Roger Flashcards
On December 31, 20X2, Paxton Co. had a note payable due on August 1, 20X3. On January 20, 20X3, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, 20X3, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton’s financial statements were issued on March 31, 20X3. How should Paxton classify the note on its balance sheet at December 31, 20X2?
A.
As a current liability because the financing agreement was signed after the balance sheet date.
B.
As a current liability because the lender is not expected to be financially capable of honoring the agreement.
C.
As a long-term liability because the agreement does not expire within one year.
D.
As a long-term liability because no violation of any provision in the financing agreement exists.
B.
As a current liability because the lender is not expected to be financially capable of honoring the agreement.
In this case, there is intent but not ability because the lender is not expected to be financially capable of honoring the agreement to refinance the short-term liability on a long-term basis. The note payable must be classified as a current liability.
In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold’s gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Gold should report the
A.
The effects of the two transactions in Other Comprehensive Income (OCI).
B.
The effects of the two transactions in income from continuing operations.
C.
Effect of its own bond transaction gain in income from continuing operations, and report the Iron bond transaction as a loss in income from discontinued operations.
D.
Effect of its own bond transaction as a gain from discontinued operations, and report the Iron bond transaction loss in income from continuing operations.
B
Despite the fact that the broker remitted the net amount to Gold, the two transactions will be reported separately. The gain on the retirement of Gold’s bonds is reported as a component of income from continuing operations. The loss on the sale of Iron’s bonds is also a component of income from continuing operations but, if material, would be reported separately.
Canterbury Co. issues a discounted, non-interest-bearing note in exchange for borrowed funds. Choose whether the cash received will be higher or lower than the face value of the note, and whether the effective annual interest rate will be higher or lower than the discount rate:
Cash Received vs. Face Value of Note Effective Rate vs. Discount Rate
A.Higher Lower
B.Lower Higher
C.Higher Higher
D.Lower Lower
B
When a note is discounted, the issuer will receive the maturity value, which will be the face amount when the note is noninterest bearing, reduced by the discount. As a result, cash received will be lower than the face value of the note. The amount of the discount will be the discount rate multiplied by the maturity value and adjusted for the length of time until the note matures. Upon repayment, the effective rate paid will be higher than the discount rate. A $1,000 noninterest bearing note, for example, maturing in one year that is discounted at 10% will result in cash received of $1,000 - $100 or $900. At maturity, the borrower remits the $1,000 to the lender, which is repayment of the $900 received plus the $100 discount. A cost of $100 to borrow $900 for one year would indicate an effective rate in excess of 11%, higher than the 10% discount rate.
When purchasing a bond, the present value of the bond’s expected net future cash inflows discounted at the market rate of interest provides what information about the bond?
A.
Price
B.
Par.
C.
Yield.
D.
Interest.
A.
Price
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.
A gain in continuing operations.
B.
A loss in continuing operations.
C.
A gain in discontinued operations.
D.
A loss in discontinued operations
Choice B (Correct) : 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.
When it is considered imminent that a company is no longer a going concern and the company needs to liquidate its assets, under the Liquidation Basis of Accounting, the assets should be valued at?
A.
Original cost
B.
Net realizable value (NRV)
C.
Amount expected to be generated upon liquidation
D.
Fair market value at date liquidation is considered imminent
Choice C (Correct) : Per ASC 205, the liquidation basis of accounting, when an entity is no longer a going concern and liquidation is considered to be imminent, the assets are valued at the amount expected to be generated upon liquidation. Liabilities are valued according to U.S. GAAP and costs expected to be incurred during liquidation should be accrued.
An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund
I. Increases by revenue earned on the investments.
II. Is not affected by revenue earned on the investments.
III. Decreases when the investments are purchased.
A.
I only.
B.
I and III.
C.
II and III.
D.
III only
Choice A (Correct) and Choices B, C, D (Incorrect): When cash is transferred to a sinking fund, it is a transfer from a current asset to a noncurrent asset. When investments are purchased, the amount in the sinking fund remains unchanged, only the composition of the fund has changed. As revenues are earned on the investments, the earnings are reported as income and added to the sinking fund.
When debt is issued at a premium, interest expense over the term of debt equals the cash interest paid?
A.
Minus premium
B.
Minus premium minus par value
C.
Plus premium
D.
Plus premium plus par value
A
JE:
Int exp 20
Premium amort 10
cash 30
Bonds with detachable stock warrants were issued by Flack Co. Immediately after issue the aggregate market value of the bonds and the warrants exceeds the proceeds. Is the portion of the proceeds allocated to the warrants less than their market value, and is that amount recorded as contributed capital?
I. Less than warrants’ market value
II. Contributed capital
A.
I only.
B.
II only.
C.
Both I and II.
D.
Neither I nor II
Choice C (Correct) and Choices A, B, D (Incorrect): When bonds are issued with detachable stock purchase warrants, the proceeds are allocated between the bonds and the warrants with the amount allocated to the warrants recorded as a form of additional paid-in capital. The proceeds are allocated using the relative fair market values of the bonds and the warrants. Since the aggregate market value of those securities exceeds the proceeds, the amount allocated to each security would be lower than its market value.
Which of the following statements characterizes convertible debt?
A.
The holder of the debt must be repaid with shares of the issuer’s stock
B.
No value is assigned to the conversion feature when convertible debt is issued.
C.
The transaction should be recorded as the issuance of stock.
D.
The issuer’s stock price is less than market value when the debt is converted.
Choice B (Correct): No value is assigned to the conversion feature when convertible debt is issued.
When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the
A.
Face value of the bonds at the beginning of the period by the contractual interest rate.
B.
Face value of the bonds at the beginning of the period by the effective interest rates.
C.
Carrying value of the bonds at the beginning of the period by the contractual interest rate.
D.
Carrying value of the bonds at the beginning of the period by the effective interest rates
A.
Face value of the bonds at the beginning of the period by the contractual interest rate
Things to remember:
Interest payable is a legal commitment and is always based on the stated (ie, contractual) rate of the bond.. Interest payable is the amount of the interest payment for a period that has not yet been paid. Interest expense correlates with a bond’s carrying value and is based on the effective interest rate.
On December 31, 20X1, Northpark Co. collected a receivable due from a major customer. Which of the following ratios would be increased by this transaction?
A.
Inventory turnover ratio.
B.
Receivable turnover ratio.
C.
Current ratio.
D.
Quick ratio
B
The collection would reduce accounts receivable and, therefore, average accounts receivable. Since the receivable turnover ratio is credit sales divided by average accounts receivable, a decrease in average accounts receivable will increase the ratio.
How are dividends per share for common stock used in the calculation of the following?
Dividend per share payout ratio Earnings per share
A.
Numerator Numerator
B.
Numerator Not used
C.
Denominator Not used
D.
Denominator Denominator
Choice B (Correct): The dividend per share payout ratio is the ratio of dividends per share to earnings per share, making dividends per share the numerator. Earnings per share, on the other hand, is net income attributable to common stockholders divided by weighted average shares. Dividends have no effect.
In a period of rising general price levels, Pollard Corp. discloses income on a current cost basis. Which of the following contributes to Pollard’s purchasing power loss on net monetary items?
A.
Refundable deposits with suppliers.
B.
Equity investment in unconsolidated subsidiaries.
C.
Warranty obligations.
D.
Wages payable
Choice A (Correct): During a period of rising prices, a purchasing power loss is incurred on monetary assets such as refundable deposits with suppliers. Neither equity investments nor warranty obligations are monetary, so neither will result in a purchasing power gain or loss. Wages payable is a monetary liability and will result in a purchasing power gain during periods of inflation.
Heath Co.’s current ratio is 4:1. Which of the following transactions would normally increase its current ratio?
A.
Purchasing inventory on account.
B.
Selling inventory on account.
C.
Collecting an account receivable.
D.
Purchasing machinery for cash
Choice B (Correct) and Choices A, C, D (Incorrect):The selling of inventory on account will increase accounts receivable for the sales price while reducing inventory for the cost. Assuming the sales price is higher than the cost of the inventory, current assets would increase as would the current ratio.
Mint Co.’s cash balance in its balance sheet is $1,300,000, of which $300,000 is identified as a compensating balance. Additionally, Mint has classified cash of $250,000 that has been restricted for future expansion plans as “other assets.” Which of the following should Mint disclose in notes to its financial statements?
A.
Both compensating balance and restricted cash.
B.
Compensating balance, not restricted cash.
C.
Restricted cash, not compensating balance.
D.
Neither compensating balance nor restricted cash
Choice A (Correct) and Choices B, C, D (Incorrect): FASB 210-10-S99 states: “Separate disclosure shall be made of the cash and cash items which are restricted as to withdrawal or usage.” T Restricted cash should be disclosed, as well as the compensating balances restricted deposit required by the bank.
Are the following ratios useful in assessing the liquidity position of a company?
Defensive-interval ratio Return on stockholders’ equity
A.
Yes Yes
B.
Yes No
C.
No Yes
D.
No No
Choice B (Correct): The defensive interval ratio, which measures the length of time a company can continue to pay its bills using only its liquid current assets, assesses liquidity. The return on stockholders’ equity measures profitability, not liquidity.
Zeta Co. reported credit sales revenue of $4,600,000 in its income statement for the year ended December 31, Year 2. Additional information is as follows:
12/31/Year 1 12/31/Year 2
Accounts receivable $1,000,000 $1,300,000
Allowance for credit losses (60,000) (110,000)
Zeta wrote off uncollectible accounts totaling $20,000 during Year 2. Under the cash basis of accounting, Zeta would have reported Year 2 sales of
A.
$4,280,000
B.
$4,300,000
C.
$4,350,000
D.
$4,900,000
A
Beginning accounts receivable Year 2 $1,000,000
Credit sales for Year 2 4,600,000
Less accounts written off (20,000)
Less collections in Year 2 (plug) (4,280,000)
Ending accounts receivable Year 2 $1,300,000
Which of the following is true regarding the comparison of managerial to financial accounting?
A.
Managerial accounting is generally more precise.
B.
Managerial accounting has a past focus and financial accounting has a future focus.
C.
The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness.
D.
Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.
D.
Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them
The following are held by Smite Co.
Cash in checking account $20,000
Cash in bond sinking fund account 30,000
Postdated check from customer dated one month from balance sheet date 250
Petty cash 200
Commercial paper (matures in two months) 7,000
Certificate of deposit (matures in six months) 5,000
What amount should be reported as cash and cash equivalents on Smite’s balance sheet?
A.
$27,200
B.
$27,450
C.
$32,200
D.
$57,200
A
In this scenario, the checking account balance, petty cash, and commercial paper maturing in two months are all cash or cash equivalents.
Checking account $20,000
Petty cash 200
Commercial paper 7,000
Cash and cash equivalents $27,200
NOTE:postdated check is treated as a receivable. Postdated checks are not liquid, so they are not cash.
During 20X5, Beck Co. purchased equipment for cash of $47,000, and sold equipment with a $10,000 carrying value for a gain of $5,000. How should these transactions be reported in Beck’s 20X5 statement of cash flows?
A.
Cash outflow of $32,000.
B.
Cash outflow of $42,000.
C.
Cash inflow of $5,000 and cash outflow of $47,000.
D.
Cash inflow of $15,000 and cash outflow of $47,000
D
Don’t net Op. and Investing!
Op JE:
Cash. 15
Acc dep. 10
Equipment 20
Gain. 5
What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization?
A.
Residual interest
B.
Ownership interest
C.
Donor’s interest
D.
Equity interest
Choice A (Correct): Residual interest is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization. As per Statement of Financial Accounting Concepts No. 6 (SFAC 6), equity or net assets is the residual interest in the assets of an entity that remains after deducting its liabilities. With business enterprises this residual interest is often referred to as owners’ equity, but a not-for-profit organization has no ownership interest in the same sense as a business enterprise.
Park, Inc. acquired 100% of Gravel Co.’s net assets. On the acquisition date, Gravel’s accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. Park’s consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities?
A.
$0
B.
$50,000
C.
$350,000
D.
$400,000
Choice D (Correct): ASC 730-10-15-4 requires R&D assets acquired in a business combination to be measured and recognized at their fair values at the date of acquisition.
Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year:
4/1 Issued 30,000 shares of common stock.
6/1 Issued 36,000 shares of common stock.
7/1 Declared a 5% stock dividend.
9/1 Purchased as treasury stock 35,000 shares of its common stock.
Balm used the cost method to account for the treasury stock.
What is Balm’s weighted average of common stock outstanding at December 31?
A.
131,000
B.
139,008
C.
150,675
D.
162,342
B
100,000
22,500 (30,000 x 9/12)
21,000 (36,000 x 7/12)
7,175 (NOTE: 5% X TOTAL ADDITION ABOVE 143,500)
(11.667) NOTE: MINUS TOTAL MO. LEFT 35000 X 4/12
=139,008
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
A.
Less the present value of all future interest payments at the market (effective) rate of interest.
B.
Less the present value of all future interest payments at the rate of interest stated on the bond.
C.
Plus the present value of all future interest payments at the market (effective) rate of interest.
D.
Plus the present value of all future interest payments at the rate of interest stated on the bond
Choice C (Correct) and Choices A, D (Incorrect): 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.
Which of the following is a research and development cost?
A.
Development or improvement of techniques and processes.
B.
Offshore oil exploration that is the primary activity of a company.
C.
Research and development performed under contract for others.
D.
Market research related to a major product for the company.
Choice A (Correct): Research is aimed at the discovery of new knowledge that will result in a new product or process or significant improvement to existing product or process. Development is the conversion of that new knowledge into a plan or design for a new product or process. Costs should not be treated as R&D and are accounted for separately when they are directly related to current revenue such as research performed for others for a fee, periodic design changes or quality control testing to existing products, costs for setting up production of a commercially viable product. Costs incurred for the development or improvement of techniques and processes are R&D costs and are expensed as such.
A city ordered goods at an estimated cost of $4,500. When the goods were received, 30 days after the order was placed, they were accompanied by an appropriate invoice in the amount of $4,800. What amount will be recognized as an adjustment to encumbrances when the goods are delivered?
A.
Debit $4,500
B.
Credit $4,500
C.
Debit $4,800
D.
Credit $4,800
Choice B (Correct) and Choices A, C, D (Incorrect): When the goods were ordered, encumbrances would have been debited for the estimated amount of $4,500. When the goods were delivered, the encumbrance would be reversed with a credit to encumbrances of $4,500. The actual cost of $4,800 would be recognized with a debit to expenditures.
Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan’s adoption. The employees, A, B, C, and D, are expected to retire from the company as follows:
“A” will retire after three years.
“B” and “C” will retire after five years.
“D” will retire after seven years.
What is the amount of prior service cost amortization in the first year?
A.
$0
B.
$5,000
C.
$20,000
D.
$25,000
Choice C (Correct) and Choices B, D (Incorrect): The prior service cost of $100,000 will be amortized over the average remaining service lives of the covered employees. Since one employee will retire after 3 years, 2 after 5 years, and one after 7 years, the average remaining service life for the 4 employees is 5 years ((3+5+5+7) / 4 = 5). Amortization will be $100,000/5 or $20,000.
Choice A (Incorrect): Amortization of prior service cost must be handled on a current and prospective basis.
Which of the following statements are required to be presented for special-purpose government entities engaged only in business-type activities (such as utilities)?
A.
Statement of net assets only.
B.
Management’s Discussion and Analysis (MD&A) and Required Supplementary Information (RSI) only.
C.
The financial statements required for governmental funds, including MD&A.
D.
The financial statements required for enterprise funds, including MD&A and RSI
Choice D (Correct) and Choices A, B, C (Incorrect): Because a special-purpose government entity engaged only in business-type activities is by definition an enterprise fund, it would need to present the financial statements required for enterprise funds, including MD&A and RSI.
Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal’s interim income statements?
A.
Ratably over the second, third, and forth quarters.
B.
Ratably over the third and fourth quarters.
C.
In the second quarter only.
D.
In the fourth quarter only.
Choice D (Correct): An inventory loss that is expected to be recovered over the course of the same fiscal year is not recognized in the interim period in which it occurs. It is instead deferred and offset against the subsequent recovery. If the loss is not recovered as of the end of the annual period, however, it is recognized in the earliest interim period in which it is determined that it will not be recovered. In this case, since the loss had not been recovered as of the end of the year, it would be reported in the fourth quarter.
At December 30, year 3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of 0.5:1. On December 31, year 3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?
A.
Increased current ratio, decreased quick ratio.
B.
Increased current ratio, no effect on quick ratio.
C.
Decreased current ratio, increased quick ratio.
D.
Decreased current ratio, no effect on quick ratio
Choice A (Correct) and Choices B, C, D (Incorrect): An increase in a current ratio of 1.5:1 would require an increase in current assets that was greater than 150% of the increase in current liabilities, or a decrease in current liabilities that was at least 2/3 of a decrease in current assets. A cash payment of accounts payable reduces a current asset and a current liability by the same amount, increasing the current ratio. An increase in a quick ratio of 0.5:1 would require an increase in quick assets that was greater than 50% of the increase in current liabilities or a decrease in current liabilities that was at least twice the decrease in quick assets. A cash payment of accounts payable decreased quick assets and current liabilities by the same amount, decreasing the quick ratio.
A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month?
A.
$185,000
B.
$190,000
C.
$195,000
D.
$200,000
B
Things to remember:
Sales returns is a contra revenue account that is recorded when goods are sold. Allowance for sales returns is a contra accounts receivable account that reduces the related receivables of those returns. Current sales revenue is adjusted only for estimated returns of current sales rather than actual returns relating to prior periods.
On December 1, 20X1, two companies entered into a 90-day forward exchange contract for speculative purposes in which A will buy £180,000 from B at the 90-day forward rate of $1.65/£1. On December 31, 20X1, the spot rate was $1.70 and the 60-day forward rate was $1.80. In their December 31, 20X1 financial statements:
A.
Company A will report an asset and a gain of $27,000 and Company B will report a liability and a loss of $27,000.
B.
Company A will report an asset and a gain of $9,000 and Company B will report a liability and a loss of $9,000.
C.
Company B will report a liability and a loss of $27,000, but Company A will not recognize a gain until it is realized when the contract is settled.
D.
Company B will report a liability and a loss of $9,000, but Company A will not recognize a gain until it is realized when the contract is settled.
Choice A (Correct): A forward exchange contract is a derivative and is reported at fair value on every balance sheet date and unrealized gains and losses are recognized in the period of the change in the exchange rate. As of December 31, 20X1, A is obligated to buy, and Company B is obligated to sell, £180,000 at the end of 60 days for $297,000 (£180,000 x $1.65), when they are expected to be worth $324,000 (£180,000 x $1.80), the 60-day forward rate. As a result, A will recognize and asset and a gain for the difference of $27,000 and B will recognize a liability and loss for the same amount.
Which of the following companies would meet the definition of a smaller reporting company with respect to public equity float and annual revenue as established by the U.S. Securities and Exchange Commission?
Public equity float Annual revenue
A.
$225 million $175 million
B.
$275 million $125 million
C.
$725 million $50 million
D.
$775 million $5 million
A
The SRC filing category depends on annual revenue and/or the market value of the entity’s outstanding equity available to investors for trading, commonly referred to as public equity float. A company with less than $250 million in public equity float is considered an SRC.
Brandon County’s general fund had the following transactions during the year:
Transfer to a debt service fund $100,000
Payment to a pension trust fund $500,000
Purchase of equipment $300,000
What amount should Brandon County report for the general fund as other financing uses in its governmental funds statement of revenues, expenditures, and changes in fund balances?
A.
$100,000
B.
$400,000
C.
$800,000
D.
$900,000
Choice A (Correct) and Choices B, C, D (Incorrect): A transfer to a debt service fund is an operating transfer because it is a movement of resources from one fund to another in order to finance the current period activities of the recipient fund. Such transfers are reported as Other Financing Sources (Uses) in the governmental fund statement of revenues, expenditures, and changes in fund balances. The purchase of equipment and the payment to a pension trust fund are external and quasi-external transactions, respectively; because payment was made for provided goods or services; therefore, they would be reported as expenditures, not Other Financing Sources (Uses).
A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except:
A.
It will be reclassified as an asset held for sale.
B.
It will be classified as a current asset.
C.
It will no longer be depreciated.
D.
It will be valued at historical cost
Choice D (Correct) and Choices A, B, C (Incorrect): When a fixed asset is held for sale it will be reclassified on the balance sheet as held for sale. Since it is expected to be sold in four months, it will be reported as a current asset. No depreciation is recognized on assets held for sale. Instead, they are written down to net realizable value, which is the amount for which they are expected to be sold, net of costs of disposal.
On January 1, Year 1, Polk Corp. and Strass Corp. had condensed balance sheets as follows:
Polk Strass Current assets $70,000 $20,000 Noncurrent assets 90,000 40,000 Total assets $160,000 $60,000 Current liabilities $30,000 $10,000 Long-term debt 50,000 - Stockholders equity 80,000 50,000 Total liab & SE $160,000 $60,000 On January 2, Year 1, Polk borrowed $60,000 and used the proceeds to purchase 90% of the outstanding common shares of Strass. This debt is payable in ten equal annual principal payments, plus interest, beginning December 30, Year 1. The excess cost of the investment over Strass' book value of acquired net assets should be allocated 60% to inventory and 40% to goodwill. On January 2, Year 1, the fair value of Strass shares held by noncontrolling parties was $10,000. On Polk's January 2, Year 1 consolidated balance sheet, noncurrent assets should be
A.
$130,000
B.
$136,000
C.
$138,000
D.
$140,000
C.
$138,000
Purch price 60,000
+Noncontrol Int 10,000
-FV net ident asset (50,000)
=Goodwill 20,000
allocated 60% inventory, 40% goodwill ($8,000)
non current asset = 90,000+40,000+8,000=138,000
The following selection financial data pertains to Callow Corporation for the current year ended December 31:
Operating Income
$ 900,000
Interest Expense
(100,000)
Income before income tax
800,000
Income tax expense
(320,000)
Net Income
480,000
Preferred stock dividends
(200,000)
Net Income available to common stockholders
$ 280,000
The times interest earned ratio is
A.
2.8 to 1
B.
4.8 to 1
C.
8.0 to 1
D.
9.0 to 1
Choice D (Correct): The times interest earned ratio measures the ratio of the entity’s income that would be available to pay interest to the actual amount of interest incurred. It is measured as income before interest and taxes, which would be $900,000, divided by the amount of interest, $100,000 in this case, providing a ratio of 9.0 to 1.
The purpose of a statement of financial position for a nongovernmental not-for-profit entity is to provide relevant information about
A.
The cash receipts and cash payments during a period in time.
B.
The effects of transactions and other events and circumstances that change the amount and nature of net assets.
C.
The assets, liabilities, and net assets, and about their relationships to one another at a moment in time.
D.
The changes in net assets with donor restrictions and net assets without donor restrictions for a period of time
Choice C (Correct): The statement of financial position for a nongovernmental not-for-profit entity is similar to the balance sheet for a for-profit entity. As such it provides relevant information about an entity’s assets, liabilities, and net assets, as well as their relationships to one another, as of a particular date in time.
Yola Corp., a diversified company, is required to report the operating profit or loss for each of its industry segments. For the year ended December 31, 20X0, segment Wy’s sales to segment Zee were $100,000. Segment Wy’s share of Yola’s allocated general corporate expenses was $20,000. In the computation of Wy’s 20X0 operating profit or loss, the amount of the aforementioned items to be included is
A.
$120,000
B.
$100,000
C.
$80,000
D.
$20,000
Choice B (Correct) and Choices A, C, D (Incorrect): Separate reporting of a segment’s operating profit or loss will be based on that segment’s sales, including sales to unaffiliated customers and intersegment sales, which will be reduced by operating expenses that are traceable to that segment and an allocation of indirect operating expenses.
NOTE: General corporate expenses are not considered. As a result, Wy’s operating profit or loss will include the $100,000 of sales to segment Zee but will not include the general corporate expenses of $20,000.
