Financial Statement Accounts

Question 1

On October 31, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15 payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.

How should these accounts be reported in Dingo’s October 31 classified balance sheet?

Answer 1

The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.

Question 2

If balance sheet has cash and cash equivalents or just cash then statement of cash flows…

Answer 2

Must match balance sheet

Question 3

Current assets represent unrestricted cash and items that will be realized within 1 year, examples:

Answer 3

Land up for sale and sells in 2 months, money market accounts, checks, money orders, etc.

Question 4

Bank overdrafts are a current liability under GAAP, under IFRS these items are…

Answer 4

Subtracted from cash

Question 5

Compensating balance on ST vs. LT liabilities:

Answer 5

Compensating balance is current vs. LT asset based on related liability.

Question 6

Monetary asset

Answer 6

Asset with a fixed nominal (stated) value

Question 7

Cash control measures:

Answer 7

1. Segregation of duties

2. Bank reconciliations

Question 8

When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accounts receivable and the allowance for uncollectible accounts?

Answer 8

Accounts receivable- not effect

Allowance of doubtful accounts- increases

Question 9

Gibbs Co. uses the allowance method for recognizing uncollectible accounts. Ignoring deferred taxes, the entry to record the write-off of a specific uncollectible account

Answer 9

Affects neither net income nor working capital.

The allowance is contra to accounts receivable and thus the entry does not affect net accounts receivable. The entry does not affect current assets, working capital, or income. However, the entry does reduce gross accounts receivable. Thus, the answer “affects neither net income nor working capital” is the only possible correct answer. The answer “affects neither net income nor accounts receivable” is incorrect if “accounts receivable” is interpreted as gross accounts receivable.

Question 10

On December 31, 2005, the correct total of Mann’s current net receivables was

Answer 10

Only the first three items are included in net receivables:
Trade accounts receivable
Allowance for uncollectible accounts
Claim against shipper for goods lost in transit

The claim for lost goods is a definite receivable. The firm has a current claim on another entity. The goods on consignment should be included in Mann’s inventory at cost, not in accounts receivable at sales value. They have not been sold. The security deposit is not included in current receivables because the firm will likely not receive this deposit back during the next fiscal year.

Question 11

What amount of accrued interest receivable should Tigg include in its December 31, 2005 balance sheet?

Answer 11

The term “accrued interest receivable” refers to the cash amount of interest due. The cash amount of interest due is based on the contractual interest rate and face value. The loan origination fee is a way of increasing the effective interest but it does not affect the cash interest component. The $2,000 accrued interest = (.12)(1/12)($200,000).

Question 12

What should be the total interest revenue earned by Leaf over the life of this note?

Answer 12

Total interest revenue is the amount received over the term of the note less the present value of the note: 5($5,009) − $19,485 = $5,560.

Leaf paid $19,485 for the note, and will receive 5($5,009) over the note term. The difference is interest revenue.

Question 13

In Emme’s 2003 income statement, what amount should be reported as gain (loss) on sale of machinery?

Answer 13

The proceeds on sale are measured as the present value of the note because there is no established market value for the equipment. The loss on sale is computed as:

Carrying amount $480,000
Less proceeds on sale: $600,000(.75) = 450,000
Equals loss on sale $ 30,000

Question 14

At what amounts should these two notes receivable be reported in Key’s December 31, 1999, balance sheet?

Answer 14

The note from Alpha Co. is a short-term asset. It is reported at the face value of $10,000. The note from Omega is discounted as a single sum for two time periods at 8% to be reported at $10,000X.857=$8,570.

Question 15

Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices. Which of the following would alter the timing of Red’s cash flows for the $3 million in receivables already recorded on its books?

Answer 15

Factoring is a sale of receivables. This allows Red Co. to sell the receivables and receive cash immediately upon sale.

Question 16

After being held for 40 days, a 120-day, 12% interest-bearing note receivable was discounted at a bank at 15%. The proceeds received from the bank equal

Answer 16

Maturity value less the discount at 15%.

The bank charges its discount (its fee) on the maturity value, which is the face value of the note plus 12% interest for 120 days. The bank charges 15% on this amount for the 80 remaining days in the note term. Thus, the proceeds equal the maturity value less its fee.

Question 17

What should be the total interest revenue earned by King on this note?

Answer 17

Total interest over the life of the note equals the total amount paid by Ace over the life of the note less the proceeds to Ace. The proceeds equal the present value of the payments at the 9% yield rate. The annual payment is found using the 8% rate because that rate is contractually set and determines the annual payment.

The annual payment P is found as: $20,000 = P(3.992). P = $5,010

Total interest revenue = total payments by Ace - proceeds to Ace

= 5($5,010) − $5,010(3.89) = $5,560.

Question 18

What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, 2004?

Answer 18

The firm is contingent for the maturity amount, which for a noninterest-bearing note is the face value. If the maker of the note fails to pay the bank or financial institution with whom Davis discounted the note, Davis would be called on to pay the entire maturity amount.

Question 19

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?

Answer 19

Milton will retain control of the receivables.

In a pledge arrangement, the title remains with the originator, and they are only used if borrower defaults.

Question 20

Assignment of accounts recievable

Answer 20

Borrower assigns specific AR as collateral for a loan and lender has a right to seek payment if the borrower defaults. AR are assigned and maintained in separate record by borrower.

Question 21

Under IFRS, a cash generating unit (CGU) is:

Answer 21

A CGU is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.

Question 22

When a note receivable is determined to be impaired,

Answer 22

A loss or expense is recognized as equal to the difference between the note carrying value and the present value of the cash flows expected to be received.

Question 23

On June 1, Year 2, Archer, Inc. issued a purchase order to Cotton Co. for a new copier machine. The machine requires one month to produce and is shipped f.o.b. destination on July 1, Year 2, and is received by Archer on July 15, Year 2. Cotton issues a sales invoice dated July 2, Year 2, for the machine. As of what date should Archer record a liability for the machine?

Answer 23

July 15, Year 2

The term f.o.b. destination means that title transfers to the buyer when it arrives at the destination. A liability is recorded when the title transfers.

Question 24

What amount should Grimm recognize as consignment sales revenue for 2005 for consignment?

Answer 24

Consignment sales revenue is the revenue recognized on consignment sales.

In this case, total consignment revenue is 10 × $1,000 = $10,000. The commission and transportation costs are expenses that reduce earnings on consignment revenues, but they do not affect total revenues to be recognized.

Question 25

FOB Destination

Answer 25

Title passes when good reach their destination. Seller incurs costs for shipping, special handling and packaging.

Question 26

Costs included in inventory:

Answer 26

Purchase cost
Purchase returns (subtracted)
Freight-in
Sales and other taxes
Insurance in transit

Question 27

Which of the following statements regarding inventory accounting systems is true?

Answer 27

A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.

A count of ending inventory establishes the inventory remaining at the end of the period, but there is no recording of cost of goods sold during the period. Cost of goods sold is the amount that completes the equation. Thus, cost of goods sold is really the cost of inventory no longer with the firm at year-end - an amount that includes shrinkage. Inventory shrinkage refers to breakage, waste, and theft. Shrinkage cannot be identified directly with a periodic inventory system.

Question 28

Generally, which inventory costing method approximates most closely the current cost for each of the following?

Answer 28

LIFO assumes the sale of the most recent purchases first and thus results in cost of goods sold that is the most current value. FIFO assumes the sale of the earliest purchases first (and beginning inventory before any purchases) and thus results in ending inventory that is the most current value.

Question 29

When the FIFO inventory method is used during periods of rising prices, a perpetual inventory system results in an ending inventory cost that is

Answer 29

The same as in a periodic inventory system.

Question 30

A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?

Answer 30

Ending inventory and NI decrease

Question 31

Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?

Answer 31

FIFO

Question 32

How does the retail inventory method establish the lower-of-cost-or-market valuation for ending inventory?

Answer 32

By excluding net markdowns from the cost-to-retail ratio.

By excluding net markdowns from the denominator of the cost-to-retail ratio, the ratio is a smaller amount, resulting in a lower ending inventory valuation.

Question 33

The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale?

Answer 33

Purchase returns

Abnormal casualty losses

Question 34

Choose the correct inclusions to the cost-to-retail ratio computation under the dollar-value LIFO retail method.

Answer 34

Beginning Inventory- NO
Net Markdowns- YES

DV LIFO retail uses the FIFO (not LCM) cost-to-retail ratio. Under LIFO, a layer added during a period should reflect only the cost and retail amounts pertaining to that period. Thus, beginning inventory amounts are not used in calculating the ratio. Also, because LIFO may contain inventory layers for several preceding periods, excluding net markdowns is not an effective way to accomplish the LCM valuation objective. Thus, net markdowns are included in the cost to retail computation.

Question 35

DV LIFO Retail Method Steps

Answer 35

1. DV LIFO applied to inventory at retail only= current period layer in current period dollars
2. FIFO cost-to-retail ratio applied= increase in cost at current prices
3. Add cost layer to beginning inventory at DV LIFO to =Ending inventory at DV LIFO cost

Question 36

When an inventory overstatement in year one counterbalances in year two, this means:

Answer 36

A prior period adjustment is recorded if the error is discovered in year two.

Counterbalancing simply means that the effect of the inventory error in the second year is opposite that of the first year. Inventory is credited for the amount of the overstatement. This allows year two to begin with corrected balances.

Question 37

Losses on purchase commitments are recorded at the end of the current year when:

Answer 37

The contractual cost of the inventory in an irrevocable purchase contract exceeds the current cost.

Question 38

At the end of 20x4, a firm recognized a loss on a contractual commitment to purchase inventory for $60,000. The value of the inventory at the end of 20x4 is $52,000. When the inventory was actually purchased in 20x5, its value had risen to $62,000. Choose the correct statement concerning reporting in 20x5.

Answer 38

The inventory is recorded at $60,000.

Question 39

A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, by a material amount. Which of the following accounting treatments is most appropriate?

Answer 39

Describe the nature of the contract in a note to the financial statements, recognize a loss in the Income Statement, and recognize a liability for the accrued loss.

Question 40

In October of year one, a firm committed to a purchase of inventory at a total cost of $26,000. The contract is irrevocable and specifies a delivery date in March of year two. At the end of year one, the market value of the inventory under contract is worth $23,000 at current cost. Choose the correct reporting for the year one financial statements:

Answer 40

A liability of $3,000 is reported in the Balance Sheet.

Question 41

As of December 31, Year 2, a company has an inventory item that was originally purchased for $80 in Year 1. The inventory item was written down to its net realizable value of $60 as of December 31, Year 1. As of December 31, Year 2, the inventory item had a net realizable value of $75 and a replacement cost of $65. Normal profit margins for this company are 20%. Under IFRS, what is the carrying amount of the inventory item as of December 31, Year 2?

Answer 41

$75, Under IFRS, the inventory would be carried at the lower of cost or NRV. The NRV at the end of Year 2 is $75.

Question 42

At the end of year 1, a company reduced its inventory cost from $100 to its net realizable value of $80. As of the end of year 2, the inventory was still on hand, and its net realizable value increased to $150. Under IFRS, what journal entry should the company record for year 2 to properly report the inventory value?

Answer 42

Debit inventory for $20 and credit expense for $20.

The entry to record the recovery is a debit to inventory and credit to expense or cost of goods sold for $20.

Question 43

When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off would

Answer 43

Increase the allowance for uncollectible accounts

Question 44

When the allowance method of recognizing bad debt expense is used, the allowance would decrease when a(an)

Answer 44

Specific uncollectible account is written off.

Question 45

When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account

Answer 45

Decreases both accounts receivable and the allowance for uncollectible accounts.

Question 46

In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000.

What is the total amount of risk of accounting loss related to Butler’s trade accounts receivable, and what amount of that risk is off-balance sheet risk?

Answer 46

1. Risk of accounting loss on accounts receivable (credit risk). This is the risk of loss resulting from not collecting amounts due from sales made on credit, and is the total amount of loss that Butler would suffer if those who owe it failed to make any payments and the receivables proved to be of no value. Since Butler’s net carrying value of accounts receivable is $230,000 ($250,000 − $20,000), that is the amount of risk of accounting loss.
2. Off-balance sheet risk: This is the amount of risk of loss that does not show on the balance sheet. Since all of Butler’s net accounts receivable show on the balance sheet, there is no off-balance sheet risk associated with the accounts receivable.

Question 47

Which method of recording uncollectible accounts expense is consistent with accrual accounting?

Answer 47

Allowance- YES

Direct write-off- NO

Question 48

Under the allowance method of recognizing uncollectible accounts, the entry to write-off an uncollectible account

Answer 48

Has no effect on net income

Question 49

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest.

What is an installment note’s receivable balance six months after the sale?

Answer 49

The present value of the remaining monthly payments discounted at 12%.

The question does not specify the exact meaning of the term “note receivable balance.” When the term “gross” is not applied, it is safe to assume that the balance referred to is the net balance, that is, net of interest yet to be recognized.

Notes are reported at present value, which is the amount net of interest yet to be recognized. However, note balances under the installment method include deferred gross margin yet to be realized, because deferred gross margin is subtracted as a separate line item.

Thus, the question is referring to the notes receivable balance exclusive of interest yet to be recognized, but inclusive of deferred gross margin yet to be realized. The note’s balance is the present value of the remaining payments. This is a two-year note. Therefore, valuation at present value is required. The note’s valuation is the present value of the remaining payments at the original discount rate.

Question 50

Estimates of price-level changes for specific inventories are required for which of the following inventory methods?

Answer 50

Dollar Value LIFO

Question 51

What inventory system should Thread select if it wants to maximize the inventory carrying amount for December 31, 2005?

Answer 51

Perpetual and total

The total inventory LCM application allows some items with market value lower than cost to be offset by other items with market value higher than cost. Thus, compared to individual application, which captures the lowest valuation for each unit and then sums over all inventory, total inventory application yields the highest valuation.

Question 52

Which of the following attributes would not be used to measure inventory?

Answer 52

Present value of future cash flows

Question 53

The lower of cost or market rule for inventories may be applied to total inventory, to groups of similar items, or to each item.

Which application generally results in the lowest inventory amount?

Answer 53

Separatly for each item

Question 54

In accordance with IFRS, what is the per-unit carrying value of inventory in the manufacturer’s statement of financial position?

Answer 54

IFRS requires that inventory be reported at the lower of cost or net realizable value. Net realizable value is defined by IAS 2 as “the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.”

Question 55

On November 1, 2004, Davis Co. discounted with recourse at 10%, a one-year, noninterest-bearing, $20,500 note receivable maturing on January 31, 2005.

What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, 2004?

Answer 55

$20,500

Notes discounted with recourse create contingent liabilities. If the maker of the note fails to pay the bank or financial institution with whom Davis discounted the note, Davis would be called on to pay the entire maturity amount.

Question 56

A company issued a purchase order on December 15, Year 1, for a piece of capital equipment that costs $100,000. The capital equipment was shipped from the vendor on December 31, Year 1, and received by the company on January 5, Year 2. The equipment was installed and placed in service on February 1, Year 2. On what date should the depreciation expense begin?

Answer 56

February 1, Year 2

Depreciation expense should begin on the date that the asset is placed into service and therefore, contributing to the generation of revenues.

Question 57

Which of the following is not requirement for an asset to be categorized as a plant asset?

Answer 57

Have a useful life of at least three years.

Question 58

Criteria to be considered plant asset?

Answer 58

1. Currently used in operations
2. Have useful life extending more than one year beyond balance sheet date
3. Have physical substance (not intangible)
4. Not held for investment purposes

Question 59

Which of the following is a required footnote disclosure on property, plant, and equipment?

Answer 59

All items listed are required disclosures: useful life, depreciation methods, and the accumulated depreciation of plant asset

Question 60

A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except:

Answer 60

It will be valued at historical cost.

Only assets used in current operations are included in the category of property, plant and equipment (PPE) on the balance sheet. Assets that are held for sale are reclassified from PPE to ‘assets held for sale’ and are no longer depreciated. This question is an example of a question framed in the null form. That is, the question wants you to find the exception. This response states the asset will be valued at historical cost—that is false. An asset held for sale is reported at net realizable value.

Question 61

Plant asset categories:

Answer 61

1. Plant and equipment- Fintite life, depreciated

2. Land improvements- Finite life, depreciated (ex. parking lot

Question 62

Merry Co. purchased a machine costing $125,000 for its manufacturing operations and paid shipping costs of $20,000. Merry spent an additional $10,000 testing and preparing the machine for use.

What amount should Merry record as the cost of the machine?

Answer 62

$155,000

Question 63

Derby Co. incurred costs to modify its building and to rearrange its production line. As a result, an overall reduction in production costs is expected. However, the modifications did not increase the building’s market value, and the rearrangement did not extend the production line’s life.

Should the building modification costs and the production line rearrangement costs be capitalized?

Answer 63

The criterion for capitalizing post-acquisition costs is not whether the market value of the overall asset is increased. Rather, the criteria are (1) increase in useful life or (2) increase in productivity or efficiency including cost reduction.

An overall reduction in production costs meets the second criterion. Therefore, both costs are capitalized rather than immediately expensed.

Question 64

Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an):

Answer 64

Part of continuing operations

The gain or loss on the sale of an asset is part of continuing operations as it is expected that a company will sell existing assets from time to time as the assets are replaced.

Question 65

Costs included in acquisition of plant assets:

Answer 65

1. cash equivalent price or negotiated acquisition cost
2. get-ready costs-Capitalize all expenditures necessary to bring the plant asset to its intended condition and location.

Question 66

When to capitalize?

Answer 66

If the estimated time of benefit is related to the current and future accounting periods, the expenditure is capitalized. The term “capitalized” means included in an asset account.

Question 67

Capitalized expenditure terms:

Answer 67

1. addition is a new major component of an asset, such as an additional room in or on a building
2. improvement is the replacement of a major component of an asset, such as an air conditioning system
3. rearrangement is a restructuring of an asset that does not extend its life but creates a new type of benefit.

Question 68

Cost of landscaping

Answer 68

Capitalize to land improvements

Question 69

Training on new equipment

Answer 69

Expense

Question 70

Cost to excavate foundation for a building

Answer 70

Capitalize to building

Question 71

Cost of permits for construction

Answer 71

Capitalize to building

Question 72

Which of the following should be presented with the statement of cash flows in a separate schedule?

Answer 72

Per ASC Topic 230, investing and financing activities that do not affect cash but do affect recognized assets and liabilities should be presented in a separate schedule to accompany the statement of cash flows. Examples of such items include

1. Conversion of debt to equity
2. Acquisition of assets by either:

− Incurring a mortgage
− Entering into a capital lease
− Issuing stock

3. Exchange of noncash assets or liabilities for other noncash assets or liabilities.

Question 73

A corporation issues quarterly interim financial statements and uses the lower of cost or market method to value its inventory in its annual financial statements. Which of the following statements is correct regarding how the corporation should value its inventory in its interim financial statements?

Answer 73

ASC Topic 270 provides that inventory losses from market declines should be recognized in the interim statements when the decline in value occurs. A temporary market decline need not be recognized in the financial statements since no loss is expected to be incurred in the fiscal year.

Question 74

If losses in the amount of $2,750 (net of tax) on available-for-sale debt securities have been previously included in other comprehensive income, what amount would be the reclassification adjustment added (or deducted) when the securities are sold? Assume a 30% tax rate.

Answer 74

$2,750 had been a deduction of other comprehensive income in prior years. When the securities are sold, the loss will be included in net income, so the $2,750 must be added back to other comprehensive income to avoid taking the loss twice.

Question 75

Wagner, a holder of a $1,000,000 Palmer, Inc. bond, collected the interest due on March 31, year 2, and then sold the bond to Seal, Inc. for $975,000. On that date, Palmer, a 100% owner of Seal, had a $1,075,000 carrying amount for this bond. What was the effect of Seal’s purchase of Palmer’s bond on the retained earnings and noncontrolling interest amounts reported in the March 31, year 3 consolidated balance sheet?

Answer 75

When Seal purchased the bonds from Wagner, the bonds were viewed as retired from a consolidated viewpoint since there is no longer any obligation to an outside party. Therefore, the consolidated entity would recognize a $100,000 gain ($1,075,000 carrying amount − $975,000 cash paid), which would increase net income, thus increasing consolidated retained earnings. This transaction has no effect on the noncontrolling interest, since the acquiree (Seal) has merely exchanged one asset for another (cash for investment in bonds).

Question 76

Assume a firm elects to adopt ASU 2015-01—Extraordinary and Unusual Items. Unusual and infrequently occurring events are reported as:

Answer 76

ASU 2015-01 requires items previously classified as extraordinary to be included as a separate line item within income from continuing operations.

Question 77

A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling interest balances in the parent company’s consolidated balance sheet?

Answer 77

No effect on retained earnings and a decrease in minority interest.

Question 78

The retirement of long-term debt by the issuance of common stock should be presented in a statement of cash flows as a

Answer 78

Neither financing or investing activity

Per ASC Topic 230, financing and investing activities which have no effect on cash flows shall be shown either in a separate schedule of noncash financing and investing activities or in narrative form in the footnotes, not in the body of the statement.

Question 79

According to ASC Topic 820, which of the following is an assumption used in fair value measurements of nonfinancial assets?

Answer 79

The asset is in its highest and best use.

Question 80

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?

Answer 80

Milton will retain control of the receivables, pledging accounts receivable is treated as a borrowing with the accounts receivable used as collateral for the loan.

Question 81

A donated fixed asset for which the fair value has been determined should be recorded as a debit to fixed assets and a credit to

Answer 81

Other income.

Question 82

Which of the following utilizes the straight-line depreciation method?

Answer 82

Composite and Group Depreciation

Composite (group) depreciation averages the service life of a number of property units and depreciates the group as if it were a single unit. The term “group” is used when the assets are similar; the term “composite” is used when they are dissimilar. The mechanical application of both of these methods is identical.

Question 83

Darnell Company reported a loss of $40,000 on its year 1 income statement related to long-lived assets which it intended to sell. On Darnell’s December 31, year 1 balance sheet, these long-lived assets were reported at $200,000. During year 2, Darnell did not sell any of these long-lived assets, and, at December 31, year 2, Darnell compiled the following information related to these assets which it intended to sell:

Fair value $220,000
Cost to sell 15,000

On Darnell’s December 31, year 2 balance sheet, what amount should be reported for the long-lived assets which were being held for sale?

Answer 83

According to ASC Topic 360, “A loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain shall be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized (for a write-down to fair value less cost to sell). The loss or gain shall adjust only the carrying amount of a long-lived asset, whether classified as held for sale individually or as part of a disposal group. A gain or loss not previously recognized that results from the sale of a long-lived asset (disposal group) shall be recognized at the date of sale.” In Darnell’s case, the estimate of fair value less cost to sell at December 31, year 2, was $205,000. This amount represents a revision of the estimate of fair value less cost to sell of $200,000 at December 31, year 1

Question 84

How much should be charged to the cost of the merchandise purchases?

Answer 84

The costs to be charged to merchandise purchases should include those costs necessary to prepare the merchandise for sale. Salesmen’s commissions are a selling expense and not related to the acquisition of the merchandise. These costs are expensed in the period incurred. The interest is a financing expense and is also expensed in the period incurred.

Question 85

Company A and Company B exchanged nonmonetary assets with no monetary consideration involved and no impairment of value. The exchange did not result in the cash flows of the new asset being significantly different than the cash flows of the old asset. The accounting should be based on the

Answer 85

Recorded amount of the asset relinquished.

When nonmonetary assets are exchanged with no monetary consideration involved, no gain is recognized if the transaction lacks commercial substance. When the cash flows are not significantly different, the transaction is deemed to lack commercial substance. Therefore, the accounting for such an exchange must be based on the recorded amount of the asset relinquished (ASC Topic 845).

Question 86

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?

Answer 86

Held to maturity- carrying value

Available for sale- FV

Question 87

An expenditure to install an improved electrical system is a

Answer 87

Capital expenditure- YES
Revenue expenditure-NO

Capital expenditures are not normal, recurring expenses, and they benefit the operations of more than one period. Examples of capital expenditures include additions, replacements, betterments, and extraordinary repairs and maintenance.

Revenue expenditures are normal, recurring expenditures such as normal repairs and maintenance.

Question 88

An asset is being constructed for an enterprise’s own use. The asset has been financed with a specific new borrowing. The interest cost incurred during the construction period as a result of expenditures for the asset is

Answer 88

A part of the historical cost of acquiring the asset to be written off over the estimated useful life of the asset.

Question 89

Theoretically, cash discounts permitted on purchased raw materials should be

Answer 89

Deducted from inventory, whether taken or not.

There are two methods of accounting for cash discounts: the gross method and the net method. The gross method records purchases before any discounts, and records cash discounts only when taken. The net method records purchases net of cash discounts whether taken or not, and any discounts foregone are considered to be financing expenses. Theoretically, purchases and accounts payable should be shown net of cash discounts whether taken or not because this net method allows for a more correct reporting of the related asset and liability, and it allows for a measure of the inefficiency of financial management if the discount is not taken.