Practice Exam 7.11.23 Flashcards
Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?
A. Dollar-value LIFO.
B. FIFO.
C. Weighted average.
D. Moving average.
B. FIFO.
The first-in, first-out method assumes that the first goods purchased are the first sold. Ending inventory consists of the latest (higher cost) purchases. Cost of goods sold includes goods purchased at the beginning of the current period and in prior periods, which bear lower costs. In a time of rising prices, this method will result in the lowest cost of goods sold and the highest net income.
During the year, Hauser Co. wrote off a customer’s account receivable. Hauser used the allowance method for credit losses on accounts receivable. What impact would the write-off have on net income and total assets?
B. No effect No effect
When using the allowance method, accounts that are written off are charged to the allowance account. The write-off of a particular bad debt has no effect on expenses and net income. Furthermore, write-offs do not affect the carrying amount of net accounts receivable because the reductions of gross accounts receivable and the allowance are the same.
In the financial statements of a nongovernmental not-for-profit entity, information about perpetual donor-imposed restrictions on assets must be disclosed in
A. The notes or in separate line items within net assets with donor restrictions.
B. Separate line items within net assets with donor restrictions if the assets are held in perpetual endowment funds.
C. Separate line items within net assets with donor restrictions.
D. The notes.
A. The notes or in separate line items within net assets with donor restrictions.
Information about the nature and amounts of donor-imposed restrictions must be provided on the face of the statement of financial position or in the notes. Also, to report different types of restrictions, separate line items may be included in (1) net assets with donor restrictions or (2) the notes. Examples are (1) assets to be used for a specific purpose, to be preserved, and not to be sold and (2) assets to be invested to provide permanent income (e.g., donor-restricted perpetual endowment).
A 6-year finance lease entered into on December 31, Year 4, specified equal annual lease payments due on December 31 of each year. The first annual lease payment, paid on December 31, Year 4, consists of which of the following?
D. No Yes
Under the effective-interest method, interest is recognized to account for a change in value due to the passage of time. Given that the first payment is made at the inception of the lease, no time has passed. Thus, the first payment reduces the lease liability, but no interest is recognized.
On July 1, Year 1, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, Year 1, and mature on April 1, Year 11. Interest is payable semiannually on April 1 and October 1. What amount did Eagle receive from the bond issuance?
A. $579,000
B. $600,000
C. $594,000
D. $609,000
D. $609,000
A bond issued “at 99” is issued at a price equal to 99% of its face amount (600 bonds × $1,000 face amount × .99 = $594,000). Accrued interest for 3 months was $15,000 [$600,000 face amount × 10% coupon rate × (3 ÷ 12)]. The net cash received from the issuance of the bonds was therefore $609,000 ($594,000 bond proceeds + $15,000 accrued interest).
Whetstone Co. took advantage of market conditions to refund debt. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a(n)
A. An item of other comprehensive loss, net of income taxes.
B. Deferred credit to be amortized over the life of the new debt.
C. An item of other comprehensive income, net of income taxes.
D. Part of continuing operations.
D. Part of continuing operations.
Differences between the reacquisition prices and the net carrying amounts of extinguished debt are recognized currently as gains or losses in income of the period of extinguishment. Thus, the gain from extinguishment of debt should be reported as part of continuing operations.
Ina Co. had the following beginning and ending balances in its prepaid expenses and accrued liabilities accounts for the current year:
Debits to operating expenses totaled $100,000. What amount did Ina pay for operating expenses during the current year?
A. $93,000
B. $107,000
C. $117,000
D. $83,000
A. $93,000
Debits to operating expenses totaled $100,000 for the year. The accrued liabilities account increased by $12,000 ($20,000 ending – $8,000 beginning). This means that $12,000 of the debited operating expenses were not paid in the current year and must be subtracted from the $100,000. The prepaid expenses account increased by $5,000 ($10,000 ending – $5,000 beginning). This means $5,000 of operating expenses were prepaid in the current year but not included in debited operating expenses because the prepaid expense account was debited instead; these must be added to the $100,000. Thus, Ina paid $93,000 total in operating expenses during the current year ($100,000 – $12,000 + $5,000).
A capital projects fund for a new city courthouse recorded a receivable of $300,000 for a state grant and a $450,000 transfer from the general fund. What amount should be reported as revenue by the capital projects fund?
A. $300,000
B. $750,000
C. $0
D. $450,000
A. $300,000
The grant is a revenue.
Fact Pattern: On June 30, Year 4, ORCA, a nongovernmental not-for-profit entity (NFP), received a building and the land on which it was constructed as a gift from Tyler Corporation. The building is intended to support the entity’s education and training mission or any other purpose consistent with the entity’s mission. Immediately prior to the contribution, the fair values of the building and land had been appraised as $350,000 and $150,000, respectively. Carrying amounts on Tyler’s books at June 30, Year 4, were $290,000 and $75,000, respectively.
C. $500,000 $0
The terms of this contribution allow the long-lived assets to be used for any purpose consistent with the NFP’s mission. Accordingly, the building and land on which it was constructed should be recorded at fair value as a contribution received without donor-imposed restrictions. It is reported as support that increases net assets without donor restrictions.
Bal Corp. declared a $25,000 cash dividend on May 8 to shareholders of record on May 23, payable on June 3. As a result of this cash dividend, working capital
A. Was not affected.
B. Decreased on June 3.
C. Decreased on May 8.
D. Decreased on May 23.
C. Decreased on May 8.
On May 8, the date of declaration, retained earnings is debited, and dividends payable is credited. The declaration decreases working capital because a current liability is increased. On May 23, the date of record, no entry is made, and there is no effect on working capital. On June 3, when payment is made, both a current liability (dividends payable) and a current asset (cash) are decreased, which has no net effect on working capital. Thus, the only net effect to working capital took place on May 8.
Stam Co. incurred the following research and development project costs during the current year:
The equipment has a 5-year useful life and is depreciated using the straight-line method. What amount should Stam recognize as research and development expense at year end?
A. $1,000,000
B. $450,000
C. $1,350,000
D. $1,220,000
D. $1,220,000
The equipment with alternative future uses is capitalized and depreciated. Its contribution to R&D expense is therefore $20,000 ($100,000 ÷ 5 years). The $200,000 cost of the equipment with no alternative future use is an R&D expense. The $400,000 of R&D salaries for current projects also is an R&D expense. Furthermore, the materials and labor costs ($600,000) incurred in R&D activities (e.g., construction of a prototype) are R&D expenses. However, the legal fees to obtain a patent are capitalized, and the amortization of this amount is not an R&D expense. The legal process of obtaining a patent is not an R&D activity. Thus, R&D expense is $1,220,000 ($20,000 + $200,000 + $400,000 + $600,000).
Some costs cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. An example of such a cost is
A. Salespersons’ commissions.
B. Prepaid insurance.
C. Transportation to customers’ places of business.
D. Salespersons’ monthly salaries.
D. Salespersons’ monthly salaries.
Expenses should be recognized when a benefit has been consumed. The consumption of benefit may occur when (1) the expenses are matched with the revenues, (2) they are allocated on a systematic and rational basis to the periods in which the related assets are expected to provide benefits, or (3) the cash is spent or liabilities are incurred for goods and services that are used up either simultaneously with the acquisition or soon after. An example of a cost that (1) cannot be directly related to particular revenues but (2) is incurred to obtain benefits that are exhausted in the same period in which the cost is incurred is salespersons’ monthly salaries.
At December 31, Hull Corp. had the following debt securities that were purchased during the year, its first year of operations:
All changes in fair value are not due to credit losses. Security A is a trading security, and the other securities are available-for-sale debt securities. What amounts should be charged to earnings and other comprehensive income at December 31?
B. $(30,000) $(30,000)
The unrealized holding loss $(30,000) on the trading debt security (Security A) is included in earnings. Because the changes in the fair value are not due to credit losses, unrealized holding gains and losses on available-for-sale debt securities are included in other comprehensive income until realized. Thus, the net debit to other comprehensive income is $30,000 ($45,000 loss on Z – $10,000 gain of Y – $5,000 gain on B).
Green Co. incurred leasehold improvement costs for its leased property. The estimated useful life of the improvements was 15 years. The remaining term of the nonrenewable lease was 20 years. These costs should be
A. Capitalized and depreciated over 15 years.
B. Capitalized and depreciated over 20 years.
C. Capitalized and expensed in the year in which the lease expires.
D. Expensed as incurred.
A. Capitalized and depreciated over 15 years.
The costs of leasehold improvements are capitalized. This asset is then treated in the same way as any other tangible property. They will be depreciated over the lesser of their remaining economic life or the remaining term of the lease.
Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?
A. Payment of cash dividend to the shareholders.
B. Sale of property, plant, and equipment.
C. Issuance of common stock to the shareholders.
D. Gain on sale of plant asset.
D. Gain on sale of plant asset.
The indirect method reconciles net income to net operating cash flow. It removes the effects of (1) all deferrals of past operating cash flows, (2) all accruals of estimated future operating cash flows, and (3) items included in net income that do not affect net operating cash flow (including items with cash effects that are investing or financing cash flows). The gain on the sale of plant assets is an investing cash flow. Thus, its effect must be subtracted from net income in the operating section of the cash flow statement.
The following data apply to a unit of inventory:
Using the lower of cost or market (LCM) method of measuring LIFO basis inventory, what is the market amount for this unit of inventory?
A. $15.00
B. $20.00
C. $10.00
D. $17.50
A. $15.00
Inventory accounted for using LIFO or the retail inventory method is measured at the lower of cost or market.Under the LCM method, market is current replacement cost subject to a maximum (ceiling) equal to net realizable value and a minimum (floor) equal to net realizable value minus a normal profit margin. NRV equals selling price minus costs of completion and disposal. Thus, the maximum market amount is the $20 NRV ($22 selling price – $2 selling cost), and the minimum is $15 ($20 NRV – $5 normal profit margin). Because the minimum exceeds the $10 replacement cost, it is the market amount.
A nongovernmental, not-for-profit organization held the following investments:
What amount of stock investments should be reported in the year-end statement of financial position?
A. $13,000
B. $14,900
C. $12,700
D. $13,800
B. $14,900
Measurement of equity securities subsequent to acquisition is at fair value at each reporting date. This accounting applies whether the entity is for-profit or an NFP (a nongovernmental, not-for-profit organization). The fair value of Stock A is $5,100 (100 shares × $51), and the fair value of Stock B is $9,800 (200 shares × $49). The total reported is $14,900 ($5,100 + $9,800).
Young & Jamison’s modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?
A. $135,000
B. $125,000
C. $165,000
D. $175,000
C. $165,000
During the year, prepaid expenses increased by $5,000 ($15,000 – $10,000), and accrued liabilities increased by $20,000 ($25,000 – $5,000). The increase in prepaid expenses is a cash outflow without accrual of an expense. It indicates that accrual-basis expenses were $5,000 lower than cash-basis expenses. The increase in accrued liabilities results in accrual of an expense without a cash outflow. It indicates that accrual-basis expenses were $20,000 higher than cash-basis expenses. Thus, the adjustments of cash-basis operating expenses are a $5,000 decrease and a $20,000 increase, respectively.
Q Co. prepares monthly income statements. A physical inventory is taken only at year end; hence, month-end inventories must be estimated. All sales are made on account. The rate of markup on cost is 50%. The following information relates to the month of June:
The estimated cost of the June 30 inventory is
A. $19,000
B. $12,000
C. $14,000
D. $22,000
C. $14,000
To determine inventory cost, cost of sales must be determined. Sales can be derived from a T-account analysis of accounts receivable; that is, the beginning balance ($10,000) plus credit sales equals the collections ($25,000) plus the ending balance ($15,000). Thus, sales equal $30,000 ($25,000 + $15,000 – $10,000). Because sales equal cost of sales plus the 50% markup on cost, sales equal 150% of cost. Cost of sales therefore equals $20,000 ($30,000 sales ÷ 1.5). Cost of sales deducted from the cost of goods available for sale equals the ending inventory.
For available-for-sale debt securities acquired during Year 1, which of the following amounts should be included in the period’s net income?
A. I, II, and III.
B. I and II only.
C. III only.
D. II only.
B. I and II only.
Impairment for credit losses is recognized in the current period’s net income. A realized gain occurs when securities are sold at an amount greater than their cost basis. Realized gains are included in net income regardless of the classification of the securities.
To effect a business combination, Proper Co. acquired all the outstanding common shares of Scapula Co., a business entity, for cash equal to the carrying amount of Scapula’s net assets. The carrying amounts of Scapula’s assets and liabilities approximated their fair values at the acquisition date, except that the carrying amount of its building was more than fair value. In preparing Proper’s year-end consolidated income statement, what is the effect of recording the assets acquired and liabilities assumed at fair value, and should goodwill amortization be recognized?
C. Lower No
A business combination is accounted for as an acquisition. Under the acquisition method, the entry recording the transaction is based on the fair values exchanged. Accordingly, the identifiable assets acquired and liabilities assumed ordinarily are recorded at their acquisition-date fair values. The differences between those fair values and carrying amounts will affect net income when related expenses are incurred. The effect of recording the building at fair value in the consolidated balance sheet instead of its higher carrying amount on Scapula’s books will be to decrease future depreciation. Goodwill is the excess of (1) the sum of the acquisition-date fair values of (a) the consideration transferred, (b) any noncontrolling interest in the acquiree, and (c) the acquirer’s previously held equity interest in the acquiree over (2) the net of the acquisition-date fair values of the identifiable assets acquired and liabilities assumed. Thus, Proper recognizes goodwill for the excess of the cash paid over the fair value of the net assets acquired (given an acquisition of 100% of Scapula’s common shares). This amount will be tested for impairment, not amortized.
