MCQs 1 Flashcards

Question 1

Q

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

No effect on either retained earnings or noncontrolling interest
No effect on retained earnings and a decrease in noncontrolling interest
Decreases in both retained earnings and noncontrolling interest
A decrease in retained earnings and no effect on noncontrolling interest

Answer

A

No effect on retained earnings and a decrease in noncontrolling interest

Question 2

Q

What are the measurement focus and basis of accounting for the government-wide financial statements?

Measurement focus: Current financial resources; Basis of accounting: Modified accrual
Measurement focus: Economic resources; Basis of accounting: Modified accrual
Measurement focus: Current financial resources; Basis of accounting: Accrual
Measurement focus: Economic resources; Basis of accounting: Accrual

Answer

A

Measurement focus: Economic resources; Basis of accounting: Accrual

Question 3

Q

On November 1, year 2, Kir Co. signed a contract to purchase 10,000 British pounds on February 2, year 3. The relevant exchange rates are as follows:

                                 Spot rate   Forward rate  November 1, year 2      $1.98         $2.05  December 31, year 2      2.00          2.06

Kir accounts for the forward contract as a speculative transaction. What amount of gain, if any, should Kir report from this forward contract in its income statement for the year ended December 31, year 2?

$0
$100
$600
$700

Answer

A

$100

FASB ASC 815 requires that the gains and losses associated with speculative forward contracts be included in net income in the period(s) in which the changes in fair value of the forward contracts take place. The change in fair value is $100 [10,000 pounds × ($2.06 − $2.05)].

Question 4

Q

Belle, a nongovernmental not-for-profit entity, received funds during its annual campaign that were specifically promised by the donor to another nongovernmental not-for-profit health entity. How should Belle record these funds?

Increase in assets and increase in liabilities
Increase in assets and increase in revenue
Increase in assets and increase in deferred revenue
Decrease in assets and decrease in fund balance

Answer

A

Increase in assets and increase in liabilities

Question 5

Q

The following information pertains to each unit of merchandise purchased for resale by Vend Co.:

                             March 1       December 31   Purchase price         $8                    --   Selling price                12                $15   Price level index         110                 121   Replacement cost       --                   10

Under current cost accounting, what is the amount of Vend’s holding gain on each unit of this merchandise?

$0
$0.80
$1.20
$2.00

Answer

A

$2.00

The gain is the difference in the cost at March 1 ($8) and at December 31 ($10).
Holding gain = $10 − $8 = $2

Question 6

Q

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?

Current cost
Current market value
Historical cost
Net realizable value

Answer

A

Current cost

Question 7

Q

Which of the following would a nongovernmental not-for-profit educational institution report as program services?

Publicity costs
Teacher salaries
Management salaries
Fundraising expenses

Answer

A

Teacher salaries

Program services expenses are incurred in carrying out the primary mission of an organization, in this case the provision of educational services by teachers. All other expense classifications in this question pertain to supporting services (management, general, or fundraising).

Question 8

Q

Valley Town’s public school system is administered by a separately elected board of education. The board of education is not organized as a separate legal entity and does not have the power to levy taxes or issue bonds. Valley’s city council approves the school system’s budget. How should Valley report the public school system’s annual financial results?

Discrete presentation, yes; Blended, yes
Discrete presentation, yes; Blended, no
Discrete presentation, no; Blended, yes
Discrete presentation, no; Blended, no

Answer

A

Discrete presentation, no; Blended, yes

Blending of financial results is allowed as the public school system and the city are not separate legal entities. The city is responsible for the finances of the school system (the school board has no authority to levy taxes or issue bonds).
Discrete presentation is for affiliated entities whose resources are entirely for the benefit of the primary government. The school system does not operate for the sole benefit of the town.

Question 9

Q

Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available:

Accounts receivable increase $20,000
Equipment gain on sale increase 10,000
Nontrade notes payable increase 50,000
Prepaid insurance increase 40,000
Accounts payable increase 30,000

What amount should Martin report as net cash provided by operating activities in its statement of cash flows for the year?

$0
$40,000
$50,000
$100,000

Answer

A

$40,000

Net income $70,000
+ Depreciation expense 10,000
- Accounts receivable increase (20,000)
- Equipment gain on sale increase (10,000)
- Prepaid insurance increase (40,000)
+ Accounts payable increase 30,000
$40,000

The nontrade N/P (notes payable) is a financing activity.

Question 10

Q

Hilltop Co.’s monthly bank statement shows a balance of $54,200. Reconciliation of the statement with company books reveals the following information:

Bank service charge: $10
Insufficient funds check: $650
Checks outstanding: $1,500
Deposits in transit: $350
Check deposited by Hilltop and cleared by the bank for $125, but improperly recorded by Hilltop as $152
What is the net cash balance after the reconciliation?

$52,363
$53,023
$53,050
$53,077

Answer

A

$53,050

Starting with $54,200 and adding the $350 deposit in transit, and then subtracting the $1,500 checks outstanding, we get $53,050.

Question 11

Q

Brill Co. made the following expenditures during 20X1:

Costs to develop computer software
for internal use in Brill’s general
management information system $100,000
Costs of market research activities 75,000

What amount of these expenditures should Brill report in its 20X1 income statement as research and development expenses?

$175,000
$100,000
$75,000
$0

Answer

A

$0

Neither of these costs meets the definition of research and development cost:

Development of software for internal use is likely excluded from the applicability of FASB ASC 730-10-15-5.
Marketing research is specifically excluded from the definition of research and development by FASB ASC 730-10-15-4.
Research and development costs are defined as the “planned research…for new knowledge” and “the translation of research findings…into a…design for a new product or process.” (FASB ASC 730-10-20)

Question 12

Q

A company should report investment in debt securities that it has classified as trading at:

lower of cost or market, with holding gains and losses included in earnings.
lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses.
fair value, with holding gains included in earnings only to the extent of previously recognized holding losses.
fair value, with holding gains and losses included in earnings.

Answer

A

fair value, with holding gains and losses included in earnings.

Question 13

Q

Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell’s truck originally cost $23,000, its accumulated depreciation was $20,000, and its fair value was $5,000. Highway’s truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?

$5,700
$5,000
$3,700
$3,000

Answer

A

$3,700

Since this transaction lacks commercial substance, no gain or loss is recognized and the new book value is equal to the book value prior to the exchange:

Original cost $23,000
Accumulated depreciation 20,000
Book value $ 3,000
Additional cash paid 700
New book value $ 3,700

Question 14

Q

The following information pertains to Ceil Co., a company whose common stock trades in a public market:

Shares outstanding at 1/1 100,000
Stock dividend at 3/31 24,000
Stock issuance at 6/30 5,000

What is the weighted-average number of shares Ceil should use to calculate its basic earnings per share for the year ended December 31?

120,500
123,000
126,500
129,000

Answer

A

126,500

In computing weighted-average number of shares, retroactive application is given to stock splits, stock dividends, and shares of common stock issued in a business combination accounted for as a pooling of interests (i.e., they are treated as if they were outstanding for all of any periods presented).

Shares outstanding at 1/1 + stock dividend at 3/31:
124,000 x 6/12 = 62,000

Stock issued at 6/30:
129,000 x 6/12 = 64,500

62,000 + 64,500 = 126,500

Question 15

Q

Karr, Inc., reported net income of $300,000 for 20X1. Changes occurred in several balance sheet accounts as follows:

   Equipment                            $25,000 increase
   Accumulated depreciation    40,000 increase
   Note payable                         30,000 increase

Additional Information

During 20X1, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.
In December 20X1, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.
Depreciation expense for the year was $52,000.
In Karr’s 20X1 statement of cash flows, net cash used in investing activities should be:
$2,000.
$12,000.
$22,000.
$35,000.

Answer

A

$2,000

Cash paid for purchase of equipment $20,000
Less cash received from sale of
equipment ($25,000 - $12,000 + $5,000 gain) 18,000
Net cash outflow from investing activities $ 2,000

Question 16

Q

The billings for transportation services provided to other governmental units are recorded by the internal service fund as:

transportation appropriations.
operating revenues.
interfund exchanges.
intergovernmental transfers.

Answer

A

operating revenues

Internal service funds are established to account for activities that one department within a government undertakes for the benefit of (1) other departments within that same government (usual case), and (2) (sometimes) other governments, at prices approximating their external exchange value.

Question 17

Q

A company has multiple defined benefit pension plans. A pension asset reported in the statement of financial position represents the amount by which the:

total fair value of plan assets exceeds the total projected benefit obligation for all overfunded and underfunded plans.
total fair value of all plans exceeds the total accumulated benefit obligation for all overfunded and underfunded plans.
fair value of plan assets exceeds the projected benefit obligation for the company’s overfunded plans.
fair value of plan assets exceeds the accumulated benefit obligation for the overfunded plans.

Answer

A

fair value of plan assets exceeds the projected benefit obligation for the company’s overfunded plans.

The right to offset multiple plans does not exist; therefore, a pension asset is the total by which the fair value of plan assets for overfunded plans only exceeds the total projected benefit obligation for just those overfunded plans. Underfunded plans would be shown separately.

Question 18

Q

Smith Co. has a checking account at Small Bank and an interest-bearing savings account at Big Bank. On December 31 of the current year, the bank reconciliations for Smith are as follows:

Big Bank
Bank balance $150,000
Deposit in transit 5,000
Book balance 155,000

Small Bank
Bank balance $1,500
Outstanding checks (8,500)
Book balance (7,000)

What amount should be classified as cash on Smith’s balance sheet at December 31?

$148,000
$151,000
$155,000
$156,000

Answer

A

$155,000

The balance in the account at Big Bank of $155,000 would be the only amount included in cash. The negative balance in Small Bank would be classified as a current liability.

Question 19

Q

Terry, an auditor, is performing test work for a private not-for-profit hospital. Listed below are components of the statement of operations:

Revenue for charity care services $100,000
Bad debt expense 70,000
Net assets released from restrictions
used for operations 50,000
Other revenue 80,000
Net patient service revenue (includes revenue
related to charity care) 500,000

What amount would be reported as total revenues, gains, and other support on the statement of operations?

$460,000
$530,000
$580,000
$630,000

Answer

A

$530,000

Net patient service revenue $500,000
Less Charity care 100,000 $400,000
Other revenue 80,000
Net assets released from
restrictions used for
operations 50,000
Total $530,000

Charity care does not qualify for recognition as revenues in the financial statements. These are services provided without expectation of payment. The bad debt expense would not affect the patient service revenue reported by a private not-for-profit hospital.

Question 20

Q

Park, Inc. acquired 100% of Gravel Co.’s net assets. On the acquisition date, Gravel’s accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. Park’s consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities?

$0
$50,000
$350,000
$400,000

Answer

A

$400,000

In-process research and development results are classified as intangible assets with indefinite lives until the research and development phase is complete or the project is abandoned. These assets are originally recorded at fair value (i.e., $400,000) and will be subject to impairment tests.

Question 21

Q

Which of the following would be reported as an investing activity in a company’s statement of cash flows?

Collection of proceeds from a note payable
Collection of a note receivable from a related party
Collection of an overdue account receivable from a customer
Collection of a tax refund from the government

Answer

A

Collection of a note receivable from a related party

Investing activities involve asset transactions other than those related to operating results (e.g., accounts receivables from sales and taxes).

Question 22

Q

Cole Co. began constructing a building for its own use in January 20X1. During 20X1, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was $40,000. What amount of interest cost should Cole capitalize?

$20,000
$40,000
$50,000
$70,000

Answer

A

$40,000

For qualifying assets being constructed for an entity’s own use, FASB ASC 835-20-30-2 requires interest cost to be capitalized equal to the less of (a) the avoidable interest (based on the weighted-average amount of accumulated expenditures), or (b) the actual interest cost incurred. Cole’s avoidable interest is given to be $40,000. Since the $70,000 actual interest cost incurred ($50,000 + $20,000) is greater than the avoidable interest of $40,000, the amount of interest that Cole can capitalize is $40,000.

Question 23

Q

A state government had the following activities:

I. State-operated lottery: $10,000,000
II. State-operated hospital: $3,000,000
Which of these activities should be accounted for in an enterprise fund?

Neither I nor II
I only
II only
Both I and II

Answer

A

Both I and II

GASB 1300.109.c states that enterprise funds should be employed when the pricing policies of the activity establish fees and charges to external users designed to cover its costs, including capital costs. Covering costs is an important objective of a lottery operation, so a lottery should be accounted for in an enterprise fund. GASB Ho5.102 notes that accounting for government-operated hospitals financed in whole or in part by fees charged are usually reported in an enterprise fund.

Question 24

Q

An entity purchased new machinery from a supplier before the entity’s year-end. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. Under IFRS, what is the proper accounting treatment for the freight and interest costs related to the machinery purchase?

The freight and interest costs should be immediately expensed.
The freight and interest costs should be capitalized as part of property, plant, and equipment.
The interest cost should be capitalized as part of property, plant, and equipment, and the freight cost should be immediately expensed.
The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.

Answer

A

The freight cost should be capitalized as part of property, plant, and equipment, and the interest cost should be immediately expensed.

The costs to buy equipment, along with the costs to bring it to its location for use and make it ready for use, are capitalized into the cost of the equipment. Any interest costs in financing the purchase of equipment (which is otherwise ready to use) are finance (interest) costs and are expensed.

Question 25

Q

Dodd Corp. is preparing its December 31 current-year financial statements and must determine the proper accounting treatment for the following situations:

For the current year ended December 31, Dodd has a loss carryforward of $180,000 available to offset future taxable income. However, there are no temporary differences. Based on an analysis of both positive and negative evidence, Dodd has reason to believe it is more likely than not that the benefits of the entire loss carryforward will be realized within the carryforward period.
On 12/31 of this year, Dodd received a $200,000 offer for its patent. Dodd’s management is considering whether to sell the patent. The offer expires on 2/28 of next year. The patent has a carrying amount of $100,000 at 12/31.

Assume a current and future income tax rate of 30%. In its current-year income statement, Dodd should recognize an increase in net income of:

$0.
$54,000.
$70,000.
$124,000.

Answer

A

$54,000

The deferred tax asset is a tax benefit (lowering of this year’s income tax expense) and will increase net income by the total amount of the expected benefit amount of $54,000 ($180,000 deduction × 0.30 (the future tax rate of 30%)).

Question 26

Q

The effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a:

gain.
loss.
either a gain or a loss.
neither a gain nor a loss.

Answer

A

either a gain or a loss

FASB ASC 225-20-45-16 contains the following requirement: “A material event or transaction that an entity considers to be of an unusual nature or of a type that indicates infrequency of occurrence or both shall be reported as a separate component of income from continuing operations.”

This applies to both gains and losses.

Question 27

Q

On July 1, 20X1, Ran County issued realty tax assessments for its fiscal year ending June 30, 20X2. On September 1, 20X1, Day Co. purchased a warehouse in Ran County. The purchase price was reduced by a credit for accrued realty taxes. Day did not record the entire year’s real estate tax obligation, but instead recorded tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes payable, as appropriate. On November 1, 20X1, Day paid the first of two equal installments of $12,000 for realty taxes. What amount of this payment should Day have recorded as a debit to real estate taxes payable?

$4,000
$8,000
$10,000
$12,000

Answer

A

$8,000

The payable has been accruing since July at the rate of $2,000 per month ($24,000 ÷ 12) and is at $8,000 when paid.

Semi-annual realty tax payment = $12,000
Monthly tax accrual = $12,000 / 6 months = $2,000

November 1, 20X1, entry to pay taxes:
Prepaid real estate taxes 4,000
Real estate taxes payable 8,000
Cash 12,000

Question 28

Q

Which of the following should be considered part of one of the three primary user groups of the external financial reports of a state government?

Citizens of a neighboring state
Advocate groups within the state
Preparers of state government financial reports
Internal managers in the executive branch of the state government

Answer

A

Advocate groups within the state

Question 29

Q

A company incurred the following costs to complete a business combination in the current year:

Issuing debt securities $30,000
Registering debt securities 25,000
Legal fees 10,000
Due diligence costs 1,000

What amount should be reported as current-year expenses, not subject to amortization?

$1,000
$11,000
$36,000
$66,000

Answer

A

$11,000

A business combination occurs when two or more business enterprises are brought under common control and into one accounting entity (e.g., mergers, consolidations, or acquisitions). Acquisition costs and restructuring costs must be recognized separately from the acquisition itself in the acquirer’s post-combination financial statements in accordance with GAAP—usually expensed. The legal fees and due diligence costs that total $11,000 are considered acquisition costs and should be expensed in the current year. Debt issuance and debt registration costs are part of the consideration given, and recorded in conjunction with the debt itself.

Question 30

Q

The letter of transmittal and the statistical section are classified as:

basic financial statement.
required supplementary schedule.
other.
All of the answer choices are correct.

Answer

A

other

The letter of transmittal and the statistical section required for a CAFR and GFOA’s certificate are neither basic statements nor required supplemental information.

Question 31

Q

When should a long-lived asset be tested for recoverability?

When external financial statements are being prepared
When events or changes in circumstances indicate that its carrying amount may not be recoverable
When the asset’s carrying amount is less than its fair value
When the asset’s fair value has decreased, and the decrease is judged to be permanent

Answer

A

When events or changes in circumstances indicate that its carrying amount may not be recoverable

FASB ASC 360-10-35-21 states that an entity must review long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Question 32

Q

Which of the following is the most correct statement regarding the scope of a government’s MD&A?

Governments should present any information they believe is needed to support their analysis of financial position and results of operations.
Governments should only present that information needed to support their analysis of financial position and results of operations prescribed by GASB Statement 34 for MD&A.
Information that does not relate to the required topics of MD&A may be included in the MD&A, provided it replicates information contained elsewhere, such as in the letter of transmittal or in other forms of supplementary information.
Any information presented within a CAFR in the form of an analysis of financial position must be replicated in the MD&A, even when provided elsewhere, such as in the letter of transmittal or in other forms of supplementary information.

Answer

A

Governments should only present that information needed to support their analysis of financial position and results of operations prescribed by GASB Statement 34 for MD&A.

GASB 2200.109, which codifies elements of GASB Statement 34, indicates that MD&A “should be confined to the topics discussed” in the included list. Footnote 8 adds that information about other than the prescribed topics should be provided elsewhere in the financial statements.

Question 33

Q

Clover City’s government-wide financial statements should:

not distinguish between governmental and business-type activities.
be prepared using the modified accrual basis of accounting.
include information about fiduciary activities.
report information about the overall government without displaying individual funds or fund types.

Answer

A

report information about the overall government without displaying individual funds or fund types.

The government-wide financial statements consist of a statement of net position and a statement of activities. Those statements should “report information about the overall government without displaying individual funds or fund types” (GASB 2200.110). The statements should be prepared using the accrual basis of accounting and distinguish between governmental and business-type activities. Information about fiduciary funds should not be included in the statements.

Question 34

Q

A company had the following outstanding shares as of January 1, Year 2:

Preferred stock, $60 par, 4%, cumulative 10,000 shares
Common stock, $3 par 50,000 shares

On April 1, Year 2, the company sold 8,000 shares of previously unissued common stock. No dividends were in arrears on January 1, Year 2, and no dividends were declared or paid during Year 2. Net income for Year 2 totaled $236,000. What amount is basic earnings per share for the year ended December 31, Year 2?

$3.66
$3.79
$4.07
$4.21

Answer

A

$3.79

Basic earnings per share (EPS) is net income divided by weighted-average common stock outstanding (WACSO). Net income must be reduced by preferred cumulative dividends.

Net income - Preferred cumulative dividend = $236,000 - ($600,000 × 0.04) = $212,000
WACSO = 50,000 shares + (8,000 shares × 9/12) = 56,000 shares
Basic EPS = $212,000 ÷ 56,000 shares = $3.79/share

Question 35

Q

Baker Co. sells consumer products that are packaged in boxes. Baker offered an unbreakable glass in exchange for two box tops and $1 as a promotion during the current year. The cost of the glass was $2. Baker estimated at the end of the year that it would be probable that 50% of the box tops will be redeemed. Baker sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year for the glasses. What amount should Baker accrue as an estimated liability at the end of the current year, related to the redemption of box tops?

$0
$5,000
$20,000
$25,000

Answer

A

$5,000

A contingent liability must be reported if it is probable that the liability will occur and the amount can be reasonably estimated.

Boxes sold 100,000
Estimated redemption percentage x 0.50
Estimated redemptions 50,000
Box tops already redeemed 40,000
Remaining box tops to be redeemed 10,000
Box tops per redemption / 2
Estimated glasses to be provided 5,000
Cost per glass ($2 - $1) $ 1
Estimated liability $ 5,000

Question 36

Q

Note section disclosures in the financial statements for pensions do not require inclusion of which of the following?

The components of net period pension costs
The amount of net prior service cost or credit in accumulated other comprehensive income
The company’s best estimate of contributions expected to be paid into the plan in the next fiscal year
A detailed description of the plan, including employee groups covered

Answer

A

A detailed description of the plan, including employee groups covered

Question 37

Q

Fireworks, Inc., had an explosion in its plant that destroyed most of its inventory. Its records show that beginning inventory was $40,000. Fireworks made purchases of $480,000 and sales of $620,000 during the year. Its normal gross profit percentage is 25%. It can sell some of its damaged inventory for $5,000. The insurance company will reimburse Fireworks for 70% of its loss. What amount should Fireworks report as loss from the explosion?

$50,000
$35,000
$18,000
$15,000

Answer

A

$15,000

Beg. Inv                $40,000
\+ Purchases         480,000
- COGS                 465,000 [A]
= End. Inv                55,000
- Sold inventory        5,000
= Loss                      50,000
- 70% reimbursed
by insurance            35,000
= Final loss                15,000

[A] Sales of $620,000 x 25% = $155,000
$620,000 - 155,000 = $465,000

Question 38

Q

Payne, Inc., implemented a defined benefit pension plan for its employees on January 2, Year 3. The following data are provided for the year, as of December 31, Year 3:

Projected benefit obligation $103,000
Plan assets at fair value 78,000
Net periodic pension cost 90,000
Employer’s contribution 70,000

What amount should Payne record as additional pension liability at December 31, Year 3?

$0
$5,000
$20,000
$45,000

Answer

A

$5,000

The amount by which the net periodic pension cost exceeds the contribution is $20,000 ($90,000 – $70,000), and that amount, plus an additional $5,000 of liability must be recognized on the balance sheet, for a total underfunded pension amount of $25,000 (projected benefit obligation of $103,000 – plan assets of $78,000).

Question 39

Q

Pine City owned a vacant plot of land zoned for industrial use. Pine gave this land to Medi Corp. solely as an incentive for Medi to build a factory on the site. The land had a fair value of $300,000 at the date of the gift. This nonmonetary transaction should be reported by Medi as:

nonoperating income.
additional paid-in capital.
a credit to retained earnings.
a memorandum entry.

Answer

A

additional paid-in capital.

Only additional paid-in capital is an acceptable way to account for this donated land. The land has to be added to the assets, so a memo entry is not sufficient.

Question 40

Q

Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share, and recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share, and recognized a $50,000 gain on its income statement on May 20. Which of the following statements is correct?

Murphy’s comprehensive income for the current year is correctly stated.
Murphy’s net income for the current year is overstated.
Murphy’s net income for the current year is understated.
Murphy should have recognized a $50,000 loss on its income statement for the current year.

Answer

A

Murphy’s net income for the current year is overstated.

Gains and losses do not result from buying and selling your own equity shares. Therefore, no gain should have been reported on the resale of the treasury stock. Net income was overstated as a result.

Question 41

Q

Jorge sells $150,000 of product to Wilson, and also purchases $25,000 of advertising services from Wilson. The advertising services have a fair value of $20,000. Jorge should record revenue on its sale of product to Wilson of:

$130,000.
$125,000.
$150,000.
$145,000.

Answer

A

$145,000.

Jorge is paying more for advertising services than the fair value of those services, so the excess of $5,000 ($25,000 price paid – $20,000 fair value) is a refund of part of the $150,000 sale. Therefore, Jorge records revenue of $145,000 ($150,000 – $5,000).

Question 42

Q

On January 2, 20X1, Marx Co. as lessee signed a 5-year noncancelable equipment lease with annual payments of $200,000 beginning December 31, 20X1. Marx treated this transaction as a capital lease. The five lease payments have a present value of $758,000 at January 2, 20X1, based on interest of 10%. What amount should Marx report as interest expense for the year ended December 31, 20X1?

$0
$48,400
$55,800
$75,800

Answer

A

$75,800

A lessee under a capital lease is required to allocate each minimum lease payment between reduction of obligation and interest expense. This allocation should reflect a constant interest rate (the 10% indicated for the Mars Co. lease) over the lease term.

Interest expense (10% of $758,000) 75,800
Liabilities under capital lease
($200,000 - $75,800) 124,200
Cash 200,000

Question 43

Q

Which of the following statements is correct regarding reporting comprehensive income?

Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.
A separate statement of comprehensive income is required.
Comprehensive income must include all changes in stockholders’ equity for the period.
Comprehensive income is reported in the year-end statements but not in the interim statements.

Answer

A

Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.

Question 44

Q

On September 1, Year 1, Howe Corp., offered special termination benefits to employees who had reached the early retirement age specified in the company’s pension plan. The termination benefits consisted of lump-sum and periodic future payments. Additionally, the employees accepting the company offer receive the usual early retirement pension benefits. The offer expired on November 30, Year 1. Actual or reasonably estimated amounts at December 31, Year 1, relating to the employees accepting the offer are as follows:

Lump-sum payments totaling $475,000 were made on January 1, Year 2.
Periodic payments of $60,000 annually for three years will begin January 1, Year 3. The present value at December 31, Year 1, of these payments was $155,000.
Reduction of accrued pension costs at December 31, Year 1, for the terminating employees was $45,000.

In its December 31, Year 1, balance sheet, Howe should report a total liability of special termination benefits of:

$475,000.
$585,000.
$630,000.
$655,000.

Answer

A

$630,000

The total liability that needs to be recognized is for the lump sum and the present value of the periodic payments ($475,000 + $155,000 = $630,000). It is not to be offset against the reduction in accrued pension costs.

Question 45

Q

Blue City has a major garage facility used by the Public Works department to maintain the streets and roads equipment. The garage was built 10 years ago and was expected to meet the city’s needs for 30 years. The City has been updating its equipment fleet and unexpectedly discovered that the service bays are no longer adequate for many of the new vehicles, which are much larger. The sudden obsolescence of the building has been evaluated as a significant, unusual, and infrequent occurrence that resulted from actions within management control. The impairment would be reported on the statement of activities as:

a program expense, temporary impairment.
an extraordinary item.
a special item.
a program or operating expense.

Answer

A

a special item.

A temporary impairment does not require expense recognition and would not be reported. As an unusual and infrequent occurrence, this expense would not be included with the other operating expenses of the program (Public Works). Both extraordinary and special items are defined as unusual and infrequent in nature. However, special items are significant transactions under management’s control. The acquisition of the new equipment that suddenly caused the obsolescence of the existing building resulted from management action. Both extraordinary items and special items are reported separately at the bottom of the statement of activities.

Question 46

Q

An entity should recognize the fair value of an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The entry to record the initial liability would include:

a debit to the carrying value of the related asset.
a credit to the carrying value of the related asset.
a debit to asset retirement expense.
a debit to asset retirement obligation.

Answer

A

a debit to the carrying value of the related asset.

While a company records the legal liability (a credit), it also records the same amount as an increase (a debit) in the carrying value of the related asset.

Question 47

Q

Which of the following is the most correct statement regarding the capitalization of construction-period interest requirement on capital assets used in business-like activities?

Interest should be capitalized on qualifying assets.
Interest may not be capitalized on qualifying assets.
Interest capitalization is not an issue addressed by governmental accounting standards.
Interest capitalization is optional.

Answer

A

Interest should be capitalized on qualifying assets.

Question 48

Q

Which of the following would be added back to net income when reporting operating activities’ cash flows by the indirect method?

Excess of treasury stock acquisition cost over sales proceeds (cost method)
Bond discount amortization
Both excess of treasury stock acquisition cost over sales proceeds (cost method) and bond discount amortization
Neither excess of treasury stock acquisition cost over sales proceeds (cost method) nor bond discount amortization

Answer

A

Bond discount amortization

Question 49

Q

Combined statements may be used to present the results of operations of:

commonly controlled companies.
companies under common management.
both commonly controlled companies and companies under common management.
neither commonly controlled companies nor companies under common management.

Answer

A

both commonly controlled companies and companies under common management.

Question 50

Q

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

Debenture bonds
Serial bonds
Term bonds
Sinking fund bonds

Answer

A

Serial bonds

Serial bonds are a set of related bonds issued at the same time but which mature at intervals over time.

Question 51

Q

During 20X1, Sloan, Inc., began a project to construct new corporate headquarters. Sloan purchased land with an existing building for $750,000. The land was valued at $700,000 and the building at $50,000. Sloan planned to demolish the building and construct a new office building on the site. What is the appropriate accounting treatment for interest of $147,000 on construction financing incurred after completion of construction?

Classify as land and do not depreciate
Classify as building and depreciate
Expense

Answer

A

Expense

FASB ASC 835-20-25-5 provides: “The capitalization period shall end when the asset is substantially complete and ready for its intended use.”

Therefore, the $147,000 in construction financing incurred after completion of construction should be expensed.

Question 52

Q

SEC Regulation S-X provides guidance for the issuer regarding:

nonfinancial forms and disclosures required by the SEC.
instructions on electronically filing the forms required by the SEC.
the use of EDGAR by SEC registrants.
format and content of financial information submitted to the SEC.

Answer

A

format and content of financial information submitted to the SEC.

Question 53

Q

Kent, Inc.’s, reconciliation between financial statement and taxable income for 20X2 follows:

Pre-tax financial income $150,000
Permanent difference (12,000)
138,000
Temporary difference-
depreciation (9,000)
Taxable income $129,000
=========
ADDITIONAL INFORMATION:
AT
12/31/X1 12/31/X2
Cumulative temporary differences
(future taxable amounts) $11,000 $20,000

The enacted tax rate was 34% for 20X1, and 40% for 20X2 and years thereafter.

In its December 31, 20X2, income statement, what amount should Kent report as current portion of income tax expense?

$51,600
$55,200
$55,860
$60,000

Answer

A

$51,600

The current portion of the income tax expense is the year’s taxable income multiplied by the tax rate. The remaining part of the income tax expense is the deferred or noncurrent part.

Current portion of Taxable Current
income tax expense = income x tax rate
= $129,000 x 40%
= $51,600

Question 54

Q

On January 1 of the current year, Lundy Corp. purchased 40% of the voting common stock of Glen, Inc., and appropriately accounts for its investment by the equity method. During the year, Glen reported earnings of $225,000 and paid dividends of $75,000. Lundy assumes that all of Glen’s undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividends-received deduction. Lundy’s current enacted income tax rate is 25%. Lundy uses the liability method to account for temporary differences and expects to have taxable income in all future periods. The increase in Lundy’s deferred income tax liability for this temporary difference is:

$45,000.
$37,500.
$27,000.
$18,000.

Answer

A

$18,000.

Lundy has financial accounting income of $90,000 ($225,000 × 0.40) and this income is not recognized for tax purposes until received in dividends later on. Of course, Lundy did receive some dividends already, $30,000 ($75,000 × 0.40). Thus, $60,000 of deferred income for tax purposes will generate a future tax due, a deferred tax liability now of $18,000 ($60,000 × the future tax rate of 0.30).

Question 55

Q

An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception:

embodies an obligation to repurchase the issuer’s equity shares.
requires or may require the issuer to settle the obligation by transferring assets.
both embodies an obligation to repurchase the issuer’s equity shares and requires or may require the issuer to settle the obligation by transferring assets.
either embodies an obligation to repurchase the issuer’s equity shares or requires or may require the issuer to settle the obligation by transferring assets.

Answer

A

both embodies an obligation to repurchase the issuer’s equity shares and requires or may require the issuer to settle the obligation by transferring assets.

Question 56

Q

Lime Co.’s payroll for the month ending January 31, 20X1, is summarized as follows:

Total wages $10,000
Federal income tax withheld 1,200

All wages paid were subject to the Federal Insurance Contributions Act (FICA). FICA tax rates were 7.65% each for employee and employer. Lime remits payroll taxes on the 15th of the following month. In its financial statements for the month ending January 31, 20X1, what amounts should Lime report as total payroll tax liability and as payroll tax expense?

Liability: $1,200; Expense: $1,530
Liability: $1,965; Expense: $1,530
Liability: $1,965; Expense: $765
Liability: $2,730; Expense: $765

Answer

A

Liability: $2,730; Expense: $765

Payroll tax liability:

Federal income tax withheld $1,200
Employee FICA (7.65% x $10,000) 765
Employer FICA (7.65% x $10,000) 765
——
Total $2,730

Payroll tax expense:

Employer FICA (7.65% × $10,000) = $765

Question 57

Q

On June 30, Huff Corp. issued at 99, 1,000 of its 8%, $1,000 bonds. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, Huff should report the bond liability at:

$955,000.
$990,000.
$1,000,000.
$1,025,000.

Answer

A

$955,000.

Accounting Standards Update (ASU) 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts; the recognition and measurement guidance for debt issuance costs were not affected by the amendments. Amortization of debt issuance costs also shall be reported as interest expense; issue costs will no longer be reported in the balance sheet as deferred charges.

Question 58

Q

In the long-term liabilities section of its balance sheet at December 31, 20X1, Mene Co. reported a capital lease obligation of $75,000, net of current portion of $1,364. Payments of $9,000 were made on both January 2, 20X2, and January 2, 20X3. Mene’s incremental borrowing rate on the date of the lease was 11% and the lessor’s implicit rate, which was known to Mene, was 10%. In December 31, 20X2, balance sheet, what amount should Mene report as capital lease obligation, net of current portion?

$66,000
$73,500
$73,636
$74,250

Answer

A

$73,500

At December 31, 20X1, the total lease liability was $76,364 (the sum of the current portion of $1,364 and the long-term portion of $75,000). The $9,000 payment made on January 2, 20X2, was for the $1,364 current portion and the interest of $7,636 ($9,000 - $1,364). After the January 2, 20X2, payment, the total lease liability is $75,000. Interest for 20X2 is $7,500 ($75,000 × 10% implicit rate). Therefore, the reduction in principal that will be included in the January 2, 20X3, payment will be $1,500, which is the $9,000 payment minus $7,500 interest for 20X2. This $1,500 represents the current portion of the lease liability. Therefore, the long-term portion of the liability at December 31, 20X2, is the $75,000 total lease liability less the $1,500 current portion, or $73,500.

Question 59

Q

On January 2 of the current year, Cruises, Inc. borrowed $3,000,000 at a rate of 10% for three years and began construction of a cruise ship. The note states that annual payments of principal and interest in the amount of $1,300,000 are due every December 31. Cruises used all proceeds as a down payment for construction of a new cruise ship that is to be delivered two years after start of construction. What should Cruise report as interest expense related to the note in its income statement for the second year?

$0
$300,000
$600,000
$900,000

Answer

A

$0

The cruise ship qualifies for interest capitalization. Qualifying assets, per FASB ASC 835-20-15-5, include “assets that are constructed or otherwise produced for an entity’s own use (including assets constructed or produced for the entity by others for which deposits or progress payments have been made).”

The down payment means that the weighted-average accumulated expenditures each year will be at least $3,000,000. Therefore, all of the interest on the note is capitalized during each year of construction. No interest expense related to the note should be reported in the income statement during the construction period.

Question 60

Q

The city accountant for a newly established municipality is setting up the new fund structure for the city’s accounting system. How many funds should the accountant establish for the city?

Two: a general fund and a special revenue fund as required by GAAP
Two: a special revenue fund and a general fund as required by the city manager
The minimum number of funds consistent with the needs of the city accountant
The minimum number of funds consistent with legal requirements and sound financial administration

Answer

A

The minimum number of funds consistent with legal requirements and sound financial administration

Question 61

Q

Under the deferred method of accounting for deferred income taxes, a credit balance in the deferred income taxes account that appears on the balance sheet (statement of financial position):

represents a payable in the usual sense in which the term “payable” is used in financial statements.
does not represent a payable in the usual sense in which the term “payable” is used in financial statements.
indicates that the amount of expense reported to date for financial reporting purposes is greater than the amount of expense reported to date for tax purposes.
indicates that the amount of revenue reported to date for financial reporting purposes is less than the amount of income reported to date for tax purposes.

Answer

A

does not represent a payable in the usual sense in which the term “payable” is used in financial statements.

Question 62

Q

On October 1 of the prior year, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1 of the prior year. Fleur’s prior-year financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due on the note were paid February 1 of the current year. As a result of Fleur’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly?

Prior-year 12/31 retained earnings, yes; Prior-year 12/31 interest payable, yes
Prior-year 12/31 retained earnings, no; Prior-year 12/31 interest payable, no
Prior-year 12/31 retained earnings, yes; Prior-year 12/31 interest payable, no
Prior-year 12/31 retained earnings, no; Prior-year 12/31 interest payable, yes

Answer

A

Prior-year 12/31 retained earnings, no; Prior-year 12/31 interest payable, yes

The cost of the merchandise purchased (and sold by the end of the year) should have been based on the present value of the note used to pay for them, not the face amount. Since the note paid a higher rate of interest than what was required as a yield, the note would have a premium, a higher value than face.

Thus, the note’s present value was higher than its face amount, and the higher value should have been added to purchase cost and moved to cost of goods sold. The lower value that was used for purchase cost understated the cost of goods sold. If cost of goods sold was understated, then net income was wrong and retained earnings was not correct.

Interest payable, however, is based on the face amount of the note and the stated payment rate, so it is correct.

Question 63

Q

The modified accrual basis of accounting should be used for which of the following funds?

Capital projects fund
Enterprise fund
Pension trust fund
Proprietary fund

Answer

A

Capital projects fund

In governmental accounting, the measurement focus and basis of accounting used depend on the nature of the fund. The flow of current financial resources measurement focus and the modified accrual basis are used in the governmental funds where revenues and expenditures are recorded, such as the General, Special Revenue, Capital Projects, Debt Service, and Permanent Funds.

Question 64

Q

Farm Co. leased equipment to Union Co. on July 1, 20X1, and properly recorded the sales-type lease at $135,000, the present value of the lease payments discounted at 10%. The first of eight annual lease payments of $20,000 due at the beginning of each year was received and recorded on July 3, 20X1. Farm had purchased the equipment for $110,000. What amount of interest revenue from the lease should Farm report in its 20X1 income statement?

$0
$5,500
$5,750
$6,750

Answer

A

$5,750

Initial amount of lease $135,000
Less first payment 20,000
Lease amount applicable to last half of 20X1 $115,000
Times interest rate (10% x 6/12 year) x .05
Interest revenue for 20X1 $ 5,750
========

Answer 65

A

General

Interfund transfers are flows of assets (such as cash) without expectation of repayment. Interfund transfers of governmental funds (e.g., the General Fund) are reported as “other financing uses” in the funds making the transfer and as “other financing sources” in the funds receiving the transfer. In proprietary funds (i.e., enterprise and internal service funds), transfers should be reported after nonoperating revenues and expenses as transfers in (out). Transactions in the pension fund are typically reported as revenues and expenses, not interfund transfers.

Answer 66

A

As an asset of $10,000 and a liability of $4,000

Grove City’s special revenue fund would have an asset equal to the amount “due to special revenue fund from the general fund.” The amount “due to agency fund from special revenue fund” is a liability of the special revenue fund. It is not acceptable to “net” these two accounts.

Answer 67

A

A gain of $25,000 in the income statement

The following entry is necessary on Toigo’s books on November 20, to record the purchase of the inventory:

Inventory                                       625,000
    Accounts Payable (500,000 x $1.25)                  625,000

The following entry is necessary on December 31, the balance sheet date, to remeasure the payable denominated in a foreign currency at the exchange rate at the balance sheet date:

Accounts Payable (500,000 x ($1.25 - $1.20)      25,000
    Exchange Gain                                                       25,000

The exchange gain is included in the determination of net income.

Answer 68

A

a recording error.

Answer 69

A

$500,000

The FASB requires that the fair value method be used for stock options. The fair value method recognizes the cost of consideration received for employee services to be the fair value at the grant date of the stock options ($15). The servicing period is the three-year vesting period. The company should report $500,000 [(100,000 × $15) ÷ 3] of share-based compensation expense for the year ended December 31, year 2.

Answer 70

A

$770,000

The change in net assets with donor restrictions includes the original donation of $700,000, any increases from investment income ($50,000) and net investment appreciation ($80,000) that the donor restricted to use for the senior center, and any decreases from the amount of resources spent for the restricted purpose ($60,000). These net assets released from restrictions reduce net assets with donor restrictions and increase net assets without donor restrictions by $60,000. Therefore, the change in net assets with donor restrictions is $700,000 + $80,000 + $50,000 − $60,000, or $770,000.

Answer 71

A

Debt service

The government-wide financial statements do not report the information that is included in the fiduciary funds. Agency, private-purpose trust, and pension trust are all fiduciary funds. The debt service fund reports the payment of interest on the government’s general long-term debt such as general obligation bonds. Interest expense on general long-term debt should be reported in the government-wide statement of activities.

Answer 72

A

Sale-leaseback

FASB ASC 840-40-15-6 requires that “if a change in the provisions of a capital lease gives rise to a new agreement classified as an operating lease, the transaction shall be accounted for under the sale-leaseback requirements.”

Answer 73

A

property taxes are recorded.

Crediting the revenues control account signifies either that cash has been collected, or that a valid receivable exists. In practice, when property taxes are levied, a receivable is created. The debit to property taxes receivable is offset by a credit to revenues to the extent that the taxes are “susceptible to accrual;” that is, both measurable and available to pay liabilities of the fiscal period.

Answer 74

A

$437,000

When applying the dollar-value LIFO retail method, you need to (as in dollar-value LIFO) restate ending-year retail to base-year prices:

$660,000 ÷ 1.10 (1 + 10% increase) = $600,000
This is a $100,000 increase in the ending-year retail amount over the retail amount at the beginning of the year (in base-year prices).

Now, determine the ending inventory using dollar-value LIFO retail directly, by adding to the beginning inventory of $360,000 the new layer of $100,000 multiplied by both the new layer’s cost-to-retail percentage and the new layer price level of 1.1:

$360,000 + ($100,000 × 0.7 × 1.1) = $437,000

Answer 75

A

$20,500

“With recourse” means that the financial entity where the note was discounted can collect fully from Davis Co. in the event the maker does not honor the note.

Davis Co. should disclose the full amount ($20,500) of the note as a contingent liability in its December 31, 20X1, financial statements, because it is reasonably possible that Davis will have to make good on the note.

Answer 76

A

Statement of cash flows

The key to this question is that this is a not-for-profit entity, not a government. The basic financial statements for a not-for-profit entity are statement of financial position (like a balance sheet), statement of activities, statement of cash flows, and for voluntary health and welfare entities, a statement of functional expenses.

Answer 77

A

Cash flow per share

Answer 78

A

Financing activities

A contribution to a not-for-profit restricted to long-term purposes like construction shall be reported as a cash flow from financing activities. Cash flows received from investment income restricted by donor stipulation to the same purposes also are reported as financing activities, not as operating activities.

Answer 79

A

$60,000

Recall that “each partner has an equal initial capital balance…” Thus, since Cor contributed assets valued at $60,000, Eng’s total contribution must also equal $60,000—goodwill valued at $40,000 in addition to the $20,000 cash.

Answer 80

A

Agency fund

The debt service transactions of a special assessment [debt] issue for which the government is not obligated in any manner should be reported in an agency fund…rather than [in] a debt service fund, to reflect the fact the government’s duties are limited to acting as an agent for the assessed property owners and the bondholders.

Answer 81

A

a controlling majority of the members of its governing board are appointed by state government officials.

Answer 82

A

$20,000

When a sale of property is made and a gain is realized on the sale, if the seller immediately leases the property back from the new owner, that is sometimes a justification for deferring recognition of the gain on the sale. If the sale of the asset is for a realized loss, as here, of $20,000 (sales price of $430,000 less carrying amount of $450,000), then a loss is usually recognized immediately.

There is an exception to this, and such is the case here. The loss is realized in the sales price, but the sales price is artificially too low. The asset is actually worth more than its selling price and more than its carrying value. In such a case, the loss is deferred.

Answer 83

A

$2,300 impairment loss.

An impairment loss is recognized on an exchange of similar productive assets if the carrying amount of the asset exceeds its fair value on the date of exchange. For Winn, an impairment loss of $2,300 ($16,800 carrying amount less $14,500 fair value) should be recognized.

Answer 84

A

how the governmental entity met its cash requirements.

Answer 85

A

Capitalize; depreciation is required.

Proprietary funds (including enterprise funds and internal service funds) are reported using the economic resources measurement focus and the accrual basis of accounting. Essentially, this means they are reported using a revenue and expense model. In this model, equipment is recorded and reported as capital assets (the term used for fixed assets in government reporting). Because expenses are reported, depreciation expense must be calculated and reported.

Answer 86

A

$0

Settam would not record additional net assets without donor restrictions resulting from this donation because the entire donation is subject to donor-stipulated requirements. The answer choice of $2,000,000 is incorrect because the $2,000,000 of donated shares increase net assets with donor restrictions because the investment is to be held indefinitely, and no dividends have yet been received. The answer choice of $8,000,000 is incorrect because the donation will also be accounted for as net assets with donor restrictions until the renovation occurs.

Answer 87

A

As a component of income from continuing operations

Whenever a change in accounting principle is inseparable from a change in an accounting estimate, the change should be considered as a change in estimate. Changes in estimates are handled prospectively.

Answer 88

A

Using fair value at the date of the financial statements

Answer 89

A

No gain or loss in the income statement; $3,000 asset in the balance sheet

Normally, in a nonmonetary exchange, the asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident. However, there are three exceptions in which the exchange is recorded at the carryover amount, not fair value. One of those exceptions is for exchange transactions that lack commercial substance, as does the exchange above. Isle should record the new copy machine at the carryover amount of $3,000 and not any gain or loss.

Answer 90

A

$15,000

Both of these lawsuits are gain contingencies, which are generally not recognized until it is virtually certain that there are rights to receive the amounts involved. Thus, the amounts that are yet to be received, and subject to the uncertainty of an appeal process, should not be recognized yet.

However, the $15,000 award that has not been appealed can be taken now as pretax gain.

Answer 91

A

exercise date.

Answer 92

A

Financial capital is applied to both currently reported net income and comprehensive income.

Answer 93

A

restricted as to use by the donor, grantor, or other source of the resources.

In hospital accounting, as in accounting for other not-for-profit entities, restricted funds are restricted as to use by the donor, grantor, or other party external to the organization.

Answer 94

A

$140,000

The cost of land includes the cost to buy and also the cost to make it ready for its intended use, which in this case includes the cost of tearing down the old building. The cost to tear down the building (less the salvage revenue) is a cost to make the land ready for its intended use, which is to put up the new building on it.

Purchase price of land $100,000
Cost of razing building $50,000
Less proceeds from sale of scrap 10,000 40,000
—— ——-
Capitalized cost of land $140,000

Answer 95

A

$24,000

Annual dividend requirement on preferred = $100 × .06 = $6/share × 20,000 shares = $120,000.

20X1 cumulative dividends $120,000
20X2 regular preferred dividends 120,000
Total dividends paid for 20X2 $240,000
x 2,000 sh / 20,000 shares, Wood Co. x 0.10
$ 24,000

Answer 96

A

by retrospective application to the financial statements of all prior periods presented.

A change in accounting entity is reported under the retrospective approach. All financial statements presented must be restated to reflect the new accounting entity.

Answer 97

A

1.33

The price index for the 20X1 inventory layer is determined by dividing the 20X1 inventory layer at the current (end of the year) cost of $200,000 by the inventory at the base-year cost of $150,000.

                                               Inventory:
                                    at Base-    at Current-   Date                              Year Cost    Year Cost    January 1, 20X0           $ 90,000     $ 90,000   20X0 layer                      20,000         30,000   20X1 layer                       40,000         80,000   December 31, 20X1     $150,000     $200,000

$200,000 / $150,000 = 1.33

Answer 98

A

$155,000

The balance in the account at Big Bank of $155,000 would be the only amount included in cash. The negative balance in Small Bank would be classified as a current liability.

Answer 99

A

$900,000

Special revenue funds are used to account for resources raised from revenues that are either restricted or committed for expenditure for specific general government purposes other than capital outlay or debt service.

Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays.

The sidewalks are capital in nature and would not be part of a special revenue fund but of a capital fund, whereas the road repairs are not capital but maintenance.

Answer 100

A

Redesign of a product prerelease

Answer 101

A

when promises to give cash are initially recognized, an expense for estimated uncollectible promises should be recorded.

Answer 102

A

($1,000,000)

Howard should recognize a $1,000,000 loss for year 1. Generally, a portion of contract revenue is recognized on an estimated basis in each period covered by the contract. However, if there is an estimated loss, the total estimated loss on the contract is recognized in the period in which the loss becomes apparent and estimable.

Actual costs incurred to date $ 2,000,000
Estimated costs to complete 6,000,000
Total estimated cost $ 8,000,000
Less contract price 7,000,000
Estimated loss on contract $(1,000,000)

Answer 103

A

$87,170

Residual value is the estimated fair value of the leased asset at the end of the lease and can be either guaranteed or unguaranteed by the lessee. Guaranteed residual values (GRV) are usually included in the minimum lease payments (MLP); in other words, the present value of the MLP of $348,680 already includes the present value of the GRV of $20,000. Therefore, annual depreciation is $87,170 ($348,680 ÷ 4-year lease term).

Answer 104

A

As a loss from continuing operations

Answer 105

A

purchase common stock at the average market price.

Answer 106

A

deducted in determining the net income of the combined corporation for the period in which the costs were incurred.

Answer 107

A

Report the interest from the notes payable benefiting specific functions as a direct expense of those functions and report the remaining interest as a separate line as an indirect expense.

Interest that clearly derives from borrowing that is essential to support a program should be reported as a direct expense of that program, and interest that does not qualify as a direct expense should be reported as a separate line. The two types of interest should not be combined.

Answer 108

A

Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
Recognize revenue when (or as) the entity satisfies a performance obligation

Answer 109

A

$5,000

Non-level lease payments must be expensed on a straight-line basis.

Year 1 $25,000
Year 2 30,000
Year 3 35,000
Total rent payments $90,000

Lease term 3 years
Yearly rent $30,000

The entry for the first payment would be:

Rent expense 30,000
Cash 25,000
Lease liability 5,000

Answer 110

A

$52,000

LTTI had a purchase commitment for 600,000 units (200,000 × 3) and purchased 80,000 units. By canceling sales of the product, LTTI has a loss of $52,000 (520,000 units × .10).

Answer 111

A

all governmental and internal service funds that provide services to the governmental functions.

The governmental activities portion of the government-wide statements reports the functions also reported in the general and other governmental funds. Internal service funds providing services for governmental functions are also included. Fiduciary fund information is not shown within the government-wide financial statements.

Answer 112

A

Internal service fund

The internal service fund, a proprietary fund, is the only answer choice in which capital assets and related depreciation are recorded. The other answer choices are governmental funds in which neither capital assets nor depreciation expense are recorded.

Answer 113

A

The customer has not accepted the asset but has legal title to the asset.

Answer 114

A

Operating income

Operating income is a subtotal well before income tax expense. Income tax expenses during the period are specifically allocated to the other three answer choices (discontinued operations, income from continuing operations, and prior-period adjustments).

Answer 115

A

the original contractual rate.

Answer 116

A

Estimates a standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract

Answer 117

A

$120,000

Income tax expense—current is the tax currently payable ($400,000 × 0.30 = $120,000).

Journal Entry:

Tax expense-current 120,000
Tax payable 120,000

Answer 118

A

neither the expected rate on plan assets nor the actual return on plan assets.

Answer 119

A

Disclosure only

Information which becomes known after the balance sheet date, but before the financial statements are issued, should be disclosed to keep the financial statements from being misleading. The gains or losses associated with the redemption and issuance of the bonds would be reported and disclosed in the 20X2 financial statements.

Answer 120

A

income determination

Answer 121

A

$60,000

When one is recognizing a lease transaction as a capital lease for the lessor, one has an account for the gross receivable under the lease. This account keeps track, in undiscounted fashion, of the entire lease rental payments to be received by the lessor. Here the gross receivables balance at the beginning of the lease is all six payments of $10,000, or $60,000.

Answer 122

A

Letter of transmittal

Answer 123

A

Enterprise

Answer 124

A

Rent expense

Answer 125

A

program revenues.

Answer 126

A

$50,000 increase

The donor’s gift of $2 million is considered an increase in net assets with donor restrictions because the donor directed that it be perpetually held as an investment. The investment revenue and the gain on the value of the investment are both also considered an increase in net assets with donor restrictions as the donor directed how investment income is used. If the donor had not explicitly directed the use of investment gains on the endowment, such gains would be considered an increase in net assets without donor restrictions.

Answer 127

A

$50,000

Because Macklin had performed all services required to earn the initial franchise fee, the refund period had passed, and operations were started in the current year, it should recognize all of the initial franchise fee as revenues unless collectibility of the $40,000 receivable is not reasonably assured. The question does not raise any concerns about collectibility of the receivable.

Answer 128

A

In the period of change and future periods if the change affects both

Answer 129

A

$45,000

Present value of note = 75 × $600,000 = $450,000
Interest income for 20X1 = 0.10 × $450,000 = $45,000

Answer 130

A

face value of the bonds at the beginning of the period by the contractual interest rate.

Answer 131

A

Charges for services

Answer 132

A

$0

The debt is a long-term liability and would not appear on the balance sheets of the governmental funds, although it would be reported in the governmental activities section of the government-wide statement of net position. The interest that is due very early in the following year has been deposited in the debt service funds. The expenditure for debt service would usually be recognized in the year of payment. The expenditure and related liability could be recognized in the debt service fund but is not required in the December 31, 20X1, statements. Therefore, the correct answer is $0.

Answer 133

A

Exempt from federal taxation

Answer 134

A

internally generated cash flow projections for a related asset or liability.

Answer 135

A

$0

All intercompany liabilities are eliminated in the consolidation process.

Answer 136

A

The entity would allocate a portion of the contract price to the implicit promise, recognizing revenue and the related cost of the promise, as it is provided to the customer.

Answer 137

A

$174,000

Service cost $150,000
Interest cost 0
Amortization of past service cost 24,000
Expected return on plan assets 0
Amortization of unrecognized gain/loss 0
$174,000
========

Answer 138

A

$2,500

Restricted contributions are recognized as revenue when received or promised. The $2,000 restricted for meals is recognized as restricted revenue. Conditional promises to give are not recognized as revenue until all conditions are met. The $10,000 represents a conditional promise since it may not be used until completion of a new playroom. Therefore, none of the $10,000 is recognized as revenue currently.

The $1,500 received for subscriptions represents a $1,000 payment for the subscription and a $500 unrestricted contribution.

Total contribution revenue is:
      Restricted                  $2,000
      Unrestricted                    500
      Total revenue            $2,500

Answer 139

A

I only

“Governmental entities should report securities lent (the underlying securities) as assets in their balance sheets.”

“Securities lending transactions collateralized by letters of credit or by securities that the governmental entity does not have the ability to pledge or sell unless the borrower defaults should not be reported as assets and liabilities in the balance sheet.”

Answer 140

A

estimated historical cost.

If determining the actual historical cost of general infrastructure assets is not practical because of inadequate records, public institutions reporting as special-purpose governments should report the estimated historical cost for major general infrastructure assets.

Answer 141

A

$18,000

Deferred tax benefits only come about from temporary differences, like depreciation and warranty costs. When depreciation for tax purposes is in excess of depreciation for financial accounting, then it will not give rise to a benefit, but instead to a liability. This leaves only the warranty costs, which do give rise to a deferred tax benefit, since the warranty costs will defer to future years’ additional tax deductions.

$60,000 × 0.30 = $18,000

Answer 142

A

Confirmatory value

Answer 143

A

AFV will SPICE up your GOODNIght

AFV: Assets to Fair Value
SPICE: Stock, Paid-in Capital, Retained Earnings of Subsidiary are eliminated
GOODNIght: Record GOODwill and Noncontrolling Interest, eliminate Investment account

Answer 144

A

Loss on discontinued operations

Comprehensive income is defined as “Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.”

Answer 145

A

understated by the difference between the note’s face amount and the note’s October 1 present value.

The cost of the merchandise purchased (and sold by the end of the year) should have been based on the present value of the note used to pay for them, not the face amount. Since the note paid a higher rate of interest than what was required as a yield, the note would have a premium, a higher value than face.

Thus, the note’s present value was higher than its face amount. The higher value should have been added to purchase cost and moved to cost of goods sold. The lower value that was used for the purchase cost understated the cost of goods sold.

Answer 146

A

The adjusted market assessment approach

Answer 147

A

Temporary transfers

Answer 148

A

$43,000

Goods owned by Opal, which are out on consignment, and goods in transit FOB shipping (title to goods passed to Opal upon shipment) are included in year-end inventory. Goods held by Opal on consignment for another entity are not included.

Opal’s inventory should be reduced by:

Markup on merchandise out on consignment:
(40% x $40,000) 16,000
Goods held on consignment by Opal: 27,000
Total reduction $43,000
=======

Answer 149

A

Permanent funds

Special revenue funds are classified as governmental funds. The other governmental funds are the general fund, capital projects funds, debt service funds and permanent funds. Governmental funds use the modified accrual basis of accounting.

Answer 150

A

$1,980,000

The government-wide statement of activities is prepared using full accrual accounting and the economic resources measurement focus, which requires revenues to be recognized when due to the government regardless of the date of receipt. The estimated collectible revenue in this case is 99% of the property tax levy, or $1,980,000. That $15,000 of the expected uncollectible $20,000 (1% of the levy) is written off does not change the revenue recognition.

Answer 151

A

$2,100,000 credit balance.

The complete entry to record the adopted budget is:

Estimated revenues 30,000,000
Appropriations control 27,000,000
Estimated transfer to debt service 900,000
Budgetary Fund Balance 2,100,000

Answer 152

A

Neither general funds nor fiduciary funds

Answer 153

A

Certain information may be presented either on the face of the financial statements or in the notes to the financial statements. Disclosure in the notes to the financial statements is needed only when the information required to be disclosed is not displayed on the face of the financial statements.

Answer 154

A

sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.

Answer 155

A

$3,333,333

Costs incurred to develop software for internal use are capitalized after the application development stage is reached. The costs are amortized over the benefited periods—three years in this case.

Answer 156

A

$210,000

Here the available produced finished inventory has a buyer already under contract obligation to buy, and a guaranteed minimum price, so revenue recognition upon production is appropriate. The inventory can be carried at net realizable value, and the sales price can be recognized as revenue in Year 1, upon production, of $210,000 (300,000 pounds × $0.70 a pound, the set minimum price for Year 1).

Answer 157

A

$1,220,000

If an alternative use exists, the cost is capitalized as a tangible or intangible asset and depreciated or amortized. The periodic depreciation or amortization is identified as R&D expense as long as the asset is used in R&D activity. If no alternative use exists, the expenditure is charged to R&D in the period of acquisition.

Depreciation on equipment with an alternate use ($100,000 / 5) $20,000
Equipment for current project 200,000
Research and development salaries 400,000
Material and labor costs 600,000
Total $1,220,000

Answer 158

A

Unrestricted contribution

The board, not the donor, imposes restrictions on use of the gift. When resources are under control of the governing board and not specifically restricted by an outside donor, the resources are considered unrestricted and the resulting income is unrestricted revenue.

Answer 159

A

$5,000

When the purchase order is approved by Elm City, the estimated amount is recorded in the journal entry:

Encumbrances 5,000
Fund Balance–Reserved
for Encumbrances 5,000

When the purchase order is filled for $4,950, the entry is reversed, for the original estimated amount of the purchase order:

Fund Balance–Reserved
for Encumbrances 5,000
Encumbrances 5,000

The actual amount of expenditures may be more or less than the estimated amount, but that does not affect the amount by which the encumbrance or the Budgetary Fund Balance—Reserved for Encumbrances are reversed.

Answer 160

A

Expense $1,100,000 as incurred.

A prototype is a preliminary or first model, often built for demonstration purposes (not production) from which other forms are copied or developed. Both the $1,000,000 and the $100,000 qualify as R&R cost and should therefore be expensed as incurred.

Answer 161

A

All of the answer choices are correct.

Answer 162

A

The minimum lease payments plus residual value

Answer 163

A

$900,000

The lease obligation is recorded at the lower of the present value of the minimum lease payments ($1,000,000) or the fair value ($900,000) of the asset. Executory costs are not included in the amount capitalized as minimum lease payments receivable by the lessor or obligation under capital lease by the lessee. Arena should report the capital lease obligation at $900,000.

Answer 164

A

$188,813

The inception of a lease is the date of the lease agreement. Rental expense should be as of that date. When the lease payments begin later than the inception date, the lease payments must be spread evenly over the longer period of time, which includes the months between the inception date and the beginning of the lease payments.

$28,900 × 56 months = $1,618,400
$1,618,400 ÷ 60 months = $26,973.33
$26,973.33 × 7 months (June through December) = $188,813

Answer 165

A

a disclosure of $20,000.

Dividends for 20X1 (3,000 x $100 x.05) $15,000
Dividends for 20X2 (3,000 x $100 x.05) 15,000
Total dividends for 20X1 and 20X2 $30,000
Less dividends paid in 20X2 10,000
Dividends in arrears $20,000
=======

Dividends in arrears are not an accrued liability until actually declared. Thus, the reporting of dividends in arrears is achieved through disclosure either on the face of the balance sheet or in the notes.

Answer 166

A

be valued at historical cost.

When you cease using a building in operations, you cease depreciating it. If it is to be sold soon, it will be reclassified as held for sale. However, it will still be carried at no more than its original cost less depreciation accumulated (which would be below historical cost).

Answer 167

A

fundamentally interrelated.

Articulation means that the elements of financial statements are fundamentally interrelated in two ways: (1) beginning balance + changes = ending balance, and (2) assets = liabilities + equity.

Answer 168

A

Milton will retain control of the receivables.

Under a pledge, an account receivable is used as collateral for a loan. Milton continues to collect the receivables and applies the collection to the loan balance.

Answer 169

A

Accumulated depreciation of equipment

Monetary assets are cash or items whose amounts are fixed in terms of numbers of dollars. All of the assets are monetary assets except for accumulated depreciation.

Answer 170

A

0.81 to 1

Quick ratio = Current assets (excluding Inventories and Prepaid assets) ÷ Current liabilities:

(Cash + Net A/R + Trading debt securities) ÷ Current liabilities
($60,000 + ($180,000 - $8,000) + $90,000) ÷ $400,000 = 0.81

All of the assets listed are current. Inventory and prepaid rent are excluded from the quick ratio.

Answer 171

A

Because the art will be displayed in general government buildings, the governmental activities would show revenue from donations of $2,000,000 and an expense of $2,000,000.

The city council’s formal policy for the donated collection of American art meets the three criteria that permit the city to avoid capitalization of the art collection. If the collection is not capitalized, it would not be listed among the capital assets used for governmental activities, and depreciation would not be reported. In the year of the donation, a recipient government should recognize a revenue as well as an expense in the same amount.

Answer 172

A

$550,000

Under IFRS, after an impairment loss has been recognized, if facts change and the estimated value of the asset has increased, the impairment loss can be considered recovered and, to the extent of the recovered loss, the impairment can be undone. Here, the building has recovered some of the loss and can be written back up to the current estimated value in use of $550,000.

Answer 173

A

$27,500

The revenue under the lease is the $50,000 each year, and the expenses include the depreciation and the property tax for the year. The broker’s fee ($15,000) should be amortized equally based over the 10 years of the lease, or $1,500 a year.

Thus, the net rental income should be $27,500:

$50,000 – $12,000 – $9,000 – $1,500 = $27,500

Answer 174

A

$798,000

This building is treated as a leasehold improvement. Although the land lease is for 21 years, the building will be in use for 20 years; thus, the depreciation period for the building is 20 years:

Cost / Life = $840,000 / 20 years = $42,000/year

Building cost - Depreciation = Carrying value of building
$840,000 - $42,000 = $798,000

Answer 175

A

An interest in a variable interest entity that the entity is required to consolidate

Answer 176

A

Depreciation expense: No; Interest revenue: Yes

A lease with transfer of title meets the criteria to be classified as a capital lease. The lessor (Able) should remove the asset from the books, record a receivable, and recognize interest revenue from the receivable.

Answer 177

A

upon the liquidation or termination of the reporting entity.

Answer 178

A

$32,300

Research and development costs should be “charged to expense when incurred.” The $34,000 cost of registration would be capitalized and amortized over the 10-year economic life.

20X1 amortization: $34,000 / 10 years = $3,400 x 6/12 = $1,700

Carrying value at 12/31/X1: $32,000 - 1,700 = $32,300

Answer 179

A

$248,000

Bond issue cost related to bonds retired = 1/2 of $6,000 = $3,000
Bond issue cost amortized by 06/02/X6 = 5/15 of $3,000 = $1,000

Face amount of bonds retired (1/2 of $500,000) = $250,000
Less unamortized bond issue costs ($3,000 - $1,000) = 2,000
Bond carrying value prior to retirement $248,000
(Used to compute gain or loss on retirement)

Answer 180

A

$1,020,000

Debt issue costs are considered part of the cost of issuing the bonds and are therefore included in the cost of the bonds and amortized over the life of the debt. Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Amortization of debt issuance costs is reported as interest expense. The remaining items are considered part of the cost of the land.

Answer 181

A

An outflow equal to the 20X1 principal payments only

Only the principal portion of the monthly lease payments would be reported as cash outflow for financing activities in Dewey Co.’s 20X1 statement of cash flows.

Note: Interest is a cash outflow that is classified as an operating activity.

Answer 182

A

Other gain/loss: $(4,000)

The total gain/loss in this case is the difference between the carrying value of the debt, $105,000, and the carrying value of the machine, $109,000 and its fair value of $96,000 conceivably could be deemed to be an impairment loss.

Answer 183

A

$2,005

Net proceeds of the loan were $194,000 and the effective interest rate was 12.4%. The journal entry to record the December 31, 20X1, accrual of interest would be:

Accrued Interest Receivable 2,005
Interest Income 2,005
(12.4% x $194,000 x 1/12)

The interest income reflects the effective interest rate applied to the net proceeds received. This is an application of the “effective interest” method.

Answer 184

A

decreases net assets without donor restrictions.

Management and general expenses are reported in a separate functional classification from program expenses. They are shown as expenses and not as an offset to revenues. All expenses in the statement of activities are classified as changes in net assets without donor restrictions.

Answer 185

A

The goods or services are not interdependent or interrelated.

Answer 186

A

increase in the projected benefit obligation due to the passage of time.

Answer 187

A

Asset and liability approach

This method focuses on the calculation of deferred tax assets and liabilities, and calculates the periodic expense or benefit as the change in the asset or liability from the prior balance sheet date.

Answer 188

A

$60,000

If net income after the bonus and the taxes was $360,000, then (taking the tax expense back first) income before taxes was $600,000 (using the after-tax back to pre-tax conversion formula, $360,000 ÷ 0.6 = $600,000, 0.6 = 1 less the tax rate of 40%). Now, the bonus is equal to 10% of the income after deducting the bonus, which would be the income before taxes of $600,000. Thus the bonus is 0.10 × $600,000, or $60,000.

Answer 189

A

a capital projects fund.

Depreciation expense is not recorded in any governmental fund since governmental funds account for neither depreciable assets nor expenses (the measurement focus of governmental funds is on expenditures, not expenses). Capital assets and related depreciation expenses are accounted for in proprietary funds and fiduciary funds. The only governmental fund type listed in the responses to this question is the capital projects fund, so this is the appropriate response.

Answer 190

A

$3,300,000

At the end of Year 1, the company was 20% finished with a project costing $7,500,000 total, so they must have already expended $1,500,000 (0.20 × 7,500,000). By the end of Year 2, the company was 60% done with a total estimate of $8,000,000 cost, so by the end of the year, the total costs expended so far must have been $4,800,000 (0.60 × $8,000,000).

During Year 2, the additional costs to go from $1,500,000 total cost to $4,800,000 total cost must have been expended, for a total year 2 cost of $3,300,000 ($4,800,000 – $1,500,000).

Answer 191

A

$300,000

Interest payments are included in operating activities. Cash payments to acquire equity instruments are included in investing activities. Only payments of dividends to stockholders are included in financing activities.

Answer 192

A

major fund reporting requirements do not apply to internal service funds.

Answer 193

A

12 months

Current items cover a period which is the company operating cycle (6 months) or a year, whichever is longer, and a year is longer than six months. Thus, for this company, items covering a 12-month period going forward are current.

Answer 194

A

program revenues

Program revenues are derived directly from the program itself or from parties outside the reporting government’s taxpayers or citizenry, as a whole; they reduce the net cost of the function to be financed from the government’s general revenues. Revenues derived from those who purchase, use, or directly benefit from the goods or services of a program, even those beyond the reporting government’s boundaries, are always considered program revenues.

Answer 195

A

$66,240

The four promised payments are valued at present value by using the given interest factor of 3.312 ($20,000 × 3.312 = $66,240).

Answer 196

A

the notes contain disclosures related only to required supplementary information.

Answer 197

A

Rule adoption

There are three steps involved in the rulemaking process: Concept Release, Rule Proposal, Rule Adoption

Answer 198

A

Expenditures—salaries, debit 250,000; Salaries payable, credit 250,000

Answer 199

A

Enterprise fund

Enterprise funds are used to report any activities for which a fee is charged, and 55% of the library’s needs are covered by fees.

Answer 200

A

$4,100,000 of other financing uses, $5,000 of expenditures, and $4,160,000 of other financing sources to the debt service fund.

Answer 201

A

$16,000

Minimum purchase commitment for 20X2 and 20X3
(100,000 units x $.10/u x 2 years) $20,000
Less scrap recovery (100,000 units x $.02 x 2 years) 4,000
Probable loss from purchase commitment $16,000
=======

Note: The question asks for the probable loss from purchase commitment (i.e., the loss for the remaining two years on the contract). The loss on the 250,000 units already in inventory is not considered part of this loss; it would be reported as an operating loss due to the write-down of inventory due to obsolescence.

Answer 202

A

A statement of cash flows should be presented for proprietary funds only.

Governments should present a statement of cash flows for proprietary funds using the direct method of presenting cash flows from operating activities.

Answer 203

A

A change from the income tax basis of accounting to the accrual basis

Changes in accounting principle use the retrospective approach, whereby all prior years’ financial statements presented should be restated and the cumulative effect of the change should be reported in the retained earnings statement. The only answer choice which is a change in principle requiring restatement is a change from the income tax basis of accounting to the accrual basis.

Answer 204

A

$300,000

Transfers are other financing sources and are never recognized as revenues. If the receivable is associated with an unrestricted grant or with a restricted grant for which all eligibility requirements have been met, the state grant should be reported as revenues.

Answer 205

A

$100,000

While a government’s full accrual financial statements recognize pension expense primarily based upon changes in the pension liability during the year, the modified accrual financial statements recognize pension expenditures primarily based upon a funding approach. Therefore, the government would recognize the full $100,000 contribution as pension expense for the year.

Answer 206

A

$688,500

The discount rate to get the present value of the payments is the lower of the lessee’s incremental borrowing rate, or the rate implicit in the lease, if known to the lessee.

The lower of these two here is the implicit rate in the lease that is known to the lessee, which is 9%. Thus, the amount of the lease liability will be based here on the present value factor for an annuity due of 7 years based on 9% (5.5) multiplied by the annual rental of $153,000:

5.5 × $153,000 = $841,500
However, since the first payment was just made, lower that amount to get the remaining liability at the end of the year:

$841,500 − $153,000 = $688,500

Answer 207

A

$264,000

Total obligation $257,000
Add: undiscounted cash flow 68,000*
Accretion expense 26,000
Deduct: payment (87,000)
———
$264,000
* The original undiscounted cash flow of $110,000 should be adjusted to the discounted estimate.

Answer 208

A

EBIT / Interest Expense

Answer 209

A

$800,000

Regardless of whether you are reporting the revenue at the fund or entity-wide level, the basic recognition criterion is the same: when all applicable eligibility requirements are met. The availability requirement does not apply with entity-wide statements, but availability does not make a difference in this case.

Answer 210

A

The rights and obligations under an insurance contract that is not a financial instrument (because it requires or permits the insurer to provide goods or services rather than a cash settlement) but whose terms permit the insurer to settle by paying a third party to provide those goods or services

Answer 211

A

$19,000

Total capital of new partnership
($60,000 + $20,000 + $15,000) $95,000
Times capital credit percentage to Grant x .20
Equals capital credit allowed to Grant $19,000
=======

Note: Grant is given a “bonus” equal to $4,000, the excess of his $19,000 capital credit over the $15,000 fair value of land invested.

Answer 212

A

statutory consolidation.

Answer 213

A

$40,000 liability

The recognition of the $100,000 expense for tax purposes in advance of the point it is recognized under GAAP allows the company to defer payment of taxes on $100,000 of GAAP income for the current year. The tax expense, from a GAAP perspective, is incurred because of current-year income and should be matched to the current year. This means that a current-year tax expense is not paid in the current year, but will be paid in the future.

Answer 214

A

$885,000

Since (1) assets equals liabilities plus equity and (2) the $120,000 amount of liabilities is a given, the key is to compute the December 31, 20X0, balance of equity. The transactions described affected equity as follows:

Issuance of stock on 1/1/X0 $750,000
Revenues 82,000
Expenses (64,000)
Declaration of cash dividend (3,000)
Equity 12/31/X0 $765,000
=========

Therefore, total assets must be $885,000, as shown below:

Assets = Liabilities + Equity
Assets = $120,000 + $765,000
Assets = $885,000

Answer 215

A

accrued if attributable to employees’ services already rendered.

Four conditions are necessary for accrual of employees’ compensation for future absences:

rights to compensation vest or accumulate,
payment of compensation is probable,
amount of payment can be reasonably estimated, and
the compensation is attributable to employees’ services already rendered.

Answer 216

A

$6,000

Income tax expense for the second quarter is the total income for quarters one and two times the effective rate, less the income tax expense recorded at the end of the first quarter.

Income before tax (Q1 & Q2) $30,000
Tax rate x 25%

Total expense for Q2 $7,500
Less: Expense from Q2 (1,500)

Income tax expense, Q2 $6,000

Answer 217

A

$9,000

The recognized but as yet unreceived income will generate a future tax consequence, a future tax liability. However, dividends received by a corporation are eligible for a dividends-received deduction, and thus only a smaller taxable amount (multiplied by the tax rate) will eventually be paid.

Taft’s recorded equity in Flame earnings $180,000
Less dividends received in 20X1 30,000
Temporary difference before dividend deduction 150,000
Less dividends received deduction (80% x $150,000) 120,000
Net amount of temporary difference $ 30,000
Times tax rate x 30%
Deferred income tax liability, noncurrent $ 9,000
========

Answer 218

A

Equipment and facilities included in estimated total current cost of closure and post-closure care should not be reported as capital assets.

Answer 219

A

Exempt from federal taxation

Answer 220

A

A reconciliation of ending retained earnings to net cash flow from operations

Answer 221

A

$59,000

Baker has earned the initial franchise fee and there is no indication that collectibility of the receivable is not reasonably assured. Therefore, Baker should recognize all the revenue for the initial franchise fee. The amount to be recognized is the cash received ($25,000) plus the present value of the future payments ($34,000). The difference between the $40,000 of future payments and their present value will be recognized as interest revenue over the 4-year period.

Answer 222

A

Serial bonds, $475,000; Debenture bonds, $400,000

Serial bonds mature in installments (only part of the total principal is paid back each year, so only some of the total bonds are paid off each year) and thus are described as maturing annually.

Thus, the serial bonds are the 9.375% bonds and the 10% bonds for a total of $475,000 ($275,000 + $200,000).

Debenture bonds are unsecured debt, and so these are the 9.375% and the 11.5% bonds for a total of $400,000 ($275,000 + $125,000).

Answer 223

A

It recognizes gains and losses immediately.

Answer 224

A

Other comprehensive income will be increased.

Prior service cost is a benefit granted to current workers in respect of their prior service. It is recognized as an expense over the remaining service lives of the benefited workers. Until then, it is recognized as a part of the total projected benefit obligation, and debited to other comprehensive income (thus lowering other comprehensive income). As prior service cost is recognized as an expense, it is credited to (taken out of) other comprehensive income (thus increasing it).

Answer 225

A

required using the full governmental model.

Answer 226

A

Operating activities

Answer 227

A

$0

Revenue for long-term contracts is recognized over time when any one of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; the entity’s performance creates or enhances an asset, such as work-in-process (WIP), that the customer controls as the asset is created or enhanced; or the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. This arrangement does not qualify for revenue recognition over time, because the asset the seller is creating has an alternative use to it. Therefore, EriK must wait until completion of the contract before recognizing revenue.

Answer 228

A

credit to appropriations control, $27,000,000.

Budgetary journal entries record estimated amounts, and are only posted at the beginning and end of the fiscal year. Estimated transfers of resources between and among funds are reported in the governmental fund operating statement as Other Financing Sources or Uses, as appropriated, and NOT combined with Appropriations.

A typical journal entry to record the budget is as follows:

Estimated Revenues xxx
Appropriations xxx
Budgetary Fund Balance xx

Answer 229

A

The costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market

Answer 230

A

Credit tax anticipation notes payable

Answer 231

A

$16,000

Year 1 depreciation = $100,000 × ((100% ÷ 10) × 2) = $20,000
Year 2 depreciation = ($100,000 - $20,000) × 0.20 = $16,000

Answer 232

A

The amount is increased by the excess of the replacement forest land’s cost over the condemned forest land’s carrying amount.

Answer 233

A

$17,000,000

“Early enough in the next period” cannot exceed 60 days for property taxes; therefore, most governments apply the same limits to other revenue sources.

The first item, Year 3 property taxes, is collected in the same year and so would be recognized as revenue. The second item, Year 2 taxes collected in Year 3, is recognized in the year collected or Year 3. The third item, Year 3 taxes but not collected until January of Year 4, would be recognized as revenue in Year 3, as the collection happens within the 60-day limit.

Answer 234

A

disclosure

Answer 235

A

the carrying amount of similar assets of competitors.

Answer 236

A

The other asset group should be tested for an impairment loss before goodwill is tested.

oodwill must be tested for impairment at least annually. However, it must be tested between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Additionally, if the carrying amount of a reporting unit is zero or negative, goodwill of that reporting unit shall be tested for impairment on an annual or interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists. If any other assets are to be tested for impairment at the same time as goodwill is to be tested, those assets must be tested for impairment before goodwill is tested.

Answer 237

A

Both fund accounting and budgetary accounting

Answer 238

A

Preferred stock: $25,000; Additional paid-in capital: $(2,500); Retained earnings: $0

The entry to record the redemption and retirement of the preferred stock:

11% Preferred stock (.25 x 2,000 x $50) 25,000
APIC - pref stk ($25,000 - $22,500) 2,500
Cash 22,500

Answer 239

A

$3,000

A debtor that issues or otherwise grants an equity interest to a creditor to settle fully a payable shall account for the equity interest at its fair value. The difference between the fair value of the equity interest granted and the carrying amount of the payable settled shall be recognized as a gain on restructuring of payables.

Wood should recognize a gain on restructuring of debt of $3,000 ($28,000 − $25,000).

Answer 240

A

FASB

The Financial Accounting Standards Board (FASB) found the need to develop a financial reporting framework for smaller privately managed businesses.

Answer 241

A

Profit on sale, $720,000; Interest revenue, $146,000

When accounting for a capital lease from the perspective of the lessor, one needs to decide if the lease is sales type or direct financing. In a sales-type lease, there is an element of gross profit recognized by the lessor at the beginning of the lease, generally based on the difference between the sales price and the cost of the item to the lessor.

Here that gross profit recognized immediately is $720,000, the difference between the selling price and the cost of the equipment ($3,520,000 – $2,800,000). After the first payment is received, the remaining lease obligation will be paid like a long-term liability, with interest accruing on the unpaid balance. The unpaid balance for the first year is generally the difference between the selling price and the rent payment (when the payment is made at the start of the year). The unpaid balance for interest to accrue on is thus $2,920,000 ($3,520,000 – $600,000). The interest accrues from the payment in July to the end of the year, thus $146,000 ($2,920,000 × 0.1 × 6/12).

Answer 242

A

As restricted support of the present value of $10,000

Contribution revenues (support) from gifts, grants, bequests, and so on are reported in the period they are unconditionally promised or received, whichever is earlier. Revenues are measured at the present value (or net realizable value for any contributions expected to be received within a year after the unconditional promise was made); recognition of contribution revenues is not deferred because donations are restricted. The pledge is classified as restricted since it will be satisfied by expending resources for the restricted purpose (i.e., building the addition to the kennel).

Answer 243

A

All of the choices listed may be component units.

All of the listed organizations—governmental, not-for-profit, and for-profit—may be a component unit of the primary government.

For the purposes of defining the governmental financial reporting entity, it is not required that the component unit of the primary government be a governmental or not-for-profit organization. A for-profit corporation could be a component unit if the elected officials of the primary government are financially accountable.

Answer 244

A

The end of preceding fiscal year

Form 10-Q is used to file quarterly reports with the SEC. Required financial statements include a quarterly and end of the preceding fiscal year balance sheet. If the company is subject to seasonal fluctuations, a balance sheet for the corresponding quarter of the prior fiscal year is required.

Answer 245

A

the needs of the users of the information.

Answer 246

A

Financial statements include property with a carrying amount increased to management’s estimate of market value.

To be reliable, information about an item must be representationally faithful, verifiable, and neutral. To be reliable, information must be sufficiently faithful in its representation of the underlying resource, obligation, or effect of events and sufficiently free of error and bias to be useful to investors, creditors, and others in making decisions.

Clearly, values assigned to property based on management’s estimate of fair value are not representationally neutral and would not be considered reliable.

Answer 247

A

A proposed accounting standards update