FAR - Reenforce concepts

Question 1

How to treat Commercial substance exchange?

Answer 1

Commercial Substance recognizes gain/loss and determined by difference between book value and fair value AND record asset at FMV on Balance Sheet.

Question 2

How to calculate balance sheet presentation for Commercial Substance Exchange?

Answer 2

Asset = (BV asset given +- Gain/Loss(FV-BV)) + Cash Paid - Cash Received.

Question 3

How to calculate Balance sheet presentation for Non- Commercial substance?

Answer 3

Surrendered Asset NBV - boot received + boot paid +( ( gain ) - (loss )) Got less BV given

Question 4

What is the abbreviation for the consolidation method?

Answer 4

C( Dr. Common Stock ) 
A (Dr APIC)
R ( Dr R/E )
I (Cr Inv Subsidiary)
N ( Cr Minority Interest )
B (Dr BS adjustments to FV )
I ( Dr Intangible Adjustments to FV )
G ( Dr. Goodwill ( plug too )

Question 5

How to treat ‘lack of ‘ commercial substance asset exchange?

Answer 5

No cash received - no gain
No cash paid - no gain
Cash paid on exchange then deferred gain
Cash received then record gain on following test:

25% then 100% gain is recognized.

Question 6

How to calculate Over/under funding for Pensions

Answer 6

FV of Plan less PBO

Question 7

What is the formula to add a partner to a partnership?

Answer 7

Interest % of new partner X [ Capital of existing partners + amount to be contributed ]

Question 8

What is the formula to add a partner to a partnership?

Answer 8

Interest % of new partner X [ Capital of existing partners + amount to be contributed ]

Question 9

What is the formula to add a partner to a partnership?

Answer 9

Interest % of new partner X [ Capital of existing partners + amount to be contributed ]

Question 10

What is the formula to add a partner to a partnership?

Answer 10

Interest % of new partner X [ Capital of existing partners + amount to be contributed ]

Question 11

What is the formula to add a partner to a partnership?

Answer 11

Interest % of new partner X [ Capital of existing partners + amount to be contributed ]

Question 12

When remeasuring into US dollars, the current rate will be used for: Per the summary below, the items would be translated at $442,000.

Historical rate:   
     Securities at cost $110,000 
     Inventories at cost 132,000 
Current rate:   
     Securities at market $120,000 
     Inventory at market  80,000 
  $442,000

Answer 12

monetary items and for nonmonetary items carried at market.

The historical rate is to be used for nonmonetary items carried at cost. The inventory carried at net realizable value should be remeasured using current rates because net realizable value is a market concept.

Question 13

In a troubled debt restructure involving modification of terms, the accounting depends on the relationship between the carrying amount (CA) of the debt (principal plus unpaid interest) and the total future payments (TFP). If the TFP are greater than the CA, the excess is recognized as:

If the CA is greater than the TFP, the excess is:

Answer 13

future interest expense using a newly computed effective rate and no gain is recognized

recognized as a gain, and no future interest expense is recognized.

In this case, the CA ($1,000,000 principal + $40,000 accrued interest = $1,040,000) exceeds the TFP ($950,000 + 30,000 = $980,000), so the excess ($1,040,000 - $980,000 = $60,000) is recognized as a gain.

Question 14

If Clarion elects the fair value option for reporting its financial assets, any unrealized gains or losses are reported where?

Answer 14

in the current year’s income statement

FMV-COST

Question 15

Under the Acquisition method , how should assets and liabilities be recorded?

Answer 15

Fair Value

Question 16

Pension asset (liability) is the excess of the amount funded over what?

Answer 16

the amount recorded as pension expense.

Service (normal) cost for year 4 $110,000
Prior service cost:
Amortized 41,700
Funded 57,200

The amount funded is $167,200 ($110,000 service cost + $57,200 funding of prior service cost). Pension expense is $151,700 ($110,000 service cost + $41,700 amortization of prior service cost). Therefore, pension asset/liability is $15,500 ($167,200 – $151,700).

Question 17

extraordinary items should be disclosed separately and included in the determination of net income for the interim periods in which they occur. Therefore, an extraordinary gain occurring in the second quarter should be recognized in

Answer 17

the second quarter.

Question 18

using percentage depletion for tax, which means taking depletion in excess of cost effects Deferred taxes how?

Answer 18

creates a permanent difference which does not affect the deferred income tax provision. Therefore, the correct answer would be $0.

Question 19

Which of the following is an inherent difficulty in the determination of the results of operations on an interim basis?

Depreciation on an interim basis is a partial estimate of the actual annual amount.
• Cost of sales reflects only the amount of product expense allocable to revenue recognized as of the interim date.
• Revenues from long-term construction contracts accounted for by the percentage of completion method are based on annual completion and interim estimates may be incorrect.
• Costs expensed in one interim period may benefit other periods.

Answer 19

Costs expensed in one interim period may benefit other periods.

Question 20

Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence?

• A 10-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%.
• A 10-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%.
• A capital lease is entered into with the initial lease payment due 1 month subsequent to the signing of the lease agreement.
• A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement

Answer 20

Annuity Due

An annuity due is an annuity with the first payment occurring at the beginning of the first period. In contrast, an ordinary annuity is an annuity with the first payment occurring at the end of the first period. This answer is an example of an annuity due.

Question 21

What are the Enhancing Characteristics?

CUTV

Answer 21

Comparibility
Understandibility
Timeliness
Verifiability

Question 22

What are the factors under Relevance?

PCM

Answer 22

Predictive
Confirmatory
Materiality

Question 23

What are the factors under Faithfull Representation?

Answer 23

Completeness
Neutral
Error Free

Question 24

Under IFRS, testing for impairment of Goodwill is tested under what level?

Answer 24

Each Cash generating Level

Question 25

What is the GP% Calculation for % of Completion?

Answer 25

Contract Price $3,000,000
Cost To Date 1,800,000
Estimated to Complete 600,000
Total Cost 2,400,000
Expected GP 600,000
% Complete 18/24 75%
450,000
Profit prior recognized -300,000
GP year 2 150,000

Question 26

How to calculate Installment sales?

Answer 26

Installment sales - COS = GP%

Installment sales - less any cash collected X GP% = Deferred gain

Question 27

How do you calculate a partnership conversion to a Corp?

Answer 27

Assets at fair value less liabilities assumed by the corp less common stock on conversion should equal plug to APIC

Question 28

What is the formula to calculate % of completion?

Answer 28

Total costs to date / total estimated costs

Question 29

If a nonmonetary exchange with commercial substance takes place how is the transaction accounted for? Cost or Fair Value?

Answer 29

Accounted for using the fair value of the asset surrendered or received whichever is more evident.

Question 30

If 1st payment is received at conception of a capital lease, what annuity value would you use? Annuity Due & Ordinary Due

Answer 30

Annuity Due at the beginning of the year

Question 31

What are the Capital Lease Criteria?

OWNS

Answer 31

Ownership Transfer upon completion or buyout
Written option for bargain purchase
Ninety percent leased property FV<= PV of payments
Seventy Five percent or more of economic life

Question 32

What is the calculation for Goodwill on the Equity Method?

Answer 32

Excess of FV from purchase price.

Question 33

What is a 10K statement?

Answer 33

Audited Annual Financial statement

Question 34

Which of the following methods is used in IFRS to account for defined benefit pension plans?

• Vested years of service method.
• Projected-unit-credit method.
• Accumulated benefits method.
• Benefit-years-of-service method.

Answer 34

IFRS requires the use of the projected-unit-credit method to calculate the present value of the defined benefit obligation (PV-DBO).

Question 35

What is the formula to calculate Pension Liability/Asset?

Answer 35

Pension asset (liability) is the excess of the amount funded over the amount recorded as pension expense. The amount funded is $167,200 ($110,000 service cost + $57,200 funding of prior service cost). Pension expense is $151,700 ($110,000 service cost + $41,700 amortization of prior service cost). Therefore, pension asset/liability is $15,500 ($167,200 – $151,700).

Question 36

Milgram Corporation prepares its financial statements in accordance with IFRS. Milgram has investment property that it leases to Jenson Corporation. Milgram uses the fair value model to report its investment property. Which of the following statements is true?

Milgram should value the equipment at cost less accumulated depreciation and less accumulated impairment losses.
• Milgram depreciates the equipment using normal depreciation methods for property, plant, and equipment.
• Milgram does not record depreciation on the investment property.
• Milgram should record the increase in fair value in other comprehensive income for the period.

Answer 36

When investment property is recorded using the fair value model, depreciation is not recorded.

Question 37

Zinc Company does not elect to use the fair value option for reporting financial assets. An unrealized gain, net of tax, on Zinc’s held-to-maturity portfolio of marketable debt securities should be reflected in the current financial statements as

• A valuation allowance and included in the equity section of the statement of financial position.
• An extraordinary item shown as a direct increase to retained earnings.
• A footnote or parenthetical disclosure only.
• A current gain resulting from holding marketable debt securities

Answer 37

An unrealized gain on held-to-maturity securities is only disclosed in the notes to the financial statements. Gains are only reflected in the financial statements when they are realized (i.e., upon sale or for other than temporary declines in value). The year-end financial statements would present the held-to-maturity portfolio at cost. Parenthetical or footnote disclosure would indicate their market value.

Question 38

For external reporting purposes, it is appropriate to use estimated gross profit rates to determine the cost of goods sold for

  Interim financial reporting Year-end financial reporting 
A. Yes Yes 
B. Yes No 
C. No Yes 
D. No No

Answer 38

determining the cost of goods sold by using estimated gross profit rates is only appropriate for interim periods and is not appropriate for year-end external reporting. For year-end reporting, the actual cost of goods sold must be determined by using the inventory flow method which most clearly reflects income.

Question 39

In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for

• Financing activities.
• Operating activities.
• Lending activities.
• Borrowing activities

Answer 39

interest payments to lenders and other creditors are categorized as cash flows from operating activities.

Question 40

interest payments to lenders and other creditors are categorized as cash flows from operating activities.

• Before performing the 10% tests if a majority of the aggregation criteria are met.
• If the segments do not meet the 10% tests but meet some of the aggregation criteria.
• Before performing the 10% tests if all of the aggregation criteria are met.
• If any one of the aggregation criteria is met

Answer 40

two or more operating segments may be aggregated into a single operating segment if all of the aggregation criteria are met, or if after performing the 10% test a majority of the aggregation criteria are met.

Question 41

Which of the following items, if material, should be presented in the income statement separately as a component of income, net of applicable income taxes?
• Earthquake loss.
• Write-off of goodwill.
• Losses from translation of foreign currencies.
• Losses due to a strike.

Answer 41

An earthquake loss would generally be unusual and infrequent, meeting the definition of an extraordinary item.

Question 42

The functional currency of Nash, Inc.’s subsidiary is the Swiss franc. Nash borrowed Swiss francs as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash’s translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash’s consolidated financial statements?

• The translation loss is reported separately as “other comprehensive income” and in the stockholders’ equity section of the balance sheet and the exchange gain is reported in the income statement.
• The translation loss less the exchange gain is reported in the income statement.
• The translation loss less the exchange gain is reported as “other comprehensive income” under one of three alternatives and “accumulated other comprehensive income” in the stockholders’ equity section of the balance sheet.

Answer 42

translation adjustments resulting from the translation of foreign currency statements should be reported separately as a component of “other comprehensive income” under one of three alternatives and in “accumulated other comprehensive income” in stockholders’ equity. Additionally, gains and losses on certain foreign currency transactions should be reported in the same manner. Those gains and losses which should be excluded from net income and instead reported in “other comprehensive income” and as a component of stockholders’ equity include foreign currency transactions designated as economic hedges of a net investment in a foreign entity. Thus, both the translation loss and the exchange gain are to be reported as “other comprehensive income” and in the stockholders’ equity section of the balance sheet.

Question 43

Which of the following rates may be used to translate the cash flow statement?

I. Historical exchange rates.
II. Current exchange rates.
III. Weighted-average rates.

Answer 43

I & III

Question 44

Birk Co. purchased 30% of Sled Co.’s outstanding common stock on December 31, year 1, for $200,000. On that date, Sled’s stockholders’ equity was $500,000, and the fair value of its identifiable net assets was $600,000. Assume Birk Co. uses the equity method to account for this investment. On December 31, year 1, what amount of goodwill should Birk attribute to this acquisition?

$50,000
• $20,000
• $30,000
• $0

Answer 44

Investments between 20% and 50% of the outstanding stock are presumed to give the investor significant influence over the investee and as such should be accounted for under the equity method. Birk Co. purchased 30% of the outstanding common stock of Sled. Birk Co. is presumed to have significant influence over Sled and must account for this investment using the equity method. Under the equity method, any excess paid over the fair value of the net assets is considered goodwill. The total purchase price paid by Birk was $200,000 and the fair value of the net assets was $180,000 ($600,000 x 30%). Goodwill would be the difference between $200,000 and the $180,000. Goodwill is $20,000.

Question 45

The following information pertains to Been Corp. and its operating segments for the year ended December 31, 2010:

Total revenues $80,000,000
Sales to external customers (included in total) $30,000,000

External revenue reported by reportable operating segments must be at least

• $30,000,000
• $22,500,000
• $37,500,000
• $60,000,000

Answer 45

there must be enough segments reported so that at least 75% of unaffiliated revenues is shown by reportable segments (75% test). Sales to external customers total $30,000,000, so external revenues reported by reportable operating segments must be at least $22,500,000 ($30,000,000 x 75%).

Question 46

An enterprise must disclose all of the following about each reportable segment if the amounts are used by the chief operating decision maker, except

• Income tax expense.
• Unusual items.
• Cost of goods sold.
• Intersegment revenues.

Answer 46

the enterprise shall disclose the following about each reportable segment if the specified amounts are reviewed by the chief operating decision maker:

1. Revenues from external customers
2. Intersegment revenues
3. Interest revenue and expense (reported separately unless majority of segment’s revenues are from interest and management relies primarily on net interest revenue to assess performance)
4. Depreciation, depletion, and amortization expense
5. Unusual items, extraordinary items
6. Equity in the net income of investees accounted for by the equity method
7. Income tax expense or benefit
8. Significant noncash item

Cost of goods sold is not specifically included as a required disclosure.

Question 47

For IFRS reporting, if the functional currency is the same as the presentation currency, any translation gains or losses are generally reported as

• An extraordinary item on the statement of income.
• A gain or loss in other comprehensive income.
• A gain or loss directly in the retained earnings account.
• A gain or loss on the statement of income.

Answer 47

if the functional currency is the same as the presentation currency, any translation gain or loss is reported in current earnings on the income statement. However, there are several exceptions to this rule. Currency gains or losses on nonmonetary items for which gains and losses are recorded in other comprehensive income should also be reported in other comprehensive income.

Question 48

In accounting for stock-based compensation, what interest rate is used to discount both the exercise price of the option and the future dividend stream?

• Any rate that firms can justify as being reasonable.
• The risk-free interest rate.
• The current market rate that firms in that particular industry use to discount cash flows.
• The firm’s known incremental borrowing rate

Answer 48

The rate of interest used to discount both the exercise price and dividends is the risk-free interest rate.

Question 49

A lease contains a bargain purchase option. In determining the lessee’s capitalizable cost at the beginning of the lease term, the payment called for by the bargain purchase option would

• Be subtracted at its present value.
• Be added at its exercise price.
• Not be capitalized.
• Be added at its present value.

Answer 49

minimum lease payments include the rental payments plus the amount of the bargain purchase option if it exists. The amount to be capitalized is the present value of the minimum lease payments. Therefore, the present value of the bargain purchase option would be added to the present value of the rental payments (assumed to be previously calculated) in determining the lessee’s capitalizable cost.

Question 50

Taylored Corp. factors $200,000 of accounts receivable in a transaction in which control is surrendered and without recourse to Rich Corp. on July 1, year 1. Rich assessed a fee of 3% and retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest computed on a weighted-average time to maturity of the receivables of 41 days. Taylored

• $190,630
• $174,630
• $184,630
• $180,630

Answer 50

Taylored will receive the value of the receivables ($200,000), reduced by $10,000 for the amount of the holdback ($200,000 x .05), $6,000 withheld as fee income ($200,000 x .03), and $3,370 withheld as interest expense ($200,000 x .15 x 41/365). Therefore the correct answer is $180,630 ($200,000 – $6,000 – $3,370 – $10,000).

Question 51

For a troubled debt restructuring involving only modification of terms, it is appropriate for a debtor to recognize a gain when the carrying amount of the debt

• Is less than the present value specified by the new terms.
• Exceeds the total future cash payments specified by the new terms.
• Is less than the total future cash payments specified by the new terms.
• Exceeds the present value specified by the new terms

Answer 51

states that the debtor records a gain at the date of a restructure involving only a modification of terms when the prerestructure carrying amount exceeds the total future cash flows per the modification. The gain recognized is the difference between the prerestructure carrying amount and the future cash flows.

Question 52

Which statement is true under the installment method of cash distribution for partnerships?

• The final cash distribution is not based on the profit (loss) ratio.
• The two key steps in preparing a statement of partnership liquidation include paying off the debts of the partnership and determining which partners are to receive cash payments.
• The two key steps in preparing a statement of partnership liquidation include determining the available cash balance and using the profit (loss) ratio to distribute the cash.
• The final cash distribution is based on the profit (loss) ratio.

Answer 52

the final cash distribution is not based on the profit (loss) ratio, but instead is based upon the balance in each partner’s capital account.

Question 53

The information provided by financial reporting pertains to

• Individual business enterprises and an economy as a whole, rather than to industries or to members of society as consumers.
• Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.
• Individual business enterprises and industries, rather than to an economy as a whole or to members of society as consumers.
• Individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers.

Answer 53

SFAC 8 states that information provided by financial reporting pertains to individual business enterprises rather than to industries or an economy as a whole or to members of society as consumers.