Practice Exam 7.6.23 Flashcards
In the determination of a present value, which of the following relationships is true?
A. The lower the discount rate and the shorter the discount period, the lower the present value.
B. The higher the discount rate and the longer the discount period, the lower the present value.
Answer (B) is correct.
As the discount rate increases, the present value decreases. Also, as the discount period increases, the present value decreases.
C. The higher the future cash flow and the longer the discount period, the lower the present value.
D. The lower the future cash flow and the shorter the discount period, the lower the present value.
B. The higher the discount rate and the longer the discount period, the lower the present value.
As the discount rate increases, the present value decreases. Also, as the discount period increases, the present value decreases.
In the statement of activities for a governmental entity, revenues such as charges for building permits, garbage collection, and dog licenses are reported as which of the following?
A. Program revenues in the category “Capital Grants and Contributions.”
B. General revenues in the category “Capital Grants and Contributions.”
C. General revenues in the category “Charges for Services.”
D. Program revenues in the category “Charges for Services.”
D. Program revenues in the category “Charges for Services.”
The statement of activities displays net (expense) revenue for each function of the governmental entity. Revenues are primarily classified as program revenues and general revenues. Program revenues include (1) charges for services, resulting from charges to customers, applicants, or others who directly benefit from what is provided or otherwise are directly affected; (2) program-specific operating grants and contributions; and (3) program-specific capital grants and contributions. Grants and contributions are assigned to a given function if the revenues are restricted to it. General revenues are not required to be reported as program revenues. All taxes, including those levied for a special purpose, are general revenues. Charges for building permits, garbage collection, and dog licenses are related to services because the users benefit from using the building, disposing of garbage, and licensing the dogs. Those charges should therefore be reported as program revenues in the category “Charges for Services.”
Fact Pattern: Loire Co., a calendar year-end firm, has used the FIFO method of inventory measurement since it began operations in Year 3. Loire changed to the weighted-average method for determining inventory costs at the beginning of Year 6. Justification for this change was that it better reflected inventory flow. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods:
In its Year 6 financial statements, Loire included comparative statements for both Year 5 and Year 4.
What adjustment, before taxes, should Loire make retrospectively to the balance reported for retained earnings at the beginning of Year 4?
A. $4,000 increase.
B. $0
C. $18,000 decrease.
D. $18,000 increase.
D. $18,000 increase.
Retrospective application requires that the carrying amounts of assets, liabilities, and retained earnings at the beginning of the first period reported be adjusted for the cumulative effect of the new principle on periods prior to the first period reported. The pretax cumulative-effect adjustment to retained earnings at the beginning of Year 4 equals the $18,000 increase ($108,000 – $90,000) in inventory. If the weighted-average method had been applied in Year 3, cost of goods sold would have been $18,000 lower. Pretax net income and ending retained earnings for Year 3 (beginning retained earnings for Year 4) would have been $18,000 greater.
On July 1, Rya Corporation issued 1,000 shares of its $20 par common and 2,000 shares of its $20 par convertible preferred stock for a lump sum of $80,000. At this date, Rya’s common stock was selling for $36 per share and the convertible preferred stock for $27 per share. The amount of proceeds allocated to Rya’s preferred stock should be
A. $54,000
B. $48,000
C. $60,000
D. $44,000
B. $48,000
Given that the 1,000 shares of common stock and 2,000 shares of preferred stock were issued for a lump sum of $80,000, the proceeds should be allocated based on the relative fair values of the securities issued. The fair value of the common stock is $36,000 (1,000 shares × $36). The fair value of the preferred stock is $54,000 (2,000 shares × $27). Because 60% [$54,000 ÷ ($54,000 + $36,000)] of the total fair value is attributable to the preferred stock, it should be allocated $48,000 ($80,000 × 60%) of the proceeds.
Cobb, Inc.’s inventory at May 1 consisted of 200 units at a total cost of $1,250. Cobb uses the periodic inventory method. Purchases for the month were as follows:
Cobb sold 10 units on May 14 for $120. What is Cobb’s weighted average cost of goods sold for May?
A. $65.00
B. $60.20
C. $62.10
D. $62.50
B. $60.20
The weighted-average method is used under the periodic inventory method. The average cost is determined only at the end of the period. The weighted-average cost per unit is used to determine the ending inventory and the cost of goods sold for the period. It is calculated as follows: [(Cost of beginning inventory + Cost of purchases during the period) ÷ (Units in beginning inventory + Units purchased during the period)]. Therefore, the weighted-average cost per unit for May is $6.02 [($1,250 + $116 + $440) ÷ (200 + 20 + 80)]. Cobb’s weighted-average cost of goods sold for May is $60.20 ($6.02 per unit × 10 units sold).
Which of the following should a company classify as a research and development expense?
A. Routine design of tools, jigs, molds, and dies.
B. Redesign of a product prerelease.
C. Periodic design changes to existing products.
D. Legal work on patent applications.
B. Redesign of a product prerelease.
Development is translation of research findings or other knowledge into a plan or design for a new or improved product or process. It includes conceptual formulation, design, and testing of product alternatives, prototype construction, and operation of pilot plants. Thus, a redesign of a product prerelease is classified as a research and development expense.
When bonds with detachable stock warrants are purchased, the amount debited to investment in stock warrants relative to the total amount paid
A. Increases the discount on investment in bonds.
B. Increases any premium or decreases any discount on the bonds.
C. Has no effect on the investment of bond premium or discount because the warrants are purchased separately.
D. Increases the premium on the investment in bonds.
A. Increases the discount on investment in bonds.
The portion of the price allocated to the detachable stock warrants decreases the allocation to investment in bonds. Thus, amounts debited to investment in stock warrants increase the discount or decrease the premium recorded for the investment in bonds.
The following information pertains to Cobb City.
For the year ended December 31, Year 6, Cobb City should recognize revenues in its governmental fund financial statements of
A. $14,000,000
B. $16,000,000
C. $17,000,000
D. $19,000,000
D. $19,000,000
Governmental fund revenues are recognized when the resources are measurable and available to satisfy current liabilities. The $16 million of Year 6 revenues is measurable and available to pay current liabilities, and the amounts included from Year 4 and Year 5 transactions did not meet the recognition criteria until Year 6. Thus, $16,000,000 should be recognized for the year ended December 31, Year 6. Sales taxes are derived tax revenues. Recognition of such revenues occurs when (1) the underlying exchanges occurred and (2) the resources are available. When the modified accrual basis is used, the resources (the sales tax collections) also must be available (collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period). Collection in the month following the December 31 fiscal year end meets the availability criterion (i.e., 60 days). Thus, $3 million of sales taxes should be recognized as revenues regardless of which basis of accounting (accrual or modified accrual) applies. Total revenues recognized are $19 million ($16 million + $3 million).
For calendar Year 1, Clark Corp. reported depreciation of $300,000 in its income statement. On its Year 1 income tax return, Clark reported depreciation of $500,000. Clark’s income statement also included $50,000 of accrued warranty expense that will be deducted for tax purposes when paid. Applicable enacted tax rates are 30% for Year 1 and Year 2, and 25% for Year 3 and Year 4. The depreciation difference and warranty expense will reverse over the next 3 years as follows:
These were Clark’s only temporary differences. In Clark’s Year 1 income statement, the deferred portion of its provision for income taxes should be
A. $45,000
B. $41,000
C. $37,500
D. $67,000
B. $41,000
Deferred tax expense or benefit is the net change during the year in the entity’s deferred tax liabilities and assets. Given that the temporary differences related to the depreciable assets and the warranty liability arose in Year 1, the deferred tax asset and liability balance sheet position at the beginning of Year 1 was $0. The scheduled effects of the temporary difference related to the depreciable assets are taxable amounts of $80,000 in Year 2, $70,000 in Year 3, and $50,000 in Year 4. The scheduled effects of the temporary difference related to the accrued warranty liability are deductible amounts of $10,000 in Year 2, $15,000 in Year 3, and $25,000 in Year 4. As indicated below, the net taxable amount in each year equals the excess of the taxable amount over the deductible amount scheduled for that year. Clark’s tax consequences for each year are equal to the product of the net taxable amount and the applicable enacted tax rate(s). The total of the tax consequences is the net deferred tax liability position at December 31, Year 1.
Deferred tax expense is thus $41,000 ($41,000 ending net deferred tax liability – $0 beginning balance).
Foundation, a nongovernmental not-for-profit entity, receives free electricity on a continuous basis from a local utility company. The contribution is made subject to cancellation by the donor. Foundation should account for this contribution as a
A. Revenue only without donor-imposed restrictions.
B. Revenue only with donor-imposed restrictions.
C. Revenue without donor-imposed restrictions and an expense.
D. Revenue with donor-imposed restrictions and an expense.
C. Revenue without donor-imposed restrictions and an expense.
A contribution of utilities, such as electricity, is a contribution of other assets, not a contribution of services. A simultaneous receipt and use of utilities should be recognized as revenue that increases net assets without donor restrictions and expense in the period of receipt and use. The revenue and expense should be measured at estimated fair value. This estimate can be obtained from the rate schedule used by the utility company to determine rates charged to a similar customer.
Fact Pattern:
On January 2, Parma borrowed $60,000 and used the proceeds to purchase 90% of the outstanding common shares of Seville. Parma had no prior equity interest in Seville. Ten equal principal and interest payments begin December 30. The excess of the implied fair value of Seville over the carrying amount of its identifiable net assets should be assigned 60% to inventory and 40% to goodwill. Moreover, the fair value of the noncontrolling interest (NCI) is 10% of the implied fair value of the acquiree. The following are the balance sheets of Parma and Seville on January 1:
On Parma’s January 2 consolidated balance sheet, Parma’s shareholders’ equity should be
A. $80,000
B. $86,667
C. $130,000
D. $90,000
A. $80,000
In the absence of a bargain purchase, the total equity of the consolidated entity immediately after acquisition is the equity of the parent just prior to acquisition plus the fair value of the NCI. An NCI is the equity in a subsidiary not attributable to the parent. Thus, the portion of the total consolidated equity that is attributable to the shareholders of the parent (Parma) equals the parent’s (Parma’s) equity just prior to the acquisition of $80,000.
Which one of the following loss contingencies would be accrued as a liability rather than disclosed in the notes to the financial statement?
A. Liabilities for service or product warranties that cannot be purchased separately by the customers.
B. A pending lawsuit with an uncertain outcome.
C. A guarantee of the indebtedness of another.
D. A dispute over additional income taxes assessed for prior years (now in litigation).
A. Liabilities for service or product warranties that cannot be purchased separately by the customers.
A warranty that cannot be purchased separately by the customer is an assurance-type warranty. An assurance-type warranty creates a loss contingency. Similarly to the guidelines for loss contingencies, a liability for future warranty costs should be accrued if (1) the incurrence of the expense is probable and (2) the amount can be reasonably estimated.
Volga Co. included a foreign subsidiary in its Year 6 consolidated financial statements. The subsidiary was acquired in Year 4 and was excluded from previous consolidations. The change was caused by the elimination of foreign currency controls. Including the subsidiary in the Year 6 consolidated financial statements results in an accounting change that should be reported
A. Currently and prospectively.
B. By retrospective application to the financial statements of all prior periods presented.
C. Currently with note disclosure of pro forma effects of retrospective application.
D. By note disclosure only.
B. By retrospective application to the financial statements of all prior periods presented.
A change in the reporting entity requires retrospective application to all prior periods presented to report information for the new entity. The following are changes in the reporting entity: (1) presenting consolidated or combined statements in place of statements of individual entities, (2) changing the specific subsidiaries included in the group for which consolidated statements are presented, and (3) changing the entities included in combined statements.
During the year just ended, Orr Co. incurred the following costs:
In its income statement for the year, what should Orr report as research and development expense?
A. $525,000
B. $200,000
C. $350,000
D. $150,000
A. $525,000
Research is planned search or critical investigation aimed at discovery of new knowledge useful in developing a new product, service, process, or technique or in bringing about a significant improvement to an existing product, etc. Development is translation of research findings or other knowledge into a plan or design for a new or improved product or process. R&D expenses include R&D performed under contract by others; design, construction, and testing of prototypes; and testing in search for new products.
A company reports on the cash basis. During the company’s first year of business, it had sales on account of $1,000,000, inventory purchases on account of $400,000, and other expenses of $200,000. At the end of the year, the company had accounts receivable, inventory, and inventory related accounts payable of $100,000, $10,000, and $50,000, respectively. What is the company’s cash-basis income for its first year of operations?
A. $350,000
B. $400,000
C. $450,000
D. $300,000
A. $350,000
Under the cash basis of accounting, revenues and expenses are recognized when cash is received or paid, respectively, regardless of when goods are delivered or received or when services are rendered. The company had sales on account of $1,000,000 but only $100,000 of accounts receivable at the year-end. Therefore, the revenue under cash basis during its first-year operation is $900,000 ($1,000,000 – $100,000). The company purchased $400,000 of inventory but had inventory related accounts payable of $50,000 at the end of the year. As a result, the payment for inventory for the first year was $350,000 ($400,000 – $50,000). The company also incurred other expenses of $200,000 with no prepaid or payable accounts related to those expenses. Thus, the total amount of other expenses was paid during this year, and the total cash-basis income for the company’s first year of operations is $350,000 ($900,000 – $350,000 – $200,000).
A nongovernmental not-for-profit entity holds an investment in common stock of a publicly traded entity and an investment in debt securities of another. The NFP holds the common stock as a long-term investment and has the intent and the ability to hold the debt securities until maturity.
At year end, the statement of financial position records the stock at original cost and the debt securities at amortized cost. What adjustment(s), if any, should be made to the recorded amounts?
B. Debit of $13,000 Debit of $12,000
All purchased (contributed) debt and equity securities are measured at cost (fair value). Subsequent measurement is at fair value for (1) all debt securities and (2), with an exception for lack of a readily determinable fair value, all equity securities.
