Mock Exam Testlet 1 7.16.23 Flashcards
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
$306,000
$264,000
$280,000
$264,000
An asset retirement obligation (ARO) reflects a legal obligation arising from the acquisition, construction, development, or normal operation of an asset. The ARO is recorded initially as a liability at fair value when incurred, and the liability is adjusted periodically. The liability decreases when the entity settles part of the ARO. It increases because of incurrence of a new ARO and the passage of time (accretion expense). The ARO and the asset retirement cost (the increase in the related long-lived tangible asset equal to the initial ARO) also are adjusted for changes in estimates. An expected present value technique ordinarily is used to estimate the fair value of the ARO.
In this question, the fair value of the acquired ARO is meant to be approximated by the discounted cash flow estimate ($68,000). Thus, the ARO at year end is $264,000.
In Year 6, Spirit, Inc., determined that the 12-year estimated useful life of a machine purchased for $48,000 in January Year 1 should be extended by 3 years. The machine is being depreciated using the straight-line method and has no salvage value. What amount of depreciation expense should Spirit report in its financial statements for the year ending December 31, Year 6?
$2,800
$4,200
$3,200
$4,800
$2,800
A change in estimate is accounted for prospectively. The new estimate is used in the year of the change. For Years 1 through 5, depreciation was $4,000 per year ($48,000 historical cost ÷ 12 years original estimated useful life), resulting in accumulated depreciation at December 31, Year 5, of $20,000 ($4,000 × 5). In Year 6, the new estimate changes annual depreciation to $2,800 [($48,000 – $20,000 accumulated depreciation) ÷ 10 years revised estimated remaining life].
Dana Co.’s officers’ compensation expense account had a balance of $490,000 at December 31, Year 1, before any appropriate year-end adjustment relating to the following:
The adjusted balance for officers’ compensation expense for the year ended December 31, Year 1, should be
$683,000
$508,000
$665,000
$490,000
$683,000
The officers’ compensation expense account should include the entire compensation expense incurred in Year 1. Accordingly, it should include the $490,000 previously recorded in the account, the $18,000 of accrued salaries, and the $175,000 of accrued bonuses. The adjusted balance should therefore be $683,000 ($490,000 + $18,000 + $175,000).
A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that it is probable that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month?
$195,000
$200,000
$185,000
$190,000
$190,000
The company has $200,000 of sales and estimates that 5% of sales will be returned. Sales are recognized only in the amount of consideration to which the entity expects to be entitled. Thus, no sales are recognized for the products expected to be returned. The entity therefore recognizes net sales equal to 95% of gross sales. Net sales recognized are $190,000 ($200,000 × 95%).
Bayberry Co. has an asset with a cost of $200,000 and accumulated depreciation of $120,000. Driftwood Co. has an asset with a cost of $250,000 and accumulated depreciation of $160,000. Both assets have a fair value of $100,000. Bayberry and Driftwood find it mutually advantageous to exchange assets, and the exchange results in improved future cash flows for both companies. What amount, if any, is Bayberry’s gain on the exchange?
$20,000
$10,000
$0
$50,000
$20,000
When the fair value of both assets in a nonmonetary exchange is determinable, the transaction is treated as a monetary exchange. The asset received is measured at the fair value of the asset given up, and any gain or loss is recognized immediately. The gain or loss is the difference between the fair value of the asset given up and its carrying amount. The fair value and carrying amount of the asset Bayberry gave up were $100,000 and $80,000 ($200,000 cost – $120,000 accumulated depreciation), respectively. Therefore, Bayberry’s gain on the exchange is $20,000 ($100,000 FV – $80,000 carrying amount).
A county’s balances in the general fund included the following:
What is the remaining amount available for use by the county?
$409,750
$353,875
$391,125
$447,000
$409,750
The Vouchers payable is not included since that amount is debited from the Expenditures account and credited to the Vouchers payable.
The remaining amount available for use by the county is $409,750 ($745,000 – $37,250 – $298,000).
On January 1, Year 1, Newport Corp. purchased a machine for $100,000. The machine was depreciated using the straight-line method over a 10-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Newport’s Year 1 financial statements, resulting in a $10,000 overstatement of the book value of the machine on December 31, Year 1. The oversight was discovered during the preparation of Newport’s Year 2 financial statements. What amount should Newport report for depreciation expense on the machine in the Year 2 financial statements?
$10,000
$9,000
$11,000
$20,000
$10,000
The error in Year 1 does not affect depreciation expense in Year 2 regardless of whether single-year or comparative statements are presented. It equals $10,000 [($100,000 – $0 residual value) ÷ 10 years].
No catch-up adjustment for the omission in Year 1 is recognized in income for Year 2.
On October 31, Year 1, a company with a calendar year end paid $90,000 for services that will be performed evenly over a 6-month period from November 1, Year 1, through April 30, Year 2. The company expensed the $90,000 cash payment in October Year 1 to its services expense general ledger account. The company did not record any additional journal entries in Year 1 related to the payment. What is the adjusting journal entry that the company should record to properly report the prepayment in its Year 1 financial statements?
Debit prepaid services and credit services expense for $30,000.
Debit services expense and credit prepaid services for $60,000.
Debit services expense and credit prepaid services for $30,000.
Debit prepaid services and credit services expense for $60,000.
Debit prepaid services and credit services expense for $60,000.
The full payment of $90,000 for services was initially recorded as an expense. Thus, the year-end adjusting entry is to debit an asset (prepaid service) and credit (decrease) services expense for the unexpired portion. At year end, $30,000 of the prepaid expense had expired [$90,000 × (2 months ÷ 6 months)]. The unexpired portion is equal to $60,000 ($90,000 – $30,000 expired). The appropriate adjusting entry is to debit prepaid services (to recognize the asset) and credit services expense (to lower the expense recognized) for $60,000, or the unexpired portion.
The FASB’s due process for setting accounting standards includes which of the following procedures?
- The FASB obtains approval from the International Accounting
Standards Board in setting its agenda. - The FASB delegates topics to the Financial Accounting Foundation
for research and reporting. - The FASB can seek information about accounting and reporting
issues by holding public forums, usually based on an exposure draft. - The FASB’s Emerging Issues Task Force ratifies amendments to the Accounting Standards Codification.
- The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft.
The FASB typically issues an exposure draft of the proposed Accounting Standards Update and then requests that interested parties (academics, businesses, accountants, regulators, etc.) provide feedback on the new standard either in writing or in public meetings at various stages of its due process activities. The FASB then makes a final decision based on the feedback and its deliberations.
The following information was taken from Baxter Department Store’s financial statements:
What was Baxter’s inventory turnover for the year ending December 31?
10
5
2.5
3.5
2.5
Inventory turnover is equal to cost of goods sold divided by average inventory. Cost of goods sold is equal to net purchases minus the annual increase in inventory. Thus, it equals $500,000 [$700,000 net purchases – ($300,000 – $100,000)]. Average inventory is $200,000 [($100,000 + $300,000) ÷ 2]. Inventory turnover is therefore 2.5 ($500,000 ÷ $200,000).
East Co. issued 2,000 shares of its $5 par common stock to Krannik as compensation for 1,000 hours of legal services performed. Krannik usually bills $200 per hour for legal services. On the grant date of the shares, the stock was trading on a public exchange at $160 per share. By what amount should the additional paid-in capital account increase?
$190,000
$200,000
$320,000
$310,000
$310,000
When stock is issued for goods or services, the transaction is recorded at the grant-date fair value of the stock issued. The $320,000 (2,000 shares × $160 market price) should be allocated as follows: $10,000 (2,000 shares × $5 par) to common stock and $310,000 to additional paid-in capital.
On May 1, Rhud Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Rhud had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Rhud’s common stock was $30 per share on May 1. As a result of the stock dividend, Rhud’s total equity
Decreased by $10,000.
Decreased by $300,000.
Increased by $300,000.
Did not change.
Did not change.
When a stock dividend is declared, a portion of retained earnings is reclassified as contributed capital. The net effect on total equity is thus $0.
Ala Company acquired Mish Company on January 1, Year 1. A goodwill of $480,000 was recognized on this acquisition. Ala is a private company, and it applies the accounting alternative to account for goodwill recognized in this business combination. The synergies expected from combining the operations of the two businesses are estimated to last over the next 20 years. However, due to Ala expecting to discontinue some of the activities of Mish in the future, Ala estimates that the useful life of goodwill is 14 years. Over how many years, if at all, should the goodwill recognized be amortized by Ala?
14
0
16
10
10
A private company may elect the accounting alternative for accounting for goodwill. Under the goodwill accounting alternative, goodwill recognized must be amortized on a straight-line basis over 10 years. A private company may amortize goodwill over a period shorter than 10 years if it can demonstrate that this useful life is more appropriate. However, the amortization period of goodwill cannot exceed 10 years.
At the beginning of the fiscal year, End Corp. purchased 25% of Turf Co. for $550,000. At the end of the fiscal year, Turf reported net income of $65,000 and declared and paid cash dividends of $30,000. End uses the equity method of accounting. At year end, what amount should End report in its balance sheet for the investment in Turf?
$573,750
$566,250
$558,750
$550,000
$558,750
Under the equity method, the investor recognizes in income its share of the investee’s earnings or losses in the periods for which they are reported by the investee. Therefore, the investment in Turf account is increased by the investor’s share of the investee’s income of $16,250 ($65,000 × 25%). Dividends from the investee are treated as a return of an investment. Thus, the investment account is decreased by the dividends received of $7,500 ($30,000 × 25%). The year-end carrying amount of investment in Turf is therefore $558,750 ($550,000 + $16,250 – $7,500).
When preparing government-wide financial statements at the end of the fiscal year, Meen County recorded an adjusting entry for salaries of $8,500,000. The salaries for 1 week, $13,700,000, were paid on the first Friday of the new fiscal period. The entry to record payment of salaries for the week is
On April 1, Oak County incurred the following expenditures in issuing long-term bonds:
When Oak establishes the accounting for operating debt service, what amount should be deferred and amortized over the life of the bonds?
$0
$490,000
$90,000
$400,000
$0
the modified accrual basis does not allow for amortization of issue costs and debt insurance premiums, which must be recognized in full when the liability is incurred.
Hemple Co. maintains escrow accounts for various mortgage companies. Hemple collects the receipts and pays the bills on behalf of the customers. Hemple holds the escrow monies in interest-bearing accounts. They charge a 10% maintenance fee to the customers based on interest earned. Hemple reported the following account data:
What amount represents the escrow liability balance on Hemple’s books?
$290,000
$214,000
$286,000
$210,000
$286,000
All escrow receipts collected by Hemple on behalf of its customers represent liabilities. As such, escrow receipts during the year ($1,200,000) must be added to the beginning escrow liability account ($500,000) to arrive at a balance of $1,700,000. Hemple decreases this liability by the amount of taxes paid during the year on behalf of its customers ($1,700,000 – $1,450,000 = $250,000). Hemple must then increase this liability by the amount of interest earned by the escrow monies, less the 10% maintenance fee. This is a net increase of $36,000 [$40,000 interest earned – ($40,000 × 10% fee)]. Thus, the ending escrow liability balance on Hemple’s books is $286,000 ($250,000 + $36,000).
Clark Co. had the following transactions with affiliated parties during the year just ended:
Before eliminating entries, Clark had consolidated current assets of $320,000. What amount should Clark report in its December 31 consolidated balance sheet for current assets?
$308,000
$320,000
$314,000
$302,000
$308,000
A company reports the following information for Year 1:
What is the company’s net cash flow from financing activities?
$(9,000)
$5,000
$15,000
$5,500
$5,000
The items that should be classified as cash flows from financing activities are the dividends paid ($5,000) and the issuance of the company’s bonds ($10,000). The net cash flow should be an inflow of $5,000 ($10,000 – $5,000).
On June 1, Year 1, ABC Co. issued a 200,000 euro purchase order for equipment to be supplied by a German company. ABC’s functional currency is the U.S. dollar. The equipment was delivered to ABC on November 1, Year 1, and ABC recorded a payable due to the German company. ABC paid for the equipment on January 31, Year 2. The following are the exchange rates in effect:
What is the foreign currency gain or loss that ABC should record for the year ended December 31, Year 1?
A loss of $20,000.
A gain of $10,000.
A gain of $30,000.
A loss of $30,000.
A gain of $30,000.
On 11/1/Year 1, ABC initially recognized a payable to a German company of $300,000 (200,000 euros × 1.5 exchange rate on 11/1/Year 1) because the equipment was delivered on that date. A foreign currency transaction gain or loss is recognized in the period when the exchange rate changes, e.g., at a balance sheet date and at the settlement date. On 12/31/Year 1, a payable is reported at $270,000 (200,000 euros × 1.35 exchange rate on 12/31/Year 1). The decrease in the payable of $30,000 ($270,000 – $300,000) is recognized as a gain in the Year 1 income statement.
In January, Stitch, Inc., adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch’s inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet?
$83,000
$85,000
$80,000
$88,000
$83,000
The layers stated at base-year prices ($50,000 and $30,000) are given, and the relevant indexes are 1.0 for the base year and 1.1 (1 + .10) for the second year. The dollar-value LIFO measurement is $83,000.
Fay, Inc., was organized late in Year 1 and began operations on January 1, Year 2. Prior to the start of operations, the following costs were incurred:
For federal income tax purposes, Fay amortizes organization costs over the minimum period. What is the minimum amount of organization costs expensed in Fay’s income statement for the year ended December 31, Year 2?
$150
$10,000
$1,200
$2,000
$10,000
Organization costs are those incurred in the formation of a business entity. They include payments to promoters, legal and accounting fees, and costs of registering with the state of incorporation. Under the federal tax code, organization and start-up costs must be capitalized and amortized over a period of not less than 15 years. For financial accounting purposes, nongovernmental entities must expense all start-up and organization costs as incurred.
Young Co. issues $800,000 of 10% bonds dated January 1, Year 1. Interest is payable semiannually on June 30 and December 31. The bonds mature in 5 years. The current market rate for similar bonds is 8%. The entire issue is sold on the date of issue. The following values are given:
What amount of proceeds on the sale of bonds should Young report?
$815,564
$864,884
$849,317
$799,997
$864,884
The present value of the $800,000 face amount discounted at the market interest rate of 8% is equal to $540,448 ($800,000 × .67556). The present value of the semiannual interest payments of $40,000 [$800,000 × 10% × (6 months ÷ 12 months)] discounted at the market interest rate of 8% is equal to $324,436 ($40,000 × 8.11090). Thus, the proceeds on the sale of the bonds equal $864,884 ($540,448 + $324,436).
