Mock Exam 1 Flashcards
Nu Corp. 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 PV was $96,000.
- The machine’s carrying amount was $109,000, and its FV was $96,000.
What amount of net gains (losses) should Nu recognize in its income statement?
(A) $(4,000)
(B) $(9,000)
(C) $(13,000)
(D) $0
Answer: (A) $(4,000)
$9,000 ordinary gain on the troubled-debt restructuring, and $(13,000) ordinary loss on disposal of machine, netting to an ordinary loss of $4,000.
Note Mach. Carrying amt $105K $109K PV 96K 96K Ordin. gain $ 9K Ordin. loss on disp. $13K Net loss $(4K)
On January 1, Strathmore Cabinet Manufacturers sold a plant asset to Billings Fiance Company and immediately leased it back. Details are as follows:
CV $50K
Sales price (FV) 75K
PV of lease pmts 70K
Term of lease 4 yrs
Strathmore uses IFRS and classified the lease as a finance lease. How much gross profit on the sale should Strathmore recognize on January 1?
(A) $0
(B) $25,000
(C) $5,000
(D) $6,250
Answer: Under IFRS, all profit is deferred and amortized over the lease term if the lease is classified as a finance lease.
Baker, Inc. reported the following stockholders’ equity balances:
- 8% cumulative pref. stock, par value $100 per share; 10,000 shares issued and outstanding = $1,000,000
- Common stock, par value $10 per share, 50,000 shares issued and outstanding = $500,000
- APIC = 75,000
- Retained earnings = 450,000
Dividends are in arrears on the preferred stock for three years including the current year. What is book value per share of common stock?
(A) $15.70
(B) $19.10
(A) $14.30
(A) $20.50
Answer: (C) $14.30
8% cum. pref. stk. $1M
C/S 500K
APIC 75K
RE 450K
$2,025,000
Less: pref. stk: liq. value (10K x $107) 1,070,000
Dividends in arrears (10,000 x $8x3 yrs) 240,000
(1,310,000)
Total value of C/S $715,000
Div. by C/S out. / 50,000
Bk value per sh. $14.30
Selected amounts from Rufus Inc.’s December 31, Year 3 and December 31, Year 4 trial balances are:
12/31/3 12/31/4 Sales $1.25M $1.32 COGS 860K 940K Inventory 280K 271K A/P 86K 113K A/R 124K 109K
Rufus Inc.’s Year 4 statement of cash flows will report “cash receipts from customers” in the amount of:
(A) $1,320,000
(B) $1,335,000
(C) $1,211,000
(D) $1,305,000
Answer: (B) $1,335,000
Sales $1,320,000
+ Dec. in A/R 15,000
Cash receipts $1,355,000
from cust.
The financial statements of governments have focused on two forms of accountability. Government-wide financial statements focus the reader on accountability in which way(s):
Fiscal Operational
Accountability Accountability
(A) No Yes
(A) Yes Yes
(A) No No
(A) Yes NoAnswer: (A) No , Yes
Governmental-wide financial statements focus on operational accountability, and funds focus on fiscal accountability.
The following information pertains to certain monies held by Blair County at December 31, Year 1, that are legally limited to expenditures for specified purposes:
- Proceeds of short-term notes to be used for advances to private purpose trust funds = $8,000
- Proceeds of long-term debt to be used for a major capital project = $90,000
What amount of these monies should Blair account for as restricted or committed in special revenue funds?
(A) $8,000
(B) $98,000
(C) $0
(D) $90,000
Answer: (C) $0
Special revenue funds account for the proceeds of specific revenue sources (other than debt service or for major capital projects) that are legally restricted or committed to expenditures for specific purposes. The $8,000 is to be used for advances to private purpose trust funds and would be accounted for in private purpose trust funds. The $90,000 is for a major capital project, which would be accounted for in a capital projects fund.
The Arts & Crafts Theater had unearned ticket revenues of $20,000 as of December 31, Year 1 and unearned revenues of $40,000 at December 31, Year 2. The theater’s records included $500,000 and $340,000 in cash receipts during the years ended December 31, Year 2 and Year 1, respectively. What were the ticket revenues for the year ended December 31, Year 2?
(A) $450,000
(B) $480,000
(C) $500,000
(D) $390,000
Answer: Ticket revenues may be derived from the balances in the unearned revenue account in combination with the cash receipts as follows:
Beg Unear rev 12/31/Y1 $20K
Add Cash rec. 500K
Sub Revenues 480K
End Unear. rev 12/31/Y2 $40K
Cash receipts represent an increase to the liability while recognized revenues represent a decrease to the liability. The beginning and ending balances of the liability are known and the cash receipts are known. Place the known base amounts in the BASE mnemonic and squeeze the solution.
On January 1, Year 2, West Co. adopted the dollar-value LIFO inventory method. Inventory data for Year 2 and Year 3 are as follows: Date Inv. CY cost Index 1/1/Y2 $250K 1.00 12/31/Y2 278,250 1.05 12/31/Y3 364,000 1.12
West’s dollar-value LIFO inventory under U.S. GAAP at December 31, Year 3 is:
(A) $328,750
(B) $332,950
(C) $325,000
(D) $364,000
Step 1: Cy / Index = Base
Step 2: Layer x Index = Result
250K / 1.0 = 250K x 1.0 = 250K
278,250 / 1.05 = 265,000
250K x 1.0 = 250K
15K x 1.05 = 15,750
= $265,750
364,000 / 1.12 = 325,000
250K x 1.0 = 250K
15K x 1.05 = 15,750
60K x 1.12 = 67,200
= $332,950
Wizard Co. purchased two machines for $250,000 each on January 2 of the current year. The machines were put into use immediately. Machine A has a useful life of five years and can only be used in one research project. Machine B will be used for two years on a R&D project and then used by the production division for an additional eight years. Wizard uses the straight-line method of depreciation. What amount should Wizard include in the current year R&D expense under U.S. GAAP?
(A) $275,000
(B) $375,000
(C) $500,000
(D) $50,000
Answer: (A) $275,000
Machine A $250K
Machine B ($250K / 10 yr) 25K
Total $275K
Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, Year 1, balance sheet. For Year 2, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for Year 2. At December 31, Year 2, Quinn had cumulative taxable differences of $70,000. Quinn’s effective income tax rate is 30%. In its December 31, Year 2, income statement, what should Quinn report as deferred income tax expense?
(A) $12,000
(B) $21,000
(C) $60,000
(D) $30,000
Answer: (D) $30,000
Deferred tax expense is equal to the current period temporary differences times the enacted future tax rate: $100,00 x 30% = $30,000
Analysis of deferred tax account:
12/31 Yr1 Change 12/31/Yr2 Temp diff $30 (100) (70) Tax rate x30% x30% Def tax ass. 9 (9) 0 Def tax liab 0 (21) (21) Net def tax 9 (30) (21)
On November 15, Quazar Co. declared a property dividend of marketable securities to be distributed on December 15 to stockholders of record on December 1. The market value of the securities was as follows:
November 15 $225,000
December 1 220,000
December 15 250,000
The marketable securities originally cost Quazar $200,000. What is the net effect on Quazar’s retained earnings as a result of declaring this property dividend?
(A) $250,000
(B) $195,000
(C) $200,000
(D) $225,000
Answer: (C) $200,000
Two factors will affect retained earnings as a result of this transaction. Quazar will recognize a gain on disposition of the marketable securities as well as a dividend:
Gain on marketable securities $ 25,000
Property dividend (225,000)
Net effect on retained earnings = $ (200,000)
The property dividend is valued on the declaration date.
How should a nongovernmental, not-for-profit organization report donor-restricted cash contributions for long-term purposes in its statement of cash flows?
(A) As a noncash transaction.
(B) Investing activity inflow.
(C) Operating activity inflow.
(D) Financing activity inflow.
Answer: (D) Financing activity inflow
Cash contributions restricted by the donor for long-term purposes must be reported as a cash inflow in the financing activities section of the statement of cash flows, segregated from other financing activities.
When a purchase order is released, a commitment is made by a governmental unit to buy a computer to be manufactured to specifications for use in property tax administration. This commitment should be recorded in the general fund as a (an):
(A) Fixed asset.
(B) Appropriation.
(C) Expenditure.
(D) Encumbrance.
Answer: (D) Encumbrance.
Governmental funds use modified accrual accounting. Under modified accrual accounting, the issuing of a purchase order (commitment to purchase) is recorded for internal bookkeeping as:
Debit (Dr.) Credit (Cr.) Encumbrance $ XX
Budgetary Control $ XX
Harland Country received a $2,000,000 capital grant to be equally distributed among its five municipalities. The grant is to finance the construction of capital assets. Harland had no administrative or direct financial involvement in the construction. In which fund should Harland record the receipt of cash?
(A) Private purpose trust fund.
(B) Agency fund.
(C) Special revenue fund.
(D) General fund.
Answer: (B) Agency fund.
The fact pattern describes a transaction in which Harland County is collecting and holding cash temporarily on behalf of the cities within its borders. Transactions of this type are handled in agency funds.
Selected amounts from Rufus Inc.’s December 31, Year 3 and December 31, Year 4 trial balances are:
12/31/Y3 12/31/Y4 Sales $1,250,000 $1,320,000 COGS 860,000 940,000 Inventory 280,000 271,000 Sales 86,000 113,000 Sales 124,000 109,000
Rufus Inc.’s Year 4 statement of cash flows will report “cash payments from purchases” in the amount of:
(A) $976,000
(B) $958,000
(C) $922,000
(D) $904,000
Answer: (D) $904,000
COGS $940,000
- Dec. in inventory during period (9,000)
- Inc. in A/P during period (27,000)
Cash payments for purchases $904,000
