REVIEW Flashcards
What is the difference between a statement of activities and a statement of functional expenses
A statement of activities has info about on going revenues and expenses
The statement of functional expenses just provides information about the expenses of a NFP
Which of the following statements is correct regarding valuation allowances in accounting for income taxes?
The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.
Both deferred tax assets and deferred tax liabilities can be reduced by a valuation allowance.
Only negative evidence, not positive evidence, should be considered when determining whether a valuation allowance is needed.
A valuation allowance is necessary when the realistic probability standard of evidence is satisfied.
The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.
Deferred income tax expense or benefit, ordinarily included as part of the tax provision used in determining income from operations, is equal to the net increase or decrease in all deferred tax related accounts including all current and noncurrent deferred tax assets and liabilities and all deferred tax asset valuation accounts. Deferred tax valuation allowances relate to deferred tax assets only, not deferred tax liabilities. They are considered necessary if it is considered more likely than not that some or all of a deferred tax asset will not be realized after consideration of all of the positive and negative evidence that might influence whether or not one is needed. The standard applied is whether the need for an allowance is more likely than not as opposed to the realistic probability standard.
At December 31, 20X1, Eagle Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in 20X2 at a total cost of $1,500,000. In 20X2, Eagle appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000 of cash was restricted for the retirement of bonds due in 20X3. In its 20X2 balance sheet, Eagle should report what amount of appropriated retained earnings?
1200000
Upon completion of the building in 20X2, the appropriation of $1,750,000 would be reversed. As of 12/31/X2, only the new appropriation of $1,200,000 would be included in appropriated retained earnings. The $2,000,000 in restricted cash will be reported as a restriction of the asset, Cash. Since the bonds to be retired are already reported as a current liability, there is no need to appropriate retained earnings.
A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements?
Overstated current assets and gross profit.
Ending inventory is overstated, therefore current assets are overstated on the Balance Sheet. When ending inventory is overstated, cost of goods sold is understated, resulting in an overstatement of gross profit. (Goods Available for Sale – Ending Inventory = COGS. Sales Revenue – COGS = Gross Profit).
When equity securities are issued in exchange for services, the transaction is recognized in an amount equal to the fair value of the securities or the fair value of the services, whichever is more readily determinable
Jensen performed legal services to assist Balm Co. in accomplishing its initial organization. Jensen accepted 1,000 shares of $5 par common stock in Balm as payment for his services. The Balm shares were not yet publicly traded, but they had a book value of $4 per share. Jensen provided 48 hours of service, which is normally billed at $125 per hour. By what amount should the common stock account increase?
C/S account should increase by par value which is $5 * 1000
The fair value of the exchange is the value of the service ( more easily determinable - 6000
Dr service expense 6000
cr C/S (5) 5000
cr APIC 1000
Exchange of T/S for Preferred securities -
Investment in trading securities at market, net (cost $80,000) $140,000
Preferred stock, $20 par value, 20,000 shares issued and outstanding $400,000
Additional paid-in capital on preferred stock $30,000
Retained earnings $900,000
On January 20, 20X1, Luna exchanged all of the marketable securities for 5,000 shares of Luna’s preferred stock. Market values at the date of the exchange were $150,000 for the marketable securities and $30 per share for the preferred stock. The 5,000 shares of preferred stock were retired immediately after the exchange. Which of the following journal entries should Luna record in connection with this transaction?
dr Preferred Stock ($20 *5000) 100,000
dr APIC ( 30K / 20K * 5K ) 7500
RE 9 balance 42,500
T/S 140,000
gain on T/S 10,000
The exchange of trading securities for preferred stock would be reported using the fair market values, both of which are $150,000. If the trading securities were sold for $150,000, there would be an additional gain of $10,000 since the securities were already written up to $140,000. If the preferred stock were retired for $150,000, the original issue price consisting of preferred stock of $100,000 and additional paid in capital of $7,500 would be cancelled. The difference would be reported as a reduction of retained earnings.
Tulip Co. owns 100% of Daisy Co.’s outstanding common stock. Tulip’s cost of goods sold for the year totals $600,000 and Daisy’s cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income?
900,000
Tulip - 600,000
Daisy - 400,000
Intracompany sales - 100,000
cost of intercompany sales 60,000
Intracompany sales - all sold to third parties so
600 - 400 - 100 = 900
A company granted its employees 100,000 stock options on January 1, year 1. The stock options had a grant date fair value of $15 per option and a three-year vesting period. On January 1, year 2, the company estimated the fair value of the stock options to be $18 per option. Assuming that the company did not grant any additional options or modify the terms of any existing option grants during year 2, what amount of share-based compensation expense should the company report for the year ended December 31, year 2?
grant date fair value - $15 # of share 100,000
Total fair value at grant date - 1,500,000
recognize evenly over three years at 500,000 per year
In accordance with ASC 718-10-30-3, the fair value of the options at the grant date is the basis for recognizing the compensation expense evenly over the vesting period.
With a fair value at grant date of $15 per option, the 100,000 options have a total fair value of $1,500,000. This total fair value at grant date is recognized evenly over the vesting period, at a rate of $500,000 per year. The amount of share-based compensation expense for the year ended December 31, year 2 will be $500,000.
Common stock, $3 par $600,000
Additional paid-in capital $800,000
Treasury stock, at cost $50,000
Net unrealized loss on noncurrent marketable
debt securities available for sale $20,000
Retained earnings: appropriated for uninsured
earthquake losses $150,000
Retained earnings: unappropriated $200,000
1680000
Common stock of $600,000 and additional paid-in capital of $800,000 would be included as contributed capital for a total of $1,400,000.
Unappropriated retained earnings of $200,000 and the $150,000 of retained earnings appropriated for earthquake losses would be included as earned capital of $350,000.
The treasury stock of $50,000 and the $20,000 unrealized loss on available for sale securities both reduce stockholders’ equity in the amount of $70,000.
Stockholders’ equity at 12/31/X1 would be $1,400,000 + $350,000 - $70,000 or $1,680,000.
Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck and $5,000 cash in a transaction that lacked commercial substance. The fair value of the truck received was $15,000. At what amount should Amble record the truck received in the exchange?
Even though this transaction lacks commercial substance, it involved monetary consideration that is equal to 25% of the total consideration and will, as a result, be treated as a monetary transaction. As a monetary transaction, it is reported by recognizing a gain of $8,000 as if the old truck was sold for its fair value. The new truck would be recorded at $15,000, its fair value.
Journal Entry:
dr New truck $15,000
dr Cash $5,000
cr Old truck $12,000
cr Gain $8,000
Land and other real estate held as investments by endowments in a government’s permanent fund should be reported at
Fair Value
No matter what - deferred income tax liabilities is
NON current
Is the statistical section part of the CAFRS
No the basic reports are
Government Wide ( statement of net positions and statement of activities)
Fund Financial Statements ( gov funds: Balance sheet, Statement of Revenues, expenditures and changes in fund balance) -
Proprietary funds - cash flows, net position, revenues EXPENSES and changes in fund net position)
fiduciary funds - stamen of net position statement of changes in net position
BCS - budgetary comparison
On December 31, 20X1, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, 20X1, was 8%. The compound interest factors to convert future values into present values at 8% follow:
Present value of $1 due in nine months: .944
Present value of $1 due in five years: .680
At what amounts should these two notes receivable be reported in Jet’s December 31, 20X1, balance sheet?
10,000
7820
maturity value - 10,000 *3% = 300 * 5 years - 1500
total maturity value = 1150 * PV .680 = 7820
A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is
Both favorable and unfavorable
A planned variance that occurs in one interim period that is expected to be absorbed in a future interim period within the same fiscal year will not be recognized. It will be deferred in the period in which it occurs, regardless of whether it is favorable or unfavorable, and offset in the period in which it is absorbed.
The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest
Plus the present value of all future interest payments at the rate of interest stated on the bond.
Plus the present value of all future interest payments at the market (effective) rate of interest.
Less the present value of all future interest payments at the market (effective) rate of interest.
Less the present value of all future interest payments at the rate of interest stated on the bond.
Plus the present value of all future interest payments at the rate of interest stated on the bond.
The market price of a bond is equal to the present value of the stream of payments to be made using the market rate of interest. The stream of payments will include the principal amount, representing a lump sum to be paid at the end of the bond term, and periodic interest, representing an annuity of equal payments to be paid each period during the term of the bond. As a result, the market value of the bond will be the present value of the principal plus the present value of future interest payments, both calculated using the market rate of interest.
If you have a direct finance lease can a lessor recognize gain or loss?
No - they will only recognize interest income because they are not making any profit - they are only recognizing interest income
What is current lease liability - 20,000 - IE = current Liability for year
On December 30, 20X1, Rafferty Corp. leased equipment under a capital lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 10%. The capital lease obligation was recorded on December 30, 20X1, at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this capital lease in its December 31, 20X1, balance sheet?
8500
The lease obligation, recorded at the inception of the lease was $135,000. This would have been reduced by the initial $20,000 payment, made at the inception of the lease, resulting in an obligation of $115,000 at 12/31/X1. The payment on 12/31/X2 will consist of interest at 10% of $115,000 or $11,500. The remaining $8,500 will reduce the lease obligation in 20X2. As a result, $8,500 will be reported as a current liability, current portion of long-term debt, and the remaining $106,500 will be reported as noncurrent.
Periodic design change are NOT what
they re NOT R&D expenses
in a nonmonetary exchange - what is the boot percentage
25%
when considering what to expense in R&D - what types of costs are expensed
costs to construct and to test and modify a prototype are development costs.
What is the date you record a liability for an asset that you purchase
Liability is only recorded when the associated asset is recorded on the boots -
How do you treat DTL when you have an equity method investment that gives you net income and dividends that qualify for DRD
The earnings will be treated as though you will get them as dividends in the future
so get 180 in equity in earning and 30 in dividends
DRD 80%
ta rate = 30%
the DTL = 180 - 30 = 150*20% = 30 this is the amount in the future that will be taxable
30 * 30% tax rate = 9 = DTL
what is the most significant characteristic to determine the classification of an enterprise fund
The pricing policy establishes fees and charges designed to recover its cost
here are the others:
- The activity is financed with debt that is secured solely by a pledge of the net revenue from fees and charges.
- Laws and regulations require that the cost of providing services be recovered through fees.
- The pricing policies of the activity establish fees and charges designed to recover its costs.
On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31, balance sheet, what amount should World report as note payable?
264200 includes interest expense of the portion of the year the loan was outstanding
1,000,000 *9% = 90,000
90,000 * 3/12 = 22,500
so principle portion of payment is
264,200 - 22,500 = 241,700
Notes payable on the balance sheet = 1M - 241700 = 758,300
King, Inc. owns 70% of Simmon Co.’s outstanding common stock. King’s liabilities total $450,000, and Simmon’s liabilities total $200,000. Included in Simmon’s financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements?
Even though you own 70% you report the total
and then eliminate the total amount of notes payable
450 + 200 - 100
The following information relates to a company’s year-end inventory:
Inventory cost $910
Selling price of inventory $1,000
Normal profit margin 10% of selling price
Current replacement cost $740
Cost of completion and disposal $100
Under IFRS, what is the company’s year-end inventory balance?
IFRS is lower of original cost or NRV
$910 = original cost
NRV = selling price - cost of disposal
1000 - 100 = 900
What is the ratio of dividend s per share
dividends per share / EPS
What information is require about major customers
- is revenue with them is greater than 10%
then disclose - that yes is a segment greater than 10%
total amount of revenue from each customer
the name of the segments reporting
Don’t need to identify the name of the customer
Formula AR Turnover
Credit sales / avg AR
Make sure AR is net of allowance
What is in an operating cycle -
average days to collect + average days sales in inventory
61 + 33 = 94
Which F/S provides info about a co liquidity and financial flexibility
balance sheet
When you have a foreign operation that is a reportable segment - what do you disclose
the amount of sales from un affiliated customers?
The amount of intracompany sales between geographic areas?
yes to both
they should be separated too
when calculating a segments operating profit or loss - what is included or not included
sales to customers
inter segment sales
reduce by operating expenses
reduce by allocation of indirect operating ex[ense
Do NOT include general corporate expenses
Fair Value vs Cash flow hedge
fixed and variable trades - what are the rules
Cashflows you trade a variable rate for a fixed rate ( flow for a fixed)
Fair Value Hedge - you ahem a fixed rate - fixed - fair vale and trade for a variable rate
what is a companies functional currency
used in its primary economic environment - normal operations
NFT - you get a car donated and a car given with donor restrictions - how do you handle depreciation
Its just like GAAP
You use the same criteria an recognize depreciation expense in donors without restrictions
What kind of accounting do each of these three give you
fiduciary
proprietary
governmetn funds
government funds - modified
proprietary - enterprise and internal - accrual
Fiduciary - accrual
In a sales leaseback transaction a gin not recognized is reported as what on the B/S
A deferred credit in the liabilities section
Debit Credit Sales $575,000 Cost of sales 240,000 Administrative expenses 70,000 Loss on sale of equipment 10,000 Sales commissions 50,000 Interest revenue 25,000 Freight out 15,000 Loss on early retirement of long-term debt 20,000 Uncollectible accounts expense 15,000 Totals $420,000 $600,000 Other information Finished goods inventory: January 1, 20X3 $400,000 December 31, 20X3 360,000
Vane’s income tax rate is 30%. In Vane’s 20X3 multiple-step income statement, what amount should Vane report as income after income taxes from continuing operations?
126,000
Income from continuing operations, before tax, will include sales of $575,000 and interest revenue of $25,000. It will be reduced by cost of sales of $240,000, administrative expenses of $70,000, the loss on sale of equipment of $10,000, sales commissions of $50,000, freight out of $15,000, and uncollectible accounts expense of $15,000. The loss on early retirement of debt would further reduce income from continuing operations by an additional $20,000. The net amount of $180,000 is reduced by taxes, at 30%, of $54,000 resulting in income from continuing operations, after tax, of $126,000.
600
-420
=126 *.75 = 126,000
do you included unexpected loss on plan assets in pension expense?
Only if the cumulative amount exceeds a threshold
pensions costs: Service cost \+Interest cost -return on plan assets - Amortization of Prior service cost
How do you calculate cost of goods manufactured same as cost of goods sold
beginning \+ cost of goods manufactured = cost of goods available for sale - ending finished goods inventory = cost of goods sold
The functional currency of Nash Inc.’s subsidiary is the euro. Nash borrowed euros as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash’s translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash’s consolidated financial statements?
The translation loss less the exchange gain is reported in other comprehensive income.
What is an accrued pensions cost
You take PBO - Plan Assets = 100 the plan is under funded by 100
This is what need stop be reported on B/S
So this year you see what your expense was: 87
Then you see what you contributed: 40
87-40= 47 is what has not been funded
add to this any accrued pension cost: 2 - so 49= the accrued pension liability - this is the liability that has been funded -
need to report 100, you have already reported 49 - what do you need to add to OCI:
51
Start with 2
add 47
need 100
so the difference is 51 - which is what you will need to add
In a sales leaseback transaction - either operating or capital - you will defer the gain up to the PV of the MLP
this is a deferred credit
If capital - offset against depreciation expense
If operating - offset to rent expense
If rental is small - less than 10% - operating lease - recognize all gain immediately
what is considered revenue in governmental
Include: taxes, assessments, fines and activities of government
- funds from debt issuance- other finance sources
- funds from operating transfer - other finance sources
EPS and you have a dilutive convertible bond with a discount - what do you do
You calculate the interest on the bond
5M * 9% = 450,000
You then MUST include discount amortization:20,000 because this increases interest expense that you would NOT be paying so you add it back in
the take out tax:
470,000*75% = 352500 = income tax saved
net income 600,00 + 352500 is you numerator
What do you do when you change from cash to accrual based accounting
Prior period adjustment
adjust the beginning balance of RE
What do you report as estimated revenues for government
property taxes
license and permits
intergovernmental revenue
Who are the primary users of gov reports
- citizens
- legislative and oversight bodies
- Investors and creditors
What format must enterprise funds use to report cash flow operating activities
the direct method
How are unrestricted grants reports in a capital projects fund
As revenue as long as they are unrestricted. If restricted - then not reported as revenue
what are considered sources when you issue a bond and have bond issue costs and fees
The source is the total amount of the bond $ you get
costs like underwrite fees are expenditures
What are the disclosure requirements of companies with defined benefit pension plans
- the components of period pension costs
- the amount of un recognized prior service cost
- detailed description of the plan including groups covered
State Co. recognizes construction revenue and expenses using the percentage-of-completion method. During 20X9, a single long-term project was begun, which continued through 20X0. Information on the project follows:
20X9 20X0
Accounts receivable from
construction contract $100,000 $300,000
Construction expenses $105,000 $192,000
Construction in progress $122,000 $364,000
Partial billings on contract $100,000 $420,000
50,000
total costs = 105000+192000 = 297,000
profit to date = 364,000 - 297,000 = 67,000
last year profit was
CIP - expenses 122 - 105 = 17,000
67,000 - 17,000 = 50,000
Construction in progress at 12/31/X10 consists of costs incurred to that date and profits recognized to that date. With total costs of $105,000 + $192,000 or $297,000 and construction in progress of $364,000, total profit recognized to date is the difference of $67,000. In 20X9, the profit recognized was the difference between construction in progress of $122,000 and expenses of $105,000 or $17,000. As a result, the profit recognized in 20X0 had to be the difference between $67,000 and $17,000 or $50,000.
effective interest rate and JE when you take out a notes payable for 1,000 discounts at 10%
Dr Cash 900
Dr Discount 100
cr N/P 1000
Discount percent = 100/1000 = 10%
EIR = the amount you get 900 and what it cost you to borrow it 100/900 = 11%
so the case you receive is less that the face and the EIT is higher than the Discount rate
If you have a no interest note do you accrue interest payable?
No - you do not pay interest but you do impute an interest rate and amortize it to interest expense each month
200,000 non intérêts bearing at 11%
200,000 *11% = 22,000
200,000 - 22,000 = 178,000
Example: 200,000 note proceeds 178,000
means that there is 22,000 of interest imputed
dr cash 178,000
dr discount 22,000
cr notes payable 200,000
22,000/12 = 1833
dr interst expense 1833
cr discount 1833
A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position?
At the face amount minus a discount calculated at the imputed interest rate
What is the definition of a deferred tax asset
It results when you have an item that is deductible in the future - this is a DTA
It will reduce taxable income in the future
What is the definition of a deferred tax liability
these are items that will be taxed in the future
because there is an amount that will increase taxable income in the future and there fore increase taxes
what happens to stockholders equity when you acquire treasury stock
It always decreases stockholders equity because you use cash
dr cash
cr T/S
What if you bought the T/S at less than book value per share
Totally Assets would decrease by an amount proportionately less than the decrease in the number of shares outstanding
so books value per share would increase
why do you use separate funds in governments
- because there are multiple entities within a government - with different mandates and legal restriction for how they can use their funds
- therefore each entity needs financial control over its own resources to track them
- so each ones resources need to be separated so that each one can be a self-balancing set of accounts
when an asset is traded on 2 markets and no principle market - what are the rules
use the most advantageous = proceeds net of transaction costs
so quoted price - transaction costs
the one that makes the money money is the one you use
but what number do you use on the F/S - USE THE QUOTED PRICE OF THE ASSET - not the netted price
what do you do with allowance for doubtful accounts and the recognition of bad debt
an increase in ADA means that bad debt was recognized
dr Bad Debt expense
cr ADA
This reduces income, but no cash
So you add it back in
How do you calculate cost of goods manufactured
Begining finished goods
+ Cost of goods manufactured
= Cost of goods available for sale
- ending finished goods
= COGS
What is the difference between GAAP and IFRS with regards to classifying current liabilities versus not
GAAP = only need the intent and ability
IFRS - requires the actual agreement to be in place
How do you calculate deferred tax expense
it is the change the net amount of all deferred tax assets and liabilities
so if in x1 there was 40,000
and in x2 there was 75000 the difference (35,000) would be the deterrence tax expense for the year
How do you handle a proprietor’s draw
Owners draw is equivalent to a payment of dividends and is a direct reduction of equity.
Not included in the income statement
Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole’s
I. Paid-in capital
II. Retained earnings
I only
A liquidating dividend is any dividend paid in an amount that is in excess of retained earnings. As a result, it is recorded with a decrease to additional paid-in capital rather than retained earnings
Hoe do you calculate book value per share
Total stockholders equity which includes:
common stock
APIC
RE
Less T/S
and divide it by number of shares he’d in the treasury
Common stock $10 par, 100,000 share authorized,
50,000 shares issued of which 5,000 have been reacquired,
and are held in treasury $450,000
Additional paid-in capital common stock $1,100,000
Retained earnings $800,000
Subtotal $2,350,000
Less treasury stock ($150,000)
Total stockholders’ equity $2,200,000
2200000 / 45,000(shares outstanding) = 48.89 or 49
How do you recored the issuance of stock rights
When you issue to existing stockholders it does NOT reduce RE
It is recorded for disclose purposes but no asset, liability or equity accounts are affected
Again with the liquidating dividends - dividends paid out of earning are recognized as reductions of RE
Distributions NOT paid out of dividends are considered liquidating dividends - they reduce APIC, Not RE
Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole’s
Paid in capital ONLY\
How do you calculate bonus:
Bonus = .25 * (60,000 - x)
25% is the bonus on the excess of income over $100K after deducting bonus but before deducting tax - this year made $160,000
60,000 is excess so: X = .25(60,000) - .25(X) 1.25X = 15,000 x = 15,000/1.25 = 12,000
How do you calculate the holding gain or loss on inventory - using current cost accounting
It is the difference between its replacement cost and purchase price
$8 purchase and Replacement is $10 = $2 holding gain
On January 2, 20X3, Raft Corp. discovered that it had incorrectly expensed a $210,000 machine purchased on January 2, 20X0. Raft estimated the machine’s original useful life to be 10 years and its salvage value at $10,000. Raft uses the straight-line method of depreciation and is subject to a 30% tax rate. In its December 31, 20X3, financial statements, what amount should Raft report as a prior period adjustment?
105,000
Since prior period adjustments are made as of the beginning of the period, a prior period adjustment in the December 31, 20X3 financial statements would require a net adjustment for periods up through December 31, 20X2. If the machine had been capitalized, income before taxes in 20X0 would have increased by $210,000. In addition, however, with a useful life of 10 years and a salvage value of $10,000, depreciation would have been $20,000 per year for each of 20X0, 20X1, and 20X2, reducing total income before taxes for that 3 year period by $60,000, indicating a net increase of $210,000 - $60,000 or $150,000 in income before taxes. At 30%, taxes would be $150,000 x 30% or $45,000 for a net amount of $105,000.
dr. Equipment 210,000
cr RE 105,000
cr A/D 60,000
cr current income tax liability 45,000
R&D expense rules for equipment
Computer equipment costing $320,000 that will be used for general research and development activities. The computer has a 5-year useful life with no salvage value.
When an asset is acquired for general research and development activities, it is depreciated over its useful life with the depreciation recognized as research and development (R & D) expense. As a result, the equipment will be depreciated over its useful life and R & D expense will include $320,000 x 1/5 = $64,000.
Storage equipment costing $240,000 to contain a highly volatile substance that is being used in a specific research project. The storage equipment has a useful life of 5 years with no salvage value. The research project is expected to require 3 years to complete after which the equipment will have no alternative use to the company.
When an asset is acquired for a specific R & D project and has no alternative use to the company, the total cost is recognized as R & D expense, increasing X Company’s expense by $240,000.
A machine costing $180,000 that will be used for a specific research project that is expected to require one year. At the end of the year, the equipment, which has a 5-year useful life and no salvage value, will be used in the Company’s manufacturing operations.
When an asset is acquired that will be used for R & D, after which it will have an alternative use to the company, it is depreciated and the depreciation is recognized as R & D expense while it is being used for that purpose and as a manufacturing expense when it is converted to that purpose. The first year’s depreciation on the machine, $180,000 x 1/5 or $36,000 will be recognized as R & D expense resulting in a total of $64,000 + $240,000 + $36,000 = $340,000.
Barr Co. has total debt of $420,000 and stockholders’ equity of $700,000. Barr is seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in common stock and is negotiating with a bank to borrow additional funds. The bank is requiring a debt-to-equity ratio of 0.75. What is the maximum additional amount Barr will be able to borrow?
$330,000
Once Barr issues the additional $300,000 in common stock, total stockholders’ equity will be $1,000,000. With an allowable debt to equity ratio of .75, Barr may have total debt equal to 75% of $1,000,000, or $750,000. Since debt is already $420,000, Barr will be able to borrow an additional $330,000.
On November 1, 20X2, Davis Co. discounted with recourse at 10% a one-year, noninterest bearing, $20,500 note receivable maturing on January 31, 20X3. What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, 20X2?
When Davis Co. discounted the note, it remains liable if the maker of the note does not redeem the note in full. As a result, Davis has a contingent liability for $20,500, the maturity value of the note.
Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?
A patent
Goodwill
R&D costs for a patent
A trademark with indefinite useful life
A patent
The recoverability test is used to determine if the carrying value of an intangible asset will be recovered during its effective useful life. As a result, the test can only be applied to those intangibles that have definite lives. ASC 350-30-35-14 states that intangible assets subject to amortization – those with definite lives, such as patents –are subject to the same recoverability testing as per the Impairment or Disposal of Long-Lived Assets subsections of ASC 360-10.
In its 20X3 financial statements, Cris Co. reported interest expense of $85,000 in its income statement and cash paid for interest of $68,000 in its cash flow statement. There was no prepaid interest or interest capitalization either at the beginning or end of 20X3. Accrued interest at December 31, 20X2, was $15,000. What amount should Cris report as accrued interest payable in its December 31, 20X3, balance sheet?
32,000
With a beginning balance in interest payable of $15,000, interest expense of $85,000 would increase the liability to $100,000. Payments of $68,000 would reduce the liability to its ending balance of $32,000.
AOCI is reported on which statement
The statement of financial position
In order for an item to qualify for recognition on the f/s what must it have
- meet the definition of an element on ALL of the f/s - the b/s or I/S
- be relevant to users
- be based on information which is representationally faithful, verifiable, and neutral
During periods of rising prices, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory cost flow methods?
FIFO not LIFO
under which circumstance should an exchange be based on the reported amounts of the non monetary asset surrendered
when the transaction lacks commercial substance
In general, a nonmonetary transaction is measured on the basis of the fair value of the consideration. When a transaction lacks commercial substance, however, the transaction is measured on the basis of reported amounts. A nonmonetary transaction has commercial substance when, as a result of the transaction, the amounts or timing of future cash flows is affected.
Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell’s truck originally cost $23,000, its accumulated depreciation was $20,000, and its fair value was $5,000. Highway’s truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?
3700
dr new 3,700 dr cash 700 dr A/D 20,000 cr old 23,000 cr gain 1,400
Since the exchange lacks commercial substance, Campbell should record the asset received at the lower of three values: (i) the fair value of the asset given up (plus cash paid or minus cash received; (ii) the fair value of the asset received; or (iii) the book value of the asset given up (plus cash paid or minus cash received). This rule generally results in the new asset’s value being based in the book value of the asset given up. Campbell should value the new asset at $3,700, which is the book value of the asset given up ($3,000) plus the cash Campbell paid in the transaction ($700).
Bayberry Co. has an asset with a cost of $200,000 and accumulated depreciation of $120,000. Driftwood Co. has an asset with a cost of $250,000 and accumulated depreciation of $160,000. Both assets have a fair value of $100,000. Bayberry and Driftwood find it mutually advantageous to exchange assets, and the exchange results in improved future cash flows for both companies. What amount, if any, is Bayberry’s gain on the exchange?
dr NEW 100,00
dr A.D 120,000
cr old 200,000
cr gain 20,000
In a nonmonetary exchange with commercial substance, all gains or losses must be recognized. This transaction has commercial substance because it will result in improved future cash flows for both companies. The amount of gain or loss will be equal to the difference between the fair value, $100,000, and the carrying value, $80,000, of the asset given up, for a gain of $20,000.
Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck and $4,000 cash in a transaction that lacked commercial substance. The fair value of the truck received was $16,000. At what amount should Amble record the truck received in the exchange?
dr new 9,600
dr cash 4,000
cr old 12,000
cr Gain 1,600
what action do you take when you have an ARO
Capitalize the asset retirement cost by increasing the carrying amount of the related asset
Measure the asset retirement cost at fair value
Allocate asset retirement cost to expense over the useful life of the related asset
When should a long-lived asset be tested for recoverability?
Long-lived assets are only required to be tested for impairment as a result of a triggering event, which is an event or change in circumstances indicating that the carrying value of the asset may not be recoverable. It is tested by comparing the carrying value to the recoverable amount and reduced to fair value if the recoverable amount is lower.
Isle Co. owned a copy machine that cost $5,000 and had accumulated depreciation of $2,000. Isle exchanged the copy machine for a computer that cost $4,000. Isle’s future cash flows are not expected to change significantly as a result of the exchange. What amount of gain or loss should Isle report and at what amount should it record the asset?
dr new 3000
dr A/D 2000
cr old 5000
When an asset is exchanged for another asset in a nonmonetary transaction that lacks commercial substance, which would be the case if cash flows are not expected to change significantly as a result of the exchange, the amount recorded for the new asset will be the carrying value of the old asset plus any recognized gain.
Any loss resulting from such a transaction would be recognized in full, but gain is not recognized unless boot is received, and then only partially. In this situation, an asset with a book value of $3,000 was exchanged for an asset worth $4,000, or at least ‘costing’ $4,000 which we can only assume is the fair value in the absence of additional information. No boot was received. Because there is gain with no boot, no gain is recorded. There was no loss to record.
In this case, with no recognized gain, the amount recorded for the new asset is the carrying value of the old asset, so $5,000 - $2,000, or $3,000.
On June 30, 20X5 Castille Corp. purchases, for $600,000, land upon which a building and a dilapidated shed are situated. Castille plans to use the building as-is for operations but immediately razes the shed at a cost of $5,000 minus scrap recovery of $1,000. A recent tax appraisal of the property allocated $100,000 to the land and $400,000 to the building. In the entry to record the acquisition of the property, at what amount will Castille debit Land?
120800
600,000
+5,000
-1,000
604,000
Since the land and building are being used in their existing condition, the $4,000 net cost of razing the shed is added to the $600,000 cost of the land and building to give a total of $604,000. With no other basis for allocating the cost, it will be allocated between land and building in the same ratio as the tax appraisal values. As a result, the cost of the land will be $100,000/$500,000 x $604,000 or $120,800.
Tech Co. bought a trademark on January 2, two years ago. Tech accounted for the copyright as instructed under the provisions of FASB ASC Topic 350 – Intangibles – Goodwill and Other. The intangible was being amortized over its useful life of 40 years. The carrying value at the beginning of the year was $38,000. It was determined during the current year that the cash flow from the trademark will be generated indefinitely at the current level. What amount should Tech report as amortization expense for the current year?
0
Upon determining that the trademark will generate cash flows indefinitely, the intangible would be considered an intangible with an indefinite useful life. These intangibles are not subject to amortization but are required to be evaluated for impairment at least annually.
Brand Co. incurred the following research and development project costs at the beginning of the current year:
Equipment purchased for current and future projects $100,000
Equipment purchased for current projects only $200,000
Research and development salaries for current project $400,000
Equipment has a five-year life and is depreciated using the straight-line method. What amount should Brand record as depreciation for research and development projects at December 31?
20,000 = amount depreciated this year
the expense would be 400+200+20
Research and development costs must be expensed immediately, with the exception of equipment purchased for the production of future projects. Since $100,000 in equipment was purchased for current and future projects, it may be capitalized and depreciated. The amount depreciated for the year will be $20,000 (100,000 / 5 = 20,000).
On January 2, 20X2, Gant Co. purchased a franchise with a useful life of five years for $60,000 and an annual fee of 1% of franchise revenues. Franchise revenues were $20,000 during 20X2. Gant projects future revenues of $40,000 in 20X3 and $60,000 per year for the following three years. Gant uses the straight-line method of amortization. What amount should Gant report as intangible asset-franchise, net of related amortization in its December 31, 20X2, balance sheet?
Because Gant uses the straight-line method of amortization and the useful life of the intangible franchise asset is five years, franchise amortization for 20X2 will be $12,000 and the carrying amount of the asset on the December 31, 20X2 balance sheet will be $48,000 ((60,000 – (60,000/5) = 48,000)).
A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized?
200,000
ASC 350-40-30-1 states the following costs incurred in obtaining or developing internal-use software may be capitalized:
External direct costs such as fees paid to third parties for software development, costs of obtaining the software from a vendor, travel expenses incurred by employees associated with developing the software;
Payroll costs for employees for time spent working directly on the internal-use software project;
Interest costs incurred while developing internal-use software.
Accordingly, $200,000 paid to developers to write the code is capitalizable. The other costs would simply be expensed as incurred.
Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?
Capitalized and depreciated over its estimated useful life.
Expensed in the year in which the research and development project started.
Either capitalized or expensed, but not both, depending on the term of the research and development project.
Capitalized and depreciated over the term of the research and development project.
When equipment used in research and development activities has alternative future uses, it should be capitalized and depreciated over its estimated useful life, regardless of the term of the research and development project.
Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged an investor a franchise fee of $65,000 for the right to operate as a franchisee of one of Baker’s restaurants. A cash payment of $25,000 towards the fee was required to be paid to Baker during the current year. Four subsequent annual payments of $10,000 with a present value of $34,000 at the current market interest rate represent the balance of the fee which is expected to be collected in full. The initial cash payment is nonrefundable and no future services are required by Baker. What amount should Baker report as franchise revenue during the current year?
59,000
Franchise agreement revenue is recognized only once the franchisor has performed substantially all the material contractual services and collectability is reasonably assured. Because Baker performed all services and there appear to be no concerns about collectability, Baker should recognize the full amount of revenue in the current year. The full amount is the present value of the consideration given and expected, or $59,000 (25,000 + 34,000 = 59,000).
A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the date of the discounting transaction, the note receivable discounted account should be
Increased by the face amount of the note
When a note receivable is sold with recourse, it is treated as if the entity borrowed funds from the bank, using the receivable as collateral. In such a case, the proceeds are recognized as a liability, and the receivable is reclassified, decreasing notes receivable and increasing notes receivable discounted.
Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest revenue earned by Leaf over the life of this note?
5045
Leaf will receive a total of 5 payments at $5,009 or $25,045 on a note that was recorded at its present value of $19,485. The difference of $5,560 will be recognized as interest revenue over the term of the note.
At year end, a company has a defined benefit pension plan with a projected benefit obligation of $350,000; a net gain of $140,000 that was not previously recognized in net periodic pension cost; and prior service cost of $210,000 that was not previously recognized in net periodic pension cost. What amount should be reported in accumulated other comprehensive income related to the company’s defined benefit pension plan at year end?
debit balance of 70
Any gains and losses not already recognized as pension expense are recognized in accumulated other comprehensive income. There is a credit gain of $140,000 and a debit loss of $210,000, for a net debit to AOCI of $70,000.
On March 1, 20X7, Somar Co. issued 20-year bonds at a discount. By September 1, 20X12, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. How should Somar report the bond retirement on its 20X12 income statement?
A loss in continuing operations.
Since the bonds were issued at a discount, the carrying value would be lower than the face amount. If they are retired at 105, the amount paid to redeem the bonds would exceed the face, and therefor the carrying value, resulting in a loss on retirement. A gain or loss on early retirement of debt is recognized as a component of income from continuing operations.
Dividends on its 1,000 shares of 6%, $10 par value cumulative preferred stock have not been declared or paid for 3 years.
Treasury stock that cost $15,000 was reissued for $8,000.
What amount of retained earnings should be appropriated as a result of these items?
0
Appropriation of RE are used to indicate needs that are anticipated that may prevent the payment of dividends
Not used for dividends in arrears
Dr cash 8000
dr APIC T/S or RE 7,000
cr T/S 15,000
RE or APC T/S would be reduced, but not appropriated
During 20X2, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad’s $25 par common stock at the option of the preferred shareholder. On December 31, 20X3, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to Common Stock and to Additional Paid-in Capital-Common Stock as a result of the conversion?
dr P/S (par) (100 * 5000) 500,000
dr P/S Apic (10) *5000 50000
cr C/S (par 25) *15,000 375,000
cr APIC C/S ( to balance) 175,000
When the preferred stock is converted to common shares, the equity accounts related to it are cancelled with a debit to preferred stock of 5,000 @ $100 or $500,000 and additional paid-in capital from preferred stock of 5,000 @ $10 or $50,000. The preferred is converted into 15,000 shares of common with a par value of $25 per share resulting in a credit to common stock of $375,000. The amount required to balance the entry will be a credit to additional paid-in capital from common stock of $175,000.
Pugh Co. reported the following in its statement of stockholders’ equity on January 1, 20X0:
Common stock, $5 par value, authorized
200,000 shares, issued 100,000 shares $500,000
Additional paid-in capital $1,500,000
Retained earnings $516,000
$2,516,000
Less treasury stock, at cost, 5,000 shares $40,000
Total stockholders’ equity $2,476,000
The following events occurred in 20X0:
May 1 - 1,000 shares of treasury stock were sold for $10,000.
July 9 - 10,000 shares of previously unissued common stock were sold for $12 per share.
October 1 - The distribution of a 2-for-1 stock split resulted in the common stock’s per share par value being halved.
Pugh accounts for treasury stock under the cost method. Laws in the state of Pugh’s incorporation protect shares held in treasury from dilution when stock dividends or stock splits are declared.
100,000* 5 = 500,000
sale of T/S does not increase shares issued
issue 10,000 * 5 = 550,000
stock split doubles the number of share but halves the par value to 2.5
550,000
Pugh had 100,000 shares of $5 par common stock issued at the beginning of the year. The sale of the treasury stock does not increase shares issued, but the issuance on July 9 increases the total shares issued to 110,000. As a result of the stock split on October 1, the number of shares doubled to 220,000, but the par value was reduced to $2.50, resulting in the par value of common stock issued being $550,000.
In 20X9, Elm Corp. bought 10,000 shares of Oil Corp. at a cost of $20,000. On January 15, 20X10, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, 20X10, payable on February 15, 20X10. During 20X10, the Oil stock had the following market values:
January 15 $25,000
February 1 $26,000
February 15 $24,000
The net effect of the foregoing transactions on retained earnings during 20X10 should be a reduction of
20,000
the net effect is that the gain is closed out to RE
Since the gain or loss on the property is ultimately closed into retained earnings, the net effect on retained earnings will be the cost of the property, or $20,000 in this case.
On November 2, 20X2, Finsbury, Inc. issued warrants to its stockholders giving them the right to purchase additional $20 par value common shares at a price of $30. The stockholders exercised all warrants on March 1, 20X3. The shares had market prices of $33, $35, and $40 on November 2, 20X2, December 31, 20X2, and March 1, 20X3, respectively. What were the effects of the warrants on Finsbury’s additional paid-in capital and net income?
no JE when issue warrants
When they are exercised
you would receive $30 per share
dr cash 30
cr C/S (20) par
cr APIC 10
net income is not affected
Pine Corp. is required to contribute, to an employee stock ownership plan (ESOP), 10% of its income after deduction for this contribution but before income tax. Pine’s income before charges for the contribution and income tax was $75,000. The income tax rate is 30%. What amount should be accrued as a contribution to the ESOP?
its the bonus formula
x= %($$$ - X)
X = 10% (75,000 - )
Contribution = 10% x ($75,000 - Contribution) Contribution = $7,500 - 10% x Contribution 110% x contribution = $7,500 Contribution = $7,500/110% or $6,818
what are you required to disclose - pension plan
An entity with a defined benefit pension plan is required to disclose a description of the plan, the amount of pension expense by component, the weighted-average discount rate, and the estimate of future contributions for the next fiscal period, not the next five years.
On January 2 of the current year, Cruises, Inc. borrowed $3 million at a rate of 10% for three years and began construction of a cruise ship. The note states that annual payments of principal and interest in the amount of $1.3 million are due every December 31. Cruises used all proceeds as a down payment for construction of a new cruise ship that is to be delivered two years after start of construction. What should Cruise report as interest expense related to the note in its income statement for the second year?
0
Interest expense on self-constructed long-term assets may be capitalized to the extent that interest is actually paid, subject to certain rules. The entire amount of interest paid in the second year is capitalized. The amount expensed is $0.
A company finances the purchase of equipment with a $500,000 five-year note payable. The note has an interest rate of 12% and a monthly payment of $11,122. After two payments have been made, what amount should the company report as the note payable balance in its December 31 balance sheet?
500K * 12% = 60,000
60,000/12 = 5000 interest
payment of 11122 - 5000 = 6122 of principle reduction
5000,000 - 6122 = 493878
next month:
493,878 * 12%/12 = 4939
11,122 - 4939 = 6138 of principle reduction
493,878 - 6138 = 487,695 principle after the second payment
The first payment will include interest of $500,000 x 12% x 1/12 or $5,000. The entire payment was $11,122, indicating a principal reduction of $6,122 and an ending balance of $500,000 - $6,122 or $493,878. The second payment will include interest of $493,878 x 12% x 1/12 or $4,939, indicating a principal reduction of $6,183. After the second payment, the liability will have a balance of $493,878 - $6,183 or $487,695.
On October 1, year 1, Gold Co. borrowed $900,000 to be repaid in three equal, annual installments. The note payable bears interest at 5% annually. Gold paid the first installment of $300,000 plus interest on September 30, year 2. What amount should Gold report as a current liability on December 31, year 2?
The amount to be reported in current liabilities will include any principal payments to be made within one year of the balance sheet date and any interest that has accrued from the date of the most recent payment until the end of the period. There is a $300,000 principal payment due on September 30 of year 3, 9 months from the date of the financial statements, making it a current liability. In addition, as a result of the payment on September 30 of year 2, the principal balance was reduced to $600,000. Interest from October 1 until December 31 will be $600,000 x 5% x 3/12 = $7,500. As a result, $307,500 will be reported in current liabilities.
A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and minority interest balances in the parent company’s consolidated balance sheet
No effect on retained earnings and a decrease in minority interest.
On June 30, 20X2, Lang Co. sold equipment with an estimated useful life of eleven years and immediately leased it back for ten years. The equipment’s carrying amount was $450,000; the sales price was $430,000; and the present value of the lease payments, which is equal to the fair value of the equipment, was $465,000. In its June 30, 20X2, balance sheet, what amount should Lang report as deferred loss?
Incorrect. Since the fair value of the equipment was $465,000 compared to a carrying amount of $450,000, the equipment had actually increased in value and the loss on sale was not a real economic loss. As a result, the entire $20,000 loss will be deferred and amortized over the term of the lease as an increase in either rent expense if the lease is classified as an operating lease, or depreciation expense if the lease is classified as a capital lease.
On January 1, 20X0, Hooks Oil Co. sold equipment with a carrying amount of $100,000, and a remaining useful life of 10 years, to Maco Drilling for $150,000. Hooks immediately leased the equipment back under a 10-year capital lease with a present value of $150,000 and will depreciate the equipment using the straight-line method. Hooks made the first annual lease payment of $24,412 in December 20X0. In Hooks’ December 31, 20X0, balance sheet, the unearned gain on equipment sale should be
This is a sale and leaseback transaction under which Hooks will not recognize the gain of $50,000 on the sale of the equipment. Instead, it will be reported as a deferred credit in the liability section of the balance sheet and will be amortized over the 10-year term of the lease. Since the leaseback is a capital lease, the gain will be recognized as a reduction to depreciation expense of $5,000 per year. As of 12/31/X0, one year of the 10-year lease had elapsed indicating that $5,000 of the gain would have been amortized leaving an unearned gain of $45,000.
are prepaid included in the quick ratio numerator
No
cash
AR net
short term marketable securities
thats it
It can also be calculated as CA - inventory -prepaids / CL
Harmony Co. has a single-employer defined benefit pension plan. Harmony should report a liability related to the plan equal to which of the following amounts?
The unfunded projected benefit obligation.
The amount to be reported as a liability in connection with a defined benefit pension plan is the difference between the projected benefit obligation and the fair value of plan assets. The difference represents the portion of the projected benefit obligation that has not yet been funded.
Ocean Corp.’s comprehensive insurance policy allows its assets to be replaced at current value. The policy has a $50,000 deductible clause. One of Ocean’s waterfront warehouses was destroyed in a winter storm. Ocean incurred $20,000 of costs in dismantling the warehouse and plans to replace it. The following data relate to the warehouse:
Current carrying amount $ 300,000
Replacement cost 1,100,000
What amount of gain should Ocean report as a separate component of income from continuing operations?
$730,000
Since the insurance policy allows assets to be replaced at their current value, the policy will pay Ocean the replacement cost of $1,100,000 minus the deductible of $50,000 for a net of $1,050,000. The warehouse had a carrying value of $300,000 and an additional $20,000 was incurred for its demolition. As a result, the difference of $730,000 will be reported as a gain. The gain will be reported as a separate component of income from continuing operations.
On January 1, 20X6, Jones Construction, Inc. changed to the percentage-of-completion method of income recognition for financial statement reporting but not for income tax reporting. Jones can justify this change in accounting principle. As of December 31, 20X5, Jones compiled data showing that income under the completed-contract method aggregated $700,000. If the percentage-of-completion method had been used, the accumulated income through December 31, 20X5, would have been $880,000. Assuming an income tax rate of 40% for all years, ASC 250 requires that the cumulative effect of this accounting change to be reported by Jones as
An increase in construction-in-progress for $180,000 in the 20X5 balance sheet.
A change from completed-contract to percentage-of-completion is a change in accounting principle that is given retrospective application. The carrying value of assets and liabilities are adjusted as of the beginning of the earliest period presented with an offset to retained earnings. In this case, there would be an increase (debit) to construction in progress of $180,000. Since the change is made for the financial statement, but not for tax, it creates a temporary difference and a deferred tax liability of ($180,000 x 40%) $72,000. The difference would be an increase (credit), not a decrease, to beginning retained earnings.
Bryant Hospital, a nonprofit hospital affiliated with a religious group, reported the following information for the year ended December 31, 20X5:
Gross patient service revenue at the hospital’s
full established rates $980,000
Bad debts expense $10,000
Contractual adjustments with third-party payors $100,000
Allowance for discounts to hospital employees $15,000
On the hospital’s statement of operations for the year ended December 31, 20X5, what amount should be reported as net patient service revenue?
Net patient service revenue is the amount that the health care organization expects to collect subject to credit risk. Of the $980,000 billed at full rates, the hospital does not expect to collect the reductions due to contractual adjustments of $100,000 or the employee discounts of $15,000, resulting in $865,000 that the hospital expects to collect. This is subject to credit risk in that some patients or insurance companies may not be able to pay. The result is bad debt expense, an operating expense, of $10,000.
On June 27, 20X2, Brite Co. distributed to its common stockholders 100,000 outstanding common shares of its investment in Quik, Inc., an unrelated party. The carrying amount on Brite’s books of Quik’s $1 par common stock was $2 per share. Immediately after the distribution, the market price of Quik’s stock was $2.50 per share. In its income statement for the year ended June 30, 20X2, what amount should Brite report as gain before income taxes on disposal of the stock?
50,000
The distribution of the Quik stock is a property dividend that will be reported at the fair value of the stock when the dividend is declared. The difference between the fair value and the carrying value is recognized as a gain or loss as if the property had been sold at fair value. The Quik stock had a fair value of $2.50 compared to a carrying amount of $2 per share resulting in a gain of $.50 per share on 100,000 shares or a total gain of $50,000.
Cash paid for selling expenses
dr selling expenses 141500
cr ADA (increase) 200
cr A/D (increase) 500
cr Cash (the balance) 140,800
1/3 of the depreciation was selling expense - so only need 1/3 of it here
On January 1, Read, a nongovernmental not-for-profit organization, received $20,000 and an unconditional pledge of $20,000 for each of the next four calendar years to be paid on the first day of each year. The present value factor for an ordinary annuity for four years at a constant interest rate of 8% is 3.312. What amount of net assets with donor restrictions is reported in the year the pledge was received?
the 20,000 would be reported as revenue when received
The immediate cash contribution of $20,000 would be reported as revenue when received, and not as net assets with donor restrictions. The remaining expected $80,000 to be received in four equal yearly pledges would be reported as net assets with donor restrictions at the present value of an ordinary annuity ($20,000 X 3.312 = $66,240).
On incorporation, Dee Inc. issued common stock at a price in excess of its par value. No other stock transactions occurred except treasury stock was acquired for an amount exceeding this issue price. If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?
Net common stock: Decrease
Additional paid-in capital: Decrease
Retained earnings: Decrease
Under the par value method, the acquisition of treasury stock will be recorded with a credit or decrease to cash for the amount paid, a debit or increase to treasury stock for the par value of the stock acquired, and a debit or decrease to additional paid-in capital for the amount recorded on the original issuance of the shares in excess of par. Since the purchase price exceeds the issue price, the excess will be a debit or decrease to retained earnings. Since treasury stock decreases the number of shares of common stock outstanding, the transaction results in decreases to net common stock, additional paid-in capital, and retained earnings.
Sunk Co. is unable to service its $500,000, 8%, 5-year note payable with First Bank, which agrees to restructure the debt by accepting an asset from Sunk and modifying the terms of the debt agreement. The asset given up by Sunk has a fair value of $200,000 and a carrying value of $150,000. The transfer was applied against the face amount of the note. The carrying value of Sunk’s debt liability before the transfer, which includes accrued interest of $40,000, was $414,771. First Bank agrees to forgive the accrued interest, reduce the principle by $100,000, lower the interest rate to 7%, and extend the loan term to 10 years total, meaning Sunk now has exactly eight years to repay the note. After accounting for any gain on the disposal of the asset, what amount of gain will Sunk record as a result of the modification of terms?
0
CV of debt = 414,771
reduced by sale of asset at gain -200
414,771 - 200 = 214771
face of the debt reduced by 100 (500 -200 - 100 = 200)
so the new liability = 200plus interest for 8 years 7%
200 * .07 * 8 years = 317,000
since the new payment of 317,00 is greater than CV of 214,771 = there i son gain recognized
The transfer of the asset will be recognized by Sunk as if the asset was sold for its fair value of $200,000, at a gain of $50,000, with the proceeds used to reduce the debt. As a result, the carrying value of the debt would be reduced by $200,000 to $214,771, and the face amount of the liability will be reduced to $300,000. Under the modification of terms, the principle is being further reduced by $100,000, to $200,000, accrued interest is forgiven, and the interest rate for the remaining extended term of 8 years will be 7%. As a result, the total payments to be made under the new terms will include principle of $200,000 plus interest for 8 years at 7% of $200,000 per year or $112,000. Since the $312,000 in total payments to be made under the modified terms exceeds the revised carrying value of the liability of $214,771, there will be no gain recognized.
Sun Corp. had investments in marketable debt securities costing $650,000 that were classified as available-for sale. On June 30, 20X3, Sun decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on that date. The investments’ market value was $575,000 at December 31, 20X2, $530,000 at June 30, 20X3, and $490,000 at December 31, 20X3. Sun does not elect the fair value option to account for these investments.
120,000
its the difference between the cost you bought 650,000 and the Market price at the transfer - 530,000
= 120,000
When an investment in a debt security is reclassified from available for sale (AFS) to held to maturity (HTM), the transfer occurs at its market value on the date of transfer. Any unrealized holding gain or loss is recognized in other comprehensive income (OCI) and amortized as an adjustment to the effective interest rate on the HTM security. On the date of transfer, the market value of $530,000 is $120,000 lower than its $650,000 cost, which is recognized in OCI, but no portion is recognized in income.
What is a primary purpose and focus of the statement of activities for a nongovernmental, not-for-profit organization?
The primary purpose and focus of the statement of activities for a nongovernmental, not-for-profit organization is to demonstrate how the organization’s resources are used in providing various programs and services.
