MCQ Review 13 Flashcards
How is return of assets calculated?
-Return on assets equals net income divided by average total assets
What does declaration of a property dividend affect the balance of retained earnings?
In a property dividend, the property is first remeasured at fair value as of the date of declaration. Retained earnings is then decreased for the fair value of the property.
What does declaration of a stock split affect the balance of retained earnings?
In a stock split, no journal entry is recorded and no retained earnings are reclassified
What does declaration of a stock dividend affect the balance of retained earnings?
In a stock dividend, a portion of retained earnings is capitalized
What does declaration of a quasi-reorganization affect the balance of retained earnings?
A quasi-reorganization is accomplished by closing the retained earnings account (which, in a cumulative loss situation, would have a debit balance).
At December 31, Year 3, Eagle Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in Year 4 at a total cost of $1.5 million. In Year 4, Eagle appropriated $1.2 million of retained earnings for the construction of a new plant. Also, $2 million of cash was restricted for the retirement of bonds due in Year 5. In its Year 4 balance sheet, Eagle should report what amount of appropriated retained earnings?
Appropriating retained earnings is a formal way of marking a portion of retained earnings for other uses. A journal entry is used to move the amount from one account to the other. When the appropriation is no longer necessary, the entry is reversed, even if the full appropriation is not needed. Eagle appropriated only $1.2 million. The cash restriction is not included in appropriated retained earnings. If the amount is material, the restriction will require separate reporting of the cash item in the balance sheet, disclosure in the notes, and, possibly, reclassification as noncurrent.
What is the effect of a retained earnings appropriation?
To restrict the amount of retained earnings available for dividends, not to set aside assets.
On December 30, Rafferty Corp. leased equipment under a capital lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 10%. The capital lease obligation was recorded on December 30 at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this capital lease in its December 31 balance sheet?
In a classified balance sheet, a capital lease obligation must be allocated between the current and noncurrent portions. The current portion at a balance sheet date is the reduction of the lease liability in the forthcoming year. The portion of the minimum lease payment that exceeds the amount of interest expense is the reduction of the liability in the forthcoming year. At the beginning of the following year, the lease obligation is $115,000 ($135,000 opening balance – $20,000 initial payment), and the following year’s interest expense will be $11,500 ($115,000 lease obligation × 10% effective rate). The reduction of the liability when the next payment is made will be $8,500 ($20,000 cash – $11,500 interest).
A company has a parcel of land to be used for a future production facility. The company applies the revaluation model under IFRS to this class of assets. In Year 1, the company acquired the land for $100,000. At the end of Year 1, the carrying amount was reduced to $90,000, which represented the fair value at that date. At the end of Year 2, the land was revalued, and the fair value increased to $105,000. How should the company account for the Year 2 change in fair value?
In Year 2, the revaluation increase for the land is $15,000 ($105,000 fair value – $90,000 carrying amount). A revaluation increase must be recognized in other comprehensive income and accumulated in equity as a revaluation surplus. However, the increase must be recognized in profit or loss to the extent it reverses a decrease of the same asset that was recognized in profit or loss. In Year 1, the carrying amount of the asset was reduced by $10,000 ($100,000 – $90,000). This reduction was recognized in profit or loss (as there was no credit in revaluation surplus for the asset at that time). Thus, $10,000 of the increase in Year 2 must be recognized in profit or loss. The remaining $5,000 ($15,000 – $10,000) of the increase is recognized in other comprehensive income as a revaluation surplus.
DiAngelo Company entered into a transaction involving the exchange of nonmonetary assets with Louden Company. The assets being exchanged were considered to be dissimilar in nature. As part of the exchange transaction, DiAngelo also received cash from Louden. However, the exchange transaction resulted in a loss to DiAngelo. What is the accounting treatment for this loss?
- It is fully recognized in the year of the exchange.
- a loss must be recognized in full, regardless of the receipt of boot.
