FAR_ 6.22.2016 ( 5 of 10) Flashcards
Walt Co. adopted the dollar-value LIFO inventory method as of January 1, 2005, when its inventory was valued at $500,000.
Walt’s entire inventory constitutes a single pool. Using a relevant price index of 1.10, Walt determined that its December 31, 2005, inventory was $577,500 at current-year cost, and $525,000 at base-year cost.
What was Walt’s dollar-value LIFO inventory on December 31, 2005?
$527,500
Ending inventory at current cost
$577,500
Ending inventory in base-year dollars $577,500/1.10
$525,000
Less beginning inventory in base-year dollars
500,000
Equals increase in inventory in base-year dollars
25,000
Times current price level index
x 1.10
Equals increase in inventory at current prices
27,500
Plus beginning inventory, DV LIFO
500,000
Equals ending inventory, DV LIFO
$527,500
In the year of adoption only, the beginning inventory under DV LIFO is the same as beginning inventory in base-year dollars. DV LIFO ending inventory is the sum of the base-year inventory plus layers measured in the prices of the year added.
Tech Co. bought a trademark on January 2, two years ago. Tech accounted for the trademark as instructed under the provisions of GAAP during the current year. The intangible was being amortized over 40 years. The carrying value at the beginning of the year was $38,000. It was determined that the cash flow will be generated indefinitely at the current level for the trademark.
What amount should Tech report as amortization expense for the current year?
$0
Correct! This intangible has an indefinite life because it can be renewed and because management believes its cash flow will be generated indefinitely. Under GAAP, indefinite life intangibles are not subject to amortization. All intangibles are subject to impairment, however.
Orleans Co., a cash-basis taxpayer, prepares accrual-basis financial statements. Since year 1, Orleans has applied FASB ASC 740 - Income Taxes. In its year 3 balance sheet, Orleans’ deferred income- tax liabilities increased compared to year 2.
Which of the following changes would cause this increase in deferred income tax liabilities?
I. An increase in pre-paid insurance.
II. An increase in rent receivable.
III. An increase in warranty obligations.
I and II.
Deferred tax liabilities are the future tax effects of future taxable temporary differences. Such differences cause future taxable income to exceed future pre-tax accounting income.
I. An increase in pre-paid insurance implies that future accounting insurance expense will exceed future tax insurance expense. Therefore, future taxable income will increase relative to future pre-tax accounting income. This increases the deferred tax liability.
II. An increase in rent receivable implies that future tax-rent revenue will exceed future accounting-rent revenue. A rent receivable is recorded when accounting-rent revenue is recognized before cash is received. Cash will be received in the future, which will be recognized as rent revenue for tax, but no revenue will be recognized for accounting. Therefore, again, future taxable income will increase relative to future pre-tax accounting income.
III. An increase in warranty obligations implies that future tax-warranty expense will exceed future accounting-warranty expense. Accounting has recognized the warranty expense in the year of sale, whereas tax-warranty expense is recognized in the year the repairs are made. This time, future taxable income will decrease relative to future pre-tax accounting income. This increases the deferred tax asset, rather than the deferred tax liability.
Therefore, only I and II increase the deferred tax liability
Each of the following is a component of the changes in the net assets available for benefits of a defined benefit pension plan trust, except
The net change in the actuarial present value of accumulated plan benefits.
The net change in the actuarial present value of accumulated plan benefits refers to the liability side of the pension plan, rather than to the plan assets. This amount is the change from the previous reporting period of the amount required to pay the present value of promised benefits. It is one measure of the change in the obligation of the plan. Changes in net assets refers to the asset side of the plan. Assets are typically held by a trust co
In hospital accounting, restricted funds are:
Restricted as to their use by the donor, grantor, or other source of the resources.
On December 31, 20X8, the end of its fiscal year, Domco had a foreign currency account payable with a settlement amount greater than its previously recorded carrying amount. Which one of the following would Domco recognize for 20X8?
Exchange loss.
Since the foreign currency account payable had a settlement amount greater than its previously recorded carrying amount, Domco would have to recognize the change in settlement amounts in the period in which the settlement amount changed ‐ 20X8. Specifically, since the amount to settle the account payable increased during 20X8, Domco would have to recognize an exchange loss - it will take more dollars to acquire the foreign currency needed to settle the account.
Which of the following statements concerning contracts that are financial instruments is/are correct?
I. They result in the exchange of cash or ownership interest in an entity.
II. They impose on one entity a contractual obligation and grant another entity a contractual right.
III. They must be settled within one year or the operating cycle, whichever is longer.
I and II only.
Both Statements I and II are correct; Statement III is incorrect. Contracts that are financial instruments both result in the exchange of cash or an ownership interest (Statement I) and impose on one entity a contractual obligation and grant to another entity a contractual right (Statement II). Statement III is incorrect; contracts that are financial instruments do not have to be settled within one year or the operating cycle, whichever is longer.
On January 1, year 15, Hart, Inc. redeemed its 15-year bonds of $500,000 par value for 102.
They were originally issued on January 1, year 3 at 98 with a maturity date of January 1, 2008.
The bond issue costs relating to this transaction were $20,000. Hart amortizes discounts, premiums, and bond issue costs using the straight-line method.
What amount of loss should Hart recognize on the redemption of these bonds?
A. $16,000
The journal entry for retirement:
Bonds payable 500,000 Loss 16,000 Bond Discount 2,000 .02($500,000)(3/15) Bond Issue Costs 4,000 $20,000(3/15) Cash 510,000 $500,000(1.02)
The bond term is 15 years. Retirement is 3 years before maturity. Therefore, under the straight-line method, 3/15 of both the total bond discount and bond issue costs would remain unamortized at the retirement date. These amounts are removed along with the face value of the bonds (bonds payable account).
The original discount was 2% of $500,000.
On December 31, 2005, Elm Village paid a contractor $4,500,000 for the total cost of a new Village Hall built in 2005 on Village-owned land.
Financing for the capital project was provided by a $3,000,000 general obligation bond issue sold at face value on December 31, 2005, with the remaining $1,500,000 transferred from the General Fund.
What account and amount should be reported in Elm’s 2005 financial statements for the General Fund?
Other financing uses control
$1,500,000
This answer is correct because the General Fund should report only the $1,500,000 in the Other Financing Uses Control account as an Operating Transfer. The $3,000,000 in bonds proceeds should be reported in the Capital Projects Fund in the Other Financing Sources Control account.
On its December 31, 20x5 balance sheet, Shin Co. has income tax payable of $13,000 and a current deferred tax asset of $20,000, before determining the need for a valuation account.
Shin had reported a current deferred tax asset of $15,000 at December 31, 20x4. No estimated tax payments are made during 20x5. At December 31, 20x5, Shin determines that it is more likely than not that 10% of the deferred tax asset would not be realized.
In its 20x5 income statement, what amount should Shin report as total income tax expense?
C. $10,000
income tax expense is the net sum of the income tax liability for the year, the changes in the deferred tax accounts, and the change in the valuation account for deferred tax assets.
Tax liability (current portion of income tax expense): $13,000
Less increase in deferred tax asset: $20,000 - $15,000
($5,000)
Plus increase in valuation account: .10($20,000)
$2,000
Equals income tax expense
$10,000
The increase in the deferred tax asset causes income tax expense to decrease relative to the tax liability, because, as a result of transactions through the end of the current year, future taxable income will be reduced. This reduction is not realized in the current year as a reduction in the tax liability. Therefore, the anticipated future reduction is treated as an asset at the end of the current period. When realized, the asset is reduced in a future year.
The increase in the valuation allowance, which is contra to the deferred tax asset, reduces the deferred-tax-asset effect, because it is an amount of the deferred tax asset not likely to be realized.
