MCQs 1 Flashcards
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
No effect on retained earnings and a decrease in noncontrolling interest
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
Measurement focus: Economic resources; Basis of accounting: Accrual
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
$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)].
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
Increase in assets and increase in liabilities
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
$2.00
The gain is the difference in the cost at March 1 ($8) and at December 31 ($10).
Holding gain = $10 − $8 = $2
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
Current cost
Which of the following would a nongovernmental not-for-profit educational institution report as program services?
- Publicity costs
- Teacher salaries
- Management salaries
- Fundraising expenses
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).
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
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.
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
$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.
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
$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.
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
$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)
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.
fair value, with holding gains and losses included in earnings.
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
$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
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
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
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.
$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
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.
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.
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.
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.
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
$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.
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
$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.
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
$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.
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
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).
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
$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.
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
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.
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.
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.
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.
$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%)).
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.
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.
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
$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
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
Advocate groups within the state
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
$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.
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.
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.
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
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.
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.
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.
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.
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.
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
$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
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
$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
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
A detailed description of the plan, including employee groups covered
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
$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
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
$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).
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.
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.
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.
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.
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.
$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).
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
$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
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.
Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.
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.
$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.
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.
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.
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.
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.
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.
Interest should be capitalized on qualifying assets.
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
Bond discount amortization
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.
both commonly controlled companies and companies under common management.
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
Serial bonds
Serial bonds are a set of related bonds issued at the same time but which mature at intervals over time.
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
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.
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.
format and content of financial information submitted to the SEC.
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
$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
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.
$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).
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.
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.
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
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
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.
$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.
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
$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.
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
$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.
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
The minimum number of funds consistent with legal requirements and sound financial administration
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.
does not represent a payable in the usual sense in which the term “payable” is used in financial statements.
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
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.
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
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.
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
$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
========
Which of the following funds of a local government would report transfers to other funds as an Other Financing Use?
- Enterprise
- Internal service
- Pension trust
- General
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.
The following information pertains to Grove City’s interfund receivables and payables at December 31, 20X1:
Due to special revenue fund from
general fund $10,000
Due to agency fund from special
revenue fund 4,000
In Grove’s special revenue fund balance sheet at December 31, 20X1, how should these interfund amounts be reported?
- As an asset of $6,000
- As a liability of $6,000
- As an asset of $4,000 and a liability of $10,000
- As an asset of $10,000 and a liability of $4,000
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.
On January 1, 20X1, Dix Co. replaced its old boiler. The following information was available at that date:
Carrying amount of old boiler $ 8,000
Fair value of old boiler 2,000
Purchase and installation price of new boiler 100,000
The old boiler was sold for $2,000. What amount should Dix capitalize as the cost of the new boiler?
- $92,000
- $94,000
- $98,000
- $100,000
$100,000
Toigo Co. purchased merchandise from a vendor in England on November 20 for 500,000 British pounds. Payment was due in British pounds on January 20. The spot rates to purchase 1 pound were as follows:
November 20 $1.25
December 31 1.20
January 20 1.17
How should the foreign currency transaction gain be reported on Toigo’s financial statements at December 31?
- A gain of $40,000 as a separate component of stockholders’ equity
- A gain of $40,000 in the income statement
- A gain of $25,000 as a separate component of stockholders’ equity
- A gain of $25,000 in the income statement
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.
A balance in the Fund Balance—Reserved for Encumbrances account in excess of a balance of encumbrances account indicates:
- an excess of vouchers payable over encumbrances.
- an excess of purchase orders over invoices received.
- an excess of appropriations over encumbrances.
- a recording error.
a recording error.
A company granted its employees 100,000 stock options on January 1, year 1. The stock options had a grant date fair value of $15 per option and a three-year vesting period. On January 1, year 2, the company estimated the fair value of the stock options to be $18 per option. Assuming that the company did not grant any additional options or modify the terms of any existing option grants during year 2, what amount of share-based compensation expense should the company report for the year ended December 31, year 2?
- $500,000
- $600,000
- $700,000
- $800,000
$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.
A voluntary health and welfare entity received a $700,000 permanent endowment during the year. The donor stipulated that the income and investment appreciation be used to maintain its senior center. The endowment fund reported a net investment appreciation of $80,000 and investment income of $50,000. The organization spent $60,000 to maintain its senior center during the year. What amount of change in net assets with donor restrictions should the organization report as a result of these transactions?
- $50,000
- $70,000
- $130,000
- $770,000
$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.
Which of the following funds should be reported as part of local government’s governmental activities column in its government-wide statements?
- Debt service
- Agency
- Private-purpose trust
- Pension trust
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.
On March 1, 20X1, Ila Co. modified the terms of a 4-year lease of equipment. Ila had leased the equipment on January 1, 20X1, and properly recorded it as a capital lease. Under the modified provisions, the lease would have been classified as an operating lease. How should Ila account for the modified lease?
- Capital lease
- Operating lease
- Sale-leaseback
- Leverage lease
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.”
The revenues control account of a governmental unit is increased when:
- the encumbrance account is decreased.
- appropriations are recorded.
- property taxes are recorded.
- the budget is recorded.
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.
On December 31 of the previous year, Jason Company adopted the dollar-value LIFO retail inventory method. Inventory data are as follows:
LIFO Cost Retail Inventory, 12/31 previous year $360,000 $500,000 Inventory, 12/31 current year -- 660,000 Increase in price level for current year 10% Cost to retail ratio for current year 70%
Under the LIFO retail method, Jason’s inventory at December 31 of the current year should be:
- $437,000.
- $462,000.
- $472,000.
- $483,200.
$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
On November 1, 20X1, Davis Co. discounted with recourse at 10% a 1-year, noninterest bearing, $20,500 note receivable maturing on January 31, 20X2. What amount of contingent liability for this note must Davis disclose in its financial statements for the year ending December 31, 20X1?
- $0
- $20,000
- $20,333
- $20,500
$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.
Pharm, a nongovernmental not-for-profit entity, is preparing its year-end financial statements. Which of the following statements is required?
- Statement of changes in financial position
- Statement of cash flows
- Statement of changes in fund balance
- Statement of revenue, expenses, and changes in fund balance
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.
Which of the following should not be disclosed in an enterprise’s statement of cash flows prepared using the indirect method?
- Interest paid, net of amounts capitalized
- Income taxes paid
- Cash flow per share
- Dividends paid on preferred stock
Cash flow per share
A not-for-profit voluntary health and welfare entity should report a contribution for the construction of a new building as cash flows from which of the following in the statement of cash flows?
- Operating activities
- Financing activities
- Capital financing activities
- Investing activities
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.
Cor-Eng Partnership was formed on January 2, 20X1. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, 20X1, while Eng contributed $20,000 in cash. Drawings by the partners during 20X1 totaled $3,000 by Cor and $9,000 by Eng. Cor-Eng’s net income was $25,000.
Eng’s initial capital balance in Cor-Eng is:
- $20,000.
- $25,000.
- $40,000.
- $60,000.
$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.
In which of the following funds should the debt service transactions of a special assessment issue for which the government is not obligated in any manner be reported?
- Agency fund
- Trust fund
- Internal service fund
- General fund
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.
An organization is normally considered a governmental organization if:
- the organization is exempt from federal taxation.
- a controlling majority of the members of its governing board are appointed by state government officials.
- the organization is exempt from federal taxation and a controlling majority of the members of its governing board are appointed by state government officials.
- None of the answer choices are correct.
a controlling majority of the members of its governing board are appointed by state government officials.
On June 30 of the current year, Lang Co. sold equipment with an estimated useful life of 11 years and immediately leased it back for 10 years. The equipment’s carrying amount was $450,000; the sales price was $430,000; and the present value of the lease payments, which is equal to the fair value of the equipment, was $465,000. In its June 30 current-year balance sheet, what amount should Lang report as deferred loss?
- $35,000
- $20,000
- $15,000
- $0
$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.
On March 31, 20X1, the Winn company traded in an old machine that had a carrying amount of $16,800, and a fair value of $14,500. Winn paid a cash difference of $6,000 for a new machine having a total cash price of $20,500. The exchange should include recording:
- no gain or loss.
- $3,700.
- $2,300 loss on exchange.
- $2,300 impairment loss.
$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.
To achieve the objective of providing information to assist users in assessing the level of services that can be provided by the entity and its ability to meet its obligations as they become due, financial reporting should provide information about all of the following, except:
- the financial position and condition of the governmental entity.
- the governmental entity’s physical and other nonfinancial resources.
- legal or contractual restrictions of resources and risks of potential loss of resources.
- how the governmental entity met its cash requirements.
how the governmental entity met its cash requirements.
On January 2, Basketville City purchased equipment with a useful life of three years to be used by its water and sewer enterprise fund. Which of the following is the correct treatment for the asset?
- Record the purchase of the equipment as an expenditure.
- Capitalize; depreciation is optional.
- Capitalize; depreciation is required.
- Capitalize; depreciation is not permitted.
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.
Settam, a nongovernmental not-for-profit entity, received a donation of stock with donor-stipulated requirements as follows:
- Shares valued at $8,000,000 are to be sold with the proceeds used for renovation.
- Shares valued at $2,000,000 are to be retained with the dividends used to support current operations.
What amount should Settam include as net assets without donor restrictions as a result of this donation?
- $0
- $2,000,000
- $8,000,000
- $10,000,000
$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.
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?
- As a component of income from continuing operations
- By restating the financial statements of all prior periods presented
- As a correction of an error
- By footnote disclosure only
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.
A portfolio of equity securities that are traded on a national exchange is donated to a private, not-for-profit college as an endowment fund. How should the equity portfolio be valued in the college’s year-end financial statements three years after the donation?
- Using the donor’s original cost basis
- Using the fair value at the time of donation
- Using fair value at the date of the financial statements
- Using the lower of fair value at donation and fair value at the date of the financial statements
Using fair value at the date of the financial statements
Isle Co. owned a copy machine that cost $5,000 and had accumulated depreciation of $2,000. Isle exchanged the copy machine for a computer that cost $4,000. Isle’s future cash flows are not expected to change significantly as a result of the exchange. What amount of gain or loss should Isle report and at what amount should it record the asset?
- No gain or loss in the income statement; $3,000 asset in the balance sheet
- No gain or loss in the income statement; $4,000 asset in the balance sheet
- $1,000 gain in the income statement; $3,000 asset in the balance sheet
- $1,000 gain in the income statement; $4,000 asset in the balance sheet
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.
During January of the current year, Haze Corp. won a litigation award for $15,000 which was tripled to $45,000 to include punitive damages. The defendant, who is financially stable, has appealed only the $30,000 punitive damages. Haze was awarded $50,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals. In its current year financial statements, Haze should report what amount of pretax gain?
- $15,000
- $45,000
- $50,000
- $95,000
$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.
In a compensatory stock option plan for which the grant, vesting, and exercise dates are all different, the additional paid-in capital—stock options account should be reduced at the:
- date of grant.
- vesting date.
- beginning of the service period.
- exercise date.
exercise date.
The FASB’s conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?
- Physical capital is applied to currently reported net income; financial capital is applied to comprehensive income.
- Financial capital is applied to currently reported net income; physical capital is applied to comprehensive income.
- Physical capital is applied to both currently reported net income and comprehensive income.
- Financial capital is applied to both currently reported net income and comprehensive income.
Financial capital is applied to both currently reported net income and comprehensive income.
In private not-for-profit hospital accounting, restricted funds are:
- not available unless the board of directors remove the restrictions.
- restricted as to use only for board-designated purposes.
- not available for current operating use; however, the income generated by the funds is available for current operating use.
- restricted as to use by the donor, grantor, or other source of the resources.
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.
Samm Corp. purchased a plot of land for $100,000. The cost to raze a building on the property amounted to $50,000 and Samm received $10,000 from the sale of scrap materials. Samm built a new plant on the site at a total cost of $800,000 including excavation costs of $30,000. What amount should Samm capitalize in its land account?
- $150,000
- $140,000
- $130,000
- $100,000
$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
Wood Co. owns 2,000 shares of Arlo, Inc.’s, 20,000 shares of $100 par, 6% cumulative, nonparticipating preferred stock and 1,000 shares (2%) of Arlo’s common stock. During 20X2, Arlo declared and paid dividends of $240,000 on preferred stock. No dividends had been declared or paid during 20X1. In addition, Wood received a 5% common stock dividend from Arlo when the quoted market price of Arlo’s common stock was $10 per share. What amount should Wood report as dividend income in its 20X2 income statement?
- $12,000
- $12,500
- $24,000
- $24,500
$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
Matt Co. included a foreign subsidiary in its current consolidated financial statements. The subsidiary was acquired six years ago and was excluded from previous consolidations. The change was caused by the elimination of foreign exchange controls. Including the subsidiary in the consolidated financial statements results in accounting change that should be reported:
- by footnote disclosure only.
- currently and prospectively.
- currently with footnote disclosure of pro forma effects of retroactive application.
- by retrospective application to the financial statements of all prior periods presented.
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.
Bach Co. adopted the dollar-value LIFO inventory method as of January 1, 20X0. A single inventory pool and an internally computed price index are used to compute Bach’s LIFO inventory layers. Information about Bach’s dollar value inventory follows:
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
What was the price index used to compute Bach’s 20X1 dollar-value LIFO inventory layer?
- 1.09
- 1.25
- 1.33
- 2.00
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
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
$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.
Lake County received the following proceeds that are legally restricted to expenditure for specified purposes:
- Levies on affected property owners to install sidewalks: $500,000
- Gasoline taxes to finance road repairs: $900,000
What amount should be accounted for in Lake’s special revenue funds?
- $1,400,000
- $900,000
- $500,000
- $0
$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.