NINJA MCQ - Comprehensive

Question 1

In accordance with FASB ASC 860-30, debtors sometimes grant a security interest in assets to secured party lenders. When this happens, the debtor should:

Answer 1

reclassify the asset(s) and report it separately on the balance sheet.

Question 2

In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:

Answer 2

of the environment in which the subsidiary primarily generates and expends cash.

Question 3

Which of the following is the characteristic of a perfect hedge?

Answer 3

No possibility of future gain or loss

Question 4

How is basic EPS calculated?

Answer 4

Basic earnings per share (EPS) is net income divided by weighted-average common stock outstanding (WACSO). Net income must be reduced by preferred cumulative dividends.

Question 5

During the year, Hauser Co. wrote off a customer’s account receivable. Hauser used the allowance method for uncollectable accounts. What impact would the write-off have on net income and total assets?

Answer 5

Net income: No effect; Total assets: No effect

Question 6

On January 1, 20X1, Prim, Inc., acquired all the outstanding common shares of Scarp, Inc., for cash equal to the book value of the stock. The carrying amounts of Scarp’s assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. The combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). In preparing Prim’s 20X1 consolidated income statement, which of the following adjustments would be made?

Answer 6

Depreciation expense would be decreased and goodwill impairment would be assessed.

Question 7

How should state appropriations to a state university choosing to report as engaged only in business-type activities be reported in its statement of revenues, expenses, and changes in net position?

Answer 7

Nonoperating revenues

Question 8

Are companies required to accrue a liability for nonvesting accumulating rights to receive sick pay benefits?

Answer 8

No, since the rights are nonvesting they are not required to be accrued.

Question 9

Fixed assets donated to a governmental unit should be recorded:

Answer 9

At estimated fair value when received.

Question 10

Cash receipts from grants and subsidies to decrease operating deficits should be classified in which of the following sections of the statement of cash flows for governmental not-for-profit entities?

Answer 10

Noncapital financing

Question 11

Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance?

Answer 11

It recognizes gains and losses immediately.

Question 12

How are defined benefit pension plan balances reported on the balance sheet if underfunded? Overfunded?

Answer 12

If underfunded, the plan asset will be less than the projected benefits, so the difference between the asset and the projected benefits is reported as a liability. If overfunded, the asset will be more than then projected benefits,s o the difference is reported as an asset.

Question 13

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the:

Answer 13

Face value of the bonds at the beginning of the period by the contractual interest rate.

Interest expense for the period is the carrying value times the effective rate. Multiplying the face value of the bonds at the beginning of the period by the effective interest rates, or multiplying the carrying value of the bonds at the beginning of the period by the contractual interest rate have no accounting use per se.

Question 14

Which of the following would be reported as program revenues on a local government’s government-wide statement of activities?

Answer 14

Charges for services

Charges for services are always program revenues. Taxes are always general revenues, even if restricted to a particular program.

Question 15

Which of the following best describes a situation in which an unconditional contribution should be recognized as revenue by a private not-for-profit organization?

Answer 15

In the period received at fair value

Question 16

A town’s fund financial statements are prepared following major fund reporting requirements, and combining fund statements detailing nonmajor funds are also provided. In reviewing the comprehensive annual financial report, you notice that all the internal service funds were combined and reported in a single column in the basic financial statements. The combining financial statements for internal service funds included a column for each of the town’s four internal service funds. The explanation of this presentation is:

Answer 16

major fund reporting requirements do not apply to internal service funds.

Question 17

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?

Answer 17

$10,000

Changes in the value of a liability for an asset retirement obligation must be measured by applying an interest method of allocation using a credit-adjusted, risk-free interest rate. Accretion expense would be:

$100,000 × 0.10 = $10,000

Question 18

A company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods. This type of commitment is:

Answer 18

not reported on the balance sheet but disclosed in the notes to the financial statements.

When a company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods, it has an unconditional purchase commitment. Such an obligation is not reported on the balance sheet but is disclosed in the notes to the financial statements at the present value of the future required payments.

Question 19

Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, 20X1, balance sheet. For 20X2, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in taxable income of $200,000 for 20X2. At December 31, 20X2, Quinn had cumulative taxable differences of $70,000. Quinn’s effective income tax rate is 30%. In its December 31, 20X2, income statement, what should Quinn report as deferred income tax expense?

Answer 19

Deferred income Temporary Effective
tax expense for 20X2 = differences x tax rate
= $100,000 x 0.30
= $30,000

Question 20

Pitbull Construction Corporation applies IFRS, has equipment that it can reliably measure fair value of, and has chosen to apply the revaluation model to valuing this equipment on its accounting records. The carrying value of this equipment on Pitbull’s books at the end of last year, December 31, 20X1, was $200,000. At the end of this year, December 31, 20X2, due to increased demand for the equipment, even when resold as used, the fair value is $250,000. For the year 20X2, in relation to this equipment for which Pitbull has chosen to apply the revaluation method, Pitbull must:

Answer 20

Increase asset revaluation surplus, an equity account like other comprehensive income, by the $50,000 addition to fair value.

When a class of assets’ fair value can be reliably measured, a corporation applying IFRS can elect to apply the revaluation model to the class of assets. When the carrying value of the assets differs materially from the fair value of the assets, a revaluation must occur, with any increase being included in asset revaluation surplus, an equity account, like other comprehensive income, and a decrease being accounted for as an other loss included in income from operations.

Question 21

Are GASB standards codified?

Answer 21

Yes, Codification of Governmental Accounting and Financial Reporting Standards

Question 22

A company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods. This type of commitment is:

Answer 22

Not reported on the balance sheet but disclosed in the notes to the financial statements.

When a company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods, it has an unconditional purchase commitment. Such an obligation is not reported on the balance sheet but is disclosed in the notes to the financial statements at the present value of the future required payments.

Question 23

The FASB believes that, as a general policy, there is a maximum number of reportable segments about which information should be provided. What is the number?

Answer 23

10

Question 24

Topic 275 of the FASB’s Accounting Standards Codification is entitled “Risks and Uncertainties.” In discussing the disclosure required by this section, what element is identified as important in determining the matters that are significant to a specific entity?

Answer 24

Selectivity

Question 25

How is a cash account held for a specific purpose (such as repayment of bond sinking fund) classified on a classified balance sheet?

Answer 25

As a non-current asset.

Question 26

What items are eligible for the fair value election?

Answer 26

A recognized financial asset and financial liability, except any listed in the following paragraph

A firm commitment that would otherwise not be recognized at inception and that involves only financial instruments (An example is a forward purchase contract for a loan that is not readily convertible to cash. That commitment involves only financial instruments—a loan and cash—and would not otherwise be recognized because it is not a derivative instrument.)

A written loan commitment

The rights and obligations under an insurance contract that is not a financial instrument (because it requires or permits the insurer to provide goods or services rather than a cash settlement) but whose terms permit the insurer to settle by paying a third party to provide those goods or services

The rights and obligations under a warranty that is not a financial instrument (because it requires or permits the warrantor to provide goods or services rather than a cash settlement) but whose terms permit the warrantor to settle by paying a third party to provide those goods or services

A host financial instrument resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument under [FASB ASC] 815-15-25-1, subject to the scope exceptions in paragraph 8. (An example of such a nonfinancial hybrid instrument is an instrument in which the value of the bifurcated embedded derivative is payable in cash, services, or merchandise but the debt host is payable only in cash.)

Question 27

The debt service fund of a governmental unit is used to account for the accumulation of resources for, and the payment of, principal, and interest in connection with:

Answer 27

Neither a pension trust fund nor a proprietary fund.

Question 28

How would a municipality that uses modified accrual and encumbrance accounting record the transaction of the receipt of supplies from approved purchase orders and the approval of the related invoices?

Answer 28

Debit expenditures control.

Question 29

A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, by a material amount. What is the appropriate accounting treatment?

Answer 29

Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss

Question 30

Is LIFO allowed under IFRS?

Answer 30

No, only FIFO and average costing.

Question 31

If a current note payable is paid off with proceeds from a long term bond sale in the subsequent period, how is the note reported in the current year?

Answer 31

As a non-current liability as a result of the “refinance”

Question 32

Chase City uses an internal service fund for its central motor pool. The assets and liabilities account balances for this fund that are not eliminated normally should be reported in the government-wide statement of net assets as:

Answer 32

Governmental activities.

Question 33

The provisions of FASB ASC 718-10-25-2, “Recognition Principle for Share-Based Payment Transactions,” apply to all of the following transactions except those related to:

Answer 33

Employee stock ownership plan instruments.

FASB ASC 718-10-25-2 applies to all transactions in which an entity grants shares of its common stock, stock options, or other equity instruments to its employees, except for equity instruments held by an employee stock ownership plan (as per FASB ASC 718-10-15-7).

Question 34

Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years. The market rate for a note of this type is 10%. On issuing the note, Jole should record:

Answer 34

Discount on note receivable: Yes; Prepaid asset: Yes

If a noninterest-bearing note due in three years is issued in connection with a contract to purchase merchandise, a discount on notes receivable for the imputed interest should be established as a valuation account and amortized over the 3-year period using the effective interest method.

The contract to purchase should be shown as a prepaid asset (prepaid purchases) for the amount of the 10% discount on the fixed amount of purchases. The deferred charge will be written off in the ratio of purchases made to the fixed amount of merchandise required to be purchased.

Question 35

Perk, Inc., issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk calculate the net proceeds to be received from the issuance?

Answer 35

Discount the bonds at the market rate of interest and deduct bond issuance costs.

To determine the issue price for a bond, the cash flows from the bond should be discounted at the yield, or market, rate. The cash flows include the principal repayment and interest payments calculated at the stated rate. The net proceeds are the issue price less the cost to issue the bonds.

Question 36

On March 31, 20X1, Ashley, Inc.’s, bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashley’s books was less than the market value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion?

Answer 36

Stockholders’ equity is increased.

Assume that account balances related to Ashley, Inc.’s, convertible bonds just prior to exchange on March 31, 20X1, are:

 Bonds payable                       100,000
 Premium on bonds payable       1,000
                                                    -------
 Carrying value of bonds          101,000
                                                 ======= If these bonds are exchanged (converted) and the book-value method is used, the carrying value of the bonds ($101,000) will be removed from the bonds accounts and the same amount will be added to common stock (at par) and additional paid-in capital. The result is that stockholders' equity is increased by $101,000.

Question 37

The measurement focus of governmental-type funds is the determination of:

Answer 37

both flow of financial resources and financial position.

The measurement focus of governmental type funds is on both:

1. the changes in financial position and
2. financial position.

The flow of financial resources refers to the changes in financial position from the sources and uses of financial resources (GASB 1300.102). By contrast, the measurement focus of a proprietary fund is on determining “operating income, changes in net position (or cost recovery), financial position, and cash flows”—similar to a commercial entity.

Question 38

At the inception of a capital lease, the guaranteed residual value should be:

Answer 38

included as part of minimum lease payments at present value.

Question 39

Payne Co. prepares its statement of cash flows using the indirect method. Payne’s unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in unamortized bond discount in its statement of cash flows?

Answer 39

As an addition to net income in the operating activities section

The amortization of a bond discount is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Amortization of a discount on bonds payable results in interest expense greater than cash interest. Because more expense has been deducted in computing income than the amount of cash paid for interest, the difference (captured in the change in the bond discount account) must be added to income to reconcile to the cash provided or used for operating activities.

Question 40

Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year:

4/1 Issued 30,000 shares of common stock
6/1 Issued 36,000 shares of common stock
7/1 Declared a 5% stock dividend
9/1 Purchased as treasury stock 35,000 shares of its common stock.

Balm used the cost method to account for the treasury stock.

What is Balm’s weighted average of common stock outstanding at December 31?

Answer 40

In computing earnings per share, the weighted average of common stock outstanding is number of shares outstanding at the beginning of the year weighted by time for any change in shares outstanding. In this problem, the weighted average is:

Original shares outstanding 100,000
4/1 issue - 30,000 x 9/12 22,500
6/1 issue - 36,000 x 7/12 21,000
——–
143,500
Effect of stock dividend x 1.05
——–
150,675
Treasury stock acquired:
35,000 x 4/12 (11,667)
——–
Weighted average outstanding 139,008

Question 41

Where does the noncontrolling interest appear on the balance sheet?

Answer 41

In the owners’ equity section

Question 42

A liquidiating dividend =

Answer 42

Declared dividend > retained earnings

Question 43

On March 1, 20X0, Fine Co. borrowed $10,000 and signed a 2-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 20X2. What amount should Fine report as a liability for accrued interest on December 31, 20X1?

Answer 43

$2,320

Accrued interest on December 31, 20X1:

For 20X0: $10,000 x .12 x (10/12) = $1,000
For 20X1: ($10,000 + $1,000) x .12 = 1,320
——
Total $2,320
======

Question 44

How would a municipality that uses modified accrual and encumbrance accounting record the transaction of the receipt of supplies from approved purchase orders and the approval of the related invoices?

Answer 44

Debit expenditures control.

Question 45

Regarding stock-based compensation, FASB ASC 718-10-30-10 requires that the total amount of compensation cost recognized in a stock-based employee compensation award be based on the total number of instruments that:

Answer 45

Eventually vest

Question 46

Cash receipts from grants and subsidies to decrease operating deficits should be classified in which of the following sections of the statement of cash flows for governmental not-for-profit entities?

Answer 46

Noncapital financing

According to GASB 2450.118, footnote 6, cash inflows from noncapital financing activities include cash receipts from grants or subsidies to finance operating deficits. A governmental entity would prepare statements of cash flows for proprietary funds and business-type activities that account for activities whose goal is self-support rather than making a profit. A governmental not-for-profit entity may report as a special-purpose government engaged only in business-type activities.

Question 47

What are the primary characteristics of governmental structure?

Answer 47

(1) The representative form of government and the separation of powers
(2) The federal system of government and the prevalence of intergovernmental revenues
(3) The relationship of taxpayers to services received

Question 48

Nest Co. recorded the following inventory information during the month of January:

                                                Unit    Total    Units
                                     Units   Cost    Cost    on Hand
                                       -----      ----      ------       ------- Balance on 01/01                2,000    $1     $2,000   2,000 Purchased on 01/08            1,200     3      3,600    3,200 Sold on 01/23                      1,800                          1,400 Purchased on 01/28               800     5      4,000   2,200 Nest uses the LIFO method to cost inventory. What amount should Nest report as inventory on January 31 under each of the following methods of recording inventory?

Answer 48

Perpetual: $5,400; Periodic: $2,600

Under the LIFO method, the last goods in are treated as the first ones included in cost of goods sold.

The perpetual method of LIFO treats units sold as coming from the last units acquired prior to that sale. Thus, the sale on January 23 leaves remaining inventory at 1,400 units at $1 (2,000 + 1,200 - 1,800). The purchase on January 28 adds $4,000 to the inventory for a total of $5,400.

When using the periodic method, the inventory is not valued until the end of the period. Under the periodic method, the ending inventory of 2,200 units is priced at the earlier prices during the year (2,000 at $1 plus 200 at $3) for a total of $2,600.

Question 49

Luge Co., which began operations on January 2, 20X1, appropriately uses the installment sales method of accounting. The following information is available for 20X1:

Installment accounts receivable, December 31, 20X1
(after reduction for 20X1 cash collections) $800,000
Deferred gross profit, December 31, 20X1
(before recognition of realized gross profit for 20X1) $560,000
Gross profit on sales 40%
For the year ended December 31, 20X1, cash collections and realized gross profit on sales should be:

Answer 49

$600,000 (cash collections) and $240,000 (realized gross profit).

20X1 Installment sales = 20X1 Deferred gross profit
———————
Gross profit margin
= $560,000 / .40
= $1,400,000

Cash collections in 20X1 = 20X1 Sales - 12/31/X1 Receivables
= $1,400,000 - $800,000
= $600,000

20X1 Realized gross profit = Gross profit margin x Cash collections
= 40% x 600,000
= $240,000
Proof:

End receivables x Gross profit on sales = End deferred gross
profit (after adjustment)
$800,000 x .40 = $320,000

Deferred gross profit - Deferred gross profit
(before adjustment) (after adjustment) = Adjustment

          $560,000 - $320,000 = $240,000 = Realized gross profit

Question 50

Cantor Co. purchased a coal mine for $2,000,000. It cost $500,000 to prepare the coal mine for extraction of the coal. It was estimated that 750,000 tons of coal would be extracted from the mine during its useful life. Cantor planned to sell the property for $100,000 at the end of its useful life. During the current year, 15,000 tons of coal were extracted and sold. What would be Cantor’s depletion amount per ton for the current year?

Answer 50

$3.20

2,500,000-100,000 = 2,400,000/750,000 = 3.20

The costs of the natural resource to be depleted include the purchase price plus the cost incurred to prepare the coal mine for extraction of the coal. This amount, $2,500,000, must be reduced by the $100,000 expected sales price of the land that will be recovered after all the coal has been mined. This difference divided by the 750,000 tons is the depletion charged for each ton of coal mined during the current year.

Question 51

Civic Town’s basic financial statements included information for the nonmajor governmental funds in combined form. The aggregated data included expenditures summarized by major functional classifications. Narrative explanations are needed to accompany the combining statements of revenues, expenditures, and changes in fund balances to provide greater detail and assure the reader’s understanding of the statements. The narrative should appear:

Answer 51

directly on the combining statements, on divider pages or in a separate section.

Narrative explanations of combining and individual fund statements should be presented on divider pages, directly on the statements and schedules, or in a separate section according to GASB 2200.211. Notes to the financial statements, RSI, or MD&A are not options for locating these narratives.

Question 52

What is the defensive-interval ratio?

Answer 52

Quick assets/average daily cash expenditures

Measures liquidity