FAR SET 2 Flashcards
In the financial statements of employee benefit pension plans and trusts, the plan investments are reported at
Plan assets are always reported at fair value
Which of the following financial categories are used in a nongovernmental not-for-profit organization’s statement of financial position?
A non-profit’s statement of financial position (not balance sheet) includes 3 categories:
- Assets
- Liabilities
- Net assets (not retained earnings)
Kenn City obtained a municipal landfill and passed a local ordinance that required the city to operate the landfill so that the costs of operating the landfill, as well as the capital costs, are to be recovered with charges to customers. Which of the following funds should Kenn City use to report the activities of the landfill?
When a government charges customers for a service – similar to a regular business – that activity is managed through an enterprise fund. Enterprise funds are just that: used for government services that are funded by charging external customers a fee for.
Roy City received a gift, the principal of which is to be invested in perpetuity with the income to be used to support the local library. In which fund should this gift be recorded?
Permanent fund is the right answer because the principal is to remain invested forever, but the point of the investment’s income is to benefit the government. That’s the definition of a permanent fund.
In contrast, any government “trust” funds refer to funds being commingled from other funds or external entities for investment purposes.
Special revenue funds are funds where money is committed and set aside for a specific government purpose. It is usually funded by money transferred from the general fund.
Which of the following is the paramount objective of financial reporting by state and local governments?
The two most important objectives of government reporting are:
- Accountability
- Interperiod equity: whether current year revenues are sufficient to cover current year benefits, and along with that, whether current citizens deferred taxes to future taxpayers
Which of the following funds would be reported as a fiduciary fund in Pine City’s financial statements?
The word “trust” signifies a fiduciary fund. A private-purpose trust is one of the four types of fiduciary funds:
- Pension trust funds
- Investment trust funds
- Private-purpose trust funds
- Agency funds
Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy?
Inventory turnover is COGS/average inventory, so if inventory is increasing in cost during the year, FIFO would have the lowest COGS and the highest ending inventory. The highest-priced batches of inventory would make up ending inventory at the end of the year.
When a business has one or more significant concentrations, which of the following requires a disclosure in the financial statements?
If a concentration could have a severe impact on the firm, and the event is even reasonably possible, it needs to be disclosed. ‘Probable’ is a higher likelihood than ‘reasonably possible’, so there should have been a disclosure before the event became probable.
In a business combination, the closing date is the same as which of the following:
The date on which the acquirer gains control of the acquired business, this is the closing date, which is officially the acquisition date.
Which of the following would a nongovernmental not-for-profit educational institution report as program services?
In a non-profit you have program services and support services. Program services are the activities directly related with carrying out the mission of the non-profit. In this case, a teacher’s salary at a educational non-profit would be a program service.
A nongovernmental not-for-profit organization received a $2 million gift from a donor who specified it be used to create an endowment fund that would be invested in perpetuity. The income from the fund is to be used to support a specific program in the second year and beyond. An investment purchased with the gift earned $40,000 during the first year. At the end of the first year, the fair value of the investment was $2,010,000. What is the net effect on temporarily restricted net assets at year end?
The income from the investment is to be used for a specific program starting in year 2, so at the end of year 1 the $40,000 is included in temporarily restricted net assets. Along with the $10,000 increase in fair value of the investment, it’s $50,000 increase.
What are the components of the lease receivable for a lessor involved in a direct- financing lease?
In a direct-financing lease, the lessor records the lease receivable that is equal to the minimum lease payments plus any residual value – residual value being the fair value of the asset at the end of the lease. Most questions on this that involve any numbers will usually have “no salvage value” or “no residual value”. So in general, for a direct-financing lease, the “lease receivable” for the lessor will equal the sum of the minimum lease payments.
When you’re dealing with a capital lease, it can either be a direct financing lease, or a sales type lease. Which type only matters to the lessor. If the leased asset book value is equal to fair value, then it is a direct-financing lease and the lessor only earns interest on the lease. In a sales-type lease, the asset book value does not equal fair value, and therefore the lessor earns a margin in addition to the interest on the lease (this just means the lessor is “selling” the asset at a profit).
Fern Co. has net income, before taxes, of $100,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers’ life insurance premiums where the company is the beneficiary. The tax rate for the current year is 10%. What is Fern’s effective tax rate?
The ‘effective’ tax rate is the taxes actually paid over net income. Temporary and permanent differences can increase or decrease taxable income from net income (book income), and then the taxes actually paid over the net income amount gives you the effective tax rate.
In this example, taxable income is $90,000: $100,000 – 20,000 for muni bond interest, + 10,000 paid for officers’ life insurance = $90,000
So taxes paid are 90,000 * 10% = $9,000.
Then, the $9,000 over the original $100,000 of net income is an effective tax rate of 9%
Just in case: The muni bond interest is subtracted because this isn’t taxable but it was counted as revenue in net income. The $10,000 of officer life insurance is an expense for book income, but it is taxable so it is added back in to taxable income.
Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem’s additional paid-in capital from common stock decrease as a result of the acquisition?
Under the par value method for treasury stock, the APIC (additional paid-in capital) account is decreased by the amount it was credited for on that amount of stock when the stock was originally issued. This stock was issued at $7 per share and a $6 par, so that put $1 into APIC for every share issued. So, when 100 shares are acquired as treasury stock, $1 is taken back out of the APIC account, or $100.
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?
To record compensation expense for stock options, you need to determine the fair value of the options, and then record the expense ratably over the vesting period. In this case, the full fair value is given, so the total fair value of $300,000 would be expensed over the 3-year vesting period, for a compensation expense in year 1 of $100,000.
