Practice Exams Flashcards
In Year 1, Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, Year 3, when Fogg acquired some of the issued shares for $20 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement?
A. Year 3 net income is increased. B. Year 3 net income is decreased. C. Retained earnings is increased. D. Additional paid-in capital is decreased.
Choice “D” is correct. Additional paid-in capital is decreased upon the acquisition and retirement of shares at a cost ($20) less than initial selling price ($25). Since 1/10 of the shares are “assumed retired”, 1/10 of common stock at par is retired. The difference between the cost of retirement ($2,000) and par retired ($1,000) is the decrease in additional paid-in capital.
A transaction price cannot represent the fair value of an asset or liability at initial recognition if the:
A transaction price cannot represent the fair value of an asset or liability at initial recognition if the:
A. Transaction is between independent parties.
B. Transaction price includes transaction costs.
C. Principal markets of the parties are similar.
D. Seller has the option to decline the transaction price.
Transaction price includes transaction costs. (May include transaction costs, but these are excluded when determining fair value).
When do temporary market declines in inventory need not be recognized at interim periods?
Temporary market declines in inventory need not be recognized at interim when a turn-around can reasonably be expected to occur before the end of the fiscal year.
When a company declares and distributes a property dividend of shares it owns, and the fair value of those shares exceeds their carrying amount, how are the dividend and retained earnings affected in accounting?
The dividend is recorded at fair value, and retained earnings are decreased when the property dividend is declared. The cost of the asset is adjusted to fair value, and the difference is treated as a gain or loss on disposal of the asset. Retained earnings are reduced for both cash and property dividends.
Should temporary market declines in inventory be recognized during interim periods?
No, temporary market declines in inventory need not be recognized at interim periods if a turn-around can reasonably be expected to occur before the end of the fiscal year.
Key Point:
This approach is based on the expectation that the decline in inventory value is temporary and will recover by the fiscal year-end.
Which of the following is not an accurate feature of the dollar-value LIFO method?
This is an inaccurate feature of the dollar-value LIFO method. The price level change for a given year, calculated from the price index formula, determines whether the dollar-value LIFO is greater, the same, or less than the ending inventory at base-year cost. In a deflation scenario, dollar-value ending inventory could be lower than the base-year cost.
The beginning-year inventory amount will be the same under base-year cost, current-year cost, and dollar-value LIFO.
What are Selling Expenses?
Key selling expenses often tested include:
- Advertising and Promotion: Costs for marketing efforts.
- Sales Salaries and Commissions: Compensation for sales staff.
- Freight Out: Costs for shipping products to customers.
- Rent for Sales Office/Showroom: Portion of rent related to sales space.
- Travel and Entertainment: Sales team travel and client meeting expenses.
Tip:
Focus on expenses directly tied to sales activities, and remember that they are distinct from general and administrative costs.
What are contingent shares and how are they treated for EPS calculation?
Contingent shares are shares that will be issued if specific conditions are met, such as achieving a target net income, the passage of time, or other milestones. These shares are included in the EPS calculation only when the conditions are met. Shares issuable upon the exercise of stock options are not contingent shares, because they require the option holder to pay the strike price to acquire the shares.
How are earnings per share (EPS) presented for public entities in simple and complex capital structures?
All public entities must present EPS on the face of the income statement. In a simple capital structure, basic EPS for income from continuing operations and net income are presented. In a complex capital structure, both basic and diluted EPS must be presented for income from continuing operations and net income.
How are dividends distributed between preferred and common stock when preferred stock is participating?
With participating preferred stock, preferred shareholders receive their fixed dividend first. Then, common shareholders receive an equivalent percentage of dividends. After that, any remaining dividends are shared between preferred and common stockholders based on relative capitalization.
Preferred stock gets its fixed rate first.
Common stock receives an equal percentage.
Remaining dividends are split based on total capitalization (proportion of preferred vs. common).
