is the difference between the book value of the asset(s) and its (their) fair value. Note that there is not an impairment loss if the fair value exceeds the carrying amount.
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2370 Impairment
Fenn Museum, a nongovernmental not-for-profit entity, had the following balances in its expenses categories for the statement of activities:
Education $300,000
Fundraising 250,000
Management and general 200,000
Research 50,000
What amount should Fenn report as expenses for support services $350,000 $450,000 $500,000 $800,000
$450,000
The costs incurred by the not-for-profit entity in carrying out its primary mission are considered program expenses. As a museum, both education and research can be considered primary to the Fenn Museum’s mission. Supporting services expenses are separated into two categories:
Management and general
Fundraising
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2524 Expenses, Including Depreciation and Functional …
When property other than cash is invested in a partnership, at what amount should the non-cash property be credited to the contributing partner’s capital account
Fair value at the date of contribution
Contributing partner’s original cost
Assessed valuation for property tax purposes
Contributing partner’s tax basis
Fair value at the date of contribution
Noncash assets invested in a partnership should be recorded at their fair value at time of investment. Failure to record those asset investments at fair value would cause the difference (between recorded value and fair value) to be subject to allocation to all partners in the profit and loss ratio as these assets are used or sold.
Criteria that identify operating segments that may be combined in identifying reportable segments include all of the following, except:
nature of products and services.
overlapping personnel.
type or class of customer.
distribution methods for products or services.
overlapping personnel.
In applying these criteria, operating segments may be combined in order to meet these criteria if they have the following similar characteristics:
- Nature of products and services
- Nature of the production processes
- Type or class of customer
- Distribution methods for products or services
- Nature of regulatory environment (if appropriate)
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2390 Segment Reporting
A business interest that constitutes a large part of an individual’s total assets should be presented in a personal statement of financial condition as:
a separate listing of the individual assets and liabilities at cost.
separate line items of both total assets and total liabilities at cost.
a single amount equal to the proprietorship equity.
a single amount equal to the estimated current value of the business interest.
a single amount equal to the estimated current value of the business interest.
FASB ASC 274-10-45-9, Accounting and Financial Reporting for Personal Financial Statements, contains guidelines for preparation of personal statements of financial condition. For business interests that constitute a large part of a person’s total assets:
Quote
The estimated current value of an investment…should be shown in one amount as an investment….
Community College, a public institution, had the following encumbrances at December 31, 20X1:
Outstanding purchase orders $12,000 Commitments for services not received $50,000
What amount of these encumbrances should be reported as liabilities in Community's balance sheet at December 31, 20X1 $62,000 $50,000 $12,000 $0
$0
Encumbrances resulting from the issuance of purchase orders or approval of contracts are not reported as liabilities since neither the goods nor services have been received. A liability is recorded on the books only when the goods/services are received. However, depending on the legal restrictions observed by the Community College, the encumbrances may be shown as committed or assigned fund balance. As a public institution, Community College engages in governmental and business-type activities and follows the full governmental model.
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2411 Measurement Focus and Basis of Accounting
On December 31, 20X1, Dirk Corp. sold Smith Co. two airplanes and simultaneously leased them back. Additional information pertaining to the sale-leasebacks follows:
Plane 1 Plane 2
-------- ---------- Sales price $600,000 $1,000,000 Carrying amount, Dec 31, 20X1 $100,000 $ 550,000 Remaining useful life, Dec 31, 20X1 10 years 35 years Lease term 8 years 3 years Annual lease payments $100,000 $ 200,000
In its December 31, 20X1, balance sheet, what amount should Dirk report as deferred gain on these transactions $950,000 $500,000 $450,000 $0
$500,000
FASB ASC 840-40-55-49 provides that a sale/leaseback is to be treated as an operating or capital lease, depending on whether the capital lease criteria in FASB ASC 840-10 are met.
Further: “Any profit or loss on the sale shall be deferred and amortized in proportion to the amortization of the leased asset if a capital lease…”
Applying this:
The lease term of Plane 1 is 80% (8/10) of its remaining useful life. Since this exceeds the 75% criterion, Plane 1 involves a capital lease. Plane 2 is not a capital lease because it is leased for only 8.6% (3/35) of its useful life. (And by observation the present value, for 3 years, of the $200,000 annual payment is not 90% of the $1,000,000 fair value.)
The deferred gain reported for Plane 1 is $500,000 ($600,000 sales price less $100,000 carrying value).
As the cited FASB ASC sections state, there are circumstances when operating lease gain also can be deferred. Since a discount rate is not specified in the problem, the needed present values cannot be ascertained, so $500,000 is the best answer choice.
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2380 Leases
Which SEC document provides instructions for filing the nonfinancial statement forms required under the Securities Act of 1933 SEC Form Guide Regulation S-K Regulation S-X Regulation 10-K-I (Instructions)
Regulation S-K
Regulation S-K contains the instructions for filing the nonfinancial statement forms required by the SEC.
Regulation S-X contains information regarding the financial statements that must be submitted to the SEC. There are no such documents as the “SEC Form Guide” or “Regulation 10-K-I (Instructions).”
A company reports the following information as of December 31:
Sales revenue $800,000
Cost of goods sold 600,000
Operating expenses 90,000
Unrealized holding gain on available-
for-sale securities, net of tax 30,000
What amount should the company report as comprehensive income as of December 31 $30,000 $110,000 $140,000 $200,000
$140,000
Other comprehensive income is computed as follows:
Sales revenue $800,000
Cost of goods sold 600,000
——–
Gross profit $200,000
Operating expenses 90,000
——–
Net income $110,000
Unrealized holding gain 30,000
——–
Comprehensive income $140,000
Belle, a nongovernmental not-for-profit entity, received funds during its annual campaign that were specifically promised by the donor to another nongovernmental not-for-profit health entity. How should Belle record these funds
Increase in assets and increase in liabilities
Increase in assets and increase in revenue
Increase in assets and increase in deferred revenue
Decrease in assets and decrease in fund balance
Increase in assets and increase in liabilities
Donors often use one not-for-profit as an intermediary to forward donations to the ultimate recipient. If the intermediary has the right to redirect the resources, then it would recognize temporarily restricted support or revenue. In this case, Belle has been given specific instructions to forward the resources to another entity and has been given no discretion. It is acting as an agent.
An agency transaction does not affect the revenue account, only assets and liabilities. “Deferred revenue” and “fund balance” are governmental terms not used for a private not-for-profit.
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2521 Support, Revenues, and Contributions
Ivy Co. operates a retail store. All items are sold subject to a 6% state sales tax, which Ivy collects and records as sales revenue. Ivy files quarterly sales tax returns when due, by the 20th day following the end of the sales quarter. However, in accordance with state requirements, Ivy remits sales tax collected by the 20th day of the month following any month such collections exceed $500. Ivy takes these payments as credits on the quarterly sales tax return. The sales taxes paid by Ivy are charged against sales revenue.
The following is a monthly summary appearing in Ivy’s first quarter 20X1 sales revenue account:
Debit Credit January $10,600 February $ 600 7,420 March 8,480
------ -------
$ 600 $26,500
====== =======
In its March 31, 20X1, balance sheet, what amount should Ivy report as sales taxes payable $600 $900 $1,500 $1,590
$900
January sales tax was paid in February since tax was over $500 ($600).
$10,600 / 1.06 = $10,000 sales
$10,000 x .06 = $600 tax
February sales = Credit to sales / (1.00 + Tax rate)
= $7,420 / 1.06
= $7,000
February sales tax = $7,000 x .06
= $420
OR
= $7,420 - $7,000
= $420
March sales = Credit to sales / (1.00 + Tax rate)
= $8,480 / 1.06
= $8,000
March sales tax = $8,000 x .06
= $480
OR
= $8,480 - $8,000
= $480
Sales tax payable on 3/31/X1 = $420 + $480
= $900
Note
Sales tax was not paid for February sales on March 20 because the amount owed at that time ($420) was less than $500.
Which of the following is included in other comprehensive income:
Unrealized holding gains and losses on trading securities
Unrealized holding gains and losses that result from a debt security being transferred into the held-to-maturity category from the available-for-sale category
Foreign currency translation adjustments
The difference between the accumulated benefit obligation and the fair value of pension plan assets
Foreign currency translation adjustments
Foreign currency translation adjustments are an example of accumulated other comprehensive income. The transfer in the answer choice “Unrealized holding gains and losses that result from a debt security being transferred into the held-to-maturity category from the available-for-sale category” is backwards from what is shown in other comprehensive income. Transfers from held-to-maturity into available-for-sale are shown in other comprehensive income.
On April 30, Deer approved a plan to dispose of a segment of its business. For the period January 1 through April 30, the segment had revenues of $500,000 and expenses of $800,000. The assets of the segment were sold on October 15, at a loss for which no tax benefit is available. In its income statement for the calendar year, how should Deer report the segment’s operations from January 1 to April 30
$500,000 and $800,000 included with revenues and expenses, respectively, as part of continuing operations
$300,000 reported as a loss from discontinued operations
$300,000 reported as a net loss, as part of continuing operations
$300,000 reported as an extraordinary loss
$300,000 reported as a loss from discontinued operations
The operating loss and the loss on the sale must be reported as the loss for the discontinued operation.
Revenues $ 500,000
Expenses (800,000)
Loss from discontinued operations $(300,000)
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2345 Extraordinary and Unusual Items
Thorn Co. applies FASB ASC 740-10 (“Income Taxes, Overall”). At the end of 20X1, the tax effects of temporary differences were as follows:
Deferred
Tax Assets Related Asset
(Liabilities) Classification
------------- --------------
Accelerated tax Noncurrent
depreciation ($75,000) asset
Additional costs in
inventory for tax
purposes 25,000 Current asset
---------
($50,000)
---------
A valuation allowance was not considered necessary. Thorn anticipates that $10,000 of the deferred tax liability will reverse in 20X2. In Thorn's December 31, 20X1, balance sheet, what amount should Thorn report as noncurrent deferred tax liability $40,000 $50,000 $65,000 $75,000
$75,000
FASB ASC 740-10-45-4 provides that:
“Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting.” A deferred tax liability is considered to be related to a liability if reduction of the liability will cause the temporary difference to reverse.
Note
Based on this requirement, Thorn should report a noncurrent deferred tax liability of $75,000 at December 31, 20X1. (Note: The $10,000 reversal expected in 20X2 would affect the December 31, 20X2, noncurrent deferred tax liability amount.)
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2270 Income Taxes
UVW Broadcast Co. entered into a contract to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, advertising commercials of $10,000 were used. However, travel and lodging services were not provided. How should UVW account for advertising in its June 30 financial statements
Revenue and expense is recognized when the agreement is complete.
An asset and revenue for $10,000 is recognized.
Both the revenue and expense of $10,000 are recognized.
Not reported
An asset and revenue for $10,000 is recognized.
UVW has earned advertising revenue. The company has, in substance, prepaid for travel and lodging services. Both an asset and revenues should be recognized in its June 30 financial statements.
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2386 Nonmonetary Transactions (Barter Transactions)
Alpha Hospital, a large not-for-profit entity, has adopted an accounting policy that does not imply a time restriction on gifts of long-lived assets. A benefactor provided funds for building expansion in an earlier period. The funds are used to purchase a building in the current fiscal period. Indicate the manner in which this transaction affects Alpha’s current financial statements.
Increase in unrestricted revenues, gains, and other support
Decrease in an expense
Increase in temporarily restricted net assets
Increase in permanently restricted net assets
Increase in unrestricted revenues, gains, and other support
The conversion of the funds to the building causes a move from temporarily restricted to unrestricted support, is reported on the statement of activities as “net assets released from restriction,” and is included in “total revenues, gains, and other support.”
FASB ASC 958-205-55-13
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2512 Statement of Activities
