Practice Exam Flashcards
Reed Co.'s Year 1 Statement of Cash Flows reported cash provided from operating activities of $400,000. For Year 1, the depreciation of equipment was $190,000, the amortization of patents was $5,000, and dividends paid on common stock were $100,000. In Reed's Year 1 Statement of Cash Flows, what amount was reported as net income? $105,000 $205,000 $305,000 $595,000
The reconciliation of net income and net operating cash flows begins with net income and adjusts for items that have an effect on income different from their effect on net operating cash flow. Goodwill amortization is added to net income because it reduced earnings but caused no cash outflow. Depreciation is the same type of item. Dividends paid is a financing cash outflow and does not appear in the reconciliation. Dividends paid has no effect on income or net operating cash flow.
Net income
Patent amortization 5,000
Depreciation 190,000
Net operating cash flow 400,000
Thus, net income was $205,000. Note that goodwill is no longer amortized. This question was written before the change in accounting for intangibles
Bigco, Inc. transferred long-term receivables with a carrying value of $500,000 and a fair value of $450,000 to Banco for $425,000 cash. Of the $450,000 fair value, $45,000 is attributable to collection of future fees and penalties, which Bigco will retain. The surrender of control requirements have been met, therefore the transfer qualifies as a sale. What amount of loss should Bigco recognize at the time of the transfer? $ -0- $25,000 $50,000 $75,000
Bigco’s loss is the difference between the carrying value of the portion of the asset transferred and the cash received for the transferred portion. In this case, the total carrying value of $500,000 must be allocated between the portion of the asset surrendered and the portion retained, based on relative fair values. The relative fair values are:
Amount Percent
Asset retained $ 45,000 10%
Asset transferred 405,000 __90_
Total fair value $450,000 100%
Therefore, the carrying value of the asset transferred is .90 x $500,000 = $450,000. The resulting loss is carrying value transferred $450,000 - cash received $425,000 = $25,000 loss.
Data for a defined benefit pension plan for the current year are as follows:
PBO, January 1, $200mn
Assets, January 1, $160mn
Pension expense, $60mn
Funding contribution, $50mn
PBO gain (year-end), $14mn
Amortization of PSC for year, $4mn
The ending pension liability balance is
$36mn
$46mn
$32mn
$50mn
The beginning pension-liability balance was $40mn ($200mn PBO - $160mn assets). Pension expense is $60mn, but includes $4mn of amortization of PSC, which increases pension expense without an increase in the pension liability (the previous recognition of PSC caused pension liability to increase). Therefore, pension liability increased by $56mn from recording pension expense. Funding reduced the pension liability by $50mn and the PBO gain reduced the pension liability by $14mn. The ending balance is therefore $32mn ($40mn + $56mn - $50mn - $14mn).
On January 1, 20x6, Ritt Corp. purchased 80% of Shaw Corp.'s $10 par common stock for $975,000, which included a control premium. On this date, the fair value of the noncontrolling interest was $200,000, giving Shaw a full fair value of $1,175,000. On the acquisition date the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. Those plant assets had a 10-year remaining life, depreciated on a straight-line basis. Shaw had a net income of $190,000 and paid cash dividends totaling $125,000. Which one of the following is the amount of noncontrolling interest that should be reported in a consolidated balance sheet prepared December 31, 20x6? $213,000 $235,000 $246,000 $248,000
The noncontrolling interest on December 31, 20x6, is the noncontrolling interest (NCI) as of the acquisition date, plus the NCI share of Shaw’s net income, less the NCI share of Shaw’s dividends, less the NCI share of the depreciation of the plant asset revaluation. The consolidated net assets attributable to Shaw on January 1, 20x6, would include the book value of the net assets on the date of the combination ($1,000,000), plus the write up of the plant assets to fair value ($100,000), plus the goodwill at acquisition ($75,000) or $1,175,000 × 20% = $235,000. January 1, 20x6 NCI would be adjusted for Shaw’s net operating results for 20x6 ($190,000), less 20% of the worksheet depreciation taken on the write up of plant assets ($100,000/10 years =) $10,000 less the dividends paid by Shaw during 20x6 ($125,000).
January 1, 20x6 NCI equity $235,000 \+ 20x6 Net Income (190,000 × .2) 38,000 − 20x6 Dividends (125,000 × .2) (25,000) − 20x6 Depreciation of plant assets (10,000 × .2) ( 2,000) December 31, 20x6 NCI equity $246,000
Scroll, Inc., a wholly owned subsidiary of Pirn, Inc., began operations on January 1, 2005. The following information is from the condensed 2005 income statements of Pirn and Scroll:
Pirn Scroll Sale to Scroll $100,000 $- Sales to others 400,000 300,000 500,000 300,000 Cost of goods sold: Acquired from Pirn - 80,000 Acquired from others 350,000 190,000 Gross profit 150,000 30,000 Depreciation 40,000 10,000 Other expenses 60,000 15,000 Income from operations 50,000 5,000 Gain on sale of equipment to Scroll 12,000 - Income before income taxes $38,000 $5,000 Additional information:
Sales by Pirn to Scroll are made on the same terms as those made to third parties.
Equipment purchased by Scroll from Pirn for $36,000 on January 1, 2005, is depreciated using the straight-line method over four years.
What amount should be reported as depreciation expense in Pirn’s 2005 consolidated income statement?
the gain!!! The gain on the equipment sold to Scroll must be eliminated, since it was not sold outside the consolidated entity. With the elimination of the gain, one must also eliminate the depreciation of the gain that Scroll would have been booking (based on their higher purchase price). This excess depreciation is $3,000 a year ($12,000 gain/4 years).
This would reduce the total consolidated depreciation from $50,000 ($40,000+$10,000) to $47,000.
A firm began the construction of its new manufacturing facility in January of 20x2. The following expenditures were made on construction in that year:
Jan. 1 $40,000
Mar. 1 120,000
Oct. 31 96,000
Debt outstanding the entire year:
6%, $60,000 construction loan
4%, $90,000 note payable not related to construction
6%, $90,000 note payable not related to construction
Compute interest to be capitalized using the specific method (use the construction loan first).
$7,000
$12,600
$8,400
$8,190
8400
Average accumulated expenditures is $156,000 = $40,000 + $120,000(10/12) + $96,000(2/12). This method uses the specific construction loan first, and then the remaining debt is applied. The nonspecific loans have the same principal balance. Therefore, the weighted average interest rate on those two loans is 5% (the midpoint between 4% and 6%). Capitalized interest = .06($60,000) + .05($156,000-$60,000) = $3,600 + $4,800 = $8,400. The weighted average rate on the two nonspecific loans can also be computed as: [.04($90,000) + .06($90,000)]/($90,000 + $90,000)] = 5%.
On December 12, 20X8, Imp Co. entered into a forward exchange contract to hedge a firm commitment to purchase equipment being manufactured to Imp’s specifications. The forward contract was to purchase 100,000 Euros in 90 days as a fair value hedge of the equipment. The relevant direct exchange rates were as follows:
Spot Rate Forward Rate (for 3/12/X9)
December 12, 20X8 $1.86 $1.80
December 31, 20X8 $1.96 $1.83
At December 31, 20X8, what amount of foreign currency transaction gain should Imp include in income from this forward contract only? (Ignore discount and present value considerations.)
$-0-
$3,000
$6,000
$10,000
3000
Ian Co. is calculating earnings per share amounts for inclusion in the Ian’s annual report to shareholders. Ian has obtained the following information from the controller’s office as well as shareholder services:
Net income from January 1 to December 31 $125,000
Number of outstanding shares:
January 1 to March 31 15,000
April 1 to May 31 12,500
June 1 to December 31 17,000
In addition, Ian has issued 10,000 incentive stock options with an exercise price of $30 to its employees and a year-end market price of $25 per share. What amount is Ian’s diluted earnings per share for the year ended December 31?
$4.63
$4.85
$7.35
$7.94
look to see if the market price is LOWER than exercise price…if so it is antidilutive and just calculate basic EPS
Weighted average shares outstanding for basic EPS = 15,000(3/12) + 12,500(2/12) + 17,000(7/12) = 15,750. Basic EPS = $125,000/15,750 = $7.94. The stock options are antidilutive because the exercise price exceeds the average market price of the stock. Such options would not be assumed exercised. Under the treasury stock method, assuming exercise would result in more shares being purchased for the treasury than issued upon assumed exercised. The result is a decrease in the denominator of diluted EPS causing diluted EPS to exceed basic EPS. Therefore, in this case, diluted and basic EPS are equal.
On January 2, 2009, the beginning of its fiscal year, Zable, Inc. acquired all of the stock of Sideco, Inc. from its owners using the following forms and amounts of consideration to pay Sideco owners:
Cash $50,000
An investment in Loco, Inc. bonds which Zable had designated as held-for-trading, and which had a cost of $100,000 and a carrying amount of $102,000.
Land, with a cost of $50,000 and a fair value of $60,000.
Which one of the following is the amount of gain or loss, if any, that Zable should recognize in connection with the transfer of these assets to Sideco owners?
$ - 0 - (no gain or loss).
$ 2,000
$ 10,000
$ 12,000
The amount of gain recognized in connection with the business combination would be $10,000. Generally, assets (and liabilities and equity) transferred as consideration in a business combination should be measured at fair value. When assets being transferred have a carrying value different than fair value, they should be adjusted to fair value before the transfer and a gain or loss recognized. In this case, since the assets are transferred to Sideco’s former owners and not Sideco, the following would apply:
Cash would be transferred at face amount, $50,000, with no gain or loss.
The investment in Loco would be transferred at carrying value ($102,000), which is also fair value because the bonds are held-for-trading and would have been adjusted to fair value at December 31, 2008, with any gain or loss recognized at that time. So, no gain or loss would be recognized on January 2, 2009, in connection with the business combination.
The land would be transferred at fair value, $60,000, and a $10,000 gain would be recognized in connection with the business combination.
Windco, Inc. acquired 100% of the voting common stock of Trace, Inc. by transferring the following consideration to Trace’s shareholders:
Cash $100,000
5,000 new shares of Windco’s $10 par common stock $ 50,000 (par)
(which is less than 1% of Windco’s outstanding stock)
In addition, Windco paid $12,000 direct cost of carrying out the combination.
At the date of the acquisition, Windco’s common stock was selling in an active market for $18 per share. Also, at the date of the acquisition, Trace had the following assets and liabilities with the book values and fair values shown:
Book Value Fair Value Accounts Receivable $ 20,000 $ 20,000 Property and Equipment 80,000 100,000 Land 60,000 80,000 Other Assets 40,000 40,000 Total Assets $200,000 $240,000 Accounts Payable $ 15,000 $ 15,000 Other Short-term Debt 10,000 10,000 Long-term Debt 35,000 35,000 Total Liabilities $ 60,000 $ 60,000 Which one of the following is the amount of goodwill that results from Windco's acquisition of Trace?
$10,000
$22,000
$30,000
$50,000
Goodwill is measured as the excess of the fair value of consideration transferred (“investment value”) over the fair value of the net assets acquired. In this question, the fair value of the consideration transferred is $190,000, consisting of $100,000 cash and $90,000 of common stock (5,000 shares x $18 per share = $90,000). The fair value of the net assets acquired is $240,000 (assets) - $60,000 (liabilities) = $180,000. Therefore, the goodwill is $190,000 - $180,000 = $10,000.
Which format must an Enterprise Fund use to report cash flow operating activities in the Statement of Cash Flows?
Indirect method, beginning with operating income.
Indirect method, beginning with Change in Net Position.
Direct method.
Either direct or indirect method.
direct
Correct! According to GASB Codification Section 2450.128, governments are required to use the direct method to report cash flow from operating activities in the Statement of Cash Flows. The government should also report, in an accompanying schedule, the reconciliation between Operating Income and Cash Flow from Operating Activities [GASB Codification Section 2450.129].
On January 1, 2004, Kay Inc. issued its 10% bonds in the face amount of $400,000, which mature on January 1, 2014.
The bonds were issued for $354,000 to yield 12%, resulting in a bond discount of $46,000. Kay uses the effective interest method of amortizing bond discount. Interest is payable semiannually on July 1 and January 1.
At June 30, 2004, Kay’s unamortized bond discount would be
$46,000
$44,760
$43,700
$42,000
As of June 30, 2004, the first six-month interest period has been completed. Therefore, amortization for six months must be recorded. The July 1, 2004 entry is:
Interest expense .12(1/2)$354,000 21,240
Bond Discount
1,240
Cash .10(1/2) ($400,000)
20,000
The unamortized bond discount after the first six-months therefore is $44,760 = $46,000 - $1,240. Although technically the above entry is not recorded until July 1, as of June 30 the bond discount has decreased due to the passage of time.
According to the FASB conceptual framework, which of the following is not an enhancing qualitative characteristic? Comparability. Confirmatory value. Verifiability. Timeliness.
Confirmatory value is an ingredient of relevance. It does not relate to faithful representation. Faithful representation can be broken down into completeness, free from material error, and neutrality.
On August 21, 2003, Vann Corp.’s $500,000, one-year, noninterest-bearing note due July 31, 2004 was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing bond discounts.
What amount should Vann report for notes payable in its December 31, 2003 balance sheet?
$500,000
$477,500
$468,500
$446,000
468500
The period from August 21, 2003 to July 31, 2004 is 11 1/3 months. The correct calculation is:
Maturity value (note is noninterest bearing) $500,000
Less discount to bank $500,000(.108)[(11 1/3 months)/12 months] ( 51,000)
Equals book value at date of discounting = proceeds from bank 449,000
Plus amortization of discount to December 31, 2003
$51,000[(4 1/3 months)/(11 1/3 months)]
19,500
Equals book value at December 31, 2003 $468,500
The bank’s discount represents the total interest to be paid over the 11 1/3 month term. As the note is amortized, the note’s book value increases and interest expense is recognized. At maturity, the note book value is $500,000 and the total interest of $51,000 is paid as part of the single payment of $500,000. Total interest is $51,000 because that is the difference between the maturity value of $500,000 less the $449,000 proceeds
On June 30, 2000, King Co. had outstanding 9%, $5,000,000 face value bonds maturing on June 30, 2005. Interest was payable semi-annually every June 30 and December 31.
On June 30, 2000, after amortization was recorded for the period, the unamortized bond premium and bond issue costs were $30,000 and $50,000, respectively. On that date, King acquired all its outstanding bonds on the open market at 98 and retired them.
On redemption of the bonds at June 30, 2000, what amount should King recognize as gain before income taxes?
$20,000
$80,000
$120,000
$180,000
A journal entry illustrates the calculation:
Bonds payable 5,000,000 Bond premium 30,000 Bond issue costs 50,000 Cash .98($5,000,000) 4,900,000 Gain 80,000 The unamortized bond issue costs reduce the gain because they are an asset that has no further benefit. The write-off simply reduces the gain. Had there been a net loss, the removal of the bond issue costs would have increased that loss.
