FAR Review 1

Question 1

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

Answer 1

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.

Question 2

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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Answer 2

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.

Question 3

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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Answer 3

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.

Question 4

LCM

Answer 4

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.

Question 5

8. 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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Answer 5

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.

Question 6

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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Answer 6

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.

Question 7

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.

Answer 7

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.

Question 8

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.

Answer 8

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.

Question 9

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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Answer 9

The impairment loss is $13,000 (45,000 – 32,000 = 13,000).

Question 10

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.

Answer 10

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.

Question 11

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.

Answer 11

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

Question 12

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.

Answer 12

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.

Question 13

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

Answer 13

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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Question 14

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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Answer 14

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.

Question 15

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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Answer 15

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.

Question 16

Graf Corp. discloses supplemental industry segment information. The following information is available for 20X0:

Segment Sales Traceable operating
expenses
X $1,000,000 $600,000
Y $800,000 $500,000
Z $600,000 $350,000
$2,400,000 $1,450,000

Additional 20X0 expenses, not included above, are as follows:

Indirect operating expenses: $360,000
General corporate expenses: $240,000

Appropriate common expenses are allocated to segments based on the ratio of a segment's sales to total sales. Segment Z's 20X0 operating profit was
 a
$100,000
b
$130,000
c
$160,000
d
$250,000

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Answer 16

Segment Z’s operating profit will consist of its sales of $600,000 less traceable operating expenses of $350,000, for a net amount of $250,000. This is be further reduced by an allocation of indirect operating expenses, but will not be adjusted for general corporate expenses. The operating expenses are allocated on the basis of sales. Since segment C has sales of $600,000 of a total of $2,400,000, 25% of the indirect expenses, or $90,000, will be allocated to Z giving it an operating profit of $160,000.

Question 17

22. Three companies are doing business with a German entity and, as a result, each has entered into a forward exchange contract on December 18, 20X2, under which each will purchase 300,000 Euros on February 18, 20X3. Relevant exchange rates are as follows:

Spot rate

 Forward rate     
(for 2/18/X3)     November 18, 20X2    	        $1,27	         $1.30 December 18, 20X2    	        $1.32	         $1.25 December 31, 20X2    	        $1.35	         $1.31 February 18, 20X3    	        $1.37	 

Company C purchased printing supplies from a German supplier on November 18, 20X2, on 90 day terms, and is required to pay 300,000 Euros on February 18, 20X3. When the exchange rate increased on December 18, the company decided to enter into the forward exchange contract, which was not designated as a hedge. What amount of foreign currency gain should be recognized in income on December 31, 20X2?
 a
$0
b
$9,000 gain
c
$9,000 loss
d
$6,000 loss

Answer 17

When Company C incurred the liability on November 18, 20X2, it recorded the liability at the spot rate of $1.27 resulting in a liability of $381,000. On December 31, 20X2, when the spot rate was $1.35, the liability would be increased to $405,000, resulting in a loss of $24,000, which will be reported in earnings. In addition, the company entered into a contract to purchase 300,000 Euros at $1.25 on December 18, 20X3. As of December 31, it is expected that those Euros will be worth $1.31 each and, as a result, Company A will gain $.06 per Euro or a total of $18,000. Since the derivative was acquired on speculation, the gain will also be recognized in earnings. As a result, the net amount recognized in earnings will be a loss of $6,000.

Question 18

On January 2, 20X4, West Co. issued 9% bonds in the amount of $500,000, which mature on January 2, 20X24. The bonds were issued for $469,500 to yield 10%. Interest is payable annually on December 31. West uses the interest method of amortizing bond discount. In its June 30, 20X4, balance sheet, what amount should West report as bonds payable?
 a
$469,500
b
$470,475
c
$471,025
d
$500,000

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Answer 18

Interest on the bonds for the period from 1/2/X4 to 6/30/X4 will be $469,500 x 10% x 6/12 or $23,475. The amount of interest paid would be $500,000 x 9% x 6/12 or $22,500. Amortization of discount would be the difference of $975 increasing the carrying value of the bonds to $470,475.

Question 19

Clay Corp. had $600,000 convertible 8% bonds outstanding at June 30, 20X0. Each $1,000 bond was convertible into 10 shares of Clay's $50 par value common stock. On July 1, 20X0, the interest was paid to bondholders, and the bonds were converted into common stock, which had a fair market value of $75 per share. The unamortized premium on these bonds was $12,000 at the date of conversion. Under the book value method, this conversion increased the following elements of the stockholders' equity section by
 a
Common stock: $300,000
Additional paid-in capital: $312,000
b
Common stock: $306,000
Additional paid-in capital: $306,000
c
Common stock: $450,000
Additional paid-in capital: $162,000
d
Common stock: $600,000
Additional paid-in capital: $12,000

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Answer 19

Under the book value method, it is assumed that stock issued on the conversion of bonds is issued for the carrying value of the bonds or $612,000. At 10 shares per $1,000 bond, 6,000 shares of $50 par value common stock were issued. $300,000 would be recorded as common stock with the remaining $312,000 recorded as additional paid-in capital.

Question 20

On January 1, 20X0, Babson, Inc. leased two automobiles for executive use. The lease requires Babson to make five annual payments of $13,000 beginning January 1, 20X0. At the end of the lease term, December 31, 20X4, Babson guarantees the residual value of the automobiles will total $10,000. The lease qualifies as a capital lease. The interest rate implicit in the lease is 9%. Present value factors for the 9% rate implicit in the lease are as follows:

For an annuity due with 5 payments 4.240
For an ordinary annuity with 5 payments 3.890
Present value of $1 for 5 periods 0.650

Babson's recorded capital lease liability immediately after the first required payment should be
 a
$48,620
b
$44,070
c
$35,620
d
$31,070

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Answer 20

The capital lease will be recorded as an asset and an obligation equal to the present value of the minimum lease payments. The $13,000 lease payments represent an annuity due for 5 periods, since the first payment is at the inception of the lease. The guaranteed residual value of $10,000 represents a lump sum payment to be made at the end of 5 periods. As a result, the asset and obligation will be:

$13,000 x 4.240 or $55,120 + $10,000 x .65 or $6,500 for a total of $61,620

The first payment of $13,000 is due at the inception of the lease and will all be applied to principal. As a result, the balance will be reduced to $61,620 - $13,000 or $48,620.

Question 21

On January 1, 20X0, Hooks Oil Co. sold equipment with a carrying amount of $100,000, and a remaining useful life of 10 years, to Maco Drilling for $150,000. Hooks immediately leased the equipment back under a 10-year capital lease with a present value of $150,000 and will depreciate the equipment using the straight-line method. Hooks made the first annual lease payment of $24,412 in December 20X0. In Hooks' December 31, 20X0, balance sheet, the unearned gain on equipment sale should be
 a
$50,000
b
$45,000
c
$25,588
d
$0

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Answer 21

This is a sale and leaseback transaction under which Hooks will not recognize the gain of $50,000 on the sale of the equipment. Instead, it will be reported as a deferred credit in the liability section of the balance sheet and will be amortized over the 10-year term of the lease. Since the leaseback is a capital lease, the gain will be recognized as a reduction to depreciation expense of $5,000 per year. As of 12/31/X0, one year of the 10-year lease had elapsed indicating that $5,000 of the gain would have been amortized leaving an unearned gain of $45,000.

Question 22

n 20X0, 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 20X0 cash flow statement, the net change reported in the cash flows from investing activities section should be a
 a
$10,000 increase.
b
$21,000 decrease.
c
$31,000 increase.
d
$52,000 decrease.

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Answer 22

At the time that the tornado destroyed the building, it had a carrying value of $100,000 - $48,000 or $52,000. Since Holland only reported a loss of $21,000, the proceeds from the insurance company, which would be a cash inflow from investing activities, must be the difference of $31,000.

Question 23

On January 2 of the current year, Otto Co. purchased 40% of Penn Co.’s outstanding common stock. The carrying amount of Penn’s depreciable assets was $1,000,000 on January 2. Penn’s depreciable assets had an original useful life of 10 years, and a remaining useful life of five years. Otto recognized $8,000 amortization for the current year ending December 31 related to its investment in Penn due to the excess of fair value over book value on these assets. What was the fair value of Penn's depreciable assets on January 2 of the current year?
 a
$100,000
b
$900,000
c
$1,000,000
d
$1,100,000

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Answer 23

If Otto, with a 40% ownership interest in Penn, is recognizing $8,000 in amortization for the year, amortization of 100% would be $8,000/40% or $20,000. With a remaining useful life of 5 years, the amount being amortized would be $20,000 x 5 or $100,000 indicating that the fair value of the asset was $1,000,000 + $100,000 or $1,100,000.

Question 24

A company finances the purchase of equipment with a $500,000 five-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?
 a
$477,756
b
$487,695
c
$487,756
d
$490,061

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Answer 24

The first payment will include interest of $500,000 x 12% x 1/12 or $5,000. The entire payment was $11,122, indicating a principal reduction of $6,122 and an ending balance of $500,000 - $6,122 or $493,878. The second payment will include interest of $493,878 x 12% x 1/12 or $4,939, indicating a principal reduction of $6,183. After the second payment, the liability will have a balance of $493,878 - $6,183 or $487,695.