MCQ's Select Transactions Flashcards
A company’s foreign subsidiary operation maintains its financial statements in the local currency. The foreign operation’s capital accounts would be translated to the functional currency of the reporting entity using which of the following rates?
Historical Exchange Rate
Prior to translation, the foreign currency statements must be conformed to US GAAP and be measured in the functional currency of the foreign entity (otherwise, remeasurement into the functional currency is required). The remeasuring process should achieve the same result as if the books had been initially recorded in the functional currency. This requires the remeasuring of certain accounts (nonmonetary items) at historical exchange rates, including the foreign operations’ capital accounts. All other accounts are remeasured at current rates.
Mill Co. reported pre-tax income of $152,500 for the year ended December 31. During the year-end audit, the external auditors discovered the following errors:
Ending inventory $30,000 overstated
Depreciation expense $64,000 understated
What amount should Mill report as the correct pre-tax income for the year ended December 31?
$58,500
Correcting the overstatement of ending inventory would mean a decrease in the gross margin and consequently a decrease in the pre-tax income of the entity.
Correction of the understated depreciation expense would cause the total expenses of the year to increase, causing a decrease in the pre-tax income.
The correct pre-tax income for the year ended December 31 = 152,500 – 30,000 – 64,000= $58,500
Which of the following computer software costs should be expensed?
A - Conceptual formulation of alternatives in the preliminary project stage
B - Design of the software configuration during the application development stage
C - Costs of producing product masters after technology feasibility was established
D - Installation to hardware during the application development stage
Conceptual formulation of alternatives in the preliminary project stage
In the case of computer software developed for sale, costs prior to technological feasibility are expensed as R&D and costs associated with converting a technologically feasible program into final commercial form are capitalized.
Costs incurred after software sales begin are inventories and included in COGS.
Computer software costs that are incurred in the preliminary project stage should be expensed as incurred. Activities in this stage include conceptual formulation and evaluation of alternatives; determination of the existence of needed technology; and final selection of alternatives.
The following should be capitalized:
Design of the software configuration during the application development stage
Costs of producing product masters after technology feasibility was established
Installation to hardware during the application development stage
Cuthbert Industrials, Inc. prepares three-year comparative financial statements. In year 3, Cuthbert discovered an error in the previously issued financial statements for year 1. The error affects the financial statements that were issued in years 1 and 2. How should the company report the error?
Any correction of error in the accounting statements of prior years’ calls for a retroactive restatement. If comparative Financial Statements are presented and Financial Statement for the year with the error is presented, then corrections of errors should be made in those prior Financial Statements. Therefore, the Financial Statement of Cuthbert Industrials for years 1 & 2 should be restated, the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.
A corporation is in the final stages of developing a computer software program that will be sold to the general public. The company’s costs related to the software are as follows:
Development of a working model of the software $4 million
Customer support and training 2 million
Product master production 1 million
The costs associated with the product master production were incurred after the establishment of technological feasibility. What amount, if any, should the corporation expense against earnings?
$6 million
Costs incurred internally in creating a computer software product to be sold, leased, or otherwise marketed as a separate product, or as a part of a product or process, are charged to expense when incurred as research and development until technological feasibility has been established for the product. The costs of producing product masters incurred subsequent to establishing technological feasibility are capitalized. The corporation should expense $6 million; the $4 million development of a working model of the software and the $2 million customer support and training that was incurred. Only the $1 million for product master production would be capitalized.
Fogg Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after the goods were received at Fogg’s warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg’s favor. The resulting gain should be included in Fogg’s financial statements as a(an)
Component of income from continuing operations.
A change in exchange rates between the functional currency and the currency in which the transaction is denominated increases or decreases the expected amount of functional currency cash flows upon a settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally should be included as a component of income from continuing operations for the period in which the transaction is settled.
Galaxy Corporation had the following financial statement information:
Year 2 Year 1 Revenue $135,000 $100,000 Expenses 98,000 65,000 Net income 37,000 35,000
12/31/Y2 12/31/Y1 Total assets $157,000 $105,000 Total liabilities 50,000 35,000 Total owners' equity 107,000 70,000
Galaxy failed to record $12,000 of accrued wages at the end of year 1. The wages were recorded and paid in January year 2. Assuming that the correct accruals were made on December 31, year 2, what are the corrected balances in the year 1 and year 2 restated financial statements?
Year 1 net income $23,000
Dec. 31, year 1 total liabilities 47,000
Dec. 31, year 2 total owners’ equity 107,000
The entry for the 12/31/year 1 wage accrual should have been
Wages expense 12,000
Wages payable 12,000
Failure to accrue wage expense results in an understatement of wage expense and an understatement of wages payable by $12,000 in year 1. As a result, net income and retained earnings are overstated by $12,000 in year 1. The wages were expensed and paid in year 2. Therefore, wage expense for year 2 is overstated, and year 2 net income is understated by $12,000. This is a counterbalancing error, and ending retained earnings in year 2 would be correct. Although this is a self-correcting error, the financial statements must be restated with period-specific effects. The restated financial statements are
Galaxy Corporation
RESTATED FINANCIAL STATEMENTS
Year 2 Year 1 Revenue $135,000 $100,000 Expense 86,000 77,000 Net income 49,000 23,000 Total assets $157,000 $105,000 Total liabilities 50,000 47,000 Total owners' equity 107,000 58,000
Gains and losses on a hedging instrument will be recognized in current earnings in each reporting period for which of the following?
Fair value Cash flow
hedge hedge
Yes No
Fair value hedges will recognize gains and losses on the hedging instrument in each reporting period in current earnings. Cash flow hedges will recognize gains and losses on the hedging instrument in other comprehensive income.
On the first day of the year, a donor established a $100,000 irrevocable perpetual trust with a third-party trustee naming a not-for-profit entity as the sole income beneficiary in perpetuity. During the year, the trust earned and distributed $4,000 in income to the entity for unrestricted use. On the last day of the year, the fair value of the trust had increased by $5,000. What amount should the entity report in its year-end statement of financial position as beneficial interest in perpetual trust?
$105,000
This answer correctly reports the endowment at its $105,000 fair value as part of net assets with donor restriction. The $4,000 in income from the endowment is reported in net assets without donor restriction.
Which one of the following is not one of the financial statements required for a not-for-profit hospital?
A. Statement of changes in fund balance
B. Statement of activities
C. Statement of cash flows
D. Statement of financial position
A. Statement of changes in fund balance
Correct! Hospitals are required to issue a statement of financial position, a statement of activities, and a statement of cash flows.
While preparing its year 3 financial statements, Dek Corp. discovered computational errors in its year 2 and year 1 depreciation expense. These errors resulted in overstatement of each year’s income by $25,000, net of income taxes. The following amounts were reported in the previously issued financial statements:
Year 2 Year 1 Retained earnings, 1/1 $700,000 $500,000 Net income 150,000 200,000 Retained earnings, 12/31 $850,000 $700,000
Dek’s year 3 income is correctly reported at $180,000. Which of the following amounts should be adjusted to retained earnings and presented for net income in Dek’s year 3 and year 2 comparative financial statements?
Year Retained earnings Net income
year 2 ($50,000) $125,000
year 3 – 180,000
This answer is correct. ASC Topic 250 requires that items of profit or loss related to the correction of an error in the financial statements of a prior period be accounted for and reported as prior period adjustments and excluded from the determination of net income for the current period. When comparative financial statements are prepared, it is necessary to adjust net income, its components, retained earnings balances, and other affected balances for all of the periods presented to reflect retroactive application of prior period adjustments. Hence, the amounts for each period must be stated in the comparative statements as if the errors had not occurred. Thus, both year 1 and year 2 net income and retained earnings would be retroactively reduced by $25,000 to reflect the correct amounts for each period. After these adjustments are made, the amounts for year 3 will be correctly stated. Note that this retroactive treatment is only used for presentation purposes in the comparative financial statements. The actual journal entry made to correct retained earnings at 1/1/Y3 is
Retained earnings 50,000
Accumulated depreciation 50,000
Howard Co. had the following first-year amounts for a $7,000,000 construction contract:
Actual costs $2,000,000
Estimated costs to complete 6,000,000
Progress billings 1,800,000
Cash collected 1,500,000
What amount should Howard recognize as gross profit (loss) using the percentage-of-completion method?
(1,000,000)
CORRECT! With $2,000,000 actual costs incurred in year 1 and $6,000,000 of costs remaining, the firm expects to spend a total of $8,000,000 on this project. The contract price is $7,000,000. Therefore, the firm expects to lose $1,000,000 on this contract ($8,000,000 – $7,000,000). The entire loss is recognized even though the percentage of completion is only 25% ($2,000,000/($2,000,000 + $6,000,000)). With no previous years’ profit, the loss recognized in year 1 is the full $1,000,000 (negative gross profit).
Which of the following statements is correct as it relates to changes in accounting estimates?
A. Most changes in accounting estimates are accounted for
retrospectively.
B. Whenever it is impossible to determine whether a change in
an estimate or a change in accounting principle occurred,
the change should be considered a change in principle.
C. Whenever it is impossible to determine whether a change
in accounting estimate or a change in accounting principle
has occurred, the change should be considered a change in
estimate.
D. It is easier to differentiate between a change in accounting
estimate and a change in accounting principle than it is to
differentiate between a change in accounting estimate and
a correction of an error.
C. Whenever it is impossible to determine whether a change
in accounting estimate or a change in accounting principle
has occurred, the change should be considered a change in
estimate.
Which of the following transactions would result in an increase in net assets without donor restriction for the year ended December 31, 20X2?
I. A private, not-for-profit hospital earned interest on investments that were board-designated.
II. A private, not-for-profit voluntary health and welfare organization received unconditional promises to give (pledges) which will not be received until the beginning of 20X3. The donors placed no restrictions on their donations.
Only I
Interest earned on board-designated investments is reported as unrestricted revenue. When the governing board of a not-for-profit organization places limitations on assets, they are designating the use of net assets without donor restrictions. Therefore, income earned on board-designated investments represents an increase in net assets without donor restrictions. Unconditional promises to give are reported in the period the pledges are made, not in the period of cash collection. However, since the contributions will not be received until 20X3, the contributions should be reported as an increase in net assets with donor restriction on the statement of activities for 20X2 because of this time restriction.
