Q Flashcards

Question

Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil. On the date of the exchange, cost and market values of the oil were as follows: Yola Co. Zaro Co. Cost $100,000 $126,000 Market values 120,000 150,000 In Zaro’s income statement, what amount of gain should be reported from the exchange of the oil? $30,000 $24,000 $4,800 $0

Answer 1

$4,800 This is a nonmonetary transaction without commercial substance, and thus full gain is not recognized yet, but is instead deferred. Some cash is received, though, so some gain is recognized. $30,000 cash out of a market value of the exchange of $150,000 is 20% of the transaction being in cash, so 20% of the gain is recognized now. Zaro’s gain is $150,000 – $126,000, or $24,000, and 20% of $24,000 is $4,800, the gain recognized now.

Answer 2

$33,200 The investments would be reported at fair value at the end of the year, $33,200 ($13,200 + $20,000). Unrealized gains on investments carried at fair value increase net assets and unrealized losses on investments carried at fair value decrease net assets. As the investments themselves were an unrestricted gift, increasing net assets, the unrealized loss on Security 1 would decrease net assets without donor restrictions and the unrealized gain on Security 2 would increase net assets without donor restrictions. Investment income includes dividends that increase net assets without donor restrictions unless there are donor stipulations.

Answer 3

Advocate groups within the state There are three groups of primary users of a government’s external financial reports: (1) the citizenry to whom the government is primarily accountable, including taxpayers, voters, service recipients, the media, advocate groups, and public finance researchers; (2) legislative and oversight bodies, including members of state legislatures, county commissions, city councils, boards of trustees and school boards, and executive branch officials with oversight responsibility over other levels of government; and (3) investors and creditors, including individual and institutional investors and creditors, municipal security underwriters, bond rating agencies, bond insurers, and financial institutions.

Answer 4

$9,000. Cole should record $9,000: Depreciation (amortization) expense for 20X1 = ("Cost" − Salvage) / Useful life = $108,000 / 12 years = $9,000 Since title to the leased asset passes to the lessee (Cole) at the end of the lease, Cole should depreciate the machine over the useful life of the asset (rather than over the shorter lease term) “in a manner consistent with the lessee's normal depreciation policy.” The “cost” of the asset is the present value of the aggregate lease payments.

Answer 5

$2,000. Cash paid for purchase of equipment $20,000 Less cash received from sale of equipment ($25,000 - $12,000 + $5,000 gain) 18,000 Net cash outflow from investing activities $ 2,000 ======= All of the following are cash inflows from investing activities: Receipts from sales of property, plant, and equipment and other productive assets (FASB ASC 230-10-45-12) All of the following are cash outflows for investing activities: Payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment, and other productive assets. (FASB ASC 230-10-45-13)

Answer 6

fair value, with holding gains and losses included in earnings. Investment in debt securities are carried at fair value with holding gains and losses included in earnings.

Answer 7

$0 Resources provided before that period of qualifying activity should be recognized as deferred revenues. Since the amount of qualifying expenditures exceeded the amount of the advance, there would be no deferred revenues reported at year-end.

Answer 8

a part of continuing operations. The sale and purchase should be recorded separately. The gain on the sale is reported as other income and is a component of income from continuing operations.

Answer 9

All of the answer choices are conditions under which joint activities are not required to be reported as fundraising activities. There are three conditions that must be met to allow a nongovernmental not-for-profit to report costs of joint activities in a category other than fundraising activities. Those three conditions are: 1. one or more of the purposes of the activity is to accomplish some program function or management and general responsibility of the entity; 2. the audience for the activity was chosen based on some criteria other than the ability to make contributions; and 3. the content of the activity motivates the audience to take specific actions other than making contributions, and these actions support the program goals or fulfill a management and general responsibility of the entity. Therefore, all of the answer choices are conditions under which joint activities are not required to be reported as fundraising activities.

Answer 10

A change in the composition of the companies included in the consolidated financial statements A change in accounting entity is given retrospective treatment when reported in the financial statements. This means that all periods presented need to reflect the new accounting entity. A change in accounting estimate is given prospective treatment, meaning that all changes are reported in current and future periods, but no prior periods are restated. Of the four answer choice items, only the change in the composition of the companies included in the consolidated financial statements qualifies as a change in accounting principle. Thus, it is the only one of the four that will be treated retrospectively.

Answer 11

$900 Vacation pay must be recognized for each employee and aggregated. Because the company provides annual vacation days, this must be converted to the 3-month period ending March 31 as follows: Employee A: 6 days × 3/12 × $100 = $150 Employee B: 12 days × 3/12 × $100 = $300 Employee C: 18 days × 3/12 × $100 = $450 Total accrued vacation pay through March 31 = $900

Answer 12

Foreign currency-translation adjustments The change in equity (net assets) of a business entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income comprises both of the following: <>All components of net income <>All components of other comprehensive income. Some items included in comprehensive income include the following: <>Foreign currency translation adjustments <>Unrealized holding gains and losses that result from a debt security <>Prior service costs or credits associated with pension or other postretirement benefits It is important to note that comprehensive income is a change amount and not a cumulative amount. The amounts reported as direct charges or credits in the equity section of a balance sheet are cumulative amounts, similar to the way that retained earnings is a cumulative amount.

Answer 13

$581,000 Only the costs which are directly associated with the condemned property should be included in the determination of the gain on the condemnation (i.e., the appraisal fee and closing attorney fee: $2,500 + $3,500 = $6,000). Thus, the gain is calculated on the following total: $575,000 Carrying value + 6,000 Direct costs of condemnation $581,000 The costs associated with acquiring the replacement property will apply to the new property.

Answer 14

$248,000 Bond issue cost related to bonds retired = 1/2 of $6,000 = $3,000 Bond issue cost amortized by 06/02/X6 = 5/15 of $3,000 = $1,000 Face amount of bonds retired (1/2 of $500,000) = $250,000 Less unamortized bond issue costs ($3,000 - $1,000) = 2,000 Bond carrying value prior to retirement $248,000 (Used to compute gain or loss on retirement)

Answer 15

All of the answer choices are differences in U.S. GAAP and IFRS. There are very few differences between International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP) income statements. Under IFRS: companies may classify expenses by either nature (salaries, rent, etc.) or function (cost of goods sold, sales, etc.). companies using the functional method must disclose expenses by nature in the notes to the financial statement. net income or loss is simply “income” or “loss.” the definition of discontinued operations is narrower than that of U.S. GAAP.

Answer 16

Operating expense Depreciation for capital assets that are expected to be replaced through the internal service fund is recorded on the internal service fund’s financial statements. Depreciation is recognized as an operating expense for the internal service fund because it relates to the services provided to the other funds.

Answer 17

The financial statements required for proprietary funds such as enterprise funds, including MD&A and RSI Special-purpose governments engaged only in business-type activities are required to report by presenting the financial statements required for proprietary funds (enterprise funds and internal service funds) including notes, MD&A, and RSI.

Answer 18

$0 All intercompany liabilities are eliminated in the consolidation process. The amounts are not included as assets or liabilities on the consolidated balance sheet.

Answer 19

$20,000 When a company is bought, in whole or in part, the purchase price may exceed the fair values of all the company’s net assets. The amount of this excess is goodwill from the purchase. Purchase cost of stock $200,000 Less 30% of identifiable assets (30% of $600,000) 180,000 Excess of purchase price over fair value of assets (Goodwill) $ 20,000

Answer 20

$460,000 When, in the purchase of another company, the purchase price exceeds the fair value of the identifiable net assets (assets – liabilities) of the purchased company, then the excess is recorded as goodwill: Purchase price $2,640,000 Fair value of assets $2,800,000 Less fair value of liabilities (620,000) Net fair value of assets 2,180,000 Goodwill $ 460,000

Answer 21

Accumulated other comprehensive income The total of other comprehensive income for a period is transferred to a component of equity that is presented in the statement of financial position separately from retained earnings and additional paid-in capital. This element of stockholders' equity should carry an appropriate title, such as accumulated other comprehensive income. The accumulated balances of each separate classification of that component of stockholders' equity is required, either in the statement of financial position or in notes to the financial statements. The classifications of other comprehensive income must be consistent throughout the financial statements.

Answer 22

a recording error. A recording error must have been made if the balance in the Fund Balance—Reserved for Encumbrances account exceeds the amount of encumbrances. For example, when a purchase order is approved, the estimated amount is recorded in the journal entry: Encumbrances XX Fund Balance--Reserved for Encumbrances XX When the purchase order is filled, the entry is reversed, for the amount estimated, and the actual expenditure is recorded. The actual amount of expenditures may be more or less than the estimated amount, but that would not affect the encumbrance accounts.

Answer 23

An important dimension of FASB ASC 280-10-50-1 is the notion of operating segments, which are defined as components of a business enterprise: <>that engage in business activities from which the enterprise may earn revenues and incur expenses (including transactions with other segments), <>whose operating results are regularly reviewed by the enterprise's chief operating decision maker to make decisions about resource allocation and to assess performance, and <>for which discrete financial information is available.

Answer 24

$545,000 Regardless of whether the direct or indirect method is used to determine cash flows from operating activities, the following items are required to be disclosed: Amount of income taxes paid during the period ($325,000) Amount of interest paid during the period ($220,000) $325,000 + $220,000 = $545,000

Answer 25

$9,000 Increases in assets must equal increases in liabilities and equity (specifically increase in retained earnings in equity): Assets = Liabilities + Equity. Increase in Assets $89,000 Increase in Liabilities (27,000) Increase in stockholder's equity $62,000 Add back: Dividend Payment 13,000 Increase in stockholders' equity BEFORE dividends $75,000 Less increase-new capital stock issued: Capital Stock $60,000 Additional Paid-in Capital 6,000 66,000 20X1 Net Income $ 9,000

Answer 26

$14,000 The FASB guidance provides that investments in equity securities (stock) with readily determinable market value are reported at market value. The question asks specifically for the end-of-year amount.

Answer 27

Retained earnings is decreased by $15,000. Small stock dividends (dividends representing less than 20%–25%) are treated as a reclassification of the shareholders' equity accounts. When the dividend is issued, the resulting entry would be made: DR Retained earnings 15,000 ($10 × 15,000 × 10%) CR Common stock 7,500 ($5 par × 15,000 × 10%) CR Additional paid-in-capital 7,500 (remainder) Common stock is increased, additional paid-in-capital is increased, and retained earnings is decreased.

Answer 28

The liability should only be disclosed in the notes to the financial statements. Proper accounting for loss contingencies requires an assessment of the probability that a future event or events will confirm a loss or asset impairment or the incurrence of a liability as of the date of the financial statements. If the future event is likely to occur, it is considered probable. Losses that are probable should be accrued only if the loss is reasonably estimable. If the loss cannot be reasonably estimated, the nature of the contingency should be disclosed in the notes to the financial statements.

Answer 29

$68,000 Factoring a receivable without recourse is, in effect, a sale of the receivable. Amount factored $80,000 10% sales return allowance (8,000) 5% commission (4,000) Cash received by Aloe $68,000

Answer 30

$14,000. Since none of the information provided is an amount that is included in the bank statement balance but not included in the checkbook balance, the December 31, 20X1, checkbook balance of $14,000 is the balance sheet cash amount. This amount is confirmed by the reconciliation of the bank statement balance: Statement balance $10,000 Deposit in transit 5,000 Outstanding checks (1,000) Cash balance (December 31, 20X1) $14,000

Answer 31

The parties to the contract have approved the contract and are committed to perform their respective obligations. An entity can only recognize revenue related to a contract if all of the following criteria have been met: 1. The parties to the contract have approved the contract and are committed to perform their respective obligations. 2. The entity can identify each party’s rights regarding the goods or services to be transferred. 3. The entity can identify the payment terms for the goods or services to be transferred. 4. The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract). 5.It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. The terms of the contract can be in writing, by oral agreement, or in accordance with other customary business practices; there is no time limit on the payment of contract consideration; and legal counsel does not have to approve the contract.

Answer 32

capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building. Since the cost and related accumulated depreciation of the damaged portion of the building are identifiable, the carrying value of the damaged portion of the building is known. A loss equal to this carrying value should be recorded against removal of that cost and accumulated depreciation from the records. Then, the cost of refurbishing should be capitalized.

Answer 33

$5,000 The sale of a segment would be a discontinued operation since its disposition represents a strategic shift. The remaining two items would be reported as a net $5,000 gain component of income from continuing operations.

Answer 34

Operational accountability Governmental fund reporting covers sources, uses, and balances of current financial resources, and budgetary accounting enables financial and fiscal accountability. Both fund-based and government-wide financial reporting facilitate functional accountability as both classify costs by major service or responsibility areas. Only the government-wide statement of activities reports the government's operations using all economic resources. Thus, the statement of activities is designed primarily to promote the assessment of operational accountability.

Answer 35

Current cost SFAC 5, Recognition and Measurement in Financial Statements of Business Enterprises, discusses measurement attributes of assets and liabilities. Current cost, or replacement cost, is discussed in paragraph 67(b). Five different attributes of assets (and liabilities) are used in present practice: 1. Historical cost (historical proceeds) 2. Current cost 3. Current market value 4. Net realizable (settlement) value 5. Present (or discounted) value of future cash flows

Answer 36

performance obligation. A promise in a contract with a customer to transfer to the customer either a good or service (or a bundle of goods or services) that is distinct, or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer, is referred to as a performance obligation.

Answer 37

Neither Rose nor Jave As a general rule, the ownership of 20% or more of the voting stock of the investee leads to the presumption that absent evidence to the contrary, the investor has the ability to exercise significant influence over the investee. In this example, we are told that Goll does not have the ability to exercise significant influence. Therefore, the 20% rule is not applied and Goll should not use the equity method for either investment.

Answer 38

Operating activities: $100,000 addition to net income; Investing activities: $400,000 cash inflow The net loss ($400,000 – $500,000 = $(100,000)) would be removed (added back) from net income. The cash from the sale would be included as a cash inflow from investing activities.

Answer 39

income from continuing operations. When a loss is recognized for financial accounting, it usually generates an income tax benefit at the same time, as long as it is true that prior income and income taxes paid could be refunded or if it is expected that there will be future income to deduct the loss against. If there was no income to deduct the loss against, then the tax benefit was valued at zero for the year (using the valuation allowance specified). When later income is earned and the tax benefit can be used, then the tax benefit is recognized in the later year when the income is earned, and is caused by the later income. (The income tax benefit is thus allocated to the later year when the income arises to allow the deduction, and is allocated to the income from continuing operations from the later year.) Note that the concept of “extraordinary” items has been eliminated from GAAP; the presentation for items that are unusual in nature or occur infrequently will be expanded to include items that are both unusual in nature and infrequently occurring.

Answer 40

By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income An entire class of assets whose value can be measured reliably can be carried at fair value. This company does this for its land. At the end of the first year, the land lost value, and thus the difference lost of $10,000 is taken as a loss. When the value is regained in the second year, the prior loss is undone with a gain of $10,000, but the additional $5,000 increase in value must go to an equity account in other comprehensive income.

Answer 41

Cash flow per share Cash flow per share should not be disclosed under either the direct or indirect method. FASB ASC 230-10-45-3 is very specific concerning per share cash flow disclosures: "Financial statements shall not report an amount of cash flow per share."

Answer 42

Statement of financial position, statement of activities, and statement of cash flows According to FASB ASC 958-205-45-4, a full set of financial statements for a private not-for-profit entity that is not a health and welfare entity, like a college or university, would include a statement of financial position, a statement of activities, and a statement of cash flows. A college or university may choose to incorporate additional classifications such as operating and nonoperating within the changes to each class of net assets on its statement of activities.

Answer 43

Asset and liability approach The FASB determines income tax expense by requiring an asset and liability approach to the expense. This method recognizes that tax expense is the result of current-year activities and preceding-year activities. This method focuses on the calculation of and change in deferred tax assets and liabilities, current income tax payable, and valuation allowances, and calculates the periodic expense or benefit as the change in the asset or liability from the prior balance sheet date. Note that all deferred tax assets and liabilities are classified as long term on the balance sheet.

Answer 44

$125,000 Summary journal entries: Dr. Cr. Jan. 5 Cash (20,000 x $15) 300,000 Additional paid-in capital (20,000 x ($15 - $10)) 100,000 Common stock (20,000 x $10) 200,000 July 14 Treasury stock (5,000 x $10) 50,000 Additional paid-in capital (5,000 x ($15 - $10)) 25,000* Retained earnings (5,000 x ($17 - $15)) 10,000 Cash (5,000 x $17) 85,000 Dec. 27 Cash (5,000 x $20) 100,000 Additional paid-in capital (5,000 x ($20 - $10)) 50,000 Treasury stock (5,000 x $10) 50,000 Balance of additional paid-in capital 12/31/X1 = $100,000 - $25,000 + $50,000 = $125,000 * (5,000 shares / 20,000 shares) x $100,000 = 25% x $100,000 = $25,000 OR * 5,000 shares x ($15 original issue price per share - $10 par value share) = $25,000

Answer 45

$0 Settam would not record additional net assets without donor restrictions resulting from this donation because the entire donation is subject to donor-stipulated requirements. The answer choice of $2,000,000 is incorrect because the $2,000,000 of donated shares increase net assets with donor restrictions because the investment is to be held indefinitely, and no dividends have yet been received. The answer choice of $8,000,000 is incorrect because the donation will also be accounted for as net assets with donor restrictions until the renovation occurs. The answer choice of $10,000,000 is the sum of the other incorrect answers.

Answer 46

$750,000 Costs for computer software to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model. After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Maintenance and customer support costs are not production costs, and are expensed. The company should capitalize $750,000 (for producing product masters of the software) in software-related costs.

Answer 47

Held for disposal A long-lived asset classified as held for sale (disposal) must be measured at the lower of its carrying amount or fair value less cost to sell. A loss should be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain should be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized for a write-down to fair value less cost to sell

Answer 48

As a noncurrent liability of $21,900 This temporary difference will result in additional taxes being paid in future years, so the related tax effect will be a liability, computed as follows: $73,000 × 0.30 = $21,900. Remember that all deferred taxes are noncurrent.

Answer 49

$0 Gain contingencies are not recognized since this would be the recognition of revenue prior to realization.

Answer 50

$688,500 The finance lease obligation that a lessee recognizes on their books is based on the present value of the lease payments. The lease payments are the annual lease payments made at the beginning of each year of $153,000. The discount rate to get the present value of the payments is the rate implicit in the lease, unless that cannot be readily determined. In the case the lessee cannot determine the implicit rate, the lessee is required to use its incremental borrowing rate. Here, the implicit rate in the lease is known to the lessee, which is 9%. Thus, the amount of the lease liability will be based on the present value factor for an annuity due of 7 years based on 9% (5.5) multiplied by the annual rental of $153,000: 5.5 × $153,000 = $841,500 However, since the first payment was just made, that amount must be lowered to get the remaining liability at the end of the year: $841,500 − $153,000 = $688,500

Answer 51

non–entity specific information that is common knowledge. The FASB provides descriptions and examples for three areas that require consideration when preparing financial statement notes: financial statement line item explanations, information about the reporting entity, and information about past events and current conditions that could impact the entity’s cash flows but have not yet been incorporated into financial statement line items. The FASB also provides a list of questions to be used as a tool when considering financial statement disclosures. A “yes” response to a question means the FASB should consider disclosure but does not mean the FASB should require disclosure.

Answer 52

As a finance lease The FASB lease standard establishes five criteria for classifying leases: (1) Ownership of the asset is transferred at the end of the lease; (2) the lease contains a bargain purchase option; (3) the lease term is for the majority of the economic life of the asset; (4) the present value of lease payments is substantially all or more of the fair value of the leased asset; and (5) the leased asset has no alternative uses. If one or more of these conditions are present, the lease is a finance or sales-type lease. This lease is a finance lease because it has no alternative use.

Answer 53

Net assets without donor restrictions $0; net assets with donor restrictions $3,000 The donation was earmarked for a specific purpose. As of the date of the statement of financial position for 20X6, the unspent donation amounted to $3,000 ($12,500 – $3,100 – $6,400) that would be reflected in net assets with donor restrictions. The 20X6 supplies purchase and use of supplies would be reported in the statement of activities as both an increase at the time of purchase (reclassification from net assets with donor restrictions to net assets without donor restrictions) and a decrease (expense) at the time of use with a zero net effect on net assets without donor restrictions by the end of 20X6.

Answer 54

Preferred stock: $36,000; Common stock: $8,000 Preferred stock dividends for each year must be paid before common stock dividends may be paid. Cumulative preferred stock dividends in arrears must be caught up as well, prior to paying any dividends to common stock for the year. Dividends in arrears on preferred stock $12,000 Preferred stock dividend requirement for 20X2 (4,000 shares x $100 x 6%) 24,000 Dividends allocable to preferred shares $36,000 ======= Dividends allocable to common shares ($44,000 - $36,000) $ 8,000 ======= Remember: Dividends in arrears and current dividends on cumulative preferred stock must be paid before any dividend can be paid to common. Since the preferred stock is not participating, the total amount remaining after the current and in arrears amount is paid to preferred goes to common.

Answer 55

$2,500 Futures contracts are a selected type of derivative instrument. All derivatives must be recognized on the balance sheet at fair value. Fair value is $0.70 on November 2, 20X1. Accounting for the changes in fair value depends on whether it has been designated as and qualifies for hedge accounting. Platt Co. has not hedged the risk of the futures contract and FASB ASC 815-20-35-1 specifies that gains and losses must be included in income for these contracts. Since this is a futures contract, the future 30-day rate ($0.65) is used to measure the gain or loss for the year ended December 31, 20X1. The foreign currency exchange loss for 20X1 is ($.70 - $.65) × 50,000 = $2,500.

Answer 56

FIFO, Yes; LIFO, No Under the FIFO inventory method, the ending inventory would consist of the last units purchased under both the perpetual and periodic inventory systems. Under the LIFO inventory method, the periodic inventory system would include in ending inventory the earliest units (beginning inventory and early purchases). Under LIFO, the perpetual inventory system would have expensed some of the beginning inventory and early purchases when sales were made early in the year.

Answer 57

$2,500 Sussman’s cash-basis accounting income would be $1,900 ($1,900 Cash in − $0 Cash out). Sussman’s accrual basis income would be $4,400 ($5,600 Credit sales − $1,200 Accrued salary expense). Restating the income from cash to accrual would result in net income increasing $2,500 ($4,400 Accrual income − $1,900 Cash-basis income).

Answer 58

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 Expenses are generally recognized when an enterprise's economic benefits are consumed in revenue-earning activities or otherwise. Expenses or losses are recognized if it becomes evident that previously recognized future economic benefits of assets have been reduced or eliminated, or that liabilities have been incurred or increased, without associated economic benefits. In this case, a loss is recognized because it has become evident that previously recognized future economic benefits of assets have been reduced without any associated economic benefits.

Answer 59

Accumulated depreciation of equipment Monetary assets are cash or items whose amounts are fixed in terms of numbers of dollars. All of the assets are monetary assets except for accumulated depreciation.

Answer 60

No required reportable event This designation of the board as to use of the income from investments is neither a change in restrictions nor a change in revenue/expenses. Thus, it is not a required reportable event. Only donors can place restrictions, not the board.

Answer 61

The building modification costs and the production line rearrangement costs should both be capitalized. The general rule here is that if an expenditure benefits periods other than the current period, the expenditure should be capitalized and charged (depreciated) to the present and all future periods benefited. This treatment should be applied to both the building modification costs and the production line rearrangement costs since the expenditures involved more than simple routine maintenance and are large dollar amounts, nonrecurring in nature, that increase the utility (efficiency) of the asset by decreasing production costs.

Answer 62

FASB Accounting Standards Codification Under FASB ASC 105-10, effective for financial statements issued for interim and annual periods ending after September 15, 2009, the Accounting Standards Codification (ASC) is the single source of authoritative GAAP recognized by the Financial Accounting Standards Board (FASB) to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority.

Answer 63

$8,000,000 The obligations of the proprietary fund, the revenue bonds of $2,000,000, should be shown as a fund liability. The other bonds should be shown in the government-wide statements as a liability relating to governmental activities, but not shown in the fund statements. The general obligation debt consists of the $4,000,000 and $3,000,000 general obligation bonds as well as the special assessment bonds of $1,000,000. Special assessment debt is usually an obligation of the general government, although some costs may be defrayed with special assessments.

Answer 64

An update is issued only after a majority vote by the members of the FASB. The FASB describes its due process procedures on its web site (http://www.fasb.org) as follows: The FASB has established the following procedures for developing accounting standards. These procedures are used for major agenda projects. Not all of the steps may be necessary for application and implementation projects. Many other steps are followed during the course of the project that are not specifically required by the Board's Rules of Procedures. 1. The Board identifies a financial reporting issues based on requests/recommendations from stakeholders or through other means. 2. The FASB Chairman decides whether to add a project to the technical agenda, after consultation with FASB members and others as appropriate, and subject to oversight by the Foundation's Board of Trustees. The Board votes on whether to add the project to its agenda. A simple majority vote is needed. 3. The Board deliberates at one or more public meetings the various reporting issues identified and analyzed by the staff. 4. The Board issues the Exposure Draft. (In some projects, the staff may prepare and issue an Invitation to Comment or Preliminary Views prior to the Board issuing an Exposure Draft.) 5. The Board holds a public roundtable meeting on the Exposure Draft, if necessary. 6. The staff analyzes comment letters, public roundtable discussion, and any other information and the Board redeliberates the proposed provisions at public meetings. 7. The Board issues an Accounting Standards Update by simple majority vote, describing amendments to the Accounting Standards Codification. The Board issues an Accounting Standards Update by simple majority vote.

Answer 65

As a change in accounting estimate, not requiring restatement of prior periods According to GASB 1400.107, footnote 9, a change from depreciation to the modified approach should be reported as a change in an accounting estimate, and this change would not require a restatement of prior periods.

Answer 66

$24,000 The income tax due and yet to be paid for the year (payable) is $24,000. The income before income taxes and depreciation is $100,000 and the tax depreciation is taken from that to compute taxable income. Taxable income is $80,000 ($100,000 – $20,000) and the tax rate is 30%, so the current income tax due is $24,000 ($80,000 × 0.30). No part of the tax has been paid (no estimates for the year, yet), so it is all still payable.

Answer 67

Redesign of a product prerelease Research is a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, developing a new process or technique, or bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. A useful way to analyze activities to determine if their costs are research and development (R&D) costs is to establish if they relate to activities identified with the period prior to the beginning of commercial production. Only the redesign of a product prerelease qualifies as an R&D expense.

Answer 68

$6,020 An asset retirement obligation (ARO) refers to an obligation associated with the retirement of a tangible, long-lived asset, such as a nuclear power plant. After the initial measurement, an entity should recognize period-to-period changes in the liability for an ARO resulting from (a) the passage of time and (b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Changes in the value of a liability for an ARO must be measured by applying an interest method of allocation using a credit-adjusted, risk-free interest rate. Accretion expense would be: $86,000 × 0.07 = $6,020 Note: Accounting for ARO liability is similar to the treatment of bonds payable. The liability is initially recorded at its present value and is amortized. Amortization is recorded with a debit to accretion expense and a credit to ARO liability.

Answer 69

$665,000 Contributions receivable expected to be collected within a year (and the related revenues) are reported net of estimated uncollectible contributions. Further, if the contributions are multi-year, the receivables (and the corresponding revenues) must be reported at present value. $400,000 + $300,000 = $700,000 $700,000 × 0.05 = $35,000 $700,000 - $35,000 = $665,000

Answer 70

Depreciation expense: No; Interest revenue: Yes A lease with transfer of title meets the criteria to be classified as a sales-type lease. The lessor (Able) should remove the asset from the books, record a receivable, and recognize interest revenue from the receivable.

Answer 71

Decrease in both ending inventory and net income In a period of rising prices, changing from FIFO to LIFO will cause ending inventory to decrease because the earlier, lower-cost items will be included. As a result of the lower-ending inventory, cost of goods sold will be higher. (Less-ending inventory will be subtracted from cost of goods available.) The higher cost of goods sold will produce a decrease in net income.

Answer 72

$1,062,000 Since freight-out costs between Trook and Papillon are paid by the seller (Trook), they are not included in the value of inventory by the buyer (Papillon). Also, since they were paid on an intercompany sale, these costs should be eliminated from Papillon’s consolidated income statement. Thus, consolidated selling expenses for 20X6 are as follows: Papillon total + Trook's total – Trook’s Intercompany ($790,000) + ($375,000 – $103,000) $790,000* + $272,000 = $1,062,000 * Papillon’s full total is included in consolidated selling expenses because none of the freight-out expense is related to sales to Trook.

Answer 73

Both Lease M and Lease P as finance leases FASB ASC 842-10-25-2 established five criteria for classifying leases. The first set of criteria result in a finance lease for a lessee or sales-type lease for the lessor if the lease meets any of the following criteria at commencement: 1. Title (ownership) transfers to the lessee by the end of the lease term. 2. The lease contains a purchase option that the lessee is reasonably certain to exercise. 3. The lease term is for the major part of the remaining economic life of the underlying asset. This criterion shall not be used if the lease commencement date is near the end of the asset’s economic life. 4. The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. 5. The underlying asset is specialized and is not expected to have an alternative use to the lessor at the end of the lease term. If one or more of these conditions are present, the lease is a finance lease. The FASB has removed the former bright-line tests but in FASB ASC 842-10-55-2 uses the former rules as benchmarks. Lease M is a finance lease because the lease term is greater than or equal to 75% of the economic life of the property. Lease P is also a finance lease for the same reason.

Answer 74

recognize an impairment loss of $28,500. Because the franchise is a limited-life intangible asset, the two-step impairment process should be used. The recoverability test (comparison of book value to undiscounted cash flows) indicates that the book value will not be recoverable (undiscounted cash flows of $107,000 is less than the book value of $123,500) and therefore the second step needs to be carried out. Because the fair value ($95,000) of the franchise is less than the book value ($123,500), the difference between the two values ($123,500 – $95,000 = $28,500) is the amount of the impairment loss.

Answer 75

It is prohibited. Subsequent reversal of a previously recognized impairment loss of goodwill or other intangible assets is prohibited in FASB ASC 350-30-35-14.

Answer 76

for each annual and interim reporting period. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued). Auditor requests, economic conditions, and financial institution requirements do not impact FASB guidance that management should evaluate conditions and events for each annual and interim reporting period.

Answer 77

Present value of future cash flows SFAC 5, Recognition and Measurement in Financial Statements of Business Enterprises, discusses each of these measurement attributes. Each of the methods, except present value of future cash flows, would be acceptable in measuring inventory in certain circumstances. The use of present values of future cash flows was said to be useful in reporting long-term receivables. Inventory is accounted for at lower of (historical) cost or market. Market is measured as replacement cost, net realizable value, or net realizable value less a normal profit margin.

Answer 78

They can result from revenues or investment by owners. SFAC 6, Elements of Financial Statements, defines gains as “increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.” Because gains are distinct from revenues, transactions that result in revenues are not gains. Investments by owners are contributions, not gains.

Answer 79

$15,000 FASB ASC 845-10-30-1 specifies that the accounting for nonmonetary exchanges generally should be accounted based on fair values, which is the same basis as that used for monetary transactions. FASB ASC 845-10-30-3 provides three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered: 1. Fair value is not determinable. 2. Exchange transaction is to facilitate sales for customers. 3. Exchange transaction lacks commercial substance. In determining if a nonmonetary exchange has commercial substance, the key issue is to determine if the exchange is expected to significantly change the entity's future cash flows. FASB ASC 845-10-30-4 specifies that the entity's future cash flows are expected to change significantly if either of the following criteria is met: 1. The configuration (risk, timing and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred. 2. The entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged. In Dahl's case, criterion (1) is met because the configuration of the future cash flows associated with the asset received (a new van) differs significantly from the future cash flows of the asset surrendered (the old van and cash). Therefore, the exchange has commercial substance and must be accounted for based on fair value. Dahl should record the new van at the $50,000 fair value of the assets surrendered ($5,000 cash × $45,000 fair value of old van). The $15,000 difference between the $30,000 carrying amount of the old van and its fair value of $45,000 should be recognized as a gain. The entry is: Van (new) 50,000 Van (old) 30,000 Cash 5,000 Gain 15,000

Answer 80

$275,000 Accrual-based revenue for Year 2 is the row titled, “From Year 2 sales” ($200,000 + $75,000) regardless of when cash is received.

Answer 81

$66,500 This is a finance lease, and the lease liability for the lessee at the beginning of the lease is based on the present value of the lease payments, including the purchase at the end of the lease, discounted to their present value (at the beginning of the lease) based on the implicit interest rate specified in the lease itself. Thus, the lease liability here is based on the $10,000 rental payments each year, plus the $10,000 purchase at the end of the 10th year. The present value of both of these items at the beginning of the lease, based on a 12% interest rate would be the $10,000 rent × 6.328 (the present value of an annuity due for 10 periods at 12%) = $63,280. Add this amount to the $10,000 × 0.322 (the present value of $1 at 12%, for 10 periods) = $3,220, and the two amounts add to $66,500.

Answer 82

format and content of financial information submitted to the SEC. Regulation S-X contains information regarding the financial statements that must be submitted to the SEC. Regulation S-K contains the instructions for filing the nonfinancial statement forms required by the SEC. Regulation S-T contains instructions for the electronic filing of required SEC forms. Both Regulation S-K and S-T should be read together, as some parts of Regulation S-X may supersede the instructions in Regulation S-K.

Answer 83

FASB Accounting Standards Codification Under FASB ASC 105-10, effective for financial statements issued for interim and annual periods ending after September 15, 2009, the Accounting Standards Codification (ASC) is the single source of authoritative GAAP recognized by the Financial Accounting Standards Board (FASB) to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority.

Answer 84

Internal service fund The internal service fund, a proprietary fund, is the only answer choice in which capital assets and related depreciation are recorded. The other answer choices are governmental funds in which neither capital assets nor depreciation expense are recorded.

Answer 85

Statement of financial position, statement of activities, and statement of cash flows According to FASB ASC 958-205-45-4, a full set of financial statements for a private not-for-profit entity that is not a health and welfare entity, like a college or university, would include a statement of financial position, a statement of activities, and a statement of cash flows. A college or university may choose to incorporate additional classifications such as operating and nonoperating within the changes to each class of net assets on its statement of activities.

Answer 86

separate legal standing as a sole proprietorship, partnership, corporation, or corporate joint venture. An important dimension of FASB ASC 280-10-50-1 is the notion of operating segments, which are defined as components of a business enterprise: <>that engage in business activities from which the enterprise may earn revenues and incur expenses (including transactions with other segments), <>whose operating results are regularly reviewed by the enterprise's chief operating decision maker to make decisions about resource allocation and to assess performance, and <>for which discrete financial information is available.

Answer 87

$12,000 Total separate accounts receivable = $52,000 + $38,000 = $90,000 Less consolidated accounts receivable 78,000 Accounts receivable eliminated in consolidation $12,000 Intercompany receivables and payables are always eliminated in the consolidation process. Therefore, the $12,000 eliminated must represent the amount Shel owed to Pare for intercompany sales.

Answer 88

Fair value, fair value, amortized cost Trading debt securities are carried on the balance sheet at fair value, with unrealized holding gains and losses (determined at the portfolio level) reported in net income. Any discount or premium is amortized. Available-for-sale (AFS) debt securities are carried on the balance sheet at fair value. Held-to-maturity debt securities are accounted for using the amortized cost method. They are carried at original cost adjusted for the amortization of any discount or premium.

Answer 89

June 30: $0; December 31: $900 Under U.S. GAAP, profit is deemed to be realized at the point of sale unless the collection of the sales price is not reasonably assured. The cost recovery method (CRM) is only allowed in limited situations (e.g., where receivables are collectible over an extended period of time and, because of the terms of the transaction or other uncertainties, there is no reasonable basis for estimating the degree of collectibility). Under the CRM, the early payments are considered entirely a recovery of cost, and not until the cost is completely recovered is any gross profit recognized. Accordingly, Colt should classify the first two payments as recovery of cost ($2,500) and the second two payments ($900) as gross profit on the December 31 income statement.

Answer 90

$244,000 Mare's consigned goods should be carried at cost, not selling price. Goods out on consignment remain the property of the consignor and must be included on the consignor's balance sheet at cost. Thus: Cost of consigned goods = Selling price / 1.30 = $26,000 / 1.30 = $20,000* This would reduce the accounts receivable balance by $26,000 to $94,000. Current assets: Cash 70,000 Accounts receivable 114,000 [96,000 + (2,000)+20,000*) Inventory 60,000

Answer 91

In the fourth quarter only Temporary market declines expected to reverse are not recognized in interim financial statements. The decline should not be recognized until year-end.

Answer 92

Trust fund A: Permanent Trust fund B: Special revenue Trust fund A should be classified as a permanent fund because the principal amount of the fund is restricted in use and only the earnings can be expended. Trust fund B is classified as a special revenue fund because the fund’s principal and earnings are both restricted to use for the city’s library only. Trust fund B would be a permanent fund if, like trust fund A, the principal was prohibited from use.

Answer 93

Additional paid-in capital increased in 20X2; no effect on net income. The only accounting effect of the issue and exercise of the warrants would be a memo entry to record the issuance of warrants on November 2, 20X1, and the following journal entry to record the exercise of warrants on March 1, 20X2: Cash XX Common stock XX Additional paid-in capital XX (We know there was additional paid-in capital because the exercise price was $30, $10 more than the par value of the stock.) As a result, additional paid-in capital increased in 20X2, but net income was not affected.

Answer 94

Private-purpose trust funds Private-purpose trust funds represent resources held in trust for the benefit of parties that are not a part of the government, rather than for the benefit of government programs.

Answer 95

Investor recommendation for the investee to hire a specific executive As a general rule, ownership of less than 20% (direct or indirect) of the voting stock of the investee leads to the presumption that an investor does not have the ability to exercise significant influence. This presumption can be overcome, however, if the ability to exercise significant influence can be demonstrated in other ways. Examples of such circumstances include the following: <>Representation on the investee’s board of directors <>Participation in the investee’s policy-making processes <>Material intercompany transactions with the investee <>Interchange of managerial personnel <>Technological dependency of the investee on the investor Investor recommendation for the investee to hire a specific executive is not one of the listed circumstances.

Answer 96

Form 10-Q SEC Form 10-Q is the quarterly report and would be used to file interim information. Form 10-K is the required annual report. SEC Form S-1 is the initial registration form for new securities required by the SEC for public companies. The SEC requires that shareholders of a company whose securities are registered under Section 12 of the Securities Exchange Act of 1934 receive a proxy statement (pursuant to Section 14(a)) prior to an annual or special meeting.

Answer 97

$10,000 20X2 Depreciation Expense: Double-declining-balance rate = 2 (1/4 years) = .50/year 20X0 DDB depr. = .50 ($80,000) = $40,000 20X1 DDB depr. = .50 ($80,000 - $40,000) = $20,000 20X2 DDB depr. = .50 ($80,000 - $40,000 - $20,000) = $10,000 Note: The full amount, $10,000, of depreciation can be taken in 20X2 because the remaining book value of $10,000 ($80,000 - $40,000 - $20,000 - $10,000) exceeds the estimated salvage value of $8,000 (10% of $80,000). However, only $2,000 of depreciation will be available in 20X3. Salvage value is not used in the depreciation formula, but the plant asset cannot be depreciated below its salvage value.

Answer 98

$500,000 Under FASB ASC 205-20-45-3, the losses from a discontinued segment that qualifies as a component are reported in the period they occur. An anticipated loss on sale should be recognized by writing the component down to FMV. An anticipated gain on sale of the component should not be recognized until the day of the sale. Loss 01/01/X1 to 09/30/X1 ($200,000) Loss 10/01/X1 to 12/31/X1 ( 300,000) Loss ($500,000) FASB ASC 205-20-45-3 states the following: "In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business entity or statement of activities of a not-for-profit entity (NFP) for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with paragraphs 360-10-35-40 and 360-10-40-5, in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur. The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income. For example, the results of discontinued operations may be reported in the income statement of a business entity as follows: Income from continuing operations before income taxes $XXXX Income taxes XXX Income from continuing operations $XXXX Discontinued operations (Note X): Loss from operations of discontinued Component X (including loss on disposal of $XXX) $XXXX Income tax benefit XXXX Loss on discontinued operations XXXX Net Income $XXXX ===== "A gain or loss recognized on the disposal shall be disclosed either on the face of the income statement or in the notes to financial statements."

Answer 99

419,500 At the beginning of the year, the number of shares outstanding was 746,000 (given): 75,000 new shares were issued, giving a new total of 821,000 outstanding 18,000 treasury shares were reissued; adding them to the 821,000 gives a new total of 839,000. A 1-for-2 reverse stock split reduces the shares outstanding at that point by half, for a new total of 419,500 (839,000 ÷ 2).

Answer 100

An underfunded pension liability of $50,000 FASB ASC 715-20-45-3 requires that an entity report on its balance sheet the underfunded or overfunded pension plan. In the case of a pension plan, the underfunded pension liability represents the excess of the projected benefit obligation over the fair value of the plan assets. Thus, Payne should report a $50,000 underfunded pension liability for the excess of the $140,000 projected benefit obligation over the $90,000 fair value of the plan assets.

Answer 101

$1,062,000 Since freight-out costs between Trook and Papillon are paid by the seller (Trook), they are not included in the value of inventory by the buyer (Papillon). Also, since they were paid on an intercompany sale, these costs should be eliminated from Papillon’s consolidated income statement. Thus, consolidated selling expenses for 20X6 are as follows: Papillon total + Trook's total – Trook’s Intercompany ($790,000) + ($375,000 – $103,000) $790,000* + $272,000 = $1,062,000 * Papillon’s full total is included in consolidated selling expenses because none of the freight-out expense is related to sales to Trook.

Answer 102

based on the tax rates currently enacted for the future periods in which the temporary differences are expected to reverse. The asset/liability method bases the accounting for deferred income taxes on the tax rates currently enacted for the future periods in which the temporary differences are expected to reverse. Thus, from the standpoint of the tax rates used, the deferred tax balance represents the amount of income tax expected to be paid or refunded when the temporary differences reverse. All deferred tax assets or liabilities are classified as long term on the balance sheet.

Answer 103

$885,000. Since (1) assets equals liabilities plus equity and (2) the $120,000 amount of liabilities is a given, the key is to compute the December 31, 20X0, balance of equity. The transactions described affected equity as follows: Issuance of stock on 1/1/X0 $750,000 Revenues 82,000 Expenses (64,000) Declaration of cash dividend (3,000) Equity 12/31/X0 $765,000 ========= Therefore, total assets must be $885,000, as shown below: Assets = Liabilities + Equity Assets = $120,000 + $765,000 Assets = $885,000

Answer 104

They have a notional amount or payment provision that is based on the changes in one or more underlying variables. A derivative instrument must have all three of the following characteristics: 1. It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions, or both. Those terms determine the amount of the settlement or settlements and, in some cases, whether or not a settlement is required. 2. It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. 3. Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement. Derivatives are reported at fair value, not cost. Derivatives can be net settled or settled with delivery of the item being hedged or speculated (e.g., a share of stock, barrel of oil, etc.). They are not direct investments—alternatively, stocks, bonds, or other securities often represent the underlyings.

Answer 105

$160,000 When, in the purchase of another company, the purchase price exceeds the fair value of all the assets the purchased company owns, then the excess is goodwill. Purchase price $860,000 Fair value of assets $840,000 Less fair value of liabilities 140,000 Net fair value of assets 700,000 Goodwill $160,000

Answer 106

$250,000 When a company owns 20% or more of the voting stock of another corporation, the company is presumed to have significant influence over the decisions of the corporation, and is required to account for the investment in the other corporation using the equity method. The equity method requires the investing company to recognize its share of the owned corporation's earnings, and to increase the carrying amount of its stock in the owned corporation by the same amount. When the investing corporation is paid dividends by the owned corporation, this is not income under the equity method, but it does lower the investment carrying amount. The investing corporation's initial price in buying the stock of the owned corporation is the carrying amount of the investment, and this is increased by the share of earnings and decreased by the share of dividends. Thus, the carrying amount of Larkin's investment in Devon at year-end is the beginning balance $200,000, plus 25% of the $600,000 Devon income, and minus 25% of the Devon dividends: $200,000 + (0.25 × $600,000) - (0.25 × $400,000) $200,000 + (0.25 x $600,000) - (0.25 x $400,000) = $200,000 + $150,000 - $100,000 = $250,000

Answer 107

$100,000 The total fair value of the compensation for the stock options must be decided at the grant date, and the total compensation must be recognized evenly over the vesting period during which it is earned. $300,000 ÷ 3 years = $100,000 compensation expense per year

Answer 108

Parent's investment in Subsidiary is reduced by $4,500. If a parent company owns less than 100% of the voting stock of a subsidiary, there is a noncontrolling (minority) interest in the net assets of the subsidiary as well as a controlling interest. The noncontrolling (minority) interest represents a subset of total stockholders’ equity, as demonstrated for a consolidated balance sheet: Stockholders’ equity: 12.31.Yr 1 1.2.Yr 2 Controlling interest $135,000 $130,500 Noncontrolling interest 15,000 43,500 Total stockholders’ equity $150,000 174,000 On January 2, year 2, total stockholder equity increased to $174,000 ($150,000 + $24,000). Parent Co. now owns 75%, or $130,500 ($174,000 × 75%), so the investment in Subsidiary is decreased by $4,500 ($135,000 – $130,500).

Answer 109

$800,000 The acquisition of the stock would be reported at cost—the amount paid for the stock. Future relocation costs would not be included in the current cost of the stock. Costs expected to be incurred are not liabilities and should not be included in the acquisition cost.

Answer 110

$155,000 Cost of goods sold = Beginning inventory + Production – Ending inventory = $0 + ($50,000 + $75,000 + $30,000) – $0 = $155,000 The other expenses are selling or administrative and are not included in cost of goods sold.

Answer 111

All of these financial instruments must be presented as liabilities on the balance sheet. FASB ASC 480-10-10 addresses the classification of the following three classes of freestanding financial instruments: 1. Mandatorily redeemable financial instruments 2. Obligations to repurchase the issuer's equity shares by transferring assets 3. Certain obligations to issue a variable number of shares These three classes of financial instruments must be presented in the balance sheet as liabilities. They may not be presented between the liabilities section and the equity section.

Answer 112

$435,000 The issue here is whether Well Co. should apply the equity method to its investment in Rea, Inc. According to FASB ASC 323-10-15-6, if the investor can exercise significant influence over financial and operating policies of the investee, the equity method should be used. Significant influence may be indicated by “representation on the board of directors” as well as “the extent of ownership…in relation to the concentration of other shareholdings....” It appears that Well Co. does exercise significant influence over Rea, Inc. Therefore, the equity method should be used in accounting for the investment. Even though the amount of stock ownership is less than 20%, the investment account balance as of December 31, 20X1, would be computed: Unadjusted balance $400,000 10% of Rea's $500,000 income 50,000 10% of $150,000 dividends (15,000) Adjusted balance $435,000

Answer 113

$525,000 Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model. After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. The company should report $525,000 ($380,000 + $145,000) for research and development expense.

Answer 114

$3,333,333 Costs incurred to develop software for internal use are capitalized after the application development stage is reached (in accordance with FASB ASC 350-40-35-4). The costs are amortized over the benefited periods—three years in this case.

Answer 115

Investors and creditors and their advisors General purpose financial statements are designed to provide information to the primary users since information cannot be provided directly to these users. The primary users are existing and potential investors, lenders, and other creditors. These users make decisions about buying, selling, or holding equity and debt instruments or providing credit by evaluating the expected returns from their investment. These parties need information about the prospects of future net cash inflows to the entity. They also need information about the entity’s resources, claims against those resources, and how efficiently the entity’s management and governing board have used the entity’s resources. Regulatory and taxing authorities, the board of directors, and management of the corporation are also users of general purpose financial statements; however, they are not the primary users.

Answer 116

Date of grant Both the intrinsic value method and the fair market value method use the grant date to measure the cost for stock issued to employees. At the grant date, one must compute a value for the shares used as compensation, which will be earned and taken as an expense over the service period.

Answer 117

$190,000 The rearrangement cost and wall removal cost were reasonable and necessary costs to put the equipment “in a location and condition” for its use. These costs benefit future periods and should be capitalized along with the equipment cost.

Answer 118

general fund. According to the principles concerning the use of fund accounting specified by GASB 1300.116, “a government shall report only one general fund.” Although “the general rule is to establish the minimum number of funds consistent with legal specifications, operational requirements, and the principles of fund accounting,” a governmental entity could have a need for more than one pension trust fund, internal service fund, or capital projects fund.

Answer 119

$270,000 If the values assigned to the identifiable net assets exceed the cost of the acquired company, this would be considered a bargain purchase option and the “excess” must be recognized as a gain in earnings of the acquisition date. Brower will record a gain of $270,000, computed as follows: Purchase price less book value of purchased share of net assets: $1,960,000 – $2,172,000 = $(212,000) Because the book value of the net assets is greater than the purchase price, there is no goodwill implied in the acquisition and thus Brower will recognize a gain. The gain is the difference between the book value of the net assets plus any undervalued assets: $212,000 + $58,000 = $270,000

Answer 120

use the same accounting principles followed in preparing its latest annual financial statements. Because the standards generally treat interim periods as “integral parts” of the annual reporting periods, not as discrete periods or separate reporting periods, companies are required to use the same accounting principles for interim periods that they follow in preparing their annual financial statements.

Answer 121

greater than 50% of the directly or indirectly owned outstanding voting shares of another entity. GAAP requires that consolidated financial statements be prepared when one of the entities in the group directly or indirectly has a controlling financial interest in the other entities. FASB ASC 810 specifies that, in general, the usual condition for consolidated financial statements is ownership (direct or indirect) of a majority voting interest (i.e., at least one share in excess of 50%).

Answer 122

All of the answer choices are true. FASB ASC 480-10-25-4 requires mandatorily redeemable stock to be classified as a liability, with proper disclosure. Since death is certain to occur at some point, a liability is shown. A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.

Answer 123

$200,000 Cash payments to acquire debt instruments of other entities are classified as cash outflows from investing activities on the statement of cash flows. The purchase of Otra Co. bonds would represent a net cash used of $200,000. Cash paid for items classified as cash and cash equivalents are not reported on the statement of cash flows because they are merely a transfer of one type of cash for another type of cash.

Answer 124

the auditor’s testing procedures regarding substantial doubt. Although an auditor does have a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, the auditor’s testing procedures regarding substantial doubt would not be disclosed to financial statement users. The remaining three answer choices are required to be disclosed if the substantial doubt has been alleviated as a result of consideration of management’s plans.

Answer 125

IFRS permits, but does not require, that a lessee may apply the leasing guidance to leases of intangible assets other than those under licensing arrangements. U.S. GAAP does not include this option. IFRS (International Financial Reporting Standards) permits, but does not require, that a lessee may apply the leasing guidance to leases of intangible assets other than those under licensing arrangements. U.S. GAAP does not include this option. The other statements are incorrect: <>The IFRS standard considers all leases to be finance leases (i.e., a single-lease accounting model) while U.S. GAAP continues to differentiate between an operating lease and a finance lease (i.e., a dual-lease accounting model). <>Only under IFRS, a lessee can choose alternative measurement bases for the right-of-use asset (e.g., the fair value model or the cost model); however, under U.S. GAAP, a lessee measures its right-of-use asset at the present value of lease payments. <>Only IFRS includes a recognition exemption for low-value lease assets (approximately $5,000). While the U.S. GAAP standard does not list a specific cost threshold, it does allow that “immaterial” assets can be expensed rather than capitalized.

Answer 126

Private-purpose trust The only listed fund that would be reported as a fiduciary fund in Pine City's financial statements is the private-purpose trust fund. The special revenue and permanent funds are both governmental funds, and the internal service fund is one of two types of proprietary funds.

Answer 127

Fund balance unassigned 75,000 Fund balance--committed 75,000 The correct answer is: Fund balance unassigned 75,000 Fund balance--committed 75,000 It appears the general fund started with a fund balance of $75,000 ($150,000 ÷ 6 lawnmowers = $25,000 per lawnmower) if it held only enough cash to pay for the 3 lawn mowers delivered in April, May, and June. The fund balance would have been debited $150,000 when expenditures were closed and outstanding encumbrances removed at year-end, leaving a debit balance of $75,000 ($25,000 for each of 3 lawnmowers not yet received or paid for). The remaining encumbered amount would be disclosed as the fund balance category called “Fund balance—committed.” (The city simply reversed encumbrances at year-end, and then displayed the ending fund balance in two amounts—committed and unassigned.) Further, the amount of fund balance set aside due to the outstanding encumbrances could be labeled “Fund balance—assigned” as well as “Fund balance—committed” depending on whether the original agreement to purchase the vehicles had been approved at the highest level of the government. The remaining fund balance, a deficit amount in this case, would be labeled “unassigned.”

Answer 128

Flood damage to an insured warehouse Substantial doubt exists when conditions and events indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. Examples of situations that may raise substantial doubt about an entity’s ability to continue as a going concern include default on a loan agreement, loss of a significant customer or supplier, and negative cash flows from operating activities. The event that would least likely raise substantial doubt about an entity’s ability to continue as a going concern would be flood damage to an insured warehouse. (There is no real negative impact here presuming insurance will cover the loss.)

Answer 129

$1,450,000 Since freight-out costs are paid by the seller (Pard), they are not included in the value of inventory by the buyer (Seed). Also, since they were paid on an intercompany sale, these costs should be eliminated from Pard's consolidated income statement. Thus, consolidated selling expenses for 20X1 are: Pard total - intercompany + Seed's total ($1,100,000 - $50,000) + $400,000 $1,050,000 + $400,000 = $1,450,000

Answer 130

Lessees should first use the rate implicit in the lease, if known. Both lessees and lessors discount lease payments at the lease commencement date using the rate implicit in the lease. If the lessee does not know the rate implicit in the lease, it can use its incremental borrowing rate. Only nonpublic entities can use their risk-free interest rate as their incremental borrowing rate.

Answer 131

All of the answer choices are differences in U.S. GAAP and IFRS. There are very few differences between International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP) income statements. Under IFRS: <>companies may classify expenses by either nature (salaries, rent, etc.) or function (cost of goods sold, sales, etc.). <>companies using the functional method must disclose expenses by nature in the notes to the financial statement. <>net income or loss is simply “income” or “loss.” <>the definition of discontinued operations is narrower than that of U.S. GAAP.

Answer 132

$0 All intercompany liabilities are eliminated in the consolidation process. The amounts are not included as assets or liabilities on the consolidated balance sheet.

Answer 133

an expenditure. The purchase of capital assets (such as a snowplow) with general fund financial resources decreases the resources of the general fund, so should be recorded as a general fund expenditure. The capital asset itself is not recorded in the general fund (or any other governmental fund) because capital assets are not expendable financial resources.

Answer 134

$14,000. Since none of the information provided is an amount that is included in the bank statement balance but not included in the checkbook balance, the December 31, 20X1, checkbook balance of $14,000 is the balance sheet cash amount. This amount is confirmed by the reconciliation of the bank statement balance: Statement balance $10,000 Deposit in transit 5,000 Outstanding checks (1,000) Cash balance (December 31, 20X1) $14,000

Answer 135

had lower accrued expenses on December 31 than on January 1 of the current year. When accrued expenses decrease during the year, it implies that the company paid more in expenses than it recorded because it would have paid for all accrued expenses since January 1 and then also paid for accrued expenses that existed as of January 1. Therefore, the company would have paid more cash for expenses than it recognized under accrual accounting.

Answer 136

$500,000 100,000 * $15 = 1,500,000 3 year vested period 1,500,000/3 = $500,000

Answer 137

Financial control: Yes; Legal restrictions: Yes A governmental accounting system must make it possible both (a) to present fairly and with full disclosure the financial position and results of financial operations of funds and account groups of the governmental unit in conformity with GAAP and (b) to determine and demonstrate compliance with finance-related legal and contractual provisions (GASB 1100.101).

Answer 138

timeliness over faithful representation. Interim financial statements emphasize timeliness over faithful representation. As stated in FASB ASC 270-10-45-1: "Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise." Note: Timeliness is mentioned, but faithful representation is not.

Answer 139

operating activities. As illustrated in FASB ASC 958-205-55-18, unrestricted contributions are reported as operating activities. Cash received from contributions restricted by donors for noncurrent purposes such as fixed asset construction, acquisition or improvement, term endowments, or permanent endowments are classified as financing activities in the statement of cash flows. Cash received from investment income restricted by donor stipulation to the same purposes also are reported as financing activities, not as operating activities.

Answer 140

Net income will be overstated. Revenue has been received in advance of earning the revenue. Revenue from the second year of the service contract cannot be recognized until the second year. Consequently, revenue and net income have been overstated in the first year.

Answer 141

$0 Gain contingencies are not recognized since this would be the recognition of revenue prior to realization.

Answer 142

They evaluate the feedback and consider how to revise the Exposure Draft. When the Financial Accounting Standards Board (FASB) receives negative feedback about an Exposure Draft, due process requires that they consider the negative feedback and consider whether or not they should revise the Exposure Draft based upon the feedback. The other answer choices are not steps the FASB undertakes as part of the standard-setting process.

Answer 143

net realizable value approach. The net realizable value approach is not an acceptable fair valuation method. The determination of fair value may require the use of one or more valuation techniques. The valuation technique used should be consistent with the market approach, income approach, and/or cost approach, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach converts future amounts (e.g., cash flows) to a single present amount (discounted) using methods such as present value techniques and option-pricing models. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost).

Answer 144

fair value of plan assets exceeds the projected benefit obligation for the company's overfunded plans. The fair value of plan assets is the amount that a pension plan(s) could reasonably expect to receive for an investment in a current sale between a willing buyer and a willing seller. An entity must recognize on its balance sheet the full overfunded or underfunded status of its defined benefit pension plans. The overfunded or underfunded status is the difference between the fair value of the plan assets and the projected benefit obligation. The right to offset multiple plans does not exist; therefore, a pension asset is the total by which the fair value of plan assets for overfunded plans only exceeds the total projected benefit obligation for just those overfunded plans. Underfunded plans would be shown separately.

Answer 145

delivered to the customer. Revenue is not recognized until the company satisfies its performance obligation. In this case, the company’s performance obligation is the delivery of the goods to the customer. When the customer orders the goods, no performance obligation has been satisfied and no revenue is earned. Similarly, verification of the goods being in-stock does not satisfy, nor does packing the goods but not shipping them absent presenting them to the carrier for shipment. Note that revenue recognition would depend on the shipping terms (FOB destination or FOB shipping point).

Answer 146

Net income $0 Other comprehensive income $75,000 Available-for-sale debt securities are carried on the balance sheet at fair value. Unrealized changes in fair value between periods are reported in other comprehensive income for the period. Gains and losses are not reported on the income statement until realized. Items in other comprehensive income are reported net of their effective tax. The unrealized gain in other comprehensive income is $75,000 ($100,000 gain × (1 – .25 tax rate)).

Answer 147

$770,000 The change in net assets with donor restrictions includes the original donation of $700,000, any increases from investment income ($50,000) and net investment appreciation ($80,000) that the donor restricted to use for the senior center, and any decreases from the amount of resources spent for the restricted purpose ($60,000). These net assets released from restrictions reduce net assets with donor restrictions and increase net assets without donor restrictions by $60,000. Therefore, the change in net assets with donor restrictions is $700,000 + $80,000 + $50,000 − $60,000, or $770,000.

Answer 148

$14640 Equity securities representing less than 20% of the investee's outstanding common stock are marked to fair value at each reporting period, with gains and losses reported in earnings. Dividends are treated as dividend income. Therefore, there is both an increase from the dividend and from the increase in fair value that must be recognized: Dividend of $2640 + Increase in fair value ($95000 − $83000) of $12000 = Increase in income of $14640

Answer 149

$248,000 Bond issue cost related to bonds retired = 1/2 of $6,000 = $3,000 Bond issue cost amortized by 06/02/X6 = 5/15 of $3,000 = $1,000 Face amount of bonds retired (1/2 of $500,000) = $250,000 Less unamortized bond issue costs ($3,000 - $1,000) = 2,000 Bond carrying value prior to retirement $248,000

Answer 150

$60,000 FASB ASC 845-10-30-1 generally specifies that if fair value is determinable nonmonetary exchanges be recorded based on fair value unless the exchange transaction lacks commercial substance. In that case, the entire amount of any implied gain or loss should be recognized at the time of the exchange. The implied gain in this case is: Fair value of asset surrendered: Fair value of equipment received $60,000 Cash received 30,000 90,000 Less book value of asset surrendered ($100,000 - $40,000) 60,000 Implied gain $30,000 ======= The entry to record the exchange is: Equipment (new) 60,000 Cash 30,000 Accumulated depreciation 40,000 Equipment (old) 100,000 Gain 30,000 This question is addressed from the standpoint of Vey Co. The fair value of the equipment that Vey traded (transferred out) must be the same as the sum of the fair values of everything that Vey Co. received (cash and equipment). Thus, the fair value of the equipment surrendered by Vey Co. must be $30,000 (cash received) plus $60,000 (fair value of equipment received), for a total of $90,000. The cash received by Vey is taken into consideration in determining the fair value of the equipment surrendered, but is not taken into consideration in determining the fair value of the equipment received.

Answer 151

Cost of goods sold: LIFO; Ending inventory: FIFO Because LIFO (last in, first out) counts the most recent purchases as sold items, its cost of goods sold will be closest to current costs. Since FIFO (first in, first out) counts the most recent purchases as still in inventory, the ending inventory under FIFO will be closest to current costs.

Answer 152

operating revenues. Internal service funds are established to account for activities that one department within a government undertakes for the benefit of (1) other departments within that same government (usual case) and (2) (sometimes) other governments, at prices approximating their external exchange value. This question illustrates an exchange-like reciprocal interfund activity. Interfund services provided and used should be reported as revenues in seller funds and expenditures or expenses in purchaser funds (GASB 1800.102). Other financing sources are used to record operating transfers-in for governmental funds. Nonoperating revenues include earnings tangential to the purpose of the fund, e.g., interest and miscellaneous revenue. Transportation appropriations is a budgetary account.