Financial Statement Accounts 3

Question 1

If the payment of employees’ compensation for future absences is probable, the amount can be reasonably estimated, and the obligation relates to rights that accumulate, the compensation should be

Answer 1

Accrued if attributable to employees’ services already rendered.

Question 2

What type of bonds in a particular bond issuance will not all mature on the same date?

Answer 2

Serial bonds

Serial bonds mature according to a schedule. For example, after 20 years, 10% of the bonds may be retired at the end of each of the next 10 years. The bond term ends at the end of the 30th year.

Question 3

On January 1, 2004, what amount should Oak report as bonds payable, net of discount?

Answer 3

The net book value of the bonds on the issuance date is $388,000 (.97 × $400,000). The three months of accrued interest collected on issuance increases the proceeds but does not affect the net bond liability. Accrued interest is reported separately from the net bond liability.

Question 4

When a bond is purchased, the present value of the bond’s expected net future cash inflows discounted at the market rate of interest provides what information about the bond?

Answer 4

Price

Question 5

On February 1, year 1, Blake Corporation issued bonds with a fair value of $1,000,000. Blake prepares its financial statements in accordance with IFRS. What methods may Blake use to report the bonds on its December 31, year 1 statement of financial position?

I. Amortized cost.
II. Fair value method.
III. Fair value through profit or loss. (FVTPL)

Answer 5

I and III

Question 6

In the notes to its December 31, 20x4, balance sheet, how should Witt report the above data?

Answer 6

The combined aggregate of $17,500,000 of maturities and sinking fund requirements detailed by year should be disclosed.

FASB accounting standards require the disclosure of the aggregate amount of maturities and sinking fund requirements for all long-term debt for each of the five years following the balance sheet date.

Question 7

Cali, Inc., had a $4,000,000 note payable due on March 15, 20x6. On January 28, 20x6, before the issuance of its 20x5 financial statements, Cali issued long-term bonds in the amount of $4,500,000. Proceeds from the bonds were used to repay the note when it came due.

How should Cali classify the note in its December 31, 20x5, financial statements?

Answer 7

As a noncurrent liability, with separate disclosure of the note refinancing

Question 8

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?

Answer 8

$100,000

There is no net use of current assets to liquidate the $400,000 amount of the liabilities because the stock issuance provided the necessary cash.

Question 9

A 15-year bond was issued in year 5 at a discount. During year 15, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount.

The net effect of the year 15 bond transactions was to increase long-term liabilities by the excess of the 10-year bond’s face amount over that of the 15-year bond’s:

Answer 9

Carrying amount

Question 10

Gains or losses from the early extinguishment of debt, if material, should be

Answer 10

Recognized in income from continuing operations in the period of extinguishment.

Question 11

In a modification of the terms, troubled debt restructure of type II (sum of new flows > book value of debt), what amount of gain is recognized by the debtor?

Answer 11

No gain is recognized

Question 12

For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring?

Answer 12

In a troubled debt restructuring involving only a modification of terms, the debtor will recognize a gain only if the total undiscounted future cash payments for principal and interest under the new terms are less than the current amount payable for principal and accrued interest.

When the future payments under the new terms are less than the current obligation, the debtor writes down the carrying amount of the liability by the amount of the difference and thus recognizes a gain.

Question 13

A debtor and a creditor have negotiated new terms on a note. How can you determine whether the restructuring is a troubled debt restructure?

Answer 13

If the present value of the restructured flows using the original interest rate is less than the book value of the debt at the date of the restructure.

Question 14

Choose the correct statement regarding the accounting treatment of troubled debt restructures (TDRs) under international accounting standards (IAS).

Answer 14

Settlements are treated the same way as under U.S. standards.

Both sets of standards treat settlements as extinguishments with a gain to the debtor for the difference between debt book value and fair value of consideration paid.

Question 15

Choose the correct statement concerning the classification of a liability when a firm is subject to a debt covenant.

Answer 15

If the covenant includes a subjective acceleration clause and there is only a remote chance that debt will be called, then the liability is classified as noncurrent.

It must be at least possible that the liability will be called in order for the classification to be downgraded to current.

Question 16

A firm’s debt to equity ratio (total debt to total owners’ equity) cannot exceed 3.0 without allowing a major creditor to call a loan to the firm. The ratio is currently at the maximum before any of the transactions are listed. Which of the following transactions would not subject the firm to an immediate call by the creditor?

Answer 16

Retire a different loan by issuing common stock.

Question 17

Which of the following accounting strategies (for financial reporting purposes) is the least likely for a firm that is currently only marginally fulfilling the quantitative measures (all involving earnings) of its debt covenants?

Answer 17

Changing to the successful efforts method of accounting for natural resource exploration costs.

The successful efforts method expenses the cost of all unsuccessful exploration efforts immediately. Full costing capitalizes the cost of all efforts

Question 18

A firm is required by its creditors to maintain a 2.00 (or greater) current ratio in order to maintain compliance with a debt covenant. The current ratio of the firm is currently at the minimum before any of the transactions are listed. Which of the following actions would cause the firm to fall out of compliance?

Answer 18

Declare cash dividends.

This transaction increases current liabilities, thus reducing the current ratio.

Question 19

Early in 20x3, Shifter, Inc. wrote put options for 1,000 shares of its common stock. Purchasers of the options can sell Shifter stock back to Shifter for $20 per share on 12/31/x3. The estimated fair value of each option is $2 at the time of sale. At 12/31/x3, the share price is $15 and the options are exercised. As a result, Shifter

Answer 19

Recognizes a $3,000 loss.

Shifter paid $5,000 more for the treasury stock than its fair value: 1,000 shares × ($20 − $15). The $2,000 fee (1,000 × $2) offsets that loss yielding a net loss of $3,000.

Question 20

Allam, Inc. contracted for services to be provided over a period of time with full payment in Allam’s $2 par common stock when the service is completed. At the time of the agreement, Allam stock was trading at $20 per share. The agreed-upon total value of the contract is $20,000. When the service was completed, Allam’s stock price was $25 per share. Therefore, Allam

Answer 20

Increases the common stock account $1,600.

The value of the stock to be issued is $20,000. At time of issuance, the stock price is $25. Therefore, 800 shares are issued ($20,000/$25). The par value of the stock is $2, requiring a credit of $1,600.

Question 21

Choose the correct statement concerning transactions involving the issuance of shares in payment of obligations for goods and services.

Answer 21

When the value of shares to be issued is fixed, the number of shares to be issued is variable. This is recorded as a liability.

When number of shares fixed, rather than value, recorded in owner’s equity.

Question 22

A firm selling put options to sell the firm’s stock

Answer 22

Increases a liability for the fair value of the options.

Question 23

Renwood, Inc. contracted for services to be provided over a period of time in return for 2,000 shares of Renwood’s $5 par common stock when the service is completed. At the time, Renwood stock was selling for $10 per share. When the service was completed, Renwood’s stock price was $12 per share. Therefore, Renwood

Answer 23

Increases contributed capital in excess of par $10,000.

The total owners’ equity increase of $20,000 (2,000 shares × $10) is recorded at signing. Of that amount, the common stock account will receive $10,000 (2,000 shares × $5 par). Therefore, the remainder ($10,000) is allocated to contributed capital in excess of par. Subsequent changes in stock price do not change the total amount of OE recorded.

Question 24

Which of the following errors could result in an overstatement of both current assets and stockholders’ equity?

Answer 24

Holiday pay expense for administrative employees is misclassified as manufacturing overhead.

This error reduces expenses because part of the holiday pay will be held back in ending inventory, which is a current asset. Thus, net income, and therefore OE are overstated, as well as ending inventory, which is a current asset.

Question 25

When collectability is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as

Answer 25

Additional paid-in capital when the subscription is recorded

Given that collectability is not an issue, the recording of a stock subscription is essentially the same as the entry for issuing stock for cash, except that a receivable stands in place of cash, and common stock subscribed stands in place of common stock.

Question 26

When preferred stock is called and retired, which account or aggregate category of accounts can be increased?

Answer 26

When a firm retires preferred stock, cash is paid to the shareholders reducing total owners’ equity. Retained earnings can never be increased when shares are retired, redeemed, or converted into another class of stock.

Question 27

Mandatorily redeemable financial instruments (such as redeemable preferred stock

Answer 27

Must be classified as debt (rather than owners’ equity) unless the redemption is required to occur only if the issuing firm goes out of business.

Question 28

During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions?

Answer 28

$0

Income is not affected by treasury stock transactions.

Question 29

A property dividend should be recorded in retained earnings at the property’s

Answer 29

Market value at date of declaration.

Question 30

Bal Corp. declared a $25,000 cash dividend on May 8, 20X5, to stockholders of record on May 23, 20X5, payable on June 3, 20X5. As a result of this cash dividend, working capital

Answer 30

Decreased on May 8.

Question 31

Debit to retained earnings for stock dividends:

Answer 31

Small stock dividends (less than 25%) are capitalized at the fair value of stock issued and large stock dividends (greater than 25%) are capitalized at the par value of stock issued.

Question 32

When a company goes through a quasi-reorganization, its balance sheet carrying amounts are stated at:

Answer 32

FV

Question 33

Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price, but less than their book value. Grid uses the cost method of accounting for treasury stock.

What is the impact of this acquisition on total stockholders’ equity and the book value per common share?

Answer 33

Total stockholder’s equity- decrease

Book Value Per Share- increase

Question 34

Which of the following should be expensed as incurred by the franchisee for a franchise with an estimated useful life of 10 years?

Answer 34

Periodic payments to the franchiser based on the franchisee’s revenues.

Continuing franchise fees (periodic payments based upon revenues) should be expensed when incurred since they have no future benefits.

Question 35

Current inventory	 
At current year cost	At base year cost	Internal price index
1/1/Y2	$100,000	$100,000	1.00
12/31/Y2	126,000	120,000	1.05
12/31/Y3	140,800	128,000	1.10

Under the dollar-value LIFO method the inventory at December 31, year 3, should be

Answer 35

Base cost Ending inventory at DV LIFO cost
1/1/Y2 layer $100,000 × 1.00 = $100,000
Y2 layer 20,000 × 1.05 = 21,000
Y3 layer 8,000 × 1.10 = 8,800
$128,000 $129,800

Question 36

In an arm’s-length transaction, Company A and Company B exchanged nonmonetary assets with no monetary consideration involved. The exchange was deemed to have commercial substance for both Company A and Company B, and the fair values of the nonmonetary assets were both clearly evident. The accounting for the exchange should be based on the

Answer 36

Fair value of the asset surrendered.

An exchange of nonmonetary assets that has commercial substance is recorded at the fair value of the asset surrendered (ASC 845).

Question 37

Scott Co. exchanged similar nonmonetary assets with Dale Co. No cash was exchanged. The carrying amount of the asset surrendered by Scott exceeded both the fair value of the asset received and Dale’s carrying amount of that asset. If the transaction lacks commercial substance, Scott should recognize the difference between the carrying amount of the asset it surrendered and

Answer 37

The fair value of the asset it received as a loss.

Per ASC Topic 845, exchanges that lack commercial substance are accounted for at book value. The difference between the carrying amount of the asset surrendered and its fair market value (measured by the fair market value of the asset received in this case) should be recognized as a loss.

Question 38

Abbot Co. is being sued for illness caused to local residents as a result of negligence on the company’s part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Abbot’s lawyer states that it is probable that Abbot will lose the suit and be found liable for a judgment costing Abbot anywhere from $500,000 to $2,500,000. However, the lawyer states that the most probable cost is $1,000,000. As a result of the above facts, Abbot should accrue

Answer 38

A loss contingency of $1,000,000 and disclose an additional contingency of up to $1,500,000.

Question 39

Legal fees incurred in successfully defending a patent suit should be capitalized when the patent has been

Answer 39

Internally developed OR
Purchased from an inventor
Legal fees are always capitalized for successful defense of a patent.

Question 40

On May 1, year 2, Winston Corporation received notification of legal action against the firm. Winston’s attorneys determine that it is probable the company will lose the suit, and the loss is estimated at $5,000,000. Winston’s accountants believe this amount is material and should be disclosed. Winston prepares its financial statements in accordance with IFRS. How should the estimated loss be disclosed in Winston’s financial statements at December 31, year 2?

Answer 40

As a provision for loss reported in the balance sheet and a loss on the income statement.

IFRS defines a provision as a liability that is uncertain in timing or amount. Provisions are made for estimated liabilities and recorded as a loss in earnings for the period if the outcome is probable and measurable.

Question 41

A short-term marketable debt security was purchased on September 1, year 1, between interest dates. The next interest payment date was February 1, year 2. On the balance sheet at December 31, year 1, the debt security should be carried at

Answer 41

Market value.

Short-term marketable debt security would be carried in a trading portfolio. Securities in trading portfolios are carried at market value.

Question 42

Which of the following is true about IFRS account­ing for the development costs of the company?

Answer 42

Development costs may be capitalized as an intangible asset in very restrictive situations.

development costs can be capitalized only if six criteria are met: (1) technological feasibility of completing the asset for use or sale has been achieved; (2) the entity intends to complete and use or sell the asset; (3) the entity has the ability to use or sell the asset; (4) the entity understands how the asset will generate probable future economic benefits; (5) technical, financial, and other resources are available to complete development of the asset; (6) the entity has the ability to reliably measure the expenditures.

Question 43

A corporation declared a dividend, a portion of which was liquidating. How would this declaration affect each of the following?

Answer 43

Decrease RE and paid-in capital

Retained earnings	(balance)	 
Additional paid-in capital	(plug)	 
   Dividends payable	 	 (dividend amount)

Question 44

On July 1, year 1, Alto Corp. split its common stock 5-for-1 when the market value was $100 per share. Prior to the split, Alto had 10,000 shares of $10 par value common stock issued and outstanding. After the split, the par value of the stock

Answer 44

Was reduced to $2.

Question 45

Which of the following amounts incurred in connection with a trademark should be capitalized?

Answer 45

Cost of a successful defense

Registration fees

Question 46

In accounting for a long-term construction contract using the percentage-of-completion method, the amount of income recognized in any year would be added to

Answer 46

Construction in progress.

Construction in progress
Income on long-term contract

Question 47

What amount should Baker report as treasury stock gain at December 31?

Answer 47

$0, Treasury stock does not have gains or losses

Question 48

A company issued 10-year term bonds at a discount in year 1. Bond issue costs were incurred at that time. The company uses the effective interest method to amortize bond issue costs. Reporting the bond issue costs as a deferred charge would result in

Answer 48

The same reduction in net income in year 2 as reporting the bond issue costs as a reduction of the related debt liability.

The amortization expense related to the bond issue costs is the same regardless of how the bond issue costs are reported on the balance sheet (i.e., as a deferred charge or as a reduction of the liability).

Question 49

Which of the following should be disclosed in a company’s financial statements related to deferred taxes?

Answer 49

According to ASC Topic 740, the types and amounts of existing temporary differences, and the nature and amount of each type of operating loss and tax credit carryforward must be disclosed in the notes to the financial statements. Permanent differences do not need to be disclosed.

Question 50

In the financial statements of employee benefit pension plans and trusts, the plan investments are reported at

Answer 50

FV

Question 51

Gains and losses of the effective portion of a hedging instrument will be recognized in current earnings in each reporting period for which of the following?

Answer 51

FV Hedge-Yes
Cash Flow Hedge-No

Fair value hedges will recognize gains and losses for the effective portion of the hedging instrument in current earnings for each reporting period. Cash flow hedges will recognize gains and losses for the effective portion of the hedging instrument in other comprehensive income.

Question 52

A company changes from an accounting principle that is not generally accepted to one that is generally accepted. The effect of the change should be reported, net of applicable income taxes, in the current

Answer 52

Retained earnings statement as an adjustment of the opening balance.

ASC Topic 250 states that a change from an accounting principle that is not generally accepted to one that is generally accepted should be treated in the same manner as a correction of an error.

Question 53

Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in a purchase-business combination. The market value of Sayon’s common stock is $12. Legal and consulting fees incurred in relationship to the purchase are $110,000. Registration and issuance costs for the common stock are $35,000. What should be recorded in Sayon’s additional paid-in capital account for this business combination?

Answer 53

In a business combination accounted for as an acquisition, costs of registering securities and issuing common stock are netted against the proceeds and reduce the additional paid-in capital account. Acquisition costs are expensed in the year the costs are incurred or the services are received

Question 54

When a company elects not to bifurcate a hybrid instrument and accounts for the hybrid instrument at fair value, which method(s) of disclosure are permissible?

Answer 54

I. As a separate line item for fair value and non-fair value instruments on the balance sheet.
III. As an aggregate amount of all hybrid instruments with the amount of the hybrid instruments at fair value shown in parentheses on the balance sheet.

Question 55

A business combination is accounted for appropriately as a business acquisition. Which of the following should be deducted in determining the combined corporation’s net income for the current period?

Answer 55

Per ASC Topic 805, business acquisition costs should be treated as an expense in the period in which the costs are incurred.

Question 56

The lessee’s balance sheet liability for a capital lease would be periodically reduced by the total

Answer 56

Minimum lease payment less the portion of the minimum lease payment allocable to interest.

Question 57

Which of the following should be reported as a debit to other comprehensive income in preparing the statement of comprehensive income?

Answer 57

Translation loss

Question 58

An unrestricted cash contribution should be reported in a nongovernmental not-for-profit organization’s statement of cash flows as an inflow from

Answer 58

Operating activities.

Question 59

The Granger Community Foundation, a private, not-for-profit entity, received the following contributed services:

Ernst & Dalton, a legal firm, contributed advice to the foundation in relation to the handling of the organization’s endowment funds
Senior citizens participated in a telethon to raise money for the new computer equipment for the organization
Which of these services would be recorded on the statement of activities?

Answer 59

I only

Contributions of skilled advice that the organization would normally pay for are recorded as expenses and revenues without donor restriction. The senior citizens’ contribution does not require special skills and would not be recorded by the organization.

Question 60

In a not-for-profit organization, which of the following should be included in total expenses?

Answer 60

Grants to other organizations

Depreciation

Question 61

As a result of the investment in BMI bonds, what amount should be included in revenue, gains, and other support on the statement of operations for the year ended December 31, Year 1?

Answer 61

According to the AICPA Audit and Accounting Guide Health Care Organizations, unrealized gains on trading securities should be included as part of the amount reported for revenue, gains, and other support on the statement of operations. These unrealized gains are included in the performance indicator. Likewise, unrestricted revenues from interest and dividends are included as part of the amount reported for revenue, gains, and other support on the statement of operations. Therefore, Smithson Hospital should report both the $3,000 of interest revenue and the $2,000 unrealized holding gain ($105,000 less $103,000) in the amount reported for revenue, gains, and other support on its statement of operations for the year ended December 31, Year 1.

Question 62

Which of the following financial statements of a private, nonprofit hospital reports the changes in net assets with donor restriction and net assets without donor restriction for a time period?

Answer 62

The statement of changes in net assets reports the changes in the hospital’s net assets with donor restriction and net assets without donor restriction for a time period. The statement of operations discloses only the changes in net assets without donor restriction for a time period, while the balance sheet discloses the amounts of net assets with donor restriction and net assets without donor restriction as of a specific date.

Question 63

Vista, a private, not-for-profit health and welfare organization, purchased stock in XYZ Corp. using unrestricted net assets and paid $50,000. The investment represents less than 2% interest in XYZ. At the end of the year, Vista received a cash dividend of $3,000, and the value of the XYZ stock at year-end was $65,000. On its statement of activities from the current year, what amount would Vista report from XYZ?

Answer 63

According to FASB ASC 958, Not-for-Profit Entities, the unrealized gain on XYZ of $15,000 and the dividend revenue ($3,000) from the unrestricted investments would be included in the statement of activities as unrestricted due to the nature of the nature of the underlying investment transaction.

Question 64

Unrealized gains on investments that are permanently restricted as to use by donors are reported by a private, nonprofit hospital on the

Answer 64

Statement of changes in net assets.

Question 65

Last year, Katt Co. reduced the carrying amount of its long-lived assets used in operations from $120,000 to $100,000, in connection with its annual impairment review. During the current year, Katt determined that the fair value of the same assets had increased to $130,000. What amount should Katt record as restoration of previously recognized impairment loss in the current year’s financial statements?

Answer 65

$0

Under U.S. GAAP, previously recognized impairments of fixed assets may not be recovered or reversed.

Question 66

When a portion of RE is set aside for specific purpose, this is referred to as:

Answer 66

Appropriated

Question 67

Heritage Corporation issues convertible bonds for $600,000. At the date of issuance, it is determined that the fair value of the bonds is $580,000. Heritage prepares its financial statements in accordance with IFRS. How should the issuance of the bonds be recognized?

Answer 67

As a bond liability for $580,000 and an equity component of $20,000.

IFRS provides that financial instruments with characteristics of both debt and equity are compound instruments and must be separated into its respective components. The liability is valued at the fair value at the date of issuance and the residual value is assigned to the equity component.

Question 68

Lawson Corp. uses the revaluation model for intangible assets. On March 1, year 1, Lawson acquired intangible assets with an indefinite life for $100,000. On December 31, year 1, it was determined that the recoverable amount for these intangible assets was $90,000. On December 31, year 2, it was determined that the intangible assets had a recoverable amount of $94,000. What is the impairment gain or loss recognized in year 1 and year 2 on the income statement?

Answer 68

If either the revaluation model or cost model is used to record intangible assets, the impairment loss is recognized as a loss in the income statement in the current period unless, there is a revaluation surplus in other comprehensive income (revaluation model only). In this situation, for the revaluation model, the revaluation surplus would be reduced to zero before impairment recognition in profit or loss According to IAS 36, a reversal of impairment losses may be recognized in the income statement up to the effects of the impairment loss previously recognized.

Question 69

Under IFRS, convertible bonds issued are

Answer 69

Separated into debt and equity components with the liability component recorded at fair value and the residual assigned to the equity component.

Question 70

The provisions of ASC Subtopic 720-15, Start-Up Costs, as they relate to onetime activities include

Answer 70

Salary of new employees

According to ASC Subtopic 720-15, start-up activities are those onetime activities related to opening a new facility, introducing a new product or service, or conducting business in a new territory.

Question 71

IFRS allows plant, property, and equipment to be valued using the cost model or the revaluation model. Which statement is true about the revaluation model for valuing plant, property, and equipment?

Answer 71

There is no rule for the frequency or date of revaluation.

Question 72

On January 1, year 1, Mill Co. exchanged equipment for a $200,000 noninterest-bearing note due on January 1, year 4. The prevailing rate of interest for a note of this type at January 1, year 1, was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Mill’s year 2 income statement?

Answer 72

Per ASC Topic 835, when property is exchanged for a note and neither the property nor the note has a known fair market value, interest is imputed using the prevailing rate of interest for a note of similar quality. Therefore, the note should be recorded at its present value of $150,000 ($200,000 × .75) by debiting notes receivable for $200,000 and crediting discount on notes receivable for $50,000 ($200,000 – $150,000). ASC Topic 835 states that the discount should be amortized and recognized as interest revenue over the life of the note using the interest method. Under the interest method, interest revenue/expense equals the carrying value of the note multiplied by the imputed interest rate. For year 1, interest revenue is $15,000 ($150,000 × 10%). Discount on notes receivable is debited for the amount of interest revenue recognized ($15,000) which increases the carrying value of the notes to $165,000. Thus, interest revenue reported in year 2 is $16,500 ($165,000 × 10%).

Question 73

On July 14, year 1, JX Corporation exchanged 1,000 shares of its $8 par value common stock for a plot of land. JX’s common stock is listed on the NYSE and traded at an average price of $21 per share on July 14. The land was appraised by independent real estate appraisers on July 14 at $23,000. As a result of this exchange, JX’s additional paid-in capital will increase by

Answer 73

ince the common stock is listed on the NYSE, its valuation appears to be more clearly determinable than the appraised valuation of the land. Therefore, the value of the common stock (1,000 shares × $21 = $21,000) should be used to measure the transaction. The increase in additional paid-in capital is $21,000 less $8,000 par value of stock, or $13,000.

Question 74

On January 2, Year 1, Amanda Co. purchased, as an investment, 10,000 shares of Bonn Corp.’s common stock for $40 a share. On December 31, Year 1, the market price of Bonn’s stock was $35 a share, reflecting a temporary decline in market price. On December 30, Year 2, Amanda sold 8,000 shares of Bonn stock for $30 a share. For the year ended December 31, Year 2, Amanda should report a loss on the investment in Bonn for:

Answer 74

The loss in Year 2 should reflect the change in fair value in Year 2 for the shares that were sold (8,000 shares × ($30 – 35) = $40,000). The fact that the decline in fair value in Year 1 was temporary is irrelevant.

Question 75

What should be the retained earnings balance immediately after the stock dividend?

Answer 75

A stock dividend of less than 20-25% is recorded (on the date of declaration) at the FV of the shares to be issued.

Question 76

Assume that Duripan does not elect the fair value option to report its financial assets. What will be the maturity value of these CDs, assuming that the market interest rate at maturity is 10%?

Answer 76

If Duripan does not elect the fair value option to report financial assets, the market rate of interest at maturity is irrelevant because the $10,000 was invested at a fixed rate of 8%. Since a single lump-sum amount was invested, the future value factor at 8% for 5 periods is used.

Question 77

Finch Co. reported a total asset retirement obligation of $257,000 in last year’s financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year’s balance sheet?

Answer 77

The asset retirement obligation (ARO) is recorded at its fair value in the period in which it is incurred. Subsequently, it is adjusted for revisions in estimates and the passage of time. The beginning balance in the asset retirement obligation account is $257,000. The fair value of the additional unconditional retirement obligations incurred during the year was $68,000 and increases the ARO. The $87,000 paid toward the settlement of obligations decreases the ARO. The $26,000 accretion expense is the expense recognized on the ARO due to the passage of time and will increase the ARO. ($257,000 + $68,000 — $87,000 + $26,000 = $264,000).

Question 78

For purposes of determining whether or not Ball should recognize an impairment loss in year 1, what is the amount of expected future cash flows that would be used for Ball’s machinery?

Answer 78

Expected future cash inflows from use of the machinery $350,000
Expected proceeds from disposal of the machinery 50,000
Less the expected cash outflows from use of the machinery (75,000)
Expected cash flows for determining impairment loss $325,000

Question 79

ASC Topic 715 requires disclosure of assumed health care cost trend rates for defined benefit postretirement plans. Assumed health care cost trend rates should be disclosed for the

Answer 79

Following year

Years beyond the following year

Question 80

The statement of cash flows is required for which of the following entities?

Answer 80

Accounting standards require all nongovernmental entities to report a statement of cash flows.

Question 81

On December 31, year 2, Rapp Co. changed inventory cost methods to FIFO from LIFO for financial statement and income tax purposes. The change will result in a $175,000 increase in the beginning inventory at January 1, year 3. Rapp does not maintain records to identify the effect of the change on years prior to year 1. Assuming a 30% income tax rate, the cumulative effect of this accounting change reported in the income statement for the year ended December 31, year 3, is

Answer 81

$0

ASC Topic 250 requires changes in accounting principle to be given retrospective application, and the cumulative effects of the change reflected in the carrying value of assets and period-specific effects on the financial statements for each period presented.

Question 82

Able Co. leased equipment to Baker under a noncancellable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease?

Answer 82

Depreciation expense- NO

Interest revenue- YES

Question 83

What is the primary purpose of the statement of activities of a nongovernmental not-for-profit organization?

Answer 83

To report the change in net assets for the period