FAR Study Deck 3

Question 1

A company has an investment in a mutual fund, initially valued at $40,000 . At the year-end its fV is $45,000. What journal entry should be recorded

Answer 1

Debit Mutual Fund Investment $5,000
Credit Investment Income $5,000

Question 2

Indirect Method

Answer 2

This method adjusts net income with changes applied from non-cash transactions. Not commonly used, this method is appropriate for small business w/o significant cash transactions. Reconciles from Net income to cash provided by operating activities

Question 3

What is the LCM?

Answer 3

LCM market defines the cost to replace the item subject to a max and minimum. The maximum is net realizable value (NRV) & the minimum is NRV minus a normal profit margin. The “cost” in LCM simply means the historical cost of the inventory. Net Realizable value is the value for which an asset can be sold minus the estimated costs of selling or discarding the asset.

Question 4

Under income tax basis accounting how is prepaid rent treated?

Answer 4

It is expenses in the period paid, like rent they are typically expensed in the period they are paid, as this is when they are often deductible for tax purposes.

Question 5

In variance analysis, what does the Variable Overhead Efficiency Variance measures?

Answer 5

The efficiency in using Labor & other resources relative to output.

Question 6

In preparing journal entries for amortized cost investments, when is interest income recognized

Answer 6

Periodically, based on the effective interest rate. This allocates interest income over the relevant periods based on the carrying amount of the investment.