FAR SET 1 Flashcards
Two step test for impairment loss
- Carrying value > Undiscounted cash flows
2. Carrying Value - Fair Value = Impairment loss
On June 19, Don Co., a U.S. company, sold and delivered merchandise on a 30-day account to Cologne GmbH, a German corporation, for 100,000 euros. On July 19, Cologne paid Don in full. Relevant currency exchange rates were:
What amount should Don record on June 19 as an account receivable for its sale to Cologne?
The receivable will be recorded using that day’s spot rate, which is the spot rate on June 19th.
100,000 x .988 = $988,000
As of December 1, year 2 a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 three-year balloon note. The company has no other liabilities. How should the company’s debt be presented in its classified balance sheet on December 31, year 2 if no debt repayments were made in December?
The current liabilities include:
The $250,000 drawn on the line of credit
1/5 of the $750,000 installment note, so $150,000
Total of $400,000
The long-term liabilities include:
The $600,000 of the installment note
The $300,000 balloon note
These total $900,000
Cuthbert Industrials, Inc. prepares three-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?
Since Cuthbert prepares three-year financials, the error needs to be corrected in years 1 and 2, and the beginning balances of year 3 should reflect the correction so that all 3 years of the financials are comparable. Also, the year 1 and 2 financials should be restated.
A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend?
A “large stock dividend” is a stock dividend of more than 25% of the current outstanding stock. When this happens, retained earnings is debited for the par value, and common stock is credited for the par value.
In this case, 30% of 1,000 shares is 300 shares, and at $1 par, the entry would be $300 debit to RE, and $300 credit to common stock.
How should a city’s general fund report the acquisition of a new police car in its governmental fund statement of revenues, expenditures and changes in fund balances?
“Expenditure” is a term used in the modified-accrual basis of accounting, which is what government funds use. They don’t use the word expense. Expenditure is really any cash outflow- whether it was an “expense” or a capital purchase, which is what the police car would be.
Which of the following fund types do not appear in the government-wide financial statements?
Fiduciary funds don’t appear in the government-wide financials because the government is holding these funds as a fiduciary and these funds aren’t used for government purposes.
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?
A significant change in cash flows related to the asset is what determines whether an exchange has commercial substance or not.
At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?
An asset retirement obligation(ARO) is when there will be a large disposal or cleanup cost at the end of an asset’s useful life, and it is a liability that increases over the life of the asset. Each year, the increase in the ARO is called the “accretion expense”, and is calculated from the ‘credit adjusted risk free’ interest rate and the fair value of the ARO. In this case, the accretion expense is $100,000 x 10% = $10,000.
A company sponsors two defined benefit pension plans. The following information relates to the plans at year end:
Plan A: FV = $800,000 PBO = $1,000,000
Plan B: FV = $1,000,000 PBO = $700,000
What amount(s) should the company report in its balance sheet related to the plans?
To simplify a pension, you have the projected amount of what all the payouts will equal (project benefit obligation), and that’s the liability. Then, you start investing in assets with the hopes of having enough to meet those obligations in the future (fair value of plan assets). The difference in the two and any given point in time is the “funded status”, and is either an asset or a liability.
In this case, Plan A is a liability of $200,000, and Plan B is an asset of $300,000.
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 year?
Proceeds from selling a building is a cash flow from investing.
Issuing common stock, the line of credit, and issuing bonds are all cash increases from financing, and total $550. Paying the dividends is a financing cash outflow. So, $550 – $300 = $250
Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs?
Patent litigation costs are capitalized if the patent right is successfully defended. Otherwise the litigation costs would be expensed.
Rowe Inc. owns 80% of Cowan Co.’s outstanding capital stock. On November 1, Rowe advanced $100,000 in cash to Cowan. What amount should be reported related to the advance in the consolidated balance sheet by Rowe as of December 31?
All intercompany payables and receivables are eliminated in consolidated statements.
A company acquired an aircraft for $80 million, with the cost consisting of the airframe, $50 million; the engine, $20 million; and other components, $10 million. The company applies the cost model and uses the straight-line method of depreciation. The aircraft has a total estimated useful life of 20 years and no residual value.
The estimated useful lives of the components are as follows:
Airframe 10 years
Engine 5 years
Other components 10 years
Under IFRS, what amount should the company record as annual depreciation expense?
Under IFRS, if major components of a piece of property or equipment have significantly different useful lives, then the components are depreciated separately.
In this case:
Airframe = 50 mil / 10 years = $5 million per year
Engine = 20 mil / 5 years = $4 million per year
Other components = 10 mil /10 years = $1 million per year
Add those up and you get $10 million per year in depreciation expense.
How should a nongovernmental not-for-profit organization report investments in its financial statements?
Non profits report investments at fair value.
