MCQ Review 4

Question 1

When company use straight-line method instead of the effective interest method to amortize discount, how were the bond carrying amount and retained earning affected bye the errors?

Answer 1

In the beginning, straight line amortization of discount and interest expense are greater than under the interest method. The effects are an understatement of unamortized discount, an overstatement of the carrying amount of the bonds, an understatement of net income, and and understatement of retained earnings.

Question 2

What is the basic budgetary entry?

Answer 2

Dr: Estimated revenues
Dr: Estimated other financing sources
          Cr: Appropriations
          Cr: Estimated other financing uses
          Cr: Budgetary fund balance

Question 3

When can contingent loss can be accrued and disclosed?

Answer 3

When it’s probable and the loss can be reasonably estimated

-when the loss is reasonably possible, the loss must be disclosed but not accrued as a liability.

Question 4

When remeasuring foreign currency financial statements into the functional currency, what would be remeasured using historical exchange rates?

Answer 4

1. Nonmonetary (inventory carried at cost) balance sheet items and related revenue, expense, gain, and loss accounts are remeasured at the historical rate.
2. Monetary (Bonds payable, Accrued liabilities..etc) accounts are remeasured at the current rate

Question 5

A newly acquired plant asset is to be depreciated over its useful life. What is the basis for this accounting method?

Answer 5

• Going-concern assumption
• A basic feature of financial accounting is that the business entity is assumed to be a going concern in the absence of evidence to the contrary. The going-concern concept is based on the empirical observation that many entities have indefinite lives. The reporting entity is assumed to have a life long enough to fulfill its objectives and commitments and therefore to depreciate wasting assets over their useful lives

Question 6

(FYI)Under U.S. GAAP, different interest rates ordinarily are used to calculate interest cost and the expected return on plan assets. Under IFRS, the same rate is used to discount the defined benefit obligation (interest cost) and to calculate interest income on plan assets.

Answer 6

(FYI)Under U.S. GAAP, different interest rates ordinarily are used to calculate interest cost and the expected return on plan assets. Under IFRS, the same rate is used to discount the defined benefit obligation (interest cost) and to calculate interest income on plan assets.

Question 7

What is the special revenue funds

Answer 7

A special revenue fund is used to account for the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.

Question 8

What is the treatment for contribution item like art works and historical treasures

Answer 8

-need not be capitalized and recognized as revenues if they are added to collections that are (1) held for public exhibition, education, or research for public service purposes rather than financial gain; (2) protected, kept unencumbered, cared for, and preserved; and (3) subject to a policy that requires the proceeds of sale of collection items to be used to acquire other collection items.

Question 9

How is capital lease recorded?

Answer 9

-Both asset and liability
A capital lease must be recorded by the lessee as both an asset and an obligation at an amount equal to the present value of the minimum lease payments, but this amount should not exceed the fair value at the inception of the lease.

Question 10

Capital lease can be either sales-type or direct financing. How do you distinguish it?

Answer 10

Lease should be accounted for as a sales-type lease.

In a sales-type lease, two components of income are recognized: the profit on the sale and interest income.