Mock Exam Testlet 2 7.16.23

Question 1

The term “more likely than not” is defined in the FASB codification as a probability of

90% or more.
20% or more.
More than 50%.
More than 75%.

Answer 1

More than 50%.

According to the FASB codification, the term “more likely than not” is defined as a likelihood of more than 50%.

Question 2

On January 1, the Fulmar Company sold personal property to the Austin Company. The personal property had cost Fulmar $40,000. Fulmar frequently sells similar items of property for $44,000. Austin gave Fulmar a noninterest-bearing note payable in six equal annual installments of $10,000 with the first payment due this December 31. Collection of the note is reasonably assured. A reasonable rate of interest for a note of this type is 10%. The present value of an annuity of $1 in arrears at 10% for six periods is 4.355. What amount of sales revenue from this transaction should be reported in Fulmar’s income statement for the year ended December 31?

$43,550
$44,000
$10,000
$40,000

Answer 2

$44,000

When a noninterest-bearing note is exchanged for property, the note, the sales price, and the cost of the property exchanged for the note should be recorded at the fair value of the property or at the market value of the note, whichever is more clearly determinable. Here, the $44,000 fair value of the property is clearly determinable because Fulmar frequently sells similar items for that amount. Consequently, $44,000 is the proper amount to be recorded as sales revenue from this transaction.

Question 3

On January 1, Year 1, the general fund of a state government made a capital acquisition of $50,000. The asset’s useful life is 10 years, and the government uses the straight-line basis of depreciation. What is the complete journal entry that should be recorded on December 31, Year 1, when reconciling the fund financial statements to the government-wide financial statements?

Debit capital asset $45,000; credit capital acquisition $45,000.
Debit capital asset $50,000; credit expenditures $50,000; debit depreciation expense $5,000; credit accumulated depreciation $5,000.
Debit capital asset $50,000; credit expenditures $45,000; credit accumulated depreciation $5,000.
Debit capital asset $50,000; credit capital acquisition $45,000; credit accumulated depreciation $5,000.

Answer 3

Debit capital asset $50,000; credit expenditures $50,000; debit depreciation expense $5,000; credit accumulated depreciation $5,000.

No capital acquisition account is involved in recording the capital outlay in the governmental fund financial statements or the government-wide financial statements.

The following entries should be made: (1) debit capital asset and credit cash for $50,000 and (2) debit depreciation expense and credit accumulated depreciation for $5,000 ($50,000 cost ÷ 10 years). The entries to reconcile the fund financial statements with the government-wide financial statements are to (1) debit a capital asset and credit expenditures for $50,000 and (2) debit depreciation and credit accumulated depreciation for $5,000.

Question 4

The appropriate attribute for measuring plant assets is

Net realizable value.
Historical cost.
Present value of future cash flows.
Current cost.

Answer 4

Historical cost.

Plant assets should be measured at historical cost. Property, plant, and equipment are reported at historical cost, which is the price paid to acquire an asset or the amount received for the incurrence of a liability in an actual exchange transaction.

Question 5

Blue Group, a nongovernmental not-for-profit entity, borrowed $8,000 to purchase new equipment. In what section of Blue’s statement of cash flows should the transaction be reported?

1. Cash inflow from financing activities and cash outflow from investing activities.
2. Cash inflow and outflow from investing activities.
3. Cash inflow from financing activities and cash outflow from operating activities.
4. Cash inflow and outflow from operating activities.

Answer 5

1. Cash inflow from financing activities and cash outflow from investing activities.

The borrowing is a cash inflow from a financing activity. The purchase of the equipment is a cash outflow from an investing activity.

Question 6

Sackett Corporation had a beginning inventory of 10,000 units, which were purchased in the prior year as follows:

In the current year, Sackett purchases an additional 12,000 units (7,000 in June at $2.50 and 5,000 in November at $2.70) and sells 16,000 units. Using the FIFO method, what is Sackett’s ending inventory?

$15,600 (6,000 @ $2.60 – average of $2.50 and $2.70)
$16,000 (5,000 @ $2.70 and 1,000 @ $2.50)
$13,000 (4,000 @ $2.10 and 2,000 @ $2.30)
$12,200 (4,000 @ $2.00 and 2,000 @ $2.10)

Answer 6

$16,000 (5,000 @ $2.70 and 1,000 @ $2.50)

Under FIFO, the first goods purchased are assumed to be the first sold. Using FIFO, all of the 10,000 units of inventory in beginning inventory were sold and 6,000 (16,000 sold – 10,000 beginning inventory) of the units purchased in June for $2.50 each were sold. This leaves in ending inventory 1,000 units purchased in June for $2.50 each and all 5,000 units purchased in November for $2.70 each.

Question 7

On January 1 of the current year, Tree Co. enters into a 5-year lease agreement for production equipment. The lease requires Tree to pay $12,500 per year in lease payments. At the end of the 5-year lease term, Tree can purchase the equipment for $30,000. The fair value of the equipment is $75,000. The estimated useful life of the equipment is 10 years. The present value of the lease payments is $50,000. The present value of the purchase option is $20,000. Tree’s controller believes the purchase option price is sufficiently below the expected fair value of the equipment at the date the option becomes exercisable to make its exercise reasonably certain. What amount is the carrying value of the asset related to this lease at December 31 of the current year?

$63,000
$45,000
$56,000
$40,000

Answer 7

$63,000

Tree Co. can purchase the equipment at the end of the lease term. Because Tree is reasonably certain to exercise the purchase option, the lease is classified as a finance lease. On January 1, Tree Co. should record the finance lease as an asset and a liability at the present value of the lease payments, $70,000 ($50,000 + $20,000). When the lease either transfers ownership to the lessee by the end of the lease term or contains a purchase option that the lessee is reasonably certain to exercise, the amortization of the asset is over its entire estimated economic life (i.e., 10 years). Using the straight-line amortization method, the right-of-use asset will be amortized at $7,000 ($70,000 ÷ 10 years) per year. The carrying value of the right-of-use asset on December 31 of the current year should be $63,000 ($70,000 – $7,000).

Question 8

Expenditures of a government for insurance extending over more than one accounting period

1. Must be allocated between or among accounting periods.
2. May be allocated among periods or accounted for as expenditures when acquired.
3. Must be accounted for as expenditures of the periods subsequent to acquisition.
4. Must be accounted for as expenditures of the period of acquisition.

Answer 8

2. May be allocated among periods or accounted for as expenditures when acquired.

In the governmental fund financial statements, prepaid insurance may be reported under either (1) the purchases method, in which an expenditure is reported when the policy is purchased, or (2) the consumption method, in which an expenditure is reported when the asset is consumed.

Question 9

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:

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?

$100
$600
$700
$0

Answer 9

$100

Kir will report a total gain of $100 [($2.06 – $2.05) × 10,000 British pounds] from the forward contract on its year-end income statement.

10,000 × 2.05 = $20,500
10,000 × 2.06 = $20,600
20,600 - 20,500 = $100

Question 10

The government-wide financial statements report purchased capital assets

At historical cost, including other charges.
At acquisition value.
In the general fixed assets account group.
Only in the notes if they are donated.

Answer 10

At historical cost, including other charges.

General capital assets are all capital assets not reported in the proprietary funds or the fiduciary funds. Purchased capital assets are reported at historical cost, including other charges (e.g., for freight and site preparation) only in the governmental activities column of the government-wide statement of net position.

Question 11

Tulip Co. owns 100% of Daisy Co.’s outstanding common stock. Tulip’s cost of goods sold for the year totals $600,000, and Daisy’s cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income?

$940,000
$960,000
$900,000
$1,000,000

Answer 11

$900,000

Tulip’s only adjustment under these facts is to eliminate the COGS recognized by Daisy. Daisy’s COGS attributed to its purchase from Tulip is $100,000. Therefore, the eliminating entry is to reduce consolidated COGS and sales by $100,000. Accordingly, Tulip will report $900,000 (Tulip’s $600,000 COGS + Daisy’s $400,000 COGS – $100,000 intraentity elimination) as cost of goods sold in the consolidated statement of income.

Question 12

A company’s cash-basis net income for the year ended December 31 was $75,000. The following information is from the company’s accounting records:

What is the accrual-basis net income?

$83,500
$75,000
$72,500
$77,500

Answer 12

$77,500

In reconciliation of the accrual-basis net income to the cash-basis net income, (1) the increase (decrease) in current operating liabilities is added to (subtracted from) the accrual-basis net income and (2) the increase (decrease) in current operating assets is subtracted from (added to) accrual-basis net income. Thus, the increase in accounts receivable indicates that cash-basis net income is $5,000 lower than accrual-basis net income. The decrease in prepaid expenses indicates that cash-basis net income is $3,000 higher than accrual-basis net income. The decrease in accrued liabilities indicates that cash-basis net income is $500 lower than accrual-basis net income. Therefore, the accrual-basis net income is $77,500 ($75,000 + $5,000 – $3,000 + $500).

Question 13

Lion Co.’s income statement for its first year of operations shows pretax income of $6,000,000. In addition, the following differences existed between Lion’s tax return and records:

Lion’s current year tax rate is 30% and the enacted rate for future years is 40%. What amount should Lion report as deferred tax expense in its income statement for the year?

$148,000
$104,000
$78,000
$124,000

Answer 13

$104,000

The following deferred tax amounts must be recognized: (1) a taxable temporary difference for an excess of tax depreciation over accounting depreciation ($860,000 – $570,000 = $290,000) and (2) a deductible temporary difference for the excess of credit loss expense over the corresponding tax deduction ($250,000 – $220,000 = $30,000). These differences result in the recognition of a deferred tax liability of $116,000 ($290,000 taxable temporary difference × 40% future rate) and a deferred tax asset of $12,000 ($30,000 deductible temporary difference × 40% future tax rate). Thus, the deferred tax expense is $104,000 [($116,000 deferred tax liability – $0) – ($12,000 deferred tax asset – $0)].

Question 14

Which of the following should be disclosed in a summary of significant accounting policies?

Adequacy of pension plan assets in relation to vested benefits.
Composition of plant assets.
Concentration of credit risk of financial instruments.
Basis of consolidation.

Answer 14

Basis of consolidation.

Accounting policies are the specific principles and the methods of applying them used by the reporting entity. Certain disclosures about policies of business entities are commonly required. These items include the following:

1. Basis of consolidation
2. Depreciation methods
3. Amortization of intangibles
4. Inventory pricing
5. Recognition of revenue from contracts with customers
6. Recognition of revenue from leasing operations

Question 15

A company began developing computer software to be sold as a separate product on January 1, Year 1. During the planning, coding, and testing phases, the company incurred $1,300,000 of costs. On June 30, Year 1, the product was determined to be technologically feasible. The company began producing product masters of the software and incurred an additional $750,000 of costs from July 1, Year 1, through September 30, Year 1. After the software was available for release on October 1, Year 1, the company incurred an additional $275,000 of costs relating to maintenance and customer support. What amount of software-related costs should be capitalized?

$1,300,000
$275,000
$750,000
$2,050,000

Answer 15

$750,000

Costs incurred after technological feasibility is established (coding, testing, producing product masters) are capitalized as computer software costs. Capitalization ends and amortization begins when the product is available for general release. Accordingly, the $750,000 incurred after technological feasibility was established and before the software was available for general release is capitalized.

Question 16

The following information relates to two projects performed by Miley Co. during the year for laboratory research aimed at discovering new knowledge:

What should Miley report as research and development expenses in its income statement for the year?

$150,000
$50,000
$0
$100,000

Answer 16

$150,000

Research and development costs must be expensed as incurred regardless of the likelihood of the future benefits from the project.

Question 17

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

What is the net cash balance after the reconciliation?

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

Answer 17

$53,050

The bank balance is given ($54,200). The procedure is to adjust this amount for reconciling items. The bank balance includes the effects of the NSF check and the service charge. Thus, the reconciling adjustments are for the checks that have not yet cleared the bank and deposits in transit.

The error by Hilltop affects only the reconciliation from its book balance to the true balance.

Question 18

A company with a June 30 fiscal year end entered into a $3,000,000 construction project on April 1 to be completed on September 30. The cumulative construction-in-progress balances at April 30, May 31, and June 30 were $500,000, $800,000, and $1,500,000, respectively. The interest rate on company debt used to finance the construction project was 5% from April 1 through June 30 and 6% from July 1 through September 30. Assuming that the asset is placed into service on October 1, what amount of interest should be capitalized to the project on June 30?

$11,666
$90,000
$18,750
$75,000

Answer 18

$11,666

The calculation must be done with the construction-in-progress expenditure for the month; therefore, the April expenditure is $500,000, the May expenditure is $300,000 ($800,000 – $500,000), and the June expenditure is $700,000 ($1,500,000 – $800,000). Note that this question assumes the entire expenditure for a specific month was done at the beginning of the month.

The interest rate for the year ended June 30 is 5%, so the interest capitalized is $11,666 [$233,333 × 5% (rounded)].

Question 19

A county government has entered into a 2-year lease with a contractor for rental of equipment. The lease contract does not transfer ownership. But it provides each party with an option to extend the agreement for 12 months or to cancel the agreement after 12 months. If the lease is accounted for in a proprietary fund, the county government should

Debit a right-to-use asset and credit a lease liability.
Elect to treat the lease as a long-term lease.
Debit a lease receivable and credit a deferred inflow of resources.
Recognize short-term lease payments as expenses.

Answer 19

Recognize short-term lease payments as expenses.

Question 20

An asset group is being evaluated for an impairment loss. The following financial information is available for the asset group:

What amount of impairment loss, if any, should be recognized?

$15,000,000
$5,000,000
$0
$20,000,000

Answer 20

$20,000,000

The carrying amount of an asset group is not recoverable if it exceeds the sum of the undiscounted future cash flows expected from the use and disposition of the asset group. If the carrying amount is not recoverable, an impairment loss may be recognized equal to the excess of the carrying amount of the asset group over its fair value. Here, the carrying amount of the asset group is not recoverable because its carrying value ($100,000,000) exceeds the sum of its undiscounted cash flows ($95,000,000). Therefore, an impairment loss of $20,000,000 ($100,000,000 carrying value – $80,000,000 fair value) should be recognized.

Question 21

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

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

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

Answer 21

$40,000

Under the indirect method, the net cash flow from operating activities is determined by adjusting the net income for the effect of (1) noncash revenue and expenses that were included in net income, (2) items included in net income whose cash effects relate to investing or financing cash flows, (3) all deferrals of past operating cash flows, and (4) all accruals of expected future operating cash flows. Accordingly, the net cash flows provided by operating activities can be calculated as follows:

Nontrade notes payable is not an operating item. Thus, the increase in nontrade notes payable has no effect on operating cash flows.

Question 22

On January 1, Esther Pharmaceuticals had a balance of 10,000 shares of common stock outstanding. On June 1, the company issued an additional 2,000 shares of common stock for cash. A total of 5,000 shares of cumulative 6%, $100 par, nonconvertible preferred stock was outstanding all year. Esther’s net income was $120,000 for the year. The earnings per share for the year were

$10.00
$8.06
$10.75
$7.50

Answer 22

$8.06

The BEPS numerator consists of income available to common shareholders (net income – cumulative preferred dividends whether or not declared). This amount is $90,000 [$120,000 – (5,000 shares × $100 par × 6%)]. The denominator consists of the weighted-average number of common shares outstanding.

BEPS is therefore $8.06 ($90,000 ÷ 11,167).

Question 23

At the end of Year 1, Boller Co. had an ending balance in allowance for credit losses of $30,000. During Year 2, Boller wrote off $40,000 of accounts receivable. At the end of Year 2, Boller had $300,000 in accounts receivable and determined that 8% of these would be uncollectible. What amount should be reported as credit loss expense on Boller’s Year 2 income statement?

$24,000
$14,000
$64,000
$34,000

Answer 23

$34,000

The Year 2 ending balance for allowance for credit losses is $24,000 ($300,000 × 8%). The write-off of a particular bad debt has no effect on credit loss expense. It is recognized as a decrease in the balance of allowance for credit losses. Therefore, the credit loss expense in Year 2 of $34,000 can be calculated as follows:

Question 24

Janson traded stock in Flax Co. marketable equity securities during Year 1 as follows:

No other transactions took place for Flax during the remainder of the year. At December 31, Year 1, Flax is trading at $10 per share. Janson trades securities on a last in, first out basis. What amount is the net value of the investment in Flax at year end?

$2,500
$2,750
$3,750
$(250)

Answer 24

$2,500

At each balance sheet date, an investment in equity securities that does not result in significant influence or control over the investee is measured at fair value. During the year, Janson purchased 5,000 shares and sold 4,750 shares for an ending balance of 250 shares. At year end, the fair value of each share is $10, so the year-end balance is $2,500 (250 shares × $10 per share).

Question 25

Under East Co.’s accounting system, all insurance premiums paid are debited to prepaid insurance. For interim financial reports, East makes monthly estimated charges to insurance expense with credits to prepaid insurance. Additional information for the year ended December 31, Year 2, is as follows: What was the total amount of insurance premiums paid by East during Year 2? $437,500 $332,500 $455,000 $420,000

Answer 25

$455,000 The company debits prepaid insurance for all insurance premiums paid and credits the account when it charges insurance expense. Thus, total debits equal insurance premiums paid. The asset account had total credits (charges to expense) of $437,500 but increased by $17,500 ($122,500 ending balance – $105,000 beginning balance). Consequently, total debits (premiums paid) must have been $455,000 ($437,500 total charges to insurance expense + $17,500 increase in the asset account).

Question 26

During December of Year 1, Nile Co. incurred special insurance costs but did not record these costs until payment was made during the following year. These insurance costs related to inventory that had been sold by December 31, Year 1. What is the effect of the omission on Nile’s accrued liabilities and retained earnings at December 31, Year 1?

Answer 26

Understated Overstated The insurance is a cost of inventory and theoretically should be accounted for as a product cost. Thus, the entry in Year 1 should have been to debit inventory and credit a liability. The omission of this entry understated accrued liabilities. Given that the related inventory was sold in Year 1, it also overstated net income and retained earnings by understating cost of goods sold. Moreover, the same effects would occur if the insurance costs were chargeable to expense as a period cost.

Question 27

On January 1, Year 1, a company’s new CEO was awarded a $200,000 bonus that would be paid out in two $100,000 installments in Years 3 and 4 of employment, contingent on employment through the year ended December 31, Year 2. What amount should the company expense for this bonus for Years 2 and 3? $200,000 for Year 2 and $0 for Year 3. $100,000 for Year 2 and $0 for Year 3. $100,000 for Year 2 and $100,000 for Year 3. $0 for Year 2 and $100,000 for Year 3.

Answer 27

$100,000 for Year 2 and $0 for Year 3. Employee compensation cost for an award is recognized over the requisite service period, during which the CEO must perform services. The CEO’s bonus takes 2 years to vest, so the company recognizes a $100,000 expense in Year 1 and Year 2. The payment of the liability is irrelevant to the company’s expense.

Question 28

Flat Rock college is a not-for-profit entity. It assessed its students $5,000,000 for tuition and fees. Flat Rock also provided $120,000 for scholarships, $80,000 for fellowships, and $100,000 for tuition waivers. What should Flat Rock report as its total revenue from tuition and fees? $5,300,000 $5,000,000 $4,900,000 $4,700,000

Answer 28

$5,000,000 The gross (total) amounts of revenues and expenses from the NFP’s ongoing major or central operations are reported. Accordingly, the full amount of the tuition and fees assessed is reported as revenue.

Question 29

On January 1, Year 1, Boston Group issued $100,000 par value, 5% 5-year bonds when the market rate of interest was 8%. Interest is payable annually on December 31. The following present value information is available: What amount is the value of net bonds payable at the end of Year 1? $90,064 $88,022 $100,000 $110,638

Answer 29

$90,064 On January 1, Year 1, the bonds were issued at $88,022 [($5,000 annuity payment × 3.99271 present value of an 8% annuity) + ($100,000 bond repayment × .68058 present value of $1 at 8%)], which is at an $11,978 discount ($100,000 – $88,022). The interest expense in the first year is $7,042 ($88,022 × 8%), and the coupon payment is $5,000. This means $2,042 ($7,042 – $5,000) of the value of the discount is amortized in Year 1. Therefore, the value of the net bonds payable at the end of Year 1 is $90,064 ($88,022 + $2,042).

Question 30

The amount recorded initially by the lessee as a lease liability should normally 1. Exceed the present value of the lease payments at the beginning of the lease. 2. Equal the present value of the lease payments at the beginning of the lease. 3. Equal the total of the lease payments. 4. Exceed the total of the lease payments.

Answer 30

2. Equal the present value of the lease payments at the beginning of the lease. The lessee records a lease as an asset and a liability at the present value of the lease payments. The discount rate is the lessor’s implicit interest rate (if known) or the lessee’s incremental borrowing rate of interest. Lease payments include the rental payments required during the lease term and the amount of a purchase option if the lessee is reasonably certain to exercise it. If no such option exists, the lease payments equal the sum of (1) the rental payments, (2) the amount of residual value guaranteed by the lessee, and (3) any nonrenewal penalty imposed.

Question 31

A company incurred the following costs to complete a business combination in the current year: What amount should be reported as current-year expenses, not subject to amortization? $36,000 $1,000 $66,000 $11,000

Answer 31

$11,000 Direct acquisition-related costs, such as finder’s fees, professional and consulting fees, and general administrative costs, are expensed as incurred. Debt issue costs are recognized in the balance sheet as a direct deduction from the carrying amount of the debt and amortized over the life of the debt using the interest method.

Question 32

Clear Co.’s trial balance has the following selected accounts: What amount should Clear report as total current assets in its balance sheet? $74,000 $72,000 $64,000 $67,000

Answer 32

$64,000 The total of current assets is $64,000 ($40,000 unrestricted cash + $15,000 current receivables carrying amount + $7,000 merchandise inventory + $2,000 investment in trading debt securities).

Question 33

Posy Corp. acquired treasury shares at an amount greater than their par value but less than their original issue price. Compared with the cost method of accounting for treasury stock, does the par-value method report a greater amount for additional paid-in capital and a greater amount for retained earnings?

Answer 33

No No Under the cost method, the purchase of treasury stock (debit treasury stock, credit cash) has no effect on additional paid-in capital and retained earnings. Under the par-value method, given that the acquisition cost is greater than par but less than the original issue price, treasury stock is debited at par, and the additional paid-in capital associated with the original issue is also debited. Cash and paid-in capital from treasury stock transactions are credited. Hence, the par-value method does not report a greater amount for additional paid-in capital or retained earnings.