Final Review Flashcards
On January 2, 2009, the beginning of its fiscal year, Zable, Inc. acquired all of the stock of Sideco, Inc. from its owners using the following forms and amounts of consideration to pay Sideco owners:
- Cash $50,000
- An investment in Loco, Inc. bonds which Zable had designated as held-for-trading, and which had a cost of $100,000 and a carrying amount of $102,000.
- Land, with a cost of $50,000 and a fair value of $60,000.
Which one of the following is the amount of gain or loss, if any, that Zable should recognize in connection with the transfer of these assets to Sideco owners?
A. $ - 0 - (no gain or loss).
B. $ 2,000
C. $ 10,000
D. $ 12,000
A. $ - 0 - (no gain or loss).
B. $ 2,000
C. $ 10,000
The amount of gain recognized in connection with the business combination would be $10,000. Generally, assets (and liabilities and equity) transferred as consideration in a business combination should be measured at fair value. When assets being transferred have a carrying value different than fair value, they should be adjusted to fair value before the transfer and a gain or loss recognized. In this case, since the assets are transferred to Sideco’s former owners and not Sideco, the following would apply:
Cash would be transferred at face amount, $50,000, with no gain or loss.
The investment in Loco would be transferred at carrying value ($102,000), which is also fair value because the bonds are held-for-trading and would have been adjusted to fair value at December 31, 2008, with any gain or loss recognized at that time. So, no gain or loss would be recognized on January 2, 2009, in connection with the business combination.
The land would be transferred at fair value, $60,000, and a $10,000 gain would be recognized in connection with the business combination.
D. $ 12,000
When goodwill is recognized in a business combination, which of the following types of information about that goodwill must be disclosed?
I. A quantitative description of the factors that make up the goodwill.
II. The amount of goodwill that is expected to be deductible for tax purposes.
III. The amount of goodwill allocated to each reportable segment.
A. I and II only. B. I and III only. C. II and III only. D. I, II, and III.
A. I and II only. B. I and III only. C. II and III only. D. I, II, and III. Statements I, II, and III are all required. When goodwill is recognized in a business combination, a quantitative description of the factors that make up the goodwill (Statement I), the amount of goodwill that is expected to be deductible for tax purposes (Statement II), and the amount of goodwill allocated to each reportable segment (Statement III) must all be disclosed.
On October 1, 2008, Buyco entered into a legally enforceable contract to acquire raw material inventory in 180 days for $20,000. In order to mitigate the risk of a change in the value of the raw materials, Buyco also entered into a qualified 180-day forward contract to hedge the fair value of the raw materials. At December 31, 2008, the value of the raw materials had decreased by $500, and the fair value of the futures contract had increased by $480. On March 29, 2009, the date the raw materials were delivered to Buyco, they had a fair value of $19,300, and the forward contract had a fair value of $700. Which one of the following is the amount by which the derivative is ineffective as a fair value hedge for 2008?
A. $980 B. $500 C. $480 D. $20
A. $980 B. $500 C. $480 D. $20 Because Buyco entered into the forward contract (hedging instrument) to hedge the risk of change in the fair value of the raw materials (hedged item), the change in fair value of the forward contract offsets the change in the fair value of the raw materials. Since during 2008 the change in the value of the raw materials decreased more than the value of the forward contract increased, the difference is the amount by which the derivative is ineffective as a fair value hedge. Specifically, the decrease in the value of the raw materials, $500, was offset by the increase in the value of the forward contract of $480, so the hedge was ineffective by $500 - $480 = $20, which is the correct answer.
When the fair value of an investment in debt securities exceeds its carrying amount, how should each of the following assets be reported at the end of the year?
Held-to-maturity securities Available-for-sale securities
Fair value Carrying amount
Carrying amount Fair value
Carrying amount Carrying amount
Fair Value Fair Value
Held-to-maturity securities Available-for-sale securities
Fair value Carrying amount
Carrying amount Fair value
Securities classified as held-to-maturity are reported at amortized cost, which is the carrying amount of the securities. Further, securities classified as available-for-sale are reported at fair value.
Carrying amount Carrying amount
Fair Value Fair Value
The following information relates to a post-retirement benefit plan:
APBO beginning, $300mn
Plan assets beginning, $100mn
Net post-retirement benefit gain, beginning, $20mn
Amortization of net gain or loss is based on SL method, ten-year average remaining service period
Prior-service cost, initial amount, recognized four years ago, $50mn
Amortization of prior-service cost is based on SL method, ten-year average remaining service period
Service cost, $40mn
Discount rate, 5%
Expected rate of return, 6%
Actual return, $10mn
Change in estimated life expectancy caused a gain of $16mn, year-end
Funding contribution, $20mn
What amount will be reported in the ending balance sheet for post-retirement benefit liability?
A. $209mn
B. $213m
C. $9mn
D. $212mn
A. $209mn
Beginning post-retirement benefit liability equals $200mn ($300mn APBO - $100mn assets). Post-retirement benefit expense: $40mn SC + $15mn interest cost (.05 x $300mn) - $6mn expected return (.06 x $100mn) + $5mn amortization of PSC ($50mn/ten) - $2mn amortization of net gain ($20mn/10) = $52mn.
Entry: dr. post-retirement benefit expense 52, dr. postretirement gain/loss-OCI 2, cr. PSC-OCI 5, cr. post-retirement benefit liability 49. There is a $4mn asset gain = $10mn actual return - $6mn expected return.
Entry: dr. postretirement benefit liability 4, cr. postretirement gain/loss-OCI 4.
Entry for actuarial gain: dr. postretirement benefit liability 16, cr. post-retirement gain/loss-OCI 16.
Entry for funding: dr. post-retirement benefit liability 20, cr. cash 20.
From the entries: ending post-retirement benefit liability = 200 beginning + 49 - 4 - 16 - 20 = 209. Alternatively, ending post-retirement benefit liability = $200mn beginning post-retirement benefit + $40mn SC + $15mn interest cost - $10mn actual return - $16mn actuarial gain - $20mn funding = $209mn.
B. $213m C. $9mn D. $212mn
A Special Revenue Fund may report a positive amount in each of the following fund balance classifications except: A. Restricted. B. Committed. C. Assigned. D. Unassigned.
A. Restricted. B. Committed. C. Assigned. D. Unassigned. Only the General Fund can report a positive amount in Unassigned Fund Balance. In all other Governmental Fund types (including a Special Revenue Fund), if expenditures exceed amounts restricted, committed, or assigned, it may be necessary to report a negative Unassigned Fund Balance. Should that occur, the Assigned Fund Balance is reduced to eliminate the deficit. If a deficit remains after eliminating Assigned Fund Balance, the negative residual should be classified Unassigned Fund Balance.
On December 31, 2005, Roe Co. leased a machine from Colt for a 5-year period. Equal annual payments under the lease were $105,000 (including $5,000 annual executory costs) and were due on December 31 of each year.
The first payment was made on December 31, 2005, and the second payment was made on December 31, 2006.
The five lease payments were discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $417,000. The lease was appropriately accounted for as a capital lease by Roe.
In its December 31, 2006 balance sheet, Roe should report a lease liability of
A. $317,000. B. $315,000. C. $285,300. D. $248,700.
A. $317,000.
B. $315,000.
C. $285,300.
D. $248,700.
The portion of each lease payment that is applied to interest and principal (reduction of the lease liability) is $100,000 ($105,000 - $5,000). The executory costs are applied to maintenance, property taxes, and insurance.
The lease liability after the first payment (at inception, December 31, 2005) is $317,000 ($417,000 - $100,000).
Entry at December 31, 2006
Interest expense ($317,000 x .10) 31,700
Lease liability 68,300
Cash 100,000
The ending lease liability at December 31, 2006 is $248,700 = $317,000 - $68,300.
Falton Co. has the following first-year amounts related to its $9mn construction contract:
Actual costs incurred and paid $2mn
Estimated costs to complete $6mn
Progress billings $1.8mn
Cash collected $1.5mn
What amount should Falton recognize as a current liability at year end, using the percentage-of-completion method?
A. $0 B. $200,000 C. $250,000 D. $300,000
A. $0 The percentage of completion is ($2mn)/($2mn + $6mn) = 25%. This is the ratio of cost incurred to date, divided by the total project cost, which is the sum of cost to date and estimated remaining costs. Gross profit recognized is therefore .25($9mn - $2mn - $6mn) = $250,000. The contract price is $1mn more than the total estimated project cost. At 25% complete, the firm recognizes $250,000 of gross profit. The construction-in-progress balance is therefore $2mn + $250,000 = $2.25mn, the sum of cost to date, plus gross profit to date. With billings only $1.8mn so far, the firm reports a net asset equal to the difference between $2.25mn, the balance in construction in progress, and $1.8mn of billings. Billings are contra to construction in progress for reporting. This $450,000 difference is labeled "cost and profit in excess of billings on long-term contracts" in the balance sheet. No current liability is reported, because the asset balance (construction in progress) exceeds billings. B. $200,000 C. $250,000 D. $300,000
Which of the following methods used to measure and report investment property will require disclosure of a reconciliation showing the causes of changes in the carrying amounts of investment property, between the beginning and end of a period?
Use of cost method Use of fair value method
Yes Yes
Yes No
No Yes
No No
Use of cost method Use of fair value method
Yes Yes
When either the cost method or the fair value method is used to measure investment property; the entity must provide a reconciliation showing the causes of changes in the carrying amounts of investment property between the beginning and end of a period.
Yes No
No Yes
No No
On December 31, 2005, Vey Co. traded equipment with an original cost of $100,000 and accumulated depreciation of $40,000 for productive equipment with a fair value of $60,000.
In addition, Vey received $30,000 cash in connection with this exchange. There is commercial substance to the exchange.
What should be Vey’s carrying amount for the equipment received at December 31, 2005?
A. $30,000 B. $40,000 C. $60,000 D. $80,000
A. $30,000 B. $40,000 C. $60,000 When there is commercial substance to the exchange, the acquired asset is measured at fair value. In this case, the value is $60,000 as given in the problem. This amount also equals the fair value of assets given up in the exchange. The implied fair value of the asset exchanged is $60,000 + $30,000 cash received, or $90,000. The fair value of assets given up is therefore $90,000 less $30,000 cash received, or $60,000. The full journal entry for the exchange is: dr. plant asset 60,000; dr. accumulated depreciation, 40,000; debit cash 30,000; credit plant asset 100,000; credit gain, 30,000. The gain equals the difference between the fair value of the asset exchanged (90,000) and its book value (60,000). D. $80,000
Alta Co. spent $400,000 during the current year developing a new idea for a product that was patented during the year. The legal cost of applying for a patent license was $40,000. Also, $50,000 was spent to successfully defend the rights of the patent against a competitor. The patent has a life of 20 years. Under U.S. GAAP, what amount should Alta capitalize related to the patent? A. $ 40,000 B. $ 50,000 C. $ 90,000 D. $490,000
A. $ 40,000 B. $ 50,000 C. $ 90,000 The legal cost for applying for a patent can be capitalized. Alta can also capitalize the costs associated with the legal defense of the patent. This response correctly includes the legal costs associated with applying for and defending the patent. D. $490,000
Janna Association, a nongovernmental not-for-profit organization, received a cash gift with the stipulation that the principal be held for at least 20 years.
How should the cash gift be recorded?
A. A temporarily restricted asset B. A permanently restricted asset C. An unrestricted asset D. A temporary liability
Janna Association, a nongovernmental not-for-profit organization, received a cash gift with the stipulation that the principal be held for at least 20 years.
How should the cash gift be recorded?
A. A temporarily restricted asset Since the resources must be retained for 20 years, they must be reported under a restricted classification of net assets. However, because they are not permanently restricted but may ultimately be expended, they should be recorded as a temporarily restricted asset rather than a permanently restricted asset. B. A permanently restricted asset C. An unrestricted asset D. A temporary liability
Lore Co. changed from the cash basis to the accrual basis of accounting during 2005. The cumulative effect of this change should be reported in Lore’s 2005 financial statements as a
A. Prior period adjustment resulting from the correction of an error.
B. Prior period adjustment resulting from the change in accounting principle.
C. Adjustment to retained earnings for an accounting principle change.
D. Component of income after extraordinary item.
A. Prior period adjustment resulting from the correction of an error.
The cash basis of accounting is not acceptable under GAAP. Therefore, the change to the accrual basis is a change from an unacceptable method or basis of accounting to an acceptable method or basis. Such a change is treated as an error correction, which is reported as a Prior period adjustment. This adjustment is to the beginning balance in retained earnings for the current year.
B. Prior period adjustment resulting from the change in accounting principle.
C. Adjustment to retained earnings for an accounting principle change.
D. Component of income after extraordinary item.
Lind Corp. was a development-stage enterprise from its inception on October 10, 2003 to December 31, 2004. The following were among Lind’s expenditures for this period:
Leasehold improvements, equipment, and furniture $1,200,000
Research and development 850,000
Laboratory operations 175,000
General and administrative 275,000
The year ended December 31, 2005 was the first year in which Lind was an established operating enterprise. For the period ended December 31, 2004, what total amount of expenditures should Lind have capitalized?
A. $2,500,000
B. $2,225,000
C. $2,050,000
D. $1,200,000
Lind Corp. was a development-stage enterprise from its inception on October 10, 2003 to December 31, 2004. The following were among Lind’s expenditures for this period:
Leasehold improvements, equipment, and furniture $1,200,000
Research and development 850,000
Laboratory operations 175,000
General and administrative 275,000
The year ended December 31, 2005 was the first year in which Lind was an established operating enterprise. For the period ended December 31, 2004, what total amount of expenditures should Lind have capitalized?
A. $2,500,000
B. $2,225,000
C. $2,050,000
D. $1,200,000
Development stage enterprises capitalize the same costs as established on-going enterprises. Thus, only the leasehold improvements, equipment, and furniture ($1,200,000) would have been capitalized.
Research and development is expensed as incurred, as are most general and administrative costs. There is no information in the question to justify capitalizing the laboratory operations cost.
Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares of Ray’s common stock.
Total proceeds from the issue amounted to $240,000.
The market value of each warrant was $2, and the market value of the bonds without the warrants was $196,000.
The bonds were issued at a discount of
A. $0 B. $678 C. $4,000 D. $33,898
Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares of Ray’s common stock.
Total proceeds from the issue amounted to $240,000.
The market value of each warrant was $2, and the market value of the bonds without the warrants was $196,000.
The bonds were issued at a discount of
A. $0 B. $678 The proceeds are allocated based on relative market values: Market value of bonds: $196,000 \+ market value of warrants: (200 bonds)(100 warrants/bond)($2) = 40,000 = total market value of the securities $236,000 Allocation to bonds = $240,000($196,000/$236,000) = $199,322. The discount on the bonds is therefore $678 = $200,000 - $199,322. C. $4,000 D. $33,898
