module4 Flashcards
2
MCQ-00445
Application
In its Year 2 financial statements, Cris Co. reported interest expense of $85,000 in its income statement and cash paid for interest of $68,000 in its cash flow statement. There was no prepaid interest or interest capitalization either at the beginning or end of Year 2. Accrued interest at December 31, Year 1, was $15,000. What amount should Cris report as accrued interest payable in its December 31, Year 2 balance sheet?
A. $15,000 B. $17,000 C. $32,000 D. $2,000
Accrued
Interest
Payable
Beg bal 12/31/Year 1
15,000
Add: interest expense
85,000
Subtotal
100,000
Less: interest paid
(68,000)
Ending balance 12/31/Year 2
32,000
Choice “C” is correct, $32,000 accrued interest payable at Dec. 31, Year 2.
Black Corp.’s accounts payable at December 31 Year 1, totaled $900,000 before any necessary year-end adjustments relating to the following transactions:
On December 27, Year 1, Black wrote and recorded checks to creditors totaling $400,000 causing an overdraft of $100,000 in Black’s bank account at December 31, Year 1. The checks were mailed out on January 10, Year 2.
On December 28, Year 1, Black purchased and received goods for $153,061, terms 2/10, n/30. Black records purchases and accounts payable at net amounts. The invoice was recorded and paid January 3, Year 2.
Goods shipped F.O.B. destination on December 20, Year 1 from a vendor to Black were received January 2, Year 2. The invoice cost was $65,000.
At December 31, Year 1, what amount should Black report as total accounts payable?
A. $1,153,061 B. $1,450,000 C. $1,515,000 D. $1,053,061
Choice “B” is correct. $1,450,000 accounts payable at 12/31/Year 1.
Accounts
Payable
Balance per books before y/e adjustments
900,000
Add: Checks written on 12/27/Year 1 (which
reduced A/P) but not mailed until 1/10/Year 2
400,000
Add: Goods received 12/28/Year 1 but not
recorded until 1/3/Year 2 at amount net of
2% discount ($153,061 x 98%)
150,000
No entry for goods shipped FOB destination on
12/20/Year 1 but not received until 1/2/Year 2
0
Total accounts payable at 12/31/Year 1
1,450,000
At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?
A. $100,000 B. $95,000 C. $50,000 D. $10,000
Choice “D” is correct. Accretion expense is the increase in the ARO liability due to the passage of time. The credit adjusted interest rate is used to calculate the ARO, as follows:
Beginning ARO × Risk-adjusted rate = $100,000 × 10% = $10,000
Choice “A” is incorrect. Accretion expense is not equal to the asset retirement obligation. Accretion expense is the increase in the ARO liability due to the passage of time. Accretion expense is beginning asset retirement obligation times the appropriate accretion rate, in this case the credit-adjusted rate.
Choice “B” is incorrect. Accretion expense is not equal to the ending carrying value of the asset times the risk-adjusted rate. Accretion expense is the increase in the ARO liability due to the passage of time. Accretion expense is beginning asset retirement obligation times the appropriate accretion rate, in this case the credit-adjusted rate.
Choice “C” is incorrect. Accretion expense is not equal to the carrying value of the asset times the risk-free rate. Accretion expense is the increase in the ARO liability due to the passage of time. Accretion expense is beginning asset retirement obligation times the appropriate accretion rate, in this case the credit-adjusted rate
9
MCQ-00361
Application
At December 31, Year 1, Cain, Inc. owed notes payable of $1,750,000, due on May 15, Year 2. Cain expects to retire this debt with proceeds from the sale of 100,000 shares of its common stock. The stock was sold for $15 per share on March 10, Year 2, prior to the issuance of the year-end financial statements. In Cain’s December 31, Year 1, balance sheet, what amount of the notes payable should be excluded from current liabilities?
A. $1,750,000 B. $1,500,000 C. $250,000 D. $0
Choice “B” is correct. $1,500,000 should be excluded from current liabilities because 100,000 shares of common stock were sold at $15 per share. The remaining $250,000 should be included in current liabilities because current assets will be used to pay off the balance.
Rule: Long-term debt that matures within one year should be classified as a current liability, unless retirement is to be accomplished with other than current assets.
A company recorded a decommissioning liability and recognized the amount recorded as part of the cost of the related property. After the property was fully depreciated, the decommissioning liability was reviewed and adjusted. How should this change in the decommissioning liability be recognized?
A. The change in the liability is recognized as a change in the carrying amount of the property if the liability increases but is otherwise recognized in profit or loss. B. The change in the liability is recognized in other comprehensive income. C. The change in the decommissioning liability is not recognized until it is settled. D. The change in the liability is recognized in profit or loss.
Choice “D” is correct. Any change in the value of the liability after the property has been fully depreciated will be recognized in profit or loss.
Choice “A” is incorrect. The change in the liability will be booked as profit/loss regardless of whether it increases or decreases.
Choice “B” is incorrect. The change in the liability should be booked as a profit/loss on the income statement rather than going into other comprehensive income on the balance sheet.
Choice “C” is incorrect. The change is recognized when the liability is reviewed and adjusted rather than only at settlement.
As of December 1, Year 2 a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 three-year balloon note. The company has no other liabilities. How should the company’s debt be presented in its classified balance sheet on December 31, Year 2 if no debt repayments were made in December?
A. Current liabilities of $400,000; long-term liabilities of $900,000. B. Current liabilities of $1,000,000; long-term liabilities of $1,050,000. C. Current liabilities of $500,000; long-term liabilities of $800,000. D. Current liabilities of $500,000; long-term liabilities of $1,550,000.
Choice “A” is correct. The current liabilities ($400,000) consist of the $250,000 draw on the line of credit due within one year and $150,000 (1/5 of the $750,000), which represents the portion of the secured note due within the next year. The long-term liabilities are $900,000, which consist of the four remaining installments of the secured note, which is $600,000 (4 × $150,000) plus the $300,000 three-year balloon note.
Choice “B” is incorrect. Only the portion which has been drawn off the line of credit will be reported as a liability on the balance sheet. Furthermore, the portion of the secured note due within one year, $150,000 ($750,000 / 5), will be reported as a current liability and not a long-term liability.
Choices “D” and “C” are incorrect based on the above explanations.
On March 1, Year 1, Fine Co. borrowed $10,000 and signed a two-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, Year 3. What amount should Fine report as a liability for accrued interest at December 31, Year 2?
A. $1,200 B. $0 C. $2,320 D. $1,000
Explanation
Choice “C” is correct.
12%, 2-yr note payable
10,000
Year 1 interest expense [12% x $10,000 x 10/12]
1,000
Year 1 net liability
11,000
Year 2 interest expense = [12% x $11,000]
1,320
Accrued interest payable at 12/31/Year 2 equals $2,320 [$1,000 + $1,320]
Choice “A” is incorrect. This is simple interest on the original note [12% x $10,000] for one year and is not the accrued interest payable balance.
Choice “B” is incorrect. Accrued interest must be recognized and recorded during the term of the note.
Choice “D” is incorrect. Year 1 accrued interest equals $1,000 [$10,000 x 12% x 10/12].
The following information pertains to Dash Co.’s utility bills:
Period covered Amount Date paid
April 16–May 15 $5,000 June 1
May 16–June 15 $6,000 July 1
June 16–July 15 $8,000 August 1
What is the amount that Dash should report as a liability in its June 30 balance sheet?
A. $10,000 B. $7,000 C. $6,000 D. $14,000
Choice “A” is correct. The liability amount that should be reflected on the June 30 balance sheet will represent all amounts that are owed as of June 30 that have not been paid out yet. So for each of the three utility bills:
$5,000 for the period April 16–May 15 was already paid June 1, so no liability is needed.
$6,000 to be paid July 1 for the period May 16–June 15. Because this covers a time period that occurred prior to June 30, and the payment won’t be made until July 1, this entire $6,000 needs to be reflected as a liability.
$8,000 to be paid August 1 for the period June 16–July 15. As of June 30, only half of this period has occurred (June 16–June 30). The liability on June 30 should reflect ½ of this total cost, or $4,000.
$6,000 + $4,000 = $10,000 on the June 30 balance sheet.
Choice “B” is incorrect. This choice incorrectly averages the most recent two bills.
Choice “C” is incorrect. This choice does not account for the ½ of the $8,000 amount to be paid August 1 that covers the June utilities costs.
Choice “D” is incorrect. The portion of the $8,000 bill covering July 1–July 15 should not be reflected as a liability on the June 30 balance sheet.
Zach Corp. pays commissions to its sales staff at the rate of 3% of net sales. Sales staff are not paid salaries but are given monthly advances of $15,000. Advances are charged to commission expense, and reconciliations against commissions are prepared quarterly. Net sales for the year ended March 31 were $15,000,000. The unadjusted balance in the commissions expense account on March 31 was $400,000. March advances were paid on April 3. In its income statement for the year ended March 31 what amount should Zach report as commission expense?
A. $400,000 B. $465,000 C. $415,000 D. $450,000
Choice “D” is correct. The commission expense is 3% of net sales of $15,000,000, or $450,000. An adjustment would be required on March 31 to bring the expense to this amount.
Choice “A” is incorrect. The unadjusted balance in the commissions expense account is not the amount reported as commission expense. Net sales for the period must be considered.
Choice “B” is incorrect. Advances should not be considered as expenses at year-end. Charging an expense subject to adjustment is permitted, but Zach should adjust the expense to 3% of net sales of $15,000,000.
Choice “C” is incorrect. Advances should not be considered as expenses at year-end. Charging an expense subject to adjustment is permitted, but Zach should adjust the expense to 3% of net sales of $15,000,000.
An entity, upon initial recognition of an asset retirement obligation, should not take which of the following actions?
A. Capitalize the asset retirement cost by increasing the carrying amount of the related asset. B. Measure the asset retirement cost at fair value. C. Capitalize the asset retirement cost at its undiscounted cash flow value. D. Allocate asset retirement cost to expense over the useful life of the related asset.
Choice “C” is correct. When an asset retirement obligation exists, the entity should record an asset retirement cost (ARC) which increases the carrying value of the long-lived asset as well as an asset retirement obligation (ARO), which is the liability recorded on the balance sheet related to the retirement. The amount recorded to both the asset and liability will be equal to the fair value of the asset retirement obligation (which is determined by discounting the future cash flows required). The ARC will be depreciated over the useful life of the related asset while the ARO will be “accreted” based on the relevant accretion rate.
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?
A. $66,000 B. $90,000 C. $60,000 D. $36,000
Explanation
Choice “C” is correct. $60,000 bonus.
Step 1 - Determine pre-tax income
After tax income
-
$360,000 (after bonus & income tax)
Pre-tax income
-
$360,000 ÷ 60%
Pre-tax income
-
$600,000 after deduction for bonus
Step 2 - Determine bonus
Bonus
=
Pre-tax income after deduction for bonus x 10%
Bonus
=
$600,000 x 10%
Bonus
=
$60,000
On October 1, Year 1, Gold Co. borrowed $900,000 to be repaid in three equal, annual installments. The note payable bears interest at 5% annually. Gold paid the first installment of $300,000 plus interest on September 30, Year 2. What amount should Gold report as a current liability on December 31, Year 2?
A. $307,500 B. $303,750 C. $300,000 D. $330,000
Choice “A” is correct. On December 31, Year 2, Gold Co. should report a current liability related to the principal of the note which will be paid within the next year and the accrued interest at December 31st. Current liabilities associated with the note include the following: $300,000 note payable plus $7,500 of interest payable = $307,500. The interest is calculated as follows: Remaining note payable at December 31, Year 2 of $600,000 x 5% = $30,000 (this represents interest for 12 months). When $30,000 of interest is divided by 12 months, we get $2,500 per month. Interest is accrued for the months of October, November, and December. 3 x $2,500 = $7,500.
Choices “D”, “B”, and “C” are incorrect. They do not correctly accrue the three months of interest that should be recorded as an adjusting entry on December 31, Year 2. The interest will not be paid until September 30, Year 3. However, because of the matching principle, the interest related to Year 2 must be accrued during Year 2.
Paisley Incorporated borrowed $2,000,000 from State Bank on March 1, Year 1, at a rate of 6 percent. According to the loan agreement, Paisley must make principal payments of $200,000 plus appropriate interest payments every March 1 until the loan balance is paid off. Paisley has made timely principal and interest payments since the loan began. The interest payable balance to report in the December 31, Year 3, balance sheet should total:
A. $98,000 B. $100,000 C. $96,000 D. $80,000
Choice “D” is correct. Principal and interest payments were made March 1, Year 2, and March 1, Year 3. From March 1 to December 31, Year 3, the remaining loan balance totals $1,600,000 ($2,000,000 – $200,000 paid 3/1; Year 2 – $200,000 paid 3/1, Year 3). Interest must be accrued on that amount, but only for the months where interest has not been paid in cash (March to December): $1,600,000 × 6% × 10/12 = $80,000.
Choice “A” is incorrect. $98,000 is the interest revenue for Year 3: Two months of interest on $1,800,000 outstanding loan balance ($18,000) and 10 months of interest on $1,600,000 outstanding loan balance ($80,000). The $18,000 has already been paid in cash.
Choice “B” is incorrect. The interest payable is calculated on the outstanding principal at December 31, Year 3. At that date, the outstanding principal is $1,600,000, not $2,000,000.
Choice “C” is incorrect. Interest payable as of December 31, Year 3, is calculated for 10 months (because of the last cash interest and principal payment), not 12 months.
During the current year, Casual Wear Co. had total retail sales of $800,000 and collected a 5 percent state sales tax on all sales. At the end of the prior year, Casual Wear had $4,500 in sales taxes that had not been remitted to the state authorities. During the current year, Casual Wear remitted $39,500 in state sales tax. What amount should be recorded in Casual Wear’s current year financial statements?
A. $840,000 in sales revenue. B. $40,000 in sales tax revenue. C. $5,000 in sales tax payable. D. $39,500 in sales tax expense.
Explanation
Choice “C” is correct. The beginning balance in sales tax payable totaled 4,500. Sales tax is collected from the consumer by a company and recorded to a liability account before it is remitted to the government. The current year increase to sales tax payable totaled $40,000 ($800,000 × 5%) as a result of the following journal entry:
Debit (Dr) Credit (Cr)
Cash
840,000
Sales revenue
800,000
Sales tax payable
40,000
The balance paid in cash during the year totaled $39,500, which results in a reduction to sales tax payable.
Sales Tax Payable
|
4,500
39,500 |
40,000
|
?
Based on the activity in the account, the calculated liability remaining at year-end totals $5,000.
Choice “A” is incorrect. Sales tax is collected from the consumer by a company and recorded to a liability account before it is remitted to the government. It is not sales revenue of the collecting company.
Choice “B” is incorrect. Sales tax is collected from the consumer by a company and recorded to a liability account before it is remitted to the government. It is not revenue of the collecting company.
Choice “D” is incorrect. Sales tax is collected from the consumer by a company and recorded to a liability account before it is remitted to the government. It is not an expense of the collecting company.
Which of the following is a cost associated with exit and disposal activities?
A. Costs to terminate a capital lease. B. Costs associated with the retirement of a fixed asset. C. Costs to relocate employees. D. Benefits related to voluntary employee termination.
Choice “C” is correct. Costs to relocate employees are costs associated with exit and disposal activities.
Choice “A” is incorrect. Exit and disposal activities include costs to terminate a contract that is not a capital lease. Capital lease termination costs are accounted for separately from exit and disposal activities.
Choice “B” is incorrect. The cost of retiring a fixed asset is not considered an exit or disposal cost.
Choice “D” is incorrect. Exit and disposal activities include benefits related to involuntary (not voluntary) employee termination.