MCQs 1 Flashcards

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
A

No effect on retained earnings and a decrease in noncontrolling interest

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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
A

Measurement focus: Economic resources; Basis of accounting: Accrual

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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
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)].

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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
A

Increase in assets and increase in liabilities

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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
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

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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
A

Current cost

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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
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).

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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
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.

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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
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.

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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
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.

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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
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)

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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.
A

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

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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
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

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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
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

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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.
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

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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.
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.

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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.
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.

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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
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.

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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
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.

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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
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.

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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
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).

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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
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.

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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
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.

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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.
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.

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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.
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%)).

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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.
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.

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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
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

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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
A

Advocate groups within the state

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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
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.

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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.
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.

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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
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.

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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.
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.

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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.
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.

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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
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

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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
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

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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
A

A detailed description of the plan, including employee groups covered

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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
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

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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
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).

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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.
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.

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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.
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.

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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.
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).

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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
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

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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.
A

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

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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.
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.

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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.
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.

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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.
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.

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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.
A

Interest should be capitalized on qualifying assets.

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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
A

Bond discount amortization

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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.
A

both commonly controlled companies and companies under common management.

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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
A

Serial bonds

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

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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
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.

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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.
A

format and content of financial information submitted to the SEC.

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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
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

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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.
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).

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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.
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.

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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
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

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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.
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.

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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
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.

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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
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.

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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
A

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

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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.
A

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

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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
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.

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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
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.

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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
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
========

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65
Q

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
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.

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66
Q

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
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.

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67
Q

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
A

$100,000

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68
Q

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

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.

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69
Q

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

a recording error.

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70
Q

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
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.

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71
Q

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
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.

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72
Q

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
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.

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73
Q

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
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.”

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74
Q

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.
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.

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75
Q

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.
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

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76
Q

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
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.

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77
Q

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
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.

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78
Q

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
A

Cash flow per share

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79
Q

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
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.

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80
Q

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.
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.

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81
Q

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
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.

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82
Q

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

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

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83
Q

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
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.

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84
Q

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.
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.

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85
Q

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.
A

how the governmental entity met its cash requirements.

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86
Q

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.
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.

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87
Q

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
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.

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88
Q

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
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.

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89
Q

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
A

Using fair value at the date of the financial statements

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90
Q

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
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.

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91
Q

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
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.

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92
Q

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.
A

exercise date.

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93
Q

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.
A

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

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94
Q

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.
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.

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95
Q

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
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

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96
Q

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
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

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97
Q

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.
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.

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98
Q

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
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

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99
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
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.

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100
Q

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
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.

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101
Q

Which of the following should a company classify as a research and development expense?

  • Periodic design changes to existing products
  • Routine design of tools, jigs, molds, and dies
  • Redesign of a product prerelease
  • Legal work on patent applications
A

Redesign of a product prerelease

102
Q

All of the following are acceptable when not-for-profit (NFP) entities accept unconditional promises to give except:

  • NFPs may use the fair value at the date a promise to give securities was initially recognized even if the contribution will not take place for several years.
  • when promises to give cash are initially recognized, an expense for estimated uncollectible promises should be recorded.
  • when promises to give cash are initially recognized, the amount recorded could be based on the present value of estimated future cash flows.
  • when promises to give cash are initially recognized, the amount recognized should exclude amounts expected to be uncollectible.
A

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

103
Q

Howard Co. had the following first-year amounts for a $7,000,000 construction contract:

Actual costs $2,000,000
Estimated costs to complete 6,000,000
Progress billings 1,800,000
Cash collected 1,500,000

What amount should Howard recognize as gross profit (loss) if revenue is recognized over time?

  • ($1,000,000)
  • ($200,000)
  • $800,000
  • $1,750,000
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)

104
Q

On January 1, year 1, Eber Co. leased equipment under a four-year capital lease. The present value of minimum lease payments is $348,680. The equipment had a five-year economic life and a $20,000 guaranteed residual value. The equipment reverted to the lessor at the end of the lease. What amount should Eber report as depreciation expense at December 31, year 1?

  • $87,170
  • $82,170
  • $69,736
  • $65,736
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).

105
Q

In a business combination with goodwill recorded, how should any subsequent impairment of the goodwill be recognized on the income statement or statement of retained earnings?

  • As a component of other comprehensive income
  • As a change in accounting principle
  • As a loss from continuing operations
  • As a restatement of beginning retained earnings
A

As a loss from continuing operations

106
Q

The diluting effect of options and warrants and their equivalents is reflected in diluted EPS by application of the treasury stock method, which assumes that proceeds from exercise are used to:

  • retire treasury stock.
  • issue treasury stock.
  • retire convertible debentures that were issued at par.
  • purchase common stock at the average market price.
A

purchase common stock at the average market price.

107
Q

A business combination is accounted for properly as an acquisition. Direct costs of combination, other than registration and issuance costs of equity securities, should be:

  • capitalized as a deferred charge and amortized.
  • deducted directly from the retained earnings of the combined corporation.
  • deducted in determining the net income of the combined corporation for the period in which the costs were incurred.
  • included in the acquisition cost to be allocated to identifiable assets according to their fair values.
A

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

108
Q

Blue City’s finance staff is analyzing expenses for presentation on the government-wide statement of activities. The City has some notes payable that clearly benefit specific governmental functions, but most of the city’s long-term debt consists of general long-term liabilities. How should the interest on the debt be reported?

  • Combine all interest payments together and report on a separate line as a direct expense.
  • 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.
  • Combine all interest payments together and report separately at the bottom of the statement.
  • Report the interest from the notes payable benefiting specific functions as a direct expense of those functions and include the remaining interest in the cost allocations of indirect expense.
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.

109
Q

What are the five steps of the principles-based approach to recognizing revenue?

A
  1. Identify the contract(s) with a customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations in the contract
  5. Recognize revenue when (or as) the entity satisfies a performance obligation
110
Q

A company enters into a 3-year operating lease agreement effective January 1, Year 1. The amounts due on the first day of each year are $25,000 in Year 1, $30,000 in Year 2, and $35,000 in Year 3. What amount, if any, is the related liability on the first day of Year 2?

  • $0
  • $5,000
  • $60,000
  • $65,000
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

111
Q

On January 2 of the current year, LTTI Co. entered into a three-year, noncancelable contract to buy up to 1,000,000 units of a product each year at $.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year-end, LTTI had only purchased 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year?

  • $0
  • $8,000
  • $12,000
  • $52,000
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).

112
Q

A summary reconciliation between fund financial statements and government-wide financial statements is required at the bottom of the fund statements or in an accompanying schedule. For the governmental activities portion of the government-wide statement of net position, the reconciliation should tie with the fund balance(s) of:

  • the general fund.
  • all governmental funds.
  • all governmental and fiduciary funds that provide services to the governmental functions.
  • all governmental and internal service funds that provide services to the governmental functions.
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.

113
Q

Which of the following funds of a governmental unit records depreciation?

  • Capital projects fund
  • Debt service fund
  • Internal service fund
  • Special revenue fund
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.

114
Q

To determine the point in time when a customer obtains control of a promised asset (i.e., satisfies a performance obligation), which of the following is not an indicator of control that an entity considers?

  • The entity has a present right to payment for the asset.
  • The customer has not accepted the asset but has legal title to the asset.
  • The entity has transferred physical possession of the asset.
  • The customer has the significant risks and rewards of ownership of the asset.
A

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

115
Q

Which of the following items is not subject to the application of intraperiod income tax allocation?

  • Discontinued operations
  • Income from continuing operations
  • Prior-period adjustments
  • Operating income
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).

116
Q

The effective interest rate for a loan restructured in a troubled debt restructuring is based on:

  • the current rate at the time of the restructuring.
  • the rate specified in the restructuring agreement.
  • the original contractual rate.
  • any of the answer choices listed, if applied consistently to all restructured loans.
A

the original contractual rate.

117
Q

Which of the following estimation methods best describes the residual approach?

  • 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
  • Determines a standalone selling price based on vendor-specific objective evidence, third-party evidence, or a best estimate
  • Uses competitors’ prices for similar goods or services and adjusts those prices to reflect the entity’s costs and margins
  • Forecasts expected costs of satisfying a performance obligation and adds an appropriate margin for those goods or services
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

118
Q

In Year 2, Ajax, Inc., reported taxable income of $400,000 and pretax financial statement income of $300,000. The difference resulted from $60,000 of nondeductible premiums on Ajax’s officers’ life insurance and $40,000 of rental income received in advance. Rental income is taxable when received. Ajax’s effective tax rate is 30%. In its Year 2 income statement, what amount should Ajax report as income tax expense—current portion?

  • $90,000
  • $102,000
  • $108,000
  • $120,000
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

119
Q

For a defined benefit pension plan, the discount rate used to calculate the projected benefit obligation is determined by:

  • both the expected rate on plan assets and the actual return on plan assets.
  • neither the expected rate on plan assets nor the actual return on plan assets.
  • the expected rate on plan assets.
  • the actual return on plan assets.
A

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

120
Q

Town, Inc., is preparing its financial statements for the year ended December 31, 20X1. On January 5, 20X2, prior to the issuance of the financial statements, Town redeemed its outstanding bonds and issued new bonds with a lower rate of interest. The reacquisition price was in excess of the carrying amount of the bonds. What is the appropriate reporting requirement?

  • Disclosure only
  • Accrual only
  • Both accrual and disclosure
  • Neither accrual nor disclosure
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.

121
Q

The orientation of accounting and reporting for all proprietary funds of governmental units is:

  • income determination.
  • project.
  • flow of funds.
  • program.
A

income determination

122
Q

On August 1 of the current year, Kern Company leased a machine to Day Company for a 6-year period requiring payments of $10,000 at the beginning of each year. The machine cost $48,000, which is the fair value at the lease date, and has an estimated life of eight years with no residual value. Kern’s implicit interest rate is 10% and present value factors are as follows:

  • Present value of an annuity due of $1 at 10% for 6 periods: 4.791
  • Present value of an annuity due of $1 at 10% for 8 periods: 5.868

Kern appropriately recorded the lease as a direct-financing lease. At the inception of the lease, the gross lease receivables account balance should be:

  • $60,000.
  • $58,680.
  • $48,000.
  • $47,910.
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.

123
Q

Which of the following should be included in the introductory section of a local government’s comprehensive annual financial report?

  • Auditor’s report
  • Management letter
  • Engagement letter
  • Letter of transmittal
A

Letter of transmittal

124
Q

Which of the following local government funds uses the accrual basis of accounting?

  • Enterprise
  • Debt service
  • Capital projects
  • Special revenue
A

Enterprise

125
Q

Which of the following is not an item that is required to be disclosed about reportable segments’ profit or loss (assuming that the item was included in the determination of profit or loss)?

  • Depreciation, depletion, and amortization expense
  • Revenues from transactions with other operating segments of the same enterprise
  • Interest expense
  • Rent expense
A

Rent expense

126
Q

State and local governments have various sources of revenue. When revenues restricted to a particular function are derived from parties outside the reporting government’s constituency, these revenues are classified as:

  • program revenues.
  • general revenues.
  • general revenues and program revenues.
  • specific revenues.
A

program revenues.

127
Q

A nongovernmental not-for-profit entity received a $2,000,000 gift from a donor who specified it be used to create an endowment fund that would be invested in perpetuity. The income and any investment gains from the fund are to be used to support a specific program in the second year and beyond. An investment purchased with the gift earned $40,000 during the first year. At the end of the first year, the fair value of the investment was $2,010,000. What is the net effect on net assets with donor restrictions at year-end?

  • $0
  • $10,000 increase
  • $40,000 increase
  • $50,000 increase
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.

128
Q

A company is an accelerated filer that is required to file Form 10-K with the U.S. Securities and Exchange Commission (SEC). What is the maximum number of days after the company’s fiscal year-end that the company has to file Form 10-K with the SEC?

  • 60 days
  • 75 days
  • 90 days
  • 120 days
A

75 days

129
Q

Macklin Co. entered into a franchise agreement with Heath Co. for an initial fee of $50,000. Macklin received $10,000 when the agreement was signed. The balance was to be paid at a rate of $10,000 per year, starting the next year. All services were performed by Macklin and the refund period had expired. Operations started in the current year. What amount should Macklin recognize as revenue in the current year?

  • $0
  • $10,000
  • $20,000
  • $50,000
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.

130
Q

How should the effect of a change in accounting estimate be accounted for?

  • By restating amounts reported in financial statements of prior periods
  • By reporting pro forma amounts for prior periods
  • As a prior-period adjustment to beginning retained earnings
  • In the period of change and future periods if the change affects both
A

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

131
Q

On January 2, 20X1, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 non-interest-bearing note due January 2, 20X4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type on January 2, 20X1, was 10%. The present value of 1 at 10% for three periods is 0.75.

In Emme’s 20X1 income statement, what amount should be reported as interest income?

  • $9,000
  • $45,000
  • $50,000
  • $60,000
A

$45,000

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

132
Q

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the:

  • face value of the bonds at the beginning of the period by the contractual interest rate.
  • face value of the bonds at the beginning of the period by the effective interest rates.
  • carrying value of the bonds at the beginning of the period by the contractual interest rate.
  • carrying value of the bonds at the beginning of the period by the effective interest rates.
A

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

133
Q

In the government-wide financial statements, what is the correct revenue classification of fines and forfeitures?

  • Charges for services
  • General revenues
  • Operating grants and contributions
  • Capital grants and contributions
A

Charges for services

134
Q

Orange Township has two general obligation bond issues outstanding. One is for $2,000,000 and the other is for $3,000,000. Cash of $62,500 has been set aside in debt service funds, per the annual budget, to pay the interest due on these issues January 1, 20X2. What is the net liability that must be shown in the fund-based statements prepared as of December 31, 20X1?

  • $5,000,000
  • $5,062,500
  • $62,500
  • $0
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.

135
Q

The FASB has jurisdiction over entities with which of the following characteristics?

  • Body corporate and politic
  • Exempt from federal taxation
  • Body corporate and politic or exempt from federal taxation
  • Power to enact and enforce a tax levy
A

Exempt from federal taxation

136
Q

Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability’s fair value, except:

  • quoted prices for identical assets and liabilities in markets that are not active.
  • quoted prices for similar assets and liabilities in markets that are active.
  • internally generated cash flow projections for a related asset or liability.
  • interest rates that are observable at commonly quoted intervals.
A

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

137
Q

Rowe, Inc., owns 80% of Cowan Co.’s outstanding capital stock. On November 1, Rowe advanced $100,000 in cash to Cowan. What amount should be reported related to the advance in Rowe’s consolidated balance sheet as of December 31?

  • $0
  • $20,000
  • $80,000
  • $100,000
A

$0

All intercompany liabilities are eliminated in the consolidation process.

138
Q

How would an entity account for an implicit promise made to a customer in a contract that meets the definition of a performance obligation?

  • The entity would recognize the entire amount of the contract revenue at the point of sale and record as an expense the cost of the implicit promise as it is provided to the customer.
  • 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.
  • The entity would defer all revenue on the contract until all promises provided in the contract have been performed.
  • The entity would combine the implicit promise with other promises made in the contract in all instances, as the implicit promise was not formally written into the contract, recognizing revenue over the term of the written promises.
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.

139
Q

On January 2, 20X1, East Corp. adopted a defined benefit pension plan. The plan’s service cost of $150,000 was fully funded at the end of 20X1. Prior service cost was funded by a contribution of $60,000 in 20X1. Amortization of prior service cost was $24,000 for 20X1. Assuming that no amortization of unrecognized gain or loss is required in 20X1, what amount should East recognize as net periodic pension cost (including service cost) in 20X1?

  • $150,000
  • $126,000
  • $0
  • $174,000
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
========

140
Q

Child Care Centers, Inc., a not-for-profit entity, receives revenue from various sources during the year to support its day care centers. The following cash amounts were received during 20X1:

  • $2,000 restricted by the donor to be used for meals for the children
  • $1,500 received for subscriptions to a monthly child care magazine with a fair market value to subscribers of $1,000
  • $10,000 to be used only upon completion of a new playroom that was 75% complete at December 31, 20X1

What amount should Child Care Centers record as contribution revenue in its 20X1 Statement of Activities?

  • $2,000
  • $2,500
  • $10,000
  • $11,000
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
141
Q

GASB I60, Investments—Securities Lending, states that a government that (1) loans securities to a broker-dealer and (2) receives collateral in the form of other securities that the government cannot pledge or sell without borrower default should report:

I. the securities lent as assets.
II. the collateral received as assets.
III. a liability for the government’s obligation to return the collateral securities.

  • I only
  • I and III
  • II and III
  • I, II, and III
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.”

142
Q

If determining the actual historical cost of general infrastructure assets is not practical because of inadequate records, public institutions that report as special-purpose governments either engaged only in governmental activities or engaged in both governmental and business-type activities should report major general infrastructure assets using:

  • estimated historical cost.
  • current replacement value.
  • current replacement value less an allowance for estimated accumulated depreciation.
  • fair market value.
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.

143
Q

In Year 1, Lobo Corp. reported for financial statement purposes the following revenue and expenses that were not included in taxable income:

  • Premiums on officers’ life insurance under which the corporation is the beneficiary $5,000
  • Interest revenue on qualified state or municipal bonds $10,000
  • Depreciation deducted for income tax purposes in excess on depreciation reported for financial statement purposes $10,000
  • Estimated future warranty costs to be paid in Year 2 and Year 3 $60,000

Lobo’s enacted tax rate for the current and future years is 30%. Lobo expects to operate profitably in the future. There were no temporary differences in prior years. The deferred tax benefit is:

  • $18,000.
  • $19,500.
  • $21,000.
  • $22,500.
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

144
Q

To be relevant, information should have which of the following?

  • Verifiability
  • Confirmatory value
  • Understandability
  • Costs and benefits
A

Confirmatory value

145
Q

What are the steps involved for the main elimination entry when consolidating a balance sheet?

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
146
Q

According to the FASB conceptual framework, comprehensive income includes which of the following?

  • Loss on discontinued operations
  • Investment by owners
  • Both loss on discontinued operations and investment by owners
  • Neither loss on discontinued operations nor investment by owners
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.”

147
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. Fleur’s prior-year cost of goods sold for the holiday merchandise was:

  • overstated by the difference between the note’s face amount and the note’s October 1 present value.
  • overstated by the difference between the note’s face amount and the note’s October 1 present value plus 11% interest for two months.
  • understated by the difference between the note’s face amount and the note’s October 1 present value.
  • understated by the difference between the note’s face amount and the note’s October 1 present value plus 16% interest for two months.
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.

148
Q

Which of the following is an example of a suitable estimation method an entity may use if a standalone selling price is not directly observable?

  • The wait and see approach
  • The adjusted market assessment approach
  • The average of inputs approach
  • The input/output approach
A

The adjusted market assessment approach

149
Q

Which of the following does not affect an internal service fund’s net income?

  • Depreciation expense on its fixed assets
  • Operating transfer sources
  • Residual equity transfers
  • Temporary transfers
A

Temporary transfers

150
Q

The following items were included in Opal Co.’s inventory account on December 31, 20X1:

  • Merchandise out on consignment at sales price, including 40% markup on selling price $40,000
  • Goods purchased in transit, shipped FOB shipping point $36,000
  • Goods held on consignment by Opal $27,000

By what amount should Opal’s inventory account on December 31, 20X1, be reduced?

  • $103,000
  • $67,000
  • $51,000
  • $43,000
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
=======

151
Q

Which of the following funds of a governmental unit uses the same basis of accounting as the special revenue fund?

  • Enterprise funds
  • Internal trust funds
  • Pension trust funds
  • Permanent funds
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.

152
Q

During the current year, Wythe County levied $2,000,000 property taxes, 1% of which is expected to be uncollectible. During the year, the county collected $1,800,000 and wrote off $15,000 as uncollectible. What amount should Wythe County report as property tax revenue in its government-wide statement of activities for the current year?

  • $1,800,000
  • $1,980,000
  • $1,985,000
  • $2,000,000
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.

153
Q

Park City uses modified accrual and encumbrance accounting and formally integrates its budget into the general fund’s accounting records. For the year ending July 31, 20X1, the following budget was adopted:

Estimated revenues $30,000,000
Appropriations 27,000,000
Estimated transfer to debt service fund 900,000

When Park’s budget is adopted and recorded, Park’s budgetary fund balance would be a:

  • $3,000,000 credit balance.
  • $3,000,000 debit balance.
  • $2,100,000 credit balance.
  • $2,100,000 debit balance.
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

154
Q

Which of the following fund types of a governmental unit have the income determination orientation?

  • General funds
  • Fiduciary funds
  • Both general funds and fiduciary funds
  • Neither general funds nor fiduciary funds
A

Neither general funds nor fiduciary funds

155
Q

Which of the following best describes the general disclosure principle?

  • 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 and the MD&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.
  • Disclosure in the notes to the financial statements is needed only when management feels it is necessary to supplement information presented on the face of the financial statements.
  • Disclosure in the notes to the financial statements is needed only when the meaningful information is not provided elsewhere therein.
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.

156
Q

A company’s accounts receivable decreased from the beginning to the end of the year. In the company’s statement of cash flows (direct method), the cash collected from customers would be:

  • sales revenues plus accounts receivable at the beginning of the year.
  • sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.
  • sales revenues less the decrease in accounts receivable from the beginning to the end of the year.
  • the same as sales revenues.
A

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

157
Q

Standard Co. spent $10,000,000 on its new software package that is to be used only for internal use. The amount spent is for costs after the application development stage. The economic life of the product is expected to be three years. The equipment on which the package is to be used is being depreciated over five years. What amount of expense should Standard report on its income statement for the first full year?

  • $0
  • $2,000,000
  • $3,333,333
  • $10,000,000
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.

158
Q

Amar Farms produced 300,000 pounds of cotton during the Year 1 season. Amar sells all of its cotton to Brye Co., which has agreed to purchase Amar’s entire production at the prevailing market price. Recent legislation assures that the market price will not fall below $0.70 per pound during the next two years. Amar’s costs of selling and distributing the cotton are immaterial and can be reasonably estimated. Amar reports its inventory at expected exit value. During Year 1, Amar sold and delivered to Brye 200,000 pounds at the market price of $.70. Amar sold the remaining 100,000 pounds during Year 2 at the market price of $0.72. What amount of revenue should Amar recognize in Year 1?

  • $140,000
  • $144,000
  • $210,000
  • $216,000
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).

159
Q

Stam Co. incurred the following research and development project costs during the current year:

  • Equipment purchased for current and future projects $100,000
  • Equipment purchased for current projects only 200,000
    Research and development salaries for current projects 400,000
    Legal fees to obtain patent 50,000
    Material and labor costs for prototype product 600,000

The equipment has a 5-year useful life and is depreciated using the straight-line method. What amount should Stam recognize as research and development expense at year-end?

  • $450,000
  • $1,000,000
  • $1,220,000
  • $1,350,000
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

160
Q

A $100,000 gift was received by Group Home Projects, a nongovernmental not-for-profit organization. Group’s board of directors stipulated that this gift must be invested for a period of four years, with the income to be used for general operations. How should the gift be reported in Group Home’s statement of activities?

  • Unrestricted contribution
  • Restricted contribution
  • Unrestricted contribution of $25,000 and restricted contribution of $75,000
  • Deferred revenue
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.

161
Q

Elm City issued a purchase order for supplies with an estimated cost of $5,000. When the supplies were received, the accompanying invoice indicated an actual price of $4,950. What amount should Elm debit (credit) to the reserve for encumbrances after the supplies and invoice were received?

  • $(50)
  • $50
  • $4,950
  • $5,000
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.

162
Q

A company’s research department incurred $1,000,000 in material, labor, and overhead costs to construct a prototype of a new product and $100,000 to test and modify the prototype. Which of the following statements correctly describes the accounting treatment of prototype costs incurred by the company?

  • Capitalize $1,100,000 and amortize it over the expected sales life of the new product.
  • Capitalize $1,100,000 and amortize it over the life of the prototype.
  • Capitalize $1,000,000 and amortize it over the life of the prototype and expense $100,000 as incurred.
  • Expense $1,100,000 as incurred.
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.

163
Q

Escheat property held for another governmental entity should only be reported in an agency fund:

  • when the holding period is expected to be short.
  • if the assets are not required to be reported elsewhere.
  • if the unclaimed property ultimately reverts to another government.
  • All of the answer choices are correct.
A

All of the answer choices are correct.

164
Q

What are the components of the lease receivable for a lessor involved in a direct financing lease?

  • The minimum lease payments plus any executory costs
  • The minimum lease payments plus residual value
  • The minimum lease payments less residual value
  • The minimum lease payments less initial direct costs
A

The minimum lease payments plus residual value

165
Q

Arena Corp. leased equipment from Bolton Corp. and correctly classified the lease as a capital lease. The present value of the minimum lease payments at lease inception was $1,000,000. The executory costs to be paid by Bolton were $50,000, and the fair value of the equipment at lease inception was $900,000. What amount should Arena report as the capital lease obligation at the lease’s inception?

  • $900,000
  • $950,000
  • $1,000,000
  • $1,050,000
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.

166
Q

On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current year and to continue each month thereafter for 56 months. The lease term spans five years. The company has a calendar year-end. What amount is the company’s lease expense for the current calendar year?

  • $86,700
  • $161,838
  • $188,813
  • $202,300
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

167
Q

On December 31, 20X1 and 20X2, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, 20X0. Apex did not declare a dividend during 20X1. During 20X2, Apex paid a cash dividend of $10,000 on its preferred stock. Apex should report dividends in arrears in its 20X2 financial statements as:

  • an accrued liability of $15,000.
  • a disclosure of $15,000.
  • an accrued liability of $20,000.
  • a disclosure of $20,000.
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.

168
Q

A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except it will:

  • be reclassified as an asset held for sale.
  • be classified as a current asset.
  • no longer be depreciated.
  • be valued at historical cost.
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).

169
Q

Articulation means that financial statements are:

  • fundamentally interrelated.
  • separate and self-balancing.
  • unaffected by each other.
  • totally dependent on each other.
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.

170
Q

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?

  • Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.
  • Good Neighbor Financing will assume the responsibility of collecting the receivables.
  • Milton will retain control of the receivables.
  • Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.
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.

171
Q

When computing purchasing power gain or loss on net monetary items, which of the following accounts is classified as nonmonetary?

  • Advances to unconsolidated subsidiaries
  • Allowance for uncollectible accounts
  • Unamortized premium on bonds payable
  • Accumulated depreciation of equipment
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.

172
Q

Redwood Co.’s financial statements had the following information at year-end:

Cash $ 60,000
Accounts receivable 180,000
Allowance for uncollectible accounts 8,000
Inventory 240,000
Trading debt securities 90,000
Prepaid rent 18,000
Current liabilities 400,000
Long-term debt 220,000

What was Redwood’s quick ratio?

  • 0.81 to 1
  • 0.83 to 1
  • 0.94 to 1
  • 1.46 to 1
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.

173
Q

The last member of Cross Corners’ founding family, Ezra Cross, left his collection of early American art to the City for permanent display in city office buildings. The fair value of the collection at donation was $2,000,000. The Cross Corners city council formally accepted the collection and set a policy that the art would (a) be held for public exhibition, (b) be protected, cared for, and kept unencumbered, and (c) not be sold except for the purposes of acquiring different items for the collection. The city council agreed that the collection should not be capitalized for financial reporting purposes. The city’s maximum depreciation horizon for capital assets is 40 years.

How would the collection affect the government-wide financial records in the first year?

  • Because the art will be displayed in general government buildings, the governmental activities would show revenue from donations of $2,000,000.
  • 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.
  • Because the art will be displayed in general government buildings, the governmental activities would show revenue from donations of $2,000,000 and expenses of $2,050,000, as well as a capital asset of $2,000,000.
  • There would be no impact on the governmental activities section of the government-wide financial statements.
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.

174
Q

A. A. Corporation has a loading dock that is situated next to a local highway. Recently, a new major highway was completed nearby, which bypasses the loading dock, and has thus made the installation of questionable future value to the corporation. The carrying amount of the loading dock is $600,000. However, due to the fact of the loss of the access to the best thoroughfare, the loading dock was written down and an impairment loss was recognized based on the estimated value in use of the dock at present. An impairment loss of $160,000 was recognized, and the loading dock now has a carrying value of $440,000. The next year, however, a local businessman decided to and built an airport near to the loading dock, and the estimated value in use has now been calculated to be $550,000. Given these facts, and also that A. A. applies IFRS, what would the carrying value of the loading dock be now (ignoring depreciation)?

  • $440,000
  • $600,000
  • $550,000
  • $490,000
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.

175
Q

On January 1 of the current year, Wren Co. leased a building to Brill under an operating lease for 10 years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder’s fee. The building is depreciated $12,000 per year. For the year, Wren incurred insurance and property tax expense totaling $9,000. Wren’s net rental income for the year should be:

  • $27,500.
  • $29,000.
  • $35,000.
  • $36,500.
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

176
Q

On January 1, 20X1, Bay Co. acquired a land lease for a 21-year period with no option to renew. The lease required Bay to construct a building in lieu of rent. The building, completed on January 1, 20X2, at a cost of $840,000, will be depreciated using the straight-line method. At the end of the lease, the building’s estimated market value will be $420,000. What is the building’s carrying amount in Bay’s December 31, 20X2, balance sheet?

  • $798,000
  • $800,000
  • $819,000
  • $820,000
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

177
Q

Which of the following is not an eligible item for the fair value measurement option under FASB ASC 825-10-15-4?

  • A recognized financial asset and financial liability, except any listed below in exceptions
  • A firm commitment that would otherwise not be recognized at inception and that involves only financial instruments (An example is a forward purchase contract for a loan that is not readily convertible to cash. That commitment involves only financial instruments—a loan and cash—and would not otherwise be recognized because it is not a derivative instrument.)
  • A written loan commitment
  • An interest in a variable interest entity that the entity is required to consolidate
A

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

178
Q

Vale City legally adopts a cash-basis budget. What basis should be used in Vale’s combined statement of revenues, expenditures, and changes in fund balances—budget and actual?

  • Cash
  • Modified accrual
  • Accrual
  • Modified cash
A

Cash

179
Q

Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease?

  • Depreciation expense: Yes; Interest revenue: Yes
  • Depreciation expense: Yes; Interest revenue: No
  • Depreciation expense: No; Interest revenue: No
  • Depreciation expense: No; Interest revenue: Yes
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.

180
Q

A mandatorily redeemable financial instrument, such as mandatorily redeemable preferred stock, must be classified as a liability unless the redemption is required to occur only:

  • at the redemption date.
  • upon the liquidation or termination of the reporting entity.
  • if the stated dividend rate exceeds current market rate for interest.
  • if the current market rate for interest exceeds the stated dividend rate.
A

upon the liquidation or termination of the reporting entity.

181
Q

During 20X1, Jase Co. incurred research and development costs of $136,000 in its laboratories relating to a patent that was granted on July 1, 20X1. Costs of registering the patent equaled $34,000. The patent’s legal life is 17 years, and its estimated economic life is 10 years. In its December 31, 20X1, balance sheet, what amount should Jase report as patent, net of accumulated amortization assuming no impairment?

  • $32,300
  • $33,000
  • $161,500
  • $165,000
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

182
Q

On June 2, 20X1, Tory, Inc., issued $500,000 of 10%, 15-year bonds at par. Interest is payable semi-annually on June 1 and December 1. Bond issue costs were $6,000. On June 2, 20X6, Tory retired half of the bonds at 98. What is the net amount that Tory should use in computing the gain or loss on retirement of debt?

  • $249,000
  • $248,500
  • $248,000
  • $247,000
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)

183
Q

A corporation issued debt to purchase 10 acres of land for development purposes. Expenditures related to this purchase are as follows:

          Description                             Amount     Purchase price                             $1,000,000   Real estate taxes in arrears                 15,000   Debt issuance costs                              2,000   Attorney fee - title search on land        5,000

The company should record its acquisition of the land in its financial statements at a value of:

  • $1,000,000.
  • $1,015,000.
  • $1,020,000.
  • $1,022,000.
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.

184
Q

On July 1, 20X1, Dewey Co. signed a 20-year building lease that it reported as a capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its 20X1 statement of cash flows?

  • An inflow equal to the present value of future lease payments on July 1, 20X1, less 20X1 principal and interest payments
  • An outflow equal to the 20X1 principal and interest payments on the lease
  • An outflow equal to the 20X1 principal payments only
  • The lease payments should not be reported in the financing activities section.
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.

185
Q

NuCorp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machine’s original cost was $140,000. The note’s face amount was $110,000. On the date of the agreement:

  • the note’s carrying amount was $105,000, and its present value was $96,000.
  • the machine’s carrying amount was $109,000, and its fair value was $96,000.

Assuming that this trade was made as part of troubled debt restructuring, what amount of gains/losses should NuCorp. recognize, and how should these be classified in its income statement?

  • Other gain/loss: $0
  • Other gain/loss: $(13,000)
  • Other gain/loss: $4,000
  • Other gain/loss: $(4,000)
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.

186
Q

On December 1, 20X1, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, 20X2. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its 20X1 income statement?

  • $0
  • $1,833
  • $2,005
  • $7,833
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.

187
Q

Birdlovers, a not-for-profit community foundation, incurred $5,000 in management and general expenses in 20X1. In Birdlovers statement of activities for the year ended December 31, 20X1, the $5,000:

  • is presented as a program expense.
  • decreases net assets without donor restrictions.
  • decreases net assets with donor restrictions.
  • is presented as a contra account offsetting revenue and gains.
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.

188
Q

FASB ASU 2016-10 enhanced the guidance on the concept of distinctiveness. Which of the following factors is not accurate related to this concept?

  • The entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer.
  • An entity should consider whether the promise to transfer the good or service is separately identifiable.
  • One or more of the goods or services significantly modifies one or more of the other goods or services promised in the contract.
  • The goods or services are not interdependent or interrelated.
A

The goods or services are not interdependent or interrelated.

189
Q

Interest cost included in the net periodic pension cost recognized by an employer sponsoring a defined benefit pension plan represents the:

  • amortization of the discount on unrecognized prior service costs.
  • increase in the fair value of plan assets due to the passage of time.
  • increase in the projected benefit obligation due to the passage of time.
  • shortage between the expected and actual returns on plan assets.
A

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

190
Q

Under current generally accepted accounting principles, which approach is used to determine income tax expense?

  • Asset and liability approach
  • “With and without” approach
  • Net of tax approach
  • Periodic expense approach
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.

191
Q

Able Co. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the corporation’s income before income tax but after deduction of the bonus. If the tax rate is 40% and net income after bonus and income tax was $360,000, what was the amount of the bonus?

  • $36,000
  • $60,000
  • $66,000
  • $90,000
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.

192
Q

It is inappropriate to record depreciation expenses in:

  • an enterprise fund.
  • an internal service fund.
  • a private-purpose trust fund.
  • a capital projects fund.
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.

193
Q

Lake Construction Company recognizes contract revenue over time, based on cost to date versus total estimated cost. During Year 1, Lake Construction Company entered into a fixed-price contract to construct an office building for $10,000,000. Revenue is recognized over time. Information relating to the contract is as follows:

                                                       At December 31    
                                                       Year 1       Year 2  Percent complete                            20%          60% Estimated total cost at completion   $7,500,000   $8,000,000 Income recognized (cumulative)     500,000    1,200,000 Contract costs incurred during Year 2 were:
  • $3,200,000.
  • $3,300,000.
  • $3,500,000.
  • $4,800,000.
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).

194
Q

Abbott Co. is preparing its statement of cash flows for the year. Abbott’s cash disbursements during the year included the following:

Payment of interest on bonds payable $500,000
Payment of dividends to stockholders 300,000
Payment to acquire 1,000 shares of
Marks Co. common stock 100,000

What should Abbott report as total cash outflows for financing activities in its statement of cash flows?

  • $0
  • $300,000
  • $800,000
  • $900,000
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.

195
Q

A town’s fund financial statements are prepared following major fund reporting requirements, and combining fund statements detailing nonmajor funds are also provided. In reviewing the comprehensive annual financial report, you notice that all the internal service funds were combined and reported in a single column in the basic financial statements. The combining financial statements for internal service funds included a column for each of the town’s four internal service funds. The explanation of this presentation is:

  • the internal service funds provided service specifically for governmental activities.
  • none of the internal service funds accounted for 10% of the total assets, liabilities, revenues, or expenditures/expenses of the proprietary funds or 5% of those elements of all funds.
  • management did not feel that any internal service fund was important enough for separate presentation in the basic financial statements, although the officials had the option of including any fund felt to be important.
  • major fund reporting requirements do not apply to internal service funds.
A

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

196
Q

The premium on a 3-year insurance policy expiring on December 31, Year 3, was paid in total on Jan­uary 2, Year 1. If the company has a 6-month operating cycle, then on December 31, Year 1, the prepaid insurance reported as a current asset would be for:

  • 6 months.
  • 12 months.
  • 18 months.
  • 24 months.
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.

197
Q

State and local governments have various sources of revenue. When revenues are received from charges to users for services provided, these revenues are classified as:

  • program revenues.
  • general revenues.
  • general revenues and program revenues.
  • specific revenues.
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.

198
Q

On January 1, Read, a nongovernmental not-for-profit entity, received $20,000 and an unconditional promise of $20,000 for each of the next four calendar years to be paid on the first day of each year. The present value of an ordinary annuity for four years at a constant interest rate of 8% is 3.312. What amount of net assets with donor restrictions is reported in the year the promise was received?

  • $66,240
  • $80,000
  • $86,240
  • $100,000
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).

199
Q

All of the following statements regarding notes to the basic financial statements of governmental entities are true except:

  • the notes contain disclosures related only to required supplementary information.
  • some notes presented by governments are identical to notes presented in business financial statements.
  • notes that are considered essential to the basic financial statements need to be presented.
  • it is acceptable to present notes in a very extensive format.
A

the notes contain disclosures related only to required supplementary information.

200
Q

The SEC’s rulemaking procedures identified on their website include which of the following steps?

  • Issue identification
  • Commissions deliberation
  • Rule adoption
  • None of the answer choices are correct.
A

Rule adoption

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

201
Q

Which of the following journal entries should a city use to record $250,000 for fire department salaries incurred during May?

  • Salaries expense, debit 250,000; Appropriations, credit 250,000
  • Salaries expense, debit 250,000; Encumbrances, credit 250,000
  • Encumbrances, debit 250,000; Salaries payable, credit 250,000
  • Expenditures—salaries, debit 250,000; Salaries payable, credit 250,000
A

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

202
Q

King City Council will be establishing a library fund. Library fees are expected to cover 55% of the library’s annual resource requirements. King has decided that an annual determination of net income is desirable in order to maintain management control and accountability over the library. What type of fund should King establish in order to meet their measurement objectives?

  • Special revenue fund
  • General fund
  • Internal service fund
  • Enterprise fund
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.

203
Q

Noting that interest rates are declining, Blue Township opted to retire an existing, callable general obligation bond and replace it with a new bond issue with lower interest. A $4,000,000, 5% bond originally issued at par value with 15 years remaining was retired for $4,100,000. A new $4,000,000, 2%, 30-year bond was issued. The new bond issue was sold at 104 and printing, legal, and administrative costs for the transactions were paid in an amount of $5,000. On the fund financial statements, this refunding would result in:

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

204
Q

On January 1, 20X1, Card Corp. signed a 3-year, noncancelable purchase contract, which allows Card to purchase up to 500,000 units of a computer part annually from Hart Supply Co. at $.10 per unit and guarantees a minimum annual purchase of 100,000 units. During 20X1, the part unexpectedly became obsolete. Card had 250,000 units of this inventory at December 31, 20X1, and believes these parts can be sold as scrap for $.02 per unit. What amount of probable loss from the purchase commitment should Card report in its 20X1 income statement?

  • $24,000
  • $20,000
  • $16,000
  • $8,000
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.

205
Q

Which of the following statements is correct concerning financial reporting for a governmental entity?

  • A combined statement of cash flows should be presented for proprietary and fiduciary funds.
  • No statement of cash flows is required.
  • A statement of cash flows should be presented for proprietary funds only.
  • Either the direct or indirect method of presenting cash flows from operating activities may be used.
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.

206
Q

Which of the following examples would require restatement of prior years’ financial statements?

  • A calculation change of warranty obligations based on updated claim information for the prior year
  • A change from the income tax basis of accounting to the accrual basis
  • An insurance premium that was due in the prior year but that lapsed because the policy was not paid
  • An intangible asset with a remaining estimated amortization period of two years, which is determined to be obsolete
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.

207
Q

A capital projects fund for a new city courthouse recorded a receivable of $300,000 for a state grant for which all eligibility requirements have been met and a $450,000 transfer from the general fund. What amount should be reported as revenue by the capital projects fund?

  • $0
  • $300,000
  • $450,000
  • $750,000
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.

208
Q

A government contributed $100,000 to its defined benefit pension plan during the year and had no current amounts due to the plan at year-end. During the year, the net pension liability related to the plan increased by $200,000 and the total pension liability increased by $350,000. What amount of pension expenditure would the government recognize for the year?

  • $0
  • $100,000
  • $200,000
  • $350,000
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.

209
Q

On December 29, Year 1, Action Corp. signed a 7-year capital lease for an airplane to transport its sports team around the country. The airplane’s fair value was $841,500. Action made the first annual lease payment of $153,000 on December 31, Year 1. Action’s incremental borrowing rate was 12%, and the interest rate implicit in the lease, which was known by Action, was 9%. The following are the rounded present value factors for an annuity due:

  • 9% for 7 years: 5.5
  • 12% for 7 years: 5.1

What amount should Action report as capital lease liability in its December 31, Year 1, balance sheet?

  • $841,500
  • $780,300
  • $688,500
  • $627,300
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

210
Q

Finch Co. reported a total asset retirement obligation of $257,000 in last year’s financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year’s balance sheet?

  • $238,000
  • $264,000
  • $280,000
  • $306,000
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.

211
Q

How do you calculate the Times Interest Earned Ratio?

A

EBIT / Interest Expense

212
Q

The Town of Starbuck’s general fund received a notice of a federal grant award for an expenditure-driven (reimbursement) grant in the amount of $2,000,000. Included with the notice was an advance of $1,000,000. During the year, the Town incurred $1,400,000 of program expenditures of which $800,000 were considered eligible qualifying expenditures. No additional money had been received from the grantor during the year.

What would be the amount of revenues reported at the entity-wide level?

  • $800,000
  • $1,000,000
  • $1,400,000
  • $2,000,000
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.

213
Q

Which of the following is an eligible item for the fair value measurement option under FASB ASC 825-10-15-4?

  • An investment in a subsidiary that the entity is required to consolidate
  • 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
  • Employers’ and plans’ obligations (or assets representing net overfunded positions) for pension benefits or other postretirement benefits
  • None of the answer choices are eligible items.
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

214
Q

Kern and Pate are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at $15,000 for a 20% capital interest in the new partnership. Grant’s cost of the land was $12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant’s capital account should be credited for:

  • $12,000.
  • $15,000.
  • $16,000.
  • $19,000.
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.

215
Q

If Company C is established for the merging of Company A and Company B, the business combination is classified as:

  • an acquisition of stock.
  • an acquisition of assets.
  • statutory merger.
  • statutory consolidation.
A

statutory consolidation.

216
Q

For its first year of operations, Cable Corp. recorded a $100,000 expense in its tax return that will not be recorded in its accounting records until next year. There were no other differences between its taxable and financial statement income. Cable’s effective tax rate for the current year is 45%, but a 40% rate has already been passed into law for next year. In its year-end balance sheet, what amount should Cable report as a deferred tax asset (liability)?

  • $40,000 asset
  • $40,000 liability
  • $45,000 asset
  • $45,000 liability
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.

217
Q

Mirr, Inc., was incorporated on January 1, 20X0, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, 20X0, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, 20X1. No additional activities affected owners’ equity in 20X0. Mirr’s liabilities increased to $120,000 by December 31, 20X0. On Mirr’s December 31, 20X0, balance sheet (statement of financial position), total assets should be reported at:

  • $885,000.
  • $882,000.
  • $878,000.
  • $875,000.
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

218
Q

If the payment of employee’s compensation for future absences is probable, the amount can be reasonably estimated, and the obligation relates to rights that accumulate, the compensation should be:

  • accrued if attributable to employees’ services not already rendered.
  • accrued if attributable to employees’ services already rendered.
  • accrued if attributable to employees’ services whether already rendered or not.
  • recognized when paid.
A

accrued if attributable to employees’ services already rendered.

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

  1. rights to compensation vest or accumulate,
  2. payment of compensation is probable,
  3. amount of payment can be reasonably estimated, and
  4. the compensation is attributable to employees’ services already rendered.
219
Q

Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?

  • $3,500
  • $5,000
  • $6,000
  • $7,500
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

220
Q

Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During 20X1, Taft received dividends of $30,000 from Flame and recorded $180,000 as its equity in the earnings of Flame. Additional information follows:

  • All the undistributed earnings of Flame will be distributed as dividends in future periods.
  • The dividends received from Flame are eligible for the 80% dividends received deduction.
  • There are no other temporary differences.
  • Enacted income tax rates are 30% for 20X1 and thereafter.

In its December 31, 20X1, balance sheet, what amount should Taft report for deferred income tax liability?

  • $9,000
  • $10,800
  • $45,000
  • $54,000
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
========

221
Q

Which of the following statements meet the measurement and recognition criteria for landfill closure and post-closure costs?

  • Landfills should only be accounted for in the general fund.
  • Total landfill liabilities should be recognized in the general long-term debt account group.
  • Expense recognition should begin when waste is accepted and should continue through the post-closure period.
  • Equipment and facilities included in estimated total current cost of closure and post-closure care should not be reported as capital assets.
A

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

222
Q

An entity having which of the following characteristics may not be a governmental organization?

  • Body corporate and politic
  • Body corporate and politic or exempt from federal taxation
  • Exempt from federal taxation
  • Power to enact and enforce a tax levy
A

Exempt from federal taxation

223
Q

Which of the following is not disclosed on the statement of cash flows when prepared under the direct method, either on the face of the statement or in a separate schedule?

  • The major classes of gross cash receipts and gross cash payments
  • The amount of income taxes paid
  • A reconciliation of net income to net cash flow from operations
  • A reconciliation of ending retained earnings to net cash flow from operations
A

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

224
Q

Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as a franchisee of one of Baker’s restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year. Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee, which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker. What amount should Baker report as franchise revenue during the current year?

  • $0
  • $25,000
  • $59,000
  • $65,000
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.

225
Q

Hancock Co.’s December 31, Year 1, balance sheet contained the following items in the long-term liabili­ties section:

Unsecured:
- 9.375% registered bonds ($25,000 maturing
annually beginning in Year 5) $275,000
- 11.5% convertible bonds, callable beginning
in Year 10, due Year 21 125,000

Secured:
- 9.875% guaranty security bonds, due 2020 $250,000
- 10.0% commodity-backed bonds ($50,000
maturing annually beginning in Year 6) 200,000

What are the total amounts of serial bonds and debenture bonds?

  • Serial bonds, $475,000; Debenture bonds, $400,000
  • Serial bonds, $475,000; Debenture bonds, $125,000
  • Serial bonds, $450,000; Debenture bonds, $400,000
  • Serial bonds, $200,000; Debenture bonds, $650,000
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).

226
Q

Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance?

  • It defers any gains and losses.
  • It defers losses to the extent of any gains.
  • It recognizes gains and losses immediately.
  • It defers gains and recognizes losses immediately.
A

It recognizes gains and losses immediately.

227
Q

A company has an underfunded defined benefit pension plan. During the current year, the company uses the years-of-service method to amortize its prior service cost. What effect will the amortization of prior service cost have on the company’s current-year financial statements?

  • Total liabilities will be decreased.
  • Net income will be increased.
  • Current-period expenses will be decreased.
  • Other comprehensive income will be increased.
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).

228
Q

Reporting of general infrastructure assets by all public institutions that report as special-purpose governments either engaged only in governmental activities or engaged in both governmental and business-type activities is:

  • encouraged but not required.
  • required using the special provisions of GASB Statement 35 for phase 3 public institutions.
  • required using the full governmental model.
  • required beginning with fiscal years ending after June 15, 2006.
A

required using the full governmental model.

229
Q

During the current year, Ace Co. amortized a bond discount. Ace prepares its statement of cash flows using the indirect method. In which section of the statement should Ace report the amortization of the bond discount?

  • Financing activities
  • Operating activities
  • Investing activities
  • Supplemental disclosures
A

Operating activities

230
Q

On October 1, 20X6, EriK’s A/C, Inc. agrees to manufacture industrial air conditioning units for five Evergreen Apartment complexes. Under the terms of the contract, Evergreen Apartment will pay EriK’s A/C a total of $50,000; Evergreen can cancel the contract at any time but must pay EriK for work completed. EriK believes that they could sell the A/C units to another apartment complex and still make a profit even if Evergreen canceled the contract. The contract is expected to last five months, and as of December 31, 20X6, the job is 50% complete. How much revenue should EriK’s A/C recognize in 20X6 for this contract?

  • $0
  • $50,000
  • $30,000
  • $25,000
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.

231
Q

Park City uses encumbrance accounting and formally integrates its budget into the general fund’s accounting records. For the current year ending July 31, the following budget was adopted:

Estimated revenues $30,000,000
Appropriations 27,000,000
Estimated transfer to debt service fund 900,000

Park should record budgeted appropriations by a:

  • credit to appropriations control, $27,000,000.
  • debit to estimated expenditures, $27,000,000.
  • credit to appropriations control, $27,900,000.
  • debit to estimated expenditures, $27,900,000.
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

232
Q

The price used to measure fair value should be adjusted for which transaction costs?

  • All transaction costs
  • The incremental direct costs to sell the asset or transfer the liability
  • The costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market
  • No transaction costs
A

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

233
Q

How would a municipality that uses modified accrual and encumbrance accounting record the transaction of short-term financing received from a bank, secured by the city’s taxing power?

  • Credit other financing sources
  • Credit expenditures control
  • Debit deferred revenues
  • Credit tax anticipation notes payable
A

Credit tax anticipation notes payable

234
Q

Carr, Inc., purchased equipment for $100,000 on January 1, Year 1. The equipment had an estimated 10-year useful life and a $15,000 salvage value. Carr uses the 200% declining balance depreciation method. In its Year 2 income statement, what amount should Carr report as depreciation expense for the equipment?

  • $13,600
  • $16,000
  • $17,000
  • $20,000
A

$16,000

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

235
Q

Lano Corp.’s forest land was condemned for use as a national park. Compensation for the condemnation exceeded the forest land’s carrying amount. Lano purchased similar, but larger, replacement forest land for an amount greater than the condemnation award. As a result of the condemnation and replacement, what is the net effect on the carrying amount of forest land reported in Lano’s balance sheet?

  • The amount is increased by the excess of the replacement forest land’s cost over the condemned forest land’s carrying amount.
  • The amount is increased by the excess of the replacement forest land’s cost over the condemnation award.
  • The amount is increased by the excess of the condemnation award over the condemned forest land’s carrying amount.
  • No effect, because the condemned forest land’s carrying amount is used as the replacement forest land’s carrying amount.
A

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

236
Q

The following information pertains to Comb City:

Year 3 real estate property taxes assessed and collected in Year 3 $14,000,000
Year 2 real estate property taxes assessed in Year 1 and collected in Year 3 1,000,000
Year 3 sales taxes collected by merchants in Year 3 but not required to be remitted to Comb until January of Year 4 2,000,000

For the year ending December 31, Year 3, Comb should recognize revenues of:

  • $14,000,000.
  • $15,000,000.
  • $16,000,000.
  • $17,000,000.
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.

237
Q

Topic 275 of the FASB’s Accounting Standards Codification is entitled “Risks and Uncertainties.” The primary subject discussed in this topic is:

  • bankruptcy.
  • going concern.
  • disclosure.
  • All of the answer choices are discussed.
A

disclosure

238
Q

The fair value of an impaired asset may be determined by all of the following except:

  • quoted market prices in active markets for the impaired asset.
  • market prices for similar assets.
  • the carrying amount of similar assets of competitors.
  • appropriate valuation techniques (e.g., present value of expected future cash flows).
A

the carrying amount of similar assets of competitors.

239
Q

If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses?

  • The other asset group should be tested for an impairment loss before goodwill is tested.
  • Impairment testing may be conducted concurrently for the other asset group and goodwill.
  • If the other asset group is impaired, the loss should not be recognized prior to goodwill being tested for impairment.
  • If goodwill is impaired, the loss should be recognized prior to testing the other assets for impairment.
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.

240
Q

A city taxes merchants for various central district improvements. Which of the following accounting methods assists in assuring that these revenues are expended legally?

  • Fund accounting
  • Budgetary accounting
  • Both fund accounting and budgetary accounting
  • Neither fund accounting nor budgetary accounting
A

Both fund accounting and budgetary accounting

241
Q

Cross Corp. has outstanding 2,000 shares of 11% preferred stock, $50 par. On August 8, 20X1, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross’ additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:

  • Preferred stock: $25,000; Additional paid-in capital: $7,500; Retained earnings: $(10,000)
  • Preferred stock: $25,000; Additional paid-in capital: $0; Retained earnings: $(2,500)
  • Preferred stock: $25,000; Additional paid-in capital: $(2,500); Retained earnings: $0
  • Preferred stock: $22,500; Additional paid-in capital: $0; Retained earnings: $0
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

242
Q

Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the creditor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt?

  • $0
  • $3,000
  • $25,000
  • $28,000
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).

243
Q

The Private Company Decision-Making Framework has been developed by the:

  • AICPA.
  • FASB.
  • IASB.
  • None of the answer choices are correct.
A

FASB

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

244
Q

Peg Co. leased equipment from Howe Corp. on July 1 of the current year for an 8-year period. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1 of the current year. The rate of interest contemplated by Peg and Howe is 10%. The cash sell­ing price of the equipment is $3,520,000, and the cost of the equipment on Howe’s accounting records is $2,800,000. The lease is appropriately recorded as a sales-type lease. What is the amount of profit on the sale and interest revenue that Howe should record for the current year ended December 31?

  • Profit on sale, $720,000; Interest revenue, $176,000
  • Profit on sale, $720,000; Interest revenue, $146,000
  • Profit on sale, $45,000; Interest revenue, $176,000
  • Profit on sale, $45,000; Interest revenue, $146,000
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).

245
Q

The Cats and Dogs League was organized as a nongovernmental not-for-profit organization. The League received a pledge of $10,000 to be used to build an addition to the kennel. This donation will not be received for three years. How should this pledge be recorded?

  • As restricted support of the present value of $10,000
  • As restricted support of $10,000
  • As a conditional promise to give of $10,000
  • It should not be accounted for until it is received.
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).

246
Q

For the purposes of defining the governmental financial reporting entity, a component unit of the primary government may not be:

  • a governmental organization.
  • a not-for-profit organization.
  • a for-profit organization.
  • All of the choices listed may be component units.
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.

247
Q

A company is required to file quarterly financial statements with the U.S. Securities and Exchange Commission on Form 10-Q. The company operates in an industry that is not subject to seasonal fluctuations that could have a significant impact on its financial condition. In addition to the most recent quarter-end, for which of the following periods is the company required to present balance sheets on Form 10-Q?

  • The end of the corresponding fiscal quarter of the preceding fiscal year
  • The end of the preceding fiscal year and the end of the corresponding fiscal quarter of the preceding fiscal year
  • The end of preceding fiscal year
  • The end of the preceding fiscal year and the end of the prior two fiscal years
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.

248
Q

According to the FASB’s conceptual framework, the objectives of financial reporting for business enterprises are based on:

  • generally accepted accounting principles.
  • reporting on management’s stewardship.
  • the need for conservatism.
  • the needs of the users of the information.
A

the needs of the users of the information.

249
Q

According to the FASB conceptual framework, which of the following situations violates the concept of reliability?

  • Data on segments having the same expected risks and growth rates are reported to analysts estimating future profits.
  • Financial statements are issued nine months late.
  • Management reports to stockholders regularly refer to new projects undertaken, but the financial statements never report project results.
  • Financial statements include property with a carrying amount increased to management’s estimate of market value.
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.

250
Q

Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?

  • A proposed statement of position
  • A proposed accounting standards update
  • A proposed accounting research bulletin
  • A proposed staff accounting bulletin
A

A proposed accounting standards update