MSQs part 2

Question 1

Where to record remeasurement method gain & loss?

Answer 1

The remeasurement method is used to convert the fin stmt of a subsidiary from FOREING (local) currency to the FUNCTIONAL currency. The starting point is the B/S and any GAIN/LOSS is recorded on the I/S.

Question 2

Where to record translation method gain & loss?

Answer 2

The translation method is used to convert the fin stmt of a subsidiary from the FUNCIOTNARY CURRENCY to the REPORTING Currency. The starting point is the I/S and any gains/losses is recorded in the other COMPREHENSIVE INCOME (OCI).

Question 3

Birk purchased 30% of Sled’s outstanding common shares on Dec 31 for $200K. Sled stockholders equity was $500k and FV was $600k. what is the amount of goodwill should Birk record during this acquisition

Answer 3

$20k. Since investment between 20% AND 50% and assume investor significant influence, equity method used. Goodwill is difference between $200k and FV of 30%*$600k = $180. So goodwill = $20k.

Question 4

Will element of changes in equity such as “dividends paid to stockholders” will be included in COMPREHENSIVE INCOME?

Answer 4

NO. Comprehensive include all changes in equity during a period except those resulting from owner investment and distribution to owners.

Question 5

The 10-year bond was issued at 96 and fully redeemed at 102 three years later? Will it be gain or loss and where to recorded it?

Answer 5

IT WILL BE LOSS!

The issuer is paying 102 to remove liability that three years after issuance is valued somewhere between 96 and 100.

Question 6

Under the other comprehensive basis of accounting(OCBOA) which financial statement can not be used?

Answer 6

OCBOA can not use ACCRUAL basis financial stmt. Example: Stmt of financial position.

Question 7

A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date?
A. A debit to the unamortized bond premium.
B. An interest expense that is less than the cash payment made to bondholders.

C. An interest expense that is greater than the cash payment made to bondholders.

D. A debit to the unamortized bond discount.

Answer 7

A. Correct!
Because the stated rate (coupon) of interest is less than the effective rate this bond is issued at a DISCOUNT. When the 1st pmt is made, the discount is amortized. The discount amortization will increase interest expense for the period so that interest expense exceeds the intr pmt to bondholders.

Question 8

Ina Co. had the following beginning and ending balances in its prepaid expense and accrued liabilities accounts for the current year:

Prepaid Expenses Accrued Liabilities

Beginning balance $ 5,000 $ 8,000

Ending balance 10,000 20,000

Debits to operating expenses totaled $100,000. What amount did Ina pay for operating expenses during the current year?

Answer 8

The starting point for this question is Operating Expenses $100,000.

Prepaid expenses increased by $5,000. What does this mean? We debit prepaid expenses $5,000, and credit cash $5,000. How does this affect operating expenses? Well, this journal entry was not recognized in operating expenses because it isn’t an expense yet. However, it DOES affect cash, because we DID pay cash, to the insurance company for prepaid insurance or whatever. Therefore, we spent $5,000 more cash than our operating expenses claim we did. ADD $5,000 to operating expenses.

Accrued liabilities increased by $12,000 during the year. What does this mean? We debited an expense for $12,000 and we credited accrued liabilities for $12,000. How does this affect operating expenses? Well, this journal entry was recognized in operating expenses. However, it DID NOT affect cash, because we DID NOT pay cash for it yet. We’ve simply incurred an expense over the period that we’re going to get around to, just not right now. So we have $12,000 in operating expenses that did not require cash. Therefore, we spent $12,000 less than our operating expense claims we did. SUBTRACT $12,000.

$100,000

+ 5,000

– 12,000

= $93,000

Question 9

Total spent on project during Y3 was $250k, spent uniformly during the year. To pay for construction, $200k was borrowed @10% on Jan 1, Y3 . Another outstanding debt was $150k, 10 years, 7% note payable dated Jan1, Y1. How much interest should be capitalized by the comp during Y3?

Answer 9

Part 1. Avoidable interest.
Total exp $250k /2 =$125k AVERAGE ACCUMULATED EXPENDITURES. (Since int accum from Jan 1, assume it was $0 (beginning) and by Dec. 31 it was $250 (ending), so average will be (0+250)/2 =$125k. Interest exp $125*10% = $12,500.
Part2. Actual interest:
$200k*10%=$20k
$150k*7%=$10.5k
Total $30,5k>$12.5k avoidable interest.
CAPITALIZE the LOWEST AMOUNT!!!

Question 10

What is it mean each partner will be credited on the basis of weighted average capital balances? Interest rate is 10%.

Answer 10

Each transaction of capital account (such as balance before and after additions, withdrawal) multiply by months.
Bal Jan 1 = $140* 6months=$840
Additional invst Jul 1 $40
Balance Jul1 $180*1 = $180
Withdrawal $15k on Aug 31
Balance Aug 31 $165* 5months=$825
Total $1.845 mil /12 months =$152,750.
Interest credited $153750*0.1=$15,375.

Question 11

In exchange of nonmonetary assets that lacks commercial substance: how to record boot?

Answer 11

If boot is PAID, all realized losses are fully recognized. In ANY exchange, losses are full recognized due to me Principle of Conservatism.
If boot is RECEIVED, realized gains are at least partially recognized.

Question 12

At the beg of Y1 company hired an executive whose contract included the promise of payment of $100k in Y6, Y7, & Y8, if he is still employed at the end of Y5. How should the compensation expense associated with this contract?

Answer 12

Future benefits relates to a period of service greater than 1 year, so total compensation $300k would be expensed over 5 years at $60k per year (from Y1-Y5).

Question 13

Property taxes and fines represent which type of non-exchange transaction for governmental units?

1. Derived taxes revenue
2. Government-mandated non-exchange transactions
3. Voluntary non-exchange transitions
4. Imposed non-exchange revenues.

Answer 13

Imposed non-exchange revenues.

Question 14

Bee Co. uses the direct write-off method to account for uncollectible accounts receivable. During an accounting period, Bee’s cash collections from customers equal sales adjusted for the addition or deduction of the following amounts:

1. Accounts Written-Off Increase in Accounts
2. Receivable Balance
   a. Deduction. Deduction
   b. Addition. Deduction
   c. Addition. Addition
   d. Deduction. Addition

Answer 14

Under Cirect write-off method , w-offs directly credited to AR – No allowance account is used. Use following formula:
Increase in AR = Sales – Cash Collected – W-off’s =>
Cash Collected = Sales – Increase in AR – W-off’s

ANSWER: Deducted under Write off & Deducted under Increase in AR Balance.

CASH COLLECTED= Sales - acc rec - write offs = cash!!!!

Question 15

The statistical section of the CAF report of a governmental unit is not part of the basic fin. stmt. Is it true or not?

Answer 15

TRUE. CAFR has 3 sections: Intro, basic fin stmt with other requirement supplementary information mandated by GASB 34, and statistical section. The stat. sec. is not part of the basic fin stmt.

Question 16

On January 1, 20X8, Parker Inc. acquired 30% of Smith Inc.’s outstanding common stock for $400,000. During 20X8, Smith had net income of $100,000 and paid dividends of $30,000. On January 1, 20X9, Parker acquired an additional 45% interest on Smith for $1,012,000. The fair value of Smith on January 1, 20X9 was $2,250,000. What amount of gain from this transaction will Parker record in 20X9?
a.$0 b.$254,000 c.$275,000 d.$675,000

Answer 16

1/1/Y1 Purchase 30% for $400,000

12/31/Y1 Add 30% of Income (30,000) and subtract 30% of Dividends (9,000) per EQUITY METHOD

This values their investment at $421,000 on 12/31/08 for 30%.

If they purchase another 45% on 1/1/Y2 for $1,012,500.
Adjust the beginning balance of $421k to carrying amount of $675k ($2,250,000*30%). In order to make adjustment, add $254k ($675-$421k). The FV adjustment is recognized as a GAIN ($254k) or loss by investor in the period of the additional acquisition Y2.

Question 17

The current exchange is $1.59 U.S. dollars per British pound. If a retailer in Great Britain were to quote the exchange rate using the direct method, he would say:

a. 0.63 US are equal to 1 British pound
b. 1 British pound is equal to 1.59 US
c. 1 US dollar is equal to 1.59 British pounds.
d. 0.63 British pounds are equal to 1 US

Answer 17

D.
Direct method - the domestic price of 1 unit of another currency. For retailer, the domestic currency is the British pound. So the appropriate quote will be 0.63 British pounds cost of 1 US dollar.

Question 18

Ace Co. sold to King Co. a $20,000, 8% 5-year note that required five equal annual year-end payments. This note was discounted to yield a 9% rate to King. The present value factors of an ordinary annuity of $1 for five periods are as follows:

8% 3.992

9% 3.890

What should be the total interest revenue earned by King on this note?

a. $5,050
b. $5,560
c. $8,000
d. $9,000

Answer 18

Step1: Ace has a note receivable for $20k , 8% intr, which will be paid back in 5 pmt. PV of 8% ordinary annuity is 3.992.
Ace will receive back 5 pmt (20k/3.992=$5,010 per year)

Step2: Ace sell the note to King. Thus Kind will receive 5 pmt of $5010 per year.
King will not pay $20k for this note because is discounted for 9% (like a bond).
PV of the note for King is Annual payment * Factor ;
PV=5010*3.890=$19,489

The diff how much King pay for note $25,050 (5010*5)- amount receive in five payments (19,489) is interest (5560).

Question 19

Inventory Turnover formula

Answer 19

COGS/Average inventory;

Beg Inv + Purchases - End Inventory = COGS

Question 20

Which of the following is a key difference in a defined benefit plan vs a defined contribution plan?

1. The accounting for a defined contribution plan includes reporting pension expense
2. The accounting for a defined benefit plan is significantly more complicated than for a defined contribution plan
3. The accounting for a defined contribution plan is significantly more complicated than for a defined benefit plan
4. The accounting for a defined contribution plan includes calculating the fair value of plan assets

Answer 20

2. The accounting for a defined benefit plan is significantly more complicated than for a defined contribution plan.

A defined contribution plan is very simple compared to a defined benefit plan. A defined contribution plan simply involves the employer making a defined contribution to an employee’s investment account, with no guarantee as to the amount of benefits during retirement.

A defined benefit plan involves the employer guaranteeing a set amount to the employee during retirement, so the employer bears the actuarial risk and investment risk of making sure they have the resources to provide the benefits when the employee retires. The accounting involves tracking the projected benefit obligation (PBO – what is the present value of all these future payouts?), the fair value of plan assets (what’s the value of the assets we have to cover the PBO?), and then the pension expense each period (service costs, interest costs, gains/losses on investments, etc).

Question 21

Falton Co. had the following first-year amounts related to its $9,000,000 construction contract:

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

What amount should Falton recognize as a current liability at year-end, if revenue is recognized over time?

Answer 21

At year-end, Falton should record an account receivable of $300,000 (1,800,000 - 1,500,000) and inventory of $2,000,000. However, no current liability exists.

Journal entries:

Construction in Progress 2,250,000
Cash and profit 2,250,000
Accounts Receivable 1,800,000
Progress Billings 1,800,000
Cash 1,500,000
Accounts Receivable 1,500,000

Question 22

Bex Inc. Issues a 7% coupon, $ 100,000 bond maturing in 10 years. The bond pays interest semiannually and market rates at the time of issuance are 8%.

PV of $1 at 7% for 10 periods 0.5083

PV of $1 at 8% for 10 periods 0.4632

PV of $1 at 3.5% for 20 periods 0.5026

PV of an annuity of $1 at 7% for 10 periods 7.0236

PV of an annuity of $1 at 8% for 10 periods 6.7101

PV of an annuity of $1 at 3.5 % for 20 periods 14.2124

PV of an annuity of $1 at 4 % for 20 periods 15.5903

Using the factor table above, what is the appropriate discount/premium amount at bond issuance?

• $ 6,710
• $ 6,795
• $ 7020
• $ 7110

Answer 22

Step 1. Coupon pmt is $100,0007%0.5 = $3,500.
PV interest over the life of the bond $3500*13.5903=$47,566

Step 2 PV of the principal to be paid back to at maturity: $100,000*0.4564=$45,640.

SO USE MARKET RATES 8%/2=4% since its pmt seminally.
PERIODS = 10 years *2 =20 periods

Total amount $93,206. And Discount will be $100k -$93,206= $6,794.00

Question 23

Ratio days sales in accounting receivable?

Answer 23

Ending AR(net)/ (Sales(net)/365)= 
700/ (3000/365))=85.2 days

Question 24

The following stock dividends were declared and distributed by Sol Corp.:

Percentage of Common Shares Outstanding at Declaration Date: 10
Fair Value: $15,000
Par Value: $10,000

Percentage of Common Shares Outstanding at Declaration Date: 28
Fair Value: $40,000
Par Value: $30,800

What aggregate amount should be debited to retained earnings for these stock dividends?

Answer 24

$45,800

A stock dividend in which the number of shares issued is fewer than 20 to 25% of those outstanding is recorded as a debit to retained earnings for the fair value of the stock issued and a credit to the capital stock accounts. A split-up effected in the form of a stock dividend, that is, a share distribution that is greater than 20 to 25% of the outstanding shares, requires a debit to retained earnings at least equal to the legal requirement in the state of incorporation (usually the par value of the shares). Thus, the aggregate amount debited to retained earnings is $45,800 ($15,000 fair value of the 10% dividend + $30,800 par value of the 28% dividend).

Question 25

On January 1 of the current year, Lean Co. made an investment of $10,000. The following is the present value of $1.00 discounted at a 10% interest rate:

Periods Present value of $1.00 discounted at 10%
1 .909
2 .826
3 .751

What amount of cash will Lean accumulate in two years?​

A. $16,250
B. $12,000

C. $27,002

D. $12,107

Answer 25

The requirement is to determine the amount of cash that will be accumulated by Lean in two years. Normally, FV factors would be used to work this problem. Because PV factors are the only information given, the formula, PV amount equals the PV factor times the future amount, must be used. Let x= the future value. Substituting into this formula, 10,000 = .826(x). Solving forx, the future value is $12,107

Question 26

Roth, Inc. received from a customer a one-year, $500,000 note bearing annual interest of 8%. After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash did Roth receive from the bank?

a. $523,810

b.
$540,000

c.
$495,238

d.
$513,000

Answer 26

$500,000 x 8% = $40,000

540,000 x 5% (10% x 1/2 year) = ($27,000)

540,000 - 27,000 = $513,000

Question 27

A balance arising from the translation or remeasurement of
a subsidiary’s foreign currency financial statements is reported in
the consolidated income statement when the subsidiary’s functional
currency is the:

Foreign currency: YES OR NO
Reporting Currency:
YES OR NO

Answer 27

Foreign Currency - NO (b) Translation adjustments result from translating an
entity�s financial statements into the reporting currency. Such
adjustments, which result when the entity�s functional currency is
the foreign currency, should not be included in net income.
Instead, such adjustments should be reported as other comprehensive
income and accumulated other comprehensive income
in the stockholders� equity section of the balance sheet.
REPORTING CURRENCY - YES. If the
functional currency is the reporting currency (US dollar), a
remeasurement process takes place, with the resulting gain or
loss included in net income.