REVIEW

Question 1

What is the difference between a statement of activities and a statement of functional expenses

Answer 1

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

Question 2

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.

Answer 2

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.

Question 3

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?

Answer 3

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.

Question 4

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?

Answer 4

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).

Question 5

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?

Answer 5

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

Question 6

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?

Answer 6

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.

Question 7

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?

Answer 7

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

Question 8

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?

Answer 8

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.

Question 9

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

Answer 9

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.

Question 10

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?

Answer 10

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

Question 11

Land and other real estate held as investments by endowments in a government’s permanent fund should be reported at

Answer 11

Fair Value

Question 12

No matter what - deferred income tax liabilities is

Answer 12

NON current

Question 13

Is the statistical section part of the CAFRS

Answer 13

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

Question 14

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?

Answer 14

10,000
7820

maturity value - 10,000 *3% = 300 * 5 years - 1500

total maturity value = 1150 * PV .680 = 7820

Question 15

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

Answer 15

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.

Question 16

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.

Answer 16

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.

Question 17

If you have a direct finance lease can a lessor recognize gain or loss?

Answer 17

No - they will only recognize interest income because they are not making any profit - they are only recognizing interest income

Question 18

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?

Answer 18

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.

Question 19

Periodic design change are NOT what

Answer 19

they re NOT R&D expenses

Question 20

in a nonmonetary exchange - what is the boot percentage

Answer 20

25%

Question 21

when considering what to expense in R&D - what types of costs are expensed

Answer 21

costs to construct and to test and modify a prototype are development costs.

Question 22

What is the date you record a liability for an asset that you purchase

Answer 22

Liability is only recorded when the associated asset is recorded on the boots -

Question 23

How do you treat DTL when you have an equity method investment that gives you net income and dividends that qualify for DRD

Answer 23

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

Question 24

what is the most significant characteristic to determine the classification of an enterprise fund

Answer 24

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.

Question 25

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?

Answer 25

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

Question 26

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?

Answer 26

Even though you own 70% you report the total

and then eliminate the total amount of notes payable

450 + 200 - 100

Question 27

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?

Answer 27

IFRS is lower of original cost or NRV

$910 = original cost

NRV = selling price - cost of disposal

1000 - 100 = 900

Question 28

What is the ratio of dividend s per share

Answer 28

dividends per share / EPS

Question 29

What information is require about major customers

Answer 29

• 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

Question 30

Formula AR Turnover

Answer 30

Credit sales / avg AR

Make sure AR is net of allowance

Question 31

What is in an operating cycle -

Answer 31

average days to collect + average days sales in inventory

61 + 33 = 94

Question 32

Which F/S provides info about a co liquidity and financial flexibility

Answer 32

balance sheet

Question 33

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?

Answer 33

yes to both

they should be separated too

Question 34

when calculating a segments operating profit or loss - what is included or not included

Answer 34

sales to customers
inter segment sales

reduce by operating expenses
reduce by allocation of indirect operating ex[ense

Do NOT include general corporate expenses

Question 35

Fair Value vs Cash flow hedge

fixed and variable trades - what are the rules

Answer 35

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

Question 36

what is a companies functional currency

Answer 36

used in its primary economic environment - normal operations

Question 37

NFT - you get a car donated and a car given with donor restrictions - how do you handle depreciation

Answer 37

Its just like GAAP

You use the same criteria an recognize depreciation expense in donors without restrictions

Question 38

What kind of accounting do each of these three give you

fiduciary
proprietary
governmetn funds

Answer 38

government funds - modified

proprietary - enterprise and internal - accrual

Fiduciary - accrual

Question 39

In a sales leaseback transaction a gin not recognized is reported as what on the B/S

Answer 39

A deferred credit in the liabilities section

Question 40

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?

Answer 40

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

Question 41

do you included unexpected loss on plan assets in pension expense?

Answer 41

Only if the cumulative amount exceeds a threshold

pensions costs:
Service cost
\+Interest cost
-return on plan assets
- Amortization of Prior service cost

Question 42

How do you calculate cost of goods manufactured same as cost of goods sold

Answer 42

beginning
\+ cost of goods manufactured
= cost of goods available for sale
- ending finished goods inventory
= cost of goods sold

Question 43

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?

Answer 43

The translation loss less the exchange gain is reported in other comprehensive income.

Question 44

What is an accrued pensions cost

Answer 44

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

Question 45

In a sales leaseback transaction - either operating or capital - you will defer the gain up to the PV of the MLP

Answer 45

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

Question 46

what is considered revenue in governmental

Answer 46

Include: taxes, assessments, fines and activities of government

• funds from debt issuance- other finance sources
• funds from operating transfer - other finance sources

Question 47

EPS and you have a dilutive convertible bond with a discount - what do you do

Answer 47

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

Question 48

What do you do when you change from cash to accrual based accounting

Answer 48

Prior period adjustment

adjust the beginning balance of RE

Question 49

What do you report as estimated revenues for government

Answer 49

property taxes
license and permits
intergovernmental revenue

Question 50

Who are the primary users of gov reports

Answer 50

• citizens
• legislative and oversight bodies
• Investors and creditors

Question 51

What format must enterprise funds use to report cash flow operating activities

Answer 51

the direct method

Question 52

How are unrestricted grants reports in a capital projects fund

Answer 52

As revenue as long as they are unrestricted. If restricted - then not reported as revenue

Question 53

what are considered sources when you issue a bond and have bond issue costs and fees

Answer 53

The source is the total amount of the bond $ you get

costs like underwrite fees are expenditures

Question 54

What are the disclosure requirements of companies with defined benefit pension plans

Answer 54

• the components of period pension costs
• the amount of un recognized prior service cost
• detailed description of the plan including groups covered

Question 55

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

Answer 55

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.

Question 56

effective interest rate and JE when you take out a notes payable for 1,000 discounts at 10%

Answer 56

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

Question 57

If you have a no interest note do you accrue interest payable?

Answer 57

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

Question 58

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?

Answer 58

At the face amount minus a discount calculated at the imputed interest rate

Question 59

What is the definition of a deferred tax asset

Answer 59

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

Question 60

What is the definition of a deferred tax liability

Answer 60

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

Question 61

what happens to stockholders equity when you acquire treasury stock

Answer 61

It always decreases stockholders equity because you use cash

dr cash
cr T/S

Question 62

What if you bought the T/S at less than book value per share

Answer 62

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

Question 63

why do you use separate funds in governments

Answer 63

• 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

Question 64

when an asset is traded on 2 markets and no principle market - what are the rules

Answer 64

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

Question 65

what do you do with allowance for doubtful accounts and the recognition of bad debt

Answer 65

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

Question 66

How do you calculate cost of goods manufactured

Answer 66

Begining finished goods
+ Cost of goods manufactured
= Cost of goods available for sale

• ending finished goods
  = COGS

Question 67

What is the difference between GAAP and IFRS with regards to classifying current liabilities versus not

Answer 67

GAAP = only need the intent and ability

IFRS - requires the actual agreement to be in place

Question 68

How do you calculate deferred tax expense

Answer 68

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

Question 69

How do you handle a proprietor’s draw

Answer 69

Owners draw is equivalent to a payment of dividends and is a direct reduction of equity.

Not included in the income statement

Question 70

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

Answer 70

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

Question 71

Hoe do you calculate book value per share

Answer 71

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

Question 72

How do you recored the issuance of stock rights

Answer 72

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

Question 73

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

Answer 73

Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole’s

Paid in capital ONLY\

Question 74

How do you calculate bonus:

Answer 74

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

Question 75

How do you calculate the holding gain or loss on inventory - using current cost accounting

Answer 75

It is the difference between its replacement cost and purchase price

$8 purchase and Replacement is $10 = $2 holding gain

Question 76

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?

Answer 76

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

Question 77

R&D expense rules for equipment

Answer 77

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.

Question 78

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?

Answer 78

$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.

Question 79

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?

Answer 79

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.

Question 80

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

Answer 80

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.

Question 81

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?

Answer 81

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.

Question 82

AOCI is reported on which statement

Answer 82

The statement of financial position

Question 83

In order for an item to qualify for recognition on the f/s what must it have

Answer 83

• 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

Question 84

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?

Answer 84

FIFO not LIFO

Question 85

under which circumstance should an exchange be based on the reported amounts of the non monetary asset surrendered

Answer 85

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.

Question 86

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?

Answer 86

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).

Question 87

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?

Answer 87

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.

Question 88

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?

Answer 88

dr new 9,600
dr cash 4,000
cr old 12,000
cr Gain 1,600

Question 89

what action do you take when you have an ARO

Answer 89

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

Question 90

When should a long-lived asset be tested for recoverability?

Answer 90

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.

Question 91

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?

Answer 91

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.

Question 92

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?

Answer 92

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.

Question 93

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?

Answer 93

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.

Question 94

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?

Answer 94

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).

Question 95

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?

Answer 95

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)).

Question 96

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?

Answer 96

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.

Question 97

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.

Answer 97

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.

Question 98

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?

Answer 98

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).

Question 99

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

Answer 99

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.

Question 100

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?

Answer 100

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.

Question 101

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?

Answer 101

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.

Question 102

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?

Answer 102

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.

Question 103

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?

Answer 103

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

Question 104

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?

Answer 104

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.

Question 105

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.

Answer 105

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.

Question 106

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

Answer 106

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.

Question 107

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?

Answer 107

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

Question 108

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?

Answer 108

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

Question 109

what are you required to disclose - pension plan

Answer 109

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.

Question 110

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?

Answer 110

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.

Question 111

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?

Answer 111

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.

Question 112

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?

Answer 112

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.

Question 113

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

Answer 113

No effect on retained earnings and a decrease in minority interest.

Question 114

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?

Answer 114

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.

Question 115

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

Answer 115

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.

Question 116

are prepaid included in the quick ratio numerator

Answer 116

No

cash
AR net
short term marketable securities

thats it

It can also be calculated as CA - inventory -prepaids / CL

Question 117

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?

Answer 117

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.

Question 118

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?

Answer 118

$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.

Question 119

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

Answer 119

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.

Question 120

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?

Answer 120

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.

Question 121

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?

Answer 121

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.

Question 122

Cash paid for selling expenses

Answer 122

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

Question 123

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?

Answer 123

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).

Question 124

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?

Answer 124

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.

Question 125

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?

Answer 125

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.

Question 126

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.

Answer 126

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.

Question 127

What is a primary purpose and focus of the statement of activities for a nongovernmental, not-for-profit organization?

Answer 127

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.