FAR Review 1 Flashcards
4. In January 20X4, Vorst Co. purchased a mineral mine for $2,640,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the ore, Vorst will be required by law to restore the land to its original condition at an estimated cost of $180,000. Vorst believes it will be able to sell the property afterwards for $300,000. During 20X4, Vorst incurred $360,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its 20X4 income statement, what amount should Vorst report as depletion? a $135,000 b $144,000 c $150,000 d $159,000
Since Vorst must restore the property to its original condition at an estimated cost of $180,000 and incurred $360,000 in preparing the mine for production, the total cost associated with the mine is $2,640,000 + $180,000 + $360,000 or $3,180,000. When the ore has been extracted, Vorst expects to receive $300,000 from the sale of the property, indicating a depletion base of $2,880,000. With expected production of 1,200,000 tons, depletion will be $2.40 per ton. In 20X4, depletion will be $2.40 x 60,000 tons or $144,000
Depletion = Depletion base (2640+180+360)-300 (salvage)/units expected production then x tons sold.
How should plan investments be reported in a defined benefit plan's financial statements? a At actuarial present value. b At cost. c At net realizable value. d At fair value.
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Explain Answer
Correct! Plan investments should be reported at fair value in a defined benefit plan’s financial statements. Change in the fair value of these plan investments (or plan assets) is a factor in the pension expense calculation.
6. The stockholders of Meadow Corp. approved a stock-option plan that grants the company's top three executives options to purchase a maximum of 1,000 shares each of Meadow's $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted? a $20,000 b $60,000 c $100,000 d $300,000
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Explain Answer
Stock option compensation expense is generally recognized evenly over the vesting period. Since the vesting period is three years and the total compensation expense is $300,000, Meadows would record $100,000 compensation expense in the year the options were granted.
LCM
Replacement cost=cost to replace the item
NRV=Sales price-cost of disposal = Ceiling
NRV-Normal Profit Margin=Floor
Find the middle amount and compare to the original cost. Original cost is the lower of the cost or the middle amount.
- In the Adel-Brick partnership, Adel and Brick had a capital ratio of 3:1 and a profit and loss ratio of 2:1, respectively. The bonus method was used to record Colter’s admittance as a new partner. What ratio would be used to allocate, to Adel and Brick, the excess of Colter’s contribution over the amount credited to Colter’s capital account?
a
Adel and Brick’s new relative capital ratio.
b
Adel and Brick’s new relative profit and loss ratio.
c
Adel and Brick’s old capital ratio.
d
Adel and Brick’s old profit and loss ratio.
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A bonus is allocated to Adel’s and Brick’s capital accounts in accordance with their profit and loss ratio (2:1). Since the bonus is allocated from the new partner to the existing partners, their old profit and loss ratio must be used.
Hann School, a nongovernmental not-for-profit organization, spent $1 million of temporarily restricted cash to acquire land and a building. How should this be reported in the statement of activities?
a
Increase in unrestricted net assets.
b
Increase in temporarily restricted net assets.
c
Increase in permanently restricted net assets.
d
Decrease in permanently restricted net assets.
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Explain Answer
In the statement of activities, Hann School would report the $1 million as an increase in unrestricted net assets. Temporarily restricted net assets represent resources that the not-for-profit organization is permitted to spend in accordance with specific legal restrictions imposed by outside donors. Temporary restrictions are based on time or purpose (in this example, to acquire land and a building). The expenditure (use) of temporarily restricted net assets has the effect of releasing the assets from restriction and is reported as both a release and an unrestricted expense.
In a business combination accounted for under the acquisition method, the appraised values of the identifiable assets acquired exceeded the acquisition price. How should the excess appraised value be reported?
a
As negative goodwill.
b
As additional paid in capital.
c
As a reduction of the values assigned to noncurrent assets and a deferred credit for any unallocated portion.
d
As a gain on bargain purchase in the period of acquisition.
Under the acquisition method, the fair value of the identifiable assets acquired is reduced by the fair value of liabilities assumed and the difference is compared to total consideration. If the fair value of identifiable net assets exceeds total consideration, the excess is recognized as a gain on bargain purchase in the period of the acquisition.
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? a Change the due date of the invoice. b Factor the receivables outstanding. c Discount the receivables outstanding. d Demand payment from customers before the due date.
Factoring is a financial transaction in which a business sells its accounts receivable for cash to a third party (called a factor) at a discount. It is a technique allows business to covert accounts receivable to generate cash more quickly.
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:
Goodwill
Patents
Other assets
Total
Historical cost $15,000 $10,000 $35,000 $60,000
Depreciation and amortization $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?
a
Decrease goodwill by $13,000
b
Decrease goodwill by $15,000
c
Decrease goodwill by $3,250; patents by $2,167; and other assets by $7,583.
d
Decrease goodwill by $4,333; patents by $1,926; and other assets by $6,741.
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Explain Answer
The impairment loss is $13,000 (45,000 – 32,000 = 13,000).
A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except:
a
It will be reclassified as an asset held for sale.
b
It will be classified as a current asset.
c
It will no longer be depreciated.
d
It will be valued at historical cost.
When a fixed asset is held for sale it will be reclassified on the balance sheet as held for sale. Since it is expected to be sold in four months, it will be reported as a current asset. No depreciation is recognized on assets held for sale. Instead, they are written down to net realizable value, which is the amount for which they are expected to be sold, net of costs of disposal.
Whitestone, a nongovernmental not-for-profit organization, received a contribution in December year 1. The donor restricted use of the contribution until March year 2. How should Whitestone record the contribution?
a
Footnote the contribution in year 1 and record as income when it becomes available in year 2.
b
No entry required in year 1 and record as income in year 2 when it becomes available.
c
Report as income in year 1.
d
Report as deferred income in year 1.
Generally, all contributions are recorded as income immediately, with the appropriate Revenue account (either Unrestricted Net Assets or Temporarily Restricted Net Assets) increased along with Cash in the journal entry, as follows:
Restricted Contribution:
Cash xxxx
Revenues (TRNA) xxxx
For interim financial reporting, a company’s income tax provision for the second quarter of 20X2 should be determined using the
a
Effective tax rate expected to be applicable for the full year of 20X2 as estimated at the end of the first quarter of 20X2.
b
Effective tax rate expected to be applicable for the full year of 20X2 as estimated at the end of the second quarter of 20X2.
c
Effective tax rate expected to be applicable for the second quarter of 20X2.
d
Statutory tax rate for 20X2.
The provision for income taxes in interim financial statements is calculated using the rate that is expected to apply to the entire annual period. In any given interim period, the rate will be based on an estimate using the most current information available at the time.
Haft construction Co. has consistently used the percentage-of-completion method. On January 10, 20X1, Haft began work on a $3,000,000 construction contract. At the inception date, the estimated cost of construction was $2,250,000. The following data relate to the progress of the contract:
Income recognized at 12/31/X1 $300,000
Costs incurred 1/10/X1 through 12/31/X2 $1,800,000
Estimated cost to complete at 12/31/X2 $600,000
In its income statement for the year ended December 31, 20X2, what amount of gross profit should Haft report? a $450,000 b $300,000 c $262,500 d $150,000
For interim financial reporting, a company’s income tax provision for the second quarter of 20X2 should be determined using the
a
Effective tax rate expected to be applicable for the full year of 20X2 as estimated at the end of the first quarter of 20X2.
b
Effective tax rate expected to be applicable for the full year of 20X2 as estimated at the end of the second quarter of 20X2.
c
Effective tax rate expected to be applicable for the second quarter of 20X2.
d
Statutory tax rate for 20X2.
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Explain Answer
Dell Co. adopted a defined benefit pension plan on January 1, 20X0. Dell amortizes the prior service cost over 16 years and funds prior service cost by making equal payments to the fund trustee at the end of each of the first ten years. The service cost is fully funded at the end of each year. The following data are available for 20X0:
Service cost for 20X0 $220,000
Prior service cost:
Amortized $83,400
Funded $114,400
Dell's prepaid pension cost at December 31, 20X0, is a $114,400 b $83,400 c $31,000 d $0
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Explain Answer
In 20X0, the first year of Dell’s pension plan, pension expense would be $220,000 + $83,400 or $303,400. The amount funded is the current service cost of $220,000 + $114,400 of funded prior service cost for a total of $334,400. The difference of $31,000 is prepaid pension cost.
Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward's credit sales for 20X2 were $1,000,000. During 20X2, Ward wrote off $18,000 of uncollectible accounts. Ward's allowance for uncollectible accounts had a $15,000 balance on January 1, 20X2. In its December 31, 20X2, income statement, what amount should Ward report as uncollectible accounts expense? a $23,000 b $20,000 c $18,000 d $17,000
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Explain Answer
Ward uses the income statement approach to calculating bad debts expense. As a result, the expense will be equal to 2% of credit sales of $1,000,000, or $20,000.
