ROUND 2 - 2017 Studying Flashcards

Question

Diluted EPS

Answer 1

(NI + After-tax interest on convertible debt + Convertible preferred dividends) / (Weighted average number of common shares outstanding during the period + All dilutive potential common stock)

Answer 2

When estimated future cash flows are LESS THAN carrying value.

Answer 3

The valuation allowance represents the difference between cost and fair value. Valuation allowance is an adjunct or contra account of marketable equity securities and accounts receivable. The valuation allowance may be a debit or credit balance—since marketable equitable securities are recorded at fair value per FASB ASC 320-10, value can exceed cost. The accounting treatment for changes in the valuation allowance depends upon the classification of the assets to which it refers: * Accounts Receivable and Securities Classified as Trading Securities—included in the determination of net income of the period in which the changes occur * Securities Classified as Available-for-Sale—included as a separate component of stockholders' equity

Answer 4

Dr. Cr. Cash 20,000 Other Assets (at fair value) 60,000 Goodwill 40,000 Cor (Capital) 60,000 Eng (Capital) 60,000

Answer 5

The revenue under the lease is the $50,000 each year, and the expenses include the depreciation and the property tax for the year. The broker’s fee ($15,000) should be amortized equally based over the 10 years of the lease, or $1,500 a year. Thus, the net rental income should be $27,500: •$50,000 – $12,000 – $9,000 – $1,500 = $27,500

Answer 6

Int Payable = Cash Payment amount of Face * Stated = 1000 * .09 = $90 Int Expense = Carrying Amount * Effective = 1000 * .1 = $100

Answer 7

A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital.

Answer 8

Debit Credit ------ ------ (1) Write an account off: Allowance for Uncollectibles xx Accounts Receivable xx (2) Reinstate account previously written off: Accounts Receivable xx Allowance for Uncollectibles xx (Entry (2) reverses entry (1) to the extent of cash subsequently collected) (3) Collect the account: Cash xx Accounts Receivable xx (Entry (2), the reinstatement, credits or increases the allowance for uncollectible accounts)

Answer 9

Add up all the payments that will be made to the lessor over the lease term: (9 × $17,500) + (12 × $19,000) + (12 × $20,500) + (12 × $23,000) + (12 × $24,500) = $1,201,500 Total amount of rent paid This total rent is divided equally over the lease term, giving an equal monthly rent amount of $20,025 a month: $1,201,500 ÷ 60 months = $20,025/month The rent expense, though paid late, is $20,025 a month. (The question specifically concerns how far behind in paying the rent the lessee is at December 31, 2013.) The rent for the months after December 31, 2013 is $360,450: 18 months × $20,025 a month = $360,450 The payments made to catch up on this deferred rent payable are $432,000: (6 × $23,000) + (12 × $24,500) = $432,000 The difference between these amounts is the amount behind that the lessee is in paying the rent due: $432,000 – $360,450 = $71,550

Answer 10

The investor receiving stock rights must allocate a portion of the purchase price of the investment that “carried” the rights. Here, although the stock rights were received 6 months after the purchase, the rights still “ride” with the purchase. Thus, the stock rights are allocated a portion of the purchase price based on the market value of the rights as a percentage of the total market value of the stock investment plus the rights at the balance sheet date: Cost of shares acquired = 1,000 x $80 = $80,000 Cost allocated to stock rights = $80,000 ($5 / ($95 + $5)) = $80,000 ($5 / $100) = $4,000

Answer 11

Depreciable base is Purchase price - Salvage value

Answer 12

The revenue principle is a generally accepted accounting principle that provides guidelines for the measurement and timing of the recording (recognition) of revenues. The revenue principle requires accrual accounting and that the recognition criteria be met. (SFAC 5.63-.77) Revenue is realized when noncash resources and rights are converted into money. Revenue is measured at the exchange values of the assets or liabilities involved, usually the market value of the resources given up (SFAC 5.83). Revenue should be recognized when it is earned, measurable, and collectible. Revenue has been earned when the entity has substantially completed what it must do to be entitled to the benefits represented by the revenues, related expenses can be reasonably estimated, and collection is reasonably assured. The earning process is then said to be complete. There are seven accepted criteria for revenue recognition: Point of sale Production and delivery—recognize prepayment (magazine subscription) Percentage of completion—long-term contract With passage of time—e.g., rent, interest Completion of production (before sale)—when product is readily salable at determinable prices without significant effort Completed transaction—in exchange for noncash assets Installment basis—when cash is collected (because of the inability to estimate collectibility)

Answer 13

Summary journal entries needed to effect quasi-reorganization: Dr. Cr. Common stock* 250,000 Additional paid-in capital 250,000 Additional paid-in capital 210,000 Retained earnings 210,000 * Common stock reduced by ($30 - $5) x 10,000 = $250,000 The resulting balance in additional paid-in capital is $150,000 + $250,000 - $210,000 = $190,000.

Answer 14

Under the book value method, the carrying value of the debt (bonds) is removed and is replaced by stockholder equity in exactly the same total amount (i.e., the book value of the debt). The journal entry to record the conversion: Bonds payable $1,000,000 Premium on bonds payable 300,000 Common stock ($1 par x 50,000 shares) $ 50,000 Additional paid-in capital 1,250,000

Answer 15

You subtract the total MV of warrants AFTER issuance (Eg 50,000q * $4) = 200,000. Then subtract that from bond+premium to calculate a premium or discount amount with issuance of bond.

Answer 16

FASB ASC 310 provides that notes receivable stating either no interest or an unreasonably low interest rate be reported at their present value computed using an appropriate interest rate if the original maturity date of the note exceeds one year. The Hart note would be reported at its face amount of $10,000 since it matures within the current 1-year accounting period. The correct value for reporting the Maxx note is: Present value of Maxx note = Maturity amount x Present value factor = ($10,000 + ($10,000 x 3% x 5 years)) x .6806 = ($10,000 + $1,500) x .6806 = $7,827 PV ONLY APPLICABLE FOR 1+ YRS DOWN THE LINE

Answer 17

= NI / Average Assets

Answer 18

Fund balance is the fund equity or the difference between the asset and liability accounts of a governmental fund. Fund balance should be reported in specific categories as circumstances require: Nonspendable reflects the value of prepaid or inventory items that are not monetary and will not support spending or the value of monetary resources legally contracted to be kept intact. Restricted reflects the value of assets whose use has previously been designated by an external party such as a grant. Committed reflects the value of assets whose use has previously been designated by the highest level of government, typically the legislature or city council. Assigned reflects the value of assets whose use has been previously designated by management without action by the highest level of authority in the government. The amount of resources to be set aside to cover encumbrances at year-end is usually designated either committed or assigned. Unassigned reflects the value of General fund assets whose use has not been previously designated. Only the General Fund has an Unassigned category of Fund balance. GASB 1800.165–.178

Answer 19

The account called Fund Balance: Reserve for Encumbrances is credited when the Encumbrances account is debited to recognize the probable effect of financial commitments on the current-year budgetary appropriation. The entry is reversed when the commitments are recognized. Fund Balance: Reserve for Encumbrances is not a liability; rather, it is considered a “memorandum” offset to Encumbrances during the fiscal year. At year-end, Encumbrances and Fund Balance: Reserve for Encumbrances are removed and a portion of the Fund Balance is labeled “committed” or “assigned” unless there is already a portion of the Fund Balance labeled “restricted” regarding the specific commitment represented by the original Encumbrance.

Answer 20

The gain is the difference in the cost at March 1 ($8) and at December 31 ($10). Holding gain = $10 − $8 = $2

Answer 21

FASB ASC 840-10-25-1 provides four criteria for capital lease application: Transfer of ownership Bargain purchase option Lease term is 75% or more of asset life. Present value of lease payments equals or exceeds 90% of fair value of asset. Since none of these criteria is met by Vail's lease agreement, the building would not be capitalized. The leasehold improvements should be capitalized and amortized over the term of the lease.

Answer 22

Non-operating Revenue Proprietary funds of governments, including enterprise funds, report unrestricted grants and restricted operating grants as nonoperating revenues. Restricted capital grants are reported as capital contributions. Neither contributed capital nor expenditures are reported for proprietary funds.

Answer 23

You answered D. The correct answer is A. Nongovernmental not-for-profit hospitals deduct charity services, bad debt, contractual adjustments, and policy discounts from gross patient service revenues to determine net patient service revenues. $775,000 - $25,000 - $15,000 - $70,000 = $665,000

Answer 24

The estimated current value of an investment in life insurance is the cash value of the policy less the amount of loans against it.

Answer 25

To report the change in net assets for the period The nongovernmental not-for-profit organization does not earn a profit in the sense that a for-profit entity would. Instead, the not-for-profit organization records the difference between revenues and expenses as a change in net assets for the accounting period. Each revenue, expense, gain, or loss must be classified according to the net asset class affected and reported based on restrictions or functional subclassification.

Answer 26

According to the FASB ASC Glossary, a not-for-profit entity is distinguished from a business entity by three characteristics: 1) contribution of significant resources from providers who do not expect proportionate return, 2) operating purposes OTHER THAN to provide goods or services for profit, and absence of ownership interests like business enterprises, 3) In addition, the IRS stipulates that no part of the organization's net earnings can inure for the benefit of any specific person or persons.

Answer 27

In FASB ASC 958-605-30-2, the FASB states, “Contributions received shall be measured at their fair values,” and FASB ASC 958-320-35-1 states that “investments in debt securities shall be measured at fair value.” Fair value of readily traded securities is found by considering current market values. The original cost to the donor and the current brokerage costs are not used by the not-for-profit recipient in valuing the contribution.

Answer 28

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

Answer 29

The key to this question is that this is a not-for-profit entity, not a government. The basic financial statements for a not-for-profit entity are statement of financial position (like a balance sheet), statement of activities, statement of cash flows, and for voluntary health and welfare entities, a statement of functional expenses.

Answer 30

A: Functional classification in the statement of activities, or notes to the financial statements. Financial reporting for a not-for-profit should provide information about the service efforts of the entity. Therefore, the FASB Accounting Standards Codification requires expenses to be reported by functional classification (i.e., program services, management, fundraising, etc.). Only those not-for-profits that are voluntary health and welfare entities must augment the functional classification of expenses that appears in the statement of activities with a natural classification of expenses, displayed in a matrix format, that is shown in a separate document, a statement of functional expenses.

Answer 31

The complete set of financial statements for a not-for-profit entity includes a statement of activities, which is analogous to the income statement of a business entity. In governmental accounting, a statement of activities is required for government-wide financial reporting. The formats of the not-for-profit and the governmental statement of activities differ.

Answer 32

A: In the period received at fair value Unconditional contributions, whether promised or received as cash, are recognized as revenue in the period received. Contributions revenue should be measured at fair value, not donor's book value. Donor intentions to give, rather than unconditional promises, are not considered revenue. FASB ASC 958-605-25-2 and 30-2

Answer 33

A: Assets, liabilities, and net assets The statement of financial position is the term for the balance sheet reported by private not-for-profit (NFP) entities. Balance sheets report the balances of permanent accounts on a specific date. Therefore, income, expenses, or changes in net asset categories are not reported. The FASB recommends that the financial statements of an NFP focus on the entity as a whole. The NFP account equation uses the term “net assets” for equity. Its accounting equation is assets equal liabilities plus net assets.

Answer 34

Plan assets at FV - PBO FASB ASC 715-20-45-3 requires that an entity report on its balance sheet the underfunded or overfunded pension plan. In the case of a pension plan, the underfunded pension liability represents the excess of the projected benefit obligation over the fair value of the plan assets. Thus, Nola should report a $100,000 overfunded pension asset for the excess of the $260,000 fair value of the plan assets over the $160,000 projected benefit obligation.

Answer 35

$5560 The total amount of interest revenue one earns on a note is related to the total payments but also to the present value of the note, with the discount recognized here initially. The total amount to be received on this note is 5 years multiplied by $5,009, as specified, for a total of $25,045. Interest is generally the amount returned over and above the amount originally recognized, which was $19,485 originally. Thus, the total interest revenue is $25,045 − $19,485, or $5,560.

Answer 36

A comprehensive annual financial report (CAFR) is the annual report of the governmental entity, and is composed of the following: 1) Introductory section 2)Financial section, including the following: ◦Auditor's report ◦Management's discussion and analysis (MD & A) ◦Basic Financial Statements and Notes to the statements ◦Required supplementary information other than MD&A ◦Combining financial statements and individual fund statements and schedules 3) Statistical section

Answer 37

A. The relationship between the amount of value given and received For governmental units, an exchange transaction involves giving and receiving equal value in a transaction. A nonexchange transaction (such as property tax collected or grant provided) means the government receives value from another party without directly providing value or provides value to another party without directly receiving value.

Answer 38

B. 900,000 Special revenue funds are used to account for resources raised from revenues that are either restricted or committed for expenditure for specific general government purposes other than capital outlay or debt service. Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays. The sidewalks are capital in nature and would not be part of a special revenue fund but of a capital fund, whereas the road repairs are not capital but maintenance.

Answer 39

A. Governmental Activities The governmental activity which is the predominant user of the internal service funds absorbs and reports the assets and liabilities of an internal service fund that are not eliminated. In most situations, this will be the governmental activities.

Answer 40

C. $409,750 The appropriations included in the adopted budget constitute the maximum authorized for expenditure during the period, and cannot legally be exceeded unless subsequently amended by the legislative body. In this question, the appropriation was established at $745,000; expenditures incurred to date were $298,000 and $37,250 was encumbered. Only $409,750 remains available for spending. The vouchers payable represent past expenditures waiting only for cash payment. Appropriation $745,000 Expenditures (298,000) Encumbrances (37,250) --------- Funds available $409,750 =========

Answer 41

A: 500,000 When Cliff City approved the purchase orders, the estimated amount is recorded in the (summary) journal entry: Encumbrances 5,000,000 Fund Balance--Reserved for Encumbrances 5,000,000 When the portion of the purchase orders were filled, the entry was reversed for the estimated cost amount of the portion of the purchase orders filled: Fund Balance--Reserved for Encumbrances 4,500,000 Encumbrances 4,500,000 The actual amount of expenditures may be more or less than the estimated amount and the amount paid may differ from the encumbered amount. However, that does not affect the encumbrance or the Fund Balance—Reserved for Encumbrances amounts. Therefore, the amount outstanding at June 30, 20X1, was $500,000. In the closing process, the outstanding Encumbrances and Fund Balance—Reserved for Encumbrances of $500,000 would be removed, and $500,000 of the post-closing Fund Balance would be displayed as “committed” or “assigned.”

Answer 42

The Governmental Funds Balance Sheet is a basic financial statement. The balance sheet includes a separate column for each major governmental fund and a column with aggregated information for all other (nonmajor) governmental funds as well as a total column for all governmental funds. Basic financial statements are: government-wide statement of net position, government-wide statement of activities, governmental funds balance sheet, governmental funds statement of revenues, expenditures, and change in fund balances, proprietary funds statement of net position, proprietary funds statement of revenues, expenses, and changes in fund net position, proprietary funds statement of cash flows, fiduciary funds statement of net position, fiduciary funds statement of changes in fiduciary net position, and notes to financial statements.

Answer 43

December 31, 20X1: Overstated; January 2, 20X7: No effect When the bond’s yield requires a discount, the bond’s interest expense is based (early on) on a lower principal, and thus the expense applying straight-line would be higher (it is an average expense for the term). The discount amortization would be too high for the first year (overstating bond carrying value), but under both methods at the end of the term, the carrying amounts will be the bond face amount. Carrying amount on 1/2/X1 = $1,000,000 - $150,000 = $850,000 Amortization of discount: Using straight-line = $150,000 / 6 yrs = $25,000 / yr. Using effective interest = (0.12 x $850,000) - (.08 x $1,000,000) = $22,000 Carrying amount on 12/31/X1: Using straight-line = $850,000 + $25,000 = $875,000 Using effective interest = $850,000 + $22,000 = $872,000 Overstatement of carrying value when using straight-line = $875,000 - $872,000 = $3,000 Over the 6-year life of the bonds, the same total discount amortization will occur under each method. The bond carrying amount on January 2, 20X7, will be the maturity value regardless of the amortization method. Thus, on December 31, 20X1, the bond carrying value will be overstated if straight-line amortization of discount is used but on January 2, 20X7, there will be no effect from its use.

Answer 44

= NI / avg. assets

Answer 45

Under the book value method, the carrying value of the debt (bonds) is removed and is replaced by stockholder equity in exactly the same total amount (i.e., the book value of the debt). The journal entry to record the conversion: Bonds payable $1,000,000 Premium on bonds payable 300,000 Common stock ($1 par x 50,000 shares) $ 50,000 Additional paid-in capital 1,250,000

Answer 46

$18,000 When applying the equity method to an investment for financial accounting purposes, the income earned by the company partially owned is recognized by the owning investing company on its own books. Lundy has financial accounting income of $90,000 ($225,000 × 0.40) and this income is not recognized for tax purposes until received in dividends later on. Of course, Lundy did receive some dividends already, $30,000 ($75,000 × 0.40). Thus, $60,000 of deferred income for tax purposes will generate a future tax due, a deferred tax liability now of $18,000 ($60,000 × the future tax rate of 0.30). All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.

Answer 47

NI LESS (increase in AR) LESS (increase in AP) Baker should report $20,000 as net cash provided by operating activities: Net income $78,000 Adjustments Increase in accounts receivable ($82,000) Increase in accounts payable 24,000 (58,000) -------- Net cash provided by operating activities $20,000

Answer 48

Operating segments that meet one of the following quantitative tests are reportable segments (FASB ASC 280-10-50-12): Segment revenue (both to external customers and intersegmental) is at least 10% of total revenue of all operating segments. The absolute amount of segment profit (or loss) is at least 10% of all operating segments with a profit (or loss). Operating segment assets are at least 10% of total assets. Reportable segments must report their revenue, profit (or loss), assets, and other related items (FASB ASC 280-10-50-22). Enterprises must report the extent of reliance on major customers—those who comprise at least 10% of sales (FASB ASC 280-10-50-42).

Answer 49

Exempt from federal taxation

Answer 50

Generally, a nonmonetary exchange should be based on the fair values of the assets exchanged—resulting in the immediate recognition of a gain or loss. Exceptions to this treatment include the following: Fair value is not determinable Exchange transaction to facilitate sales to customers Exchange transaction that lacks commercial substance Under these exceptions, no gains or losses are recognized. Since this transaction lacks commercial substance, no gain or loss is recognized and the new book value is equal to the book value prior to the exchange: ``` Original cost $23,000 Accumulated depreciation 20,000 ------- Book value $ 3,000 Additional cash paid 700 ------- New book value $ 3,700 ```

Answer 51

Under both the installment and cost recovery methods of revenue recognition, the collectability of receivables is genuinely in doubt. Since it is hard to estimate bad debts, a bad debt estimate is considered insufficient, and the actual gross profits are deferred until cash collections occur. Profit is recognized as cash is collected. The most extreme deferral of profit is under the cost recovery method, where all cash collections are considered to be return of costs, until all of the seller’s costs are recovered, and only then are future cash collections considered profits.

Answer 52

Service cost $40,000 Interest cost 15,000 Expected return on plan assets (12,000) Amortization of prior service costs 4,000 Amortization of unrecognized (gain) loss (3,000) Amortization of unrecognized transition obligation 1,500 -------- Pension expense - 20X1 $45,500 ========

Answer 53

A: II Only FASB ASC 840-40-25-4 provides that if the lease meets one of the criteria for capital lease treatment (it does—the lease transfers title to the seller-lessee at end of lease term), then any gain on the sale should be deferred and amortized. Again, the key element is the retention of the right to all remaining use of the property. Transfer of risks of ownership is not one of the four criteria for capital lease treatment.

Answer 54

The FASB’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows: Level 1 inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date Level 2 inputs—inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly Level 3 inputs—unobservable inputs for the asset or liability FASB ASC 820-10-35-37

Answer 55

A: $0 The cruise ship qualifies for interest capitalization. Qualifying assets, per FASB ASC 835-20-15-5, include “assets that are constructed or otherwise produced for an entity's own use (including assets constructed or produced for the entity by others for which deposits or progress payments have been made).” The down payment means that the weighted-average accumulated expenditures each year will be at least $3,000,000. Therefore, all of the interest on the note is capitalized during each year of construction. No interest expense related to the note should be reported in the income statement during the construction period.

Answer 56

A: Lower of Fair Val (LESS) costs to sell // or // Carrying Amnt Lower of fair value, less costs to sell or carrying amount, is the proper measurement of an impaired asset held for sale. The initial test in FASB ASC 360-10-35 for determining whether an impairment of the carrying amount of a long-lived asset is indicated is that the carrying amount exceeds undiscounted future cash flows.

Answer 57

A: Minimum lease payment plus residual val. The lessor shall measure the gross investment in a direct financing lease initially as the sum of the following amounts: The minimum lease payments The unguaranteed residual value accruing to the benefit of the lessor

Answer 58

Direct Method

Answer 59

A: 8 to 1 The price-earnings ratio is P/E = Stock price ÷ EPS (earnings per share). The net earnings per common share is $9: ($1,200,000 – $300,000) ÷ 100,000 = $9 Price-earnings ratio: $72 ÷ $9 = $8

Answer 60

$5,000 This question uses the somewhat outdated terminology "additional pension liability," but the concept is still basically true. The amount by which the net periodic pension cost exceeds the contribution is $20,000 ($90,000 – $70,000), and that amount, plus an additional $5,000 of liability must be recognized on the balance sheet, for a total underfunded pension amount of $25,000 (projected benefit obligation of $103,000 – plan assets of $78,000).

Answer 61

The direct method is one of the two optional methods of presentation of the statement of cash flows, the method preferred by the Financial Accounting Standards Board (FASB). The direct method presents gross cash receipts and payments from operating activities; cash amounts may be derived from accrual based records by adjusting income statement items for changes in the related balance sheet accounts, e.g., cash collected from customers is found by adjusting sales for the change in accounts receivable during the period. (FASB ASC 230-10-45-25) In governmental accounting, cash flow statements presented for proprietary funds and governmental entities engaged in business-type activities must use the direct method. (GASB 2450) The direct method presents major classes of cash flows: cash collected from customers, interest and dividends received, interest paid, cash paid to employees and suppliers, income taxes paid, and other cash payments. If the direct method is used, a reconciliation of net income to net cash provided by operating activities must be presented as a supplemental disclosure. This reconciliation must present all major classes of adjustments: accruals of expected future operating cash receipts and payments (receivables and payable), deferrals of past cash receipts and payments (inventory, prepaid items, deferred income and expenses), noncash income/expenses (depreciation, amortization, provisions for bad debts), and gains and losses from transactions classified as investing or financing activities (sale of productive assets, sale of debt, liquidating dividend, retirement of debt). Done

Answer 62

The capital lease obligation that a lessee recognizes on their books is based on the present value of the minimum lease payments. The minimum lease payments are the annual lease payments made at the beginning of each year of $153,000. The discount rate to get the present value of the payments is the lower of the lessee’s incremental borrowing rate, or the rate implicit in the lease, if known to the lessee. The lower of these two here is the implicit rate in the lease that is known to the lessee, which is 9%. Thus, the amount of the lease liability will be based here on the present value factor for an annuity due of 7 years based on 9% (5.5) multiplied by the annual rental of $153,000: 5.5 × $153,000 = $841,500 However, since the first payment was just made, lower that amount to get the remaining liability at the end of the year: $841,500 − $153,000 = $688,500

Answer 63

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

Answer 64

Non-level lease payments must be expensed on a straight-line basis. ``` Year 1 $25,000 Year 2 30,000 Year 3 35,000 ------- Total rent payments $90,000 ``` Lease term 3 years Yearly rent $30,000 The entry for the first payment would be: Rent expense $30,000 Cash $25,000 Lease liability 5,000

Answer 65

employee stock ownership plan instruments.

Answer 66

FASB ASC 840-30-35-1 states that “the asset recorded under a capital lease shall be amortized depending on the provisions of the lease. When a bargain purchase option exists or ownership of the leased asset reverts to the lessee, depreciation should be computed over the useful life of the assets using estimated salvage value at the end of that life.” (In other cases, the lessee computes depreciation over the lease term using residual value at the end of the lease term.) Thus, Nori recognizes depreciation expenses as follows: Depreciation expense for 20X1 = (Cost - Salvage value) / Useful life = ($240,000 - $20,000) / 8 years = $220,000 / 8 = $27,500

Answer 67

Retained earnings are an increase in net assets from results of operations, retained by the corporation for use in the enterprise. They are internally generated financing or the corporation's undistributed earnings. They are accumulated earnings, less accumulated losses and dividends paid, from inception. Retained earnings are a major source of owners' equity and can be viewed as additional investments by the owners as foregone dividends. Negative balance is called a deficit. Retained earnings may also be decreased by purchase of treasury stock at a price higher than the amount originally received for the stock. Retained earnings may be appropriated (i.e., restricted as to use) by: 1) contractual specification (e.g., bond covenants), 2) legal requirement (e.g., by state law), or 3) management discretion (e.g., for future expansion). Retained earnings are increased by net income, prior-period adjustments, and quasi-reorganization. Retained earnings are decreased by net loss, prior-period adjustments, cash, property, scrip, stock dividends, and treasury stock and stock retirement transactions.

Answer 68

contra current asset account. The current asset account maintaining an inventory value for the costs and profits recognized so far on the contract has a contra account of progress billings, lowering its carrying value. If the billings exceed the construction in process, then a current liability can exist instead.

Answer 69

The translation loss less the exchange gain is reported in other comprehensive income. Both of the items involved, the translation loss on the investment in the subsidiary and the partial hedge through the borrowing of euros, are items that will be reported in other comprehensive income. Since one is a gain and the other is a loss, the net effect of both is reported in other comprehensive income.

Answer 70

$4,300 The interest paid for the year from June 30, Year 2. to June 30, Year 3. is based on the face amount ($100,000) multiplied by the stated 7% payment rate: $100,000 × 0.07 = $7,000 The interest expense using the interest method is based on the carrying amount of the debt multiplied by the yield of the debt: $105,000 × 0.06 = $6,300 The premium amortized from June 30, Year 2, to June 30, Year 3, is the difference of these two amounts: $7,000 – $6,300 = $700 Thus, the premium of $5,000 on June 30, Year 2, ($105,000 – $100,000, carrying amount less face amount) is lowered by the $700 premium amortization down to $4,300: $5,000 – $700 = $4,300

Answer 71

Cash proceeds from the sale of an investment are a cash inflow and cash paid to purchase stock is a cash outflow. Both are investing activities. $75,000 - $38,000 = $37,000

Answer 72

East Corp.'s pension expense for 20X1 is $174,000, as shown below: Service cost $150,000 Interest cost 0 Amortization of past service cost 24,000 Expected return on plan assets 0 Amortization of unrecognized gain/loss 0 -------- $174,000 ======== The interest cost is computed by applying the appropriate rate times the projected benefit obligation (PBO) at January 1, 20X1. Since this is the first year of the plan, the PBO at January 1, 20X1, is $0, which means that the interest cost for 20X1 is $0. The expected return on the plan assets is computed by applying the appropriate rate times the fair value of the plan assets (PA) at January 1, 20X1. Since this is the first year of the plan, the PA at January 1, 20X1, is $0, which means that the expected return on plan assets for 20X1 is $0. Since no amortization of unrecognized gain/loss is necessary (which is stated in the facts), the pension expense consists of the service cost and the amortization of past service costs.

Answer 73

deferred credit When a sale of property is made and a gain is realized on the sale, if the seller immediately leases the property back from the new owner, that is generally justification for deferring recognition of the gain on the sale. The deferred gain on the sale is generally accounted for as a deferred revenue, a deferred credit, recognized in later periods. Note that the concept of “extraordinary” items has been eliminated from GAAP; the presentation for items that are unusual in nature or occur infrequently will be expanded to include items that are both unusual in nature and infrequently occurring.

Answer 74

The interest method is a method of allocation such that a constant rate of revenue/expense allocation is used. Each period a constant rate of interest is applied to the remaining balance of the obligation, resulting in a different dollar amount of revenue/expense recognized each period.

Answer 75

Interest is the charge for the use of money over time. It is the time value of money. Interest is the amount paid (or received) in excess of the amount borrowed (loaned). Interest is a financing expense (income) and is dependent on the interest rate, the principal amount, and the number of interest periods. Interest = Principal × Interest rate × Time periods Interest = Amount to be repaid - Amount received (loaned) Simple interest: Interest is computed on the same principal amount each time period, regardless of the amount of interest accrued to date. Compound interest: Interest is charged on the principal plus all interest previously accrued (interest computed on interest). In macroeconomics, interest is a factor payment or factor income. It is a component of gross national product (GNP) (approximately 10%) and is used in the income approach to national income accounting. Interest includes payments received from banks on savings, from firms on loans, and other miscellaneous income. Interest is analogous to Wages, Rent, and Profit as a component of factor payments or factor income.

Answer 76

CONTRIBUTED CAPITAL: Common stock $ 600,000 Additional paid-in capital 800,000 ---------- Total contributed capital $1,400,000 Retained earnings ($150,000 appropriated) 350,000 ---------- Subtotal $1,750,000 Less accumulated comprehensive income (unrealized loss on available-for-sale marketable equity securities) $20,000 Less Treasury stock at cost 50,000 70,000 ------- ---------- Total stockholders' equity $1,680,000 ==========

Answer 77

The retail method is a method of valuing inventory utilizing retail prices. Inventory at retail is converted to cost (using any of the cost flow assumptions, LIFO, FIFO, average cost) or to the lower of cost or market based on the cost-to-retail ratio. The method requires additional information in addition to units and unit costs: beginning inventory and purchases at retail and adjustments to original sales price, such as markups, markdowns, and cancellations of markups and markdowns.

Answer 78

Research and development (R&D) includes costs incurred in a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, developing a new process or technique, bringing about a significant improvement to an existing product (“research”), or translating research findings or other knowledge into a plan or design for a new product or process (“development”). R&D is expensed as incurred. (FASB ASC 730-10-25-1) R&D includes materials, equipment, and facilities with no alternative use, personnel, intangibles purchased from others, contract services, and an allocation of indirect costs. R&D acquired as part of a business acquisition may be capitalized. Capitalized R&D should be reviewed periodically for impairment.

Answer 79

To compute the pension expense, add the service cost, subtract the expected rate of return on plan assets, add the amortization of prior service cost, and add the interest cost on the pension obligation: $160,000 – $35,000 + $5,000 + $50,000 = $180,000

Answer 80

“With recourse” means that the financial entity where the note was discounted can collect fully from Davis Co. in the event the maker does not honor the note. Davis Co. should disclose the full amount ($20,500) of the note as a contingent liability in its December 31, 20X1, financial statements, because it is reasonably possible that Davis will have to make good on the note (FASB ASC 450-20-50-2).

Answer 81

Summary journal entry to record 2011 issuance of convertible preferred stock: Dr. Cr. Cash (5,000 x $110) $550,000 Convertible preferred stock (5,000 x $100) $500,000 Additional paid-in capital preferred ($550,000 - $500,000) 50,000 Summary journal entry to record 12/31/12 conversion of preferred shares: Dr. Cr. Convertible preferred stock $500,000 Additional paid-in capital preferred 50,000 Common stock (5,000 x 3 x $25) $375,000 Additional paid-in capital common ($550,000 - $375,000) 175,000

Answer 82

$11,000 A company incurred the following costs to complete a business combination in the current year: Issuing debt securities $30,000 Registering debt securities 25,000 Legal fees 10,000 Due diligence costs 1,000 What amount should be reported as current-year expenses, not subject to amortization?

Answer 83

Initial lease obligation on December 31, 2011 $135,000 Less payment made on December 31, 2011 - 20,000 -------- Lease obligation during 2012 $115,000 ======== Portion of December 31, 2012, payment that is interest = rate x obligation x time = 10% x $115,000 x 1 = $11,500 Portion of December 31, 2012, payment that is related to lease obligation = payment - interest portion = $20,000 - $11,500 = $8,500 This amount is a current liability since it is payable within the current period. The remaining lease obligation is noncurrent.

Answer 84

A change in the reporting entity is a change that results in financial statements that, in effect, are those of a different reporting entity. A change in the reporting entity is limited mainly to (1) consolidated or combined financial statements in place of financial statements of individual entities, (2) changing specific subsidiaries that make up the group of entities for which consolidated financial statements are presented, and (3) changing the entities included in combined financial statements. Neither a business combination accounted for by the purchase method nor the consolidation of a variable interest entity pursuant to FASB Interpretation 46R is a change in reporting entity. When an accounting change results in financial statements that are, in effect, the statements of a different reporting entity, the change is retrospectively applied to the financial statements of all prior periods presented to show financial information for the new reporting entity for those periods. FASB ASC 250-10-20

Answer 85

BREAKING DOWN 'Unamortized Bond Premium' Referred to as part of the bond premium that will be amortized (written off) in the future. A bond premium is a bond that is priced higher than its face value. BP's = sold at 102 The amortized amount of this bond is credited as an interest expense. an unamortized bond DISCOUNT is the part of a bond DISCOUNT that will be written UP in the future.. a bond discount is a bond that is priced LOWER than it's face value.

Answer 86

D. Depreciation The FASB defines monetary assets as "money or a claim to receive a sum of money the amount of which is fixed or determinable without reference to future prices of specific goods or services." FASB ASC Glossary

Answer 87

Matching is the process of associating realized revenues with the expenses and expired costs that were necessary to generate the revenues (i.e., that were incurred in the earning process). Matching requires the accrual method of accounting. It relates the accomplishment (revenue) with the effort (cost). The matching principle provides guidance for the recognition of expenses and may necessitate the use of estimates and allocations (e.g., warranty expense may need to be estimated to match it with the revenue generated from the sale of the product, since the expense may not actually be incurred until the next accounting period). The three pervasive principles of expense recognition are: associating cause and effect (e.g., cost of goods sold and delivery and salary expense), systematic and rational allocation (e.g., rent, insurance, and depreciation), and immediate recognition as incurred (e.g., advertising, research and development). SFAC 6.146–.149

Answer 88

Realization is the process of converting noncash resources and rights into money (specifically, the sales of assets for cash or claims to cash—thus, realized (unrealized) refers to revenues or gains or losses on assets sold (or unsold). SFAC 6.143 Realized and recognized are not synonymous.

Answer 89

Recognition is the process of formally recording or incorporating an item in the financial statements of the entity. (SFAC 6.143) Four fundamental recognition criteria are (subject to the pervasive cost-benefit constraint and the materiality threshold): Definitions: The item must meet the definition of an element of financial statements. Measurability: The item has a relevant attribute that can be quantified with sufficient reliability. Relevance: The information about it is capable of making a difference in user decisions. Faithful representation: The information is representationally faithful, complete, unbiased, and error-free. SFAC 5.63-.87 Revenues and gains are recognized when they are: realized or realizable or earned. SFAC 5.83 Expenses and losses are recognized when one of the following has occurred: Consumption (using up) of benefit Occurrence or discovery of loss of future economic benefit SFAC 5.85 “Realized” and “recognized” are not synonymous. There are seven accepted criteria for revenue recognition: Point of sale Production and delivery—recognize prepayment (magazine subscription) Percentage of completion—long-term contract With passage of time—rent, interest Completion of production (before sale)—when product is readily salable at determinable prices without significant effort Completed transaction—in exchange for noncash assets Installment basis—when cash is collected Done

Answer 90

Allocation is a formula or plan that disperses an amount and is considered an accounting process. It includes, but is broader than amortization. The following are examples of allocation: Assigning manufacturing costs to production departments or cost centers and then to units of product to determine “product cost” Apportioning the cost of a “basket purchase” to individual assets acquired on the basis of relative market values Spreading the cost of an insurance policy or a building to two to more accounting periods

Answer 91

A hedge is a protection against loss, specifically against a foreign exchange loss. It is the act of buying (or selling) a foreign currency for future delivery on the same date that the entity enters into a foreign currency transaction in order to eliminate the risk of (“exposure to”) fluctuations in the exchange rate, i.e., the gain or loss that results from the foreign currency transaction—the purchase or sale of goods denominated in a foreign currency—is exactly offset by a loss or gain on the hedging transaction because the exchange rate for both (opposing) transactions are the same on both the date the transactions were entered into and the date they were settled. FASB ASC 815-10 Hedges may also be speculative, i.e., a forward contract that does not cover an open receivable or payable—a forward contract designated as an economic hedge of a net investment (the ownership interest) in a foreign entity or purely speculating that the exchange rates will move in an expected direction. Any gain or loss resulting from such hedges is recognized as a separate component of equity (similar to the recognition of translation gain or loss). FASB ASC 815-10-30-5

Answer 92

Fair Value

Answer 93

In governmental accounting, expenditures should be recorded in a multiple classification scheme—typically by (1) fund, (2) function or program, (3) organizational unit (e.g., department), (4) activity, (5) character, and (6) object (“object of expenditure”). Object refers to “the type[s] of items purchased or services obtained” (GASB 1800.137) which expenditures are for—that is, “what” is acquired. Governments pay salaries and wages in order to acquire “personal services.”

Answer 94

A capital lease is a lease that has a noncancelable lease term and meets one or more of the following criteria for capitalization: For both the lessee and the lessor: the lease transfers ownership of the property to the lessee by the end of the lease term. the lease contains a bargain purchase option. the lease term is equal to 75% or more of the estimated economic life of the lease property. the present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the excess of the fair market value of the leased property at that time. FASB ASC 840-10-25-1 The lessor must meet both of the following additional criteria: Collectibility of the minimum lease payments is reasonably assured. No important uncertainties surround the amount of unreimbursed costs yet to be incurred by the lessor under the lease. Accounting for capital leases by the lessee involves the following: Record the cost of the leased asset to the lessee at the inception of the lease as an asset and as a related lease liability (cost to lessee is the present value of the minimum lease payments). Record the rental payment, allocated between interest expense and a reduction to the liability, at each payment date. Record executory costs as incurred. Record normal depreciation on the leased asset each period. Accounting for capital leases by the lessor involves the following: Record a receivable and remove the asset from its balance sheet. Record dealers' profit at lease inception for a sales-type lease. Record rental payment received, allocated between interest revenue and a reduction to the receivable, at each payment date. Capital leases recorded by the lessor are further categorized as either direct financing or sales-type leases.

Answer 95

Minimum lease payments by the lessee include the minimum rental payments called for by the lease over the lease term plus other payments, if any, related to: residual value guaranteed by the lessee, penalty for failure to renew or extend the lease, or bargain purchase option. It should be noted that it is highly unlikely that all of the above will be present in the same lease agreement. For example, one would not expect that a lease would contain both a bargain purchase option and a residual value guaranteed by the lessee. Payments related to the following are not included as a component of minimum lease payments: Executory costs Residual value guaranteed by a third party Any amount related to the lessee's agreement to pay the lessor's debt on the leased property Contingent rentals The minimum lease payments for the lessor are the same as for the lessee with several exceptions. The amount of guarantee of either residual value or of rental payments beyond the lease term by a third party are included as part of the minimum lease payments of the lessor but not of the lessee. The third party may not be related to either the lessee or the lessor. FASB ASC 840-10-25-1

Answer 96

In SFAC 2, the hierarchy of accounting qualities was a ranking of the qualities of accounting information. SFAC 8.3 replaced the “hierarchy” with “Qualitative Characteristics of Useful Financial Information,” which support the overriding criterion of decision usefulness, within pervasive cost-benefit and materiality constraints. These characteristics are a listing of the qualities to be sought when accounting choices between alternative methods are made. SFAC 8.3 includes the pervasive constraint that the benefits of the information must exceed the cost of acquiring and presenting the information (cost-benefit analysis), and ends with materiality as the threshold for recognition. Between these constraints, the hierarchy presents user-specific qualities, such as understandability, separate from decision-specific qualities. The primary decision-specific qualities are relevance and faithful representation. Ingredients of these qualities are: ``` relevance (predictive value, confirmatory value, or both) and faithful representation (complete, neutral, and free from error). Enhancing qualitative characteristics are comparability, verifiability, timeliness, and understandability. ```

Answer 97

A lessee under a capital lease is required to allocate each minimum lease payment between reduction of obligation and interest expense. This allocation should reflect a constant interest rate (the 10% indicated for the Mars Co. lease) over the lease term. The journal entry to record Mars' December 31, 20X1, payment would be: Dr. Cr. Interest expense (10% of $758,000) 75,800 Liabilities under capital lease ($200,000 - $75,800) 124,200 Cash 200,000

Answer 98

The GASB has established “accountability” as the cornerstone of financial reporting for governmental entities. Under GASB Concepts Statement 1, accountability consists of the following subobjectives: Interperiod equity: Financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services. Budgetary and fiscal compliance: Financial reporting should demonstrate whether resources were obtained and used in accordance with the entity's legally adopted budget; it should also demonstrate compliance with other finance-related legal or contractual requirements. Service efforts costs and accomplishments: Financial reporting should provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity. GASB Concepts Statement 1 Summary

Answer 99

Nongovernmental not-for-profit entities must depreciate all fixed assets used in operations except land. All expenses of nongovernmental not-for-profit entities must be reported as changes in unrestricted net assets. Donated assets must be recorded at fair value at the date of donation. Therefore, the depreciation expense both of the purchased vehicle ($15,000 ÷ 5 years, or $3,000) and of the donated vehicle ($12,000 ÷ 5 years, or $2,400) must be reported under changes in unrestricted net assets. The total depreciation expense of the two vehicles is $5,400.

Answer 100

The underfunded status of the plan is based on the figure in the table, the amount by which the projected benefit obligation exceeds the plan assets. The estimated amount at the end of Year 8 is $75,000, and if the company funds only $60,000 of this amount during the year, then they will be left as underfunded by $15,000.

Answer 101

Goods owned by Opal, which are out on consignment, and goods in transit FOB shipping (title to goods passed to Opal upon shipment) are included in year-end inventory. Goods held by Opal on consignment for another entity are not included. Opal's inventory should be reduced by: Markup on merchandise out on consignment: (40% x $40,000) 16,000 Goods held on consignment by Opal: 27,000 ------- Total reduction $43,000

Answer 102

Other comprehensive income includes items such as gains and losses on foreign currency transactions designated as hedges, gains and losses on derivative instruments, and gains or losses associated with pension or other postretirement benefits. Therefore, for this question the correct answer is $5,000: Deferred gain on an effective cash-flow hedge ($8,000) + Foreign currency translation gain ($2,000) − Prior service cost not recognized in net periodic pension cost ($5,000) = $5,000

Answer 103

A: Unrestricted net assets $(500), temporarily restricted net assets $0, permanently restricted net assets $70,000 FASB ASC 958-205-45-14 directs that each source of an endowment fund—original amount, gains and loss, and dividends and interest—must be evaluated separately in light of the donor's wishes and relevant law. Unless contravened by law or donor instruction, net losses shall reduce temporarily restricted net assets to the degree any remain from previous gains or investment earnings and then reduce unrestricted net assets. In this case, the donor's wishes indicate that the principal amount should not fall below $70,000. The excess of expenses and losses over revenues would be shown as a reduction in unrestricted net assets. The investments are being managed by an outside firm, so any mid-year investment transactions would not be recorded directly by the not-for-profit. XYZ would record the dividends received and the ending investment value as reported by the management firm. FASB ASC 958-205-45-14, 958-205-45-17, and Glossary

Answer 104

Prior to any liquidation computations, combine the partner’s loans to the partnership with their capital account balances. Then pay the debts, sell the assets (and account for losses on sales), divide up the losses, and then distribute the remaining cash based on the remaining partner capital account balances. Loss from sale of other assets = $625,000 - $500,000 = $125,000 Allocation of loss to Alfa = .60 x $125,000 = $ 75,000 Alfa's new capital balance = $348,000 - $75,000 = $273,000 Alfa should receive $273,000 of cash. Proof: Pre-liquidation cash $ 45,000 Add: Liquidation proceeds 500,000 -------- Subtotal 545,000 Payment of liabilities 120,000 -------- Remaining cash 425,000 Payment to Beda $232,000 - $30,000 - .40($125,000) 152,000 -------- Payment to Alfa $273,000

Answer 105

Personal financial statements are financial statements prepared for an individual, a husband and wife, or a family. An authoritative source is FASB ASC 274-10. Personal financial statements include a statement of financial condition and an optional statement of changes in net worth.

Answer 106

1) A recognized financial asset and financial liability, except any listed in the following paragraph 2) A firm commitment that would otherwise not be recognized at inception and that involves only financial instruments (An example is a forward purchase contract for a loan that is not readily convertible to cash. That commitment involves only financial instruments—a loan and cash—and would not otherwise be recognized because it is not a derivative instrument.) 3) A written loan commitment 4) The rights and obligations under an insurance contract that is not a financial instrument (because it requires or permits the insurer to provide goods or services rather than a cash settlement) but whose terms permit the insurer to settle by paying a third party to provide those goods or services 5) The rights and obligations under a warranty that is not a financial instrument (because it requires or permits the warrantor to provide goods or services rather than a cash settlement) but whose terms permit the warrantor to settle by paying a third party to provide those goods or services A host financial instrument resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument under [FASB ASC] 815-15-25-1, subject to the scope exceptions in paragraph 8. (An example of such a nonfinancial hybrid instrument is an instrument in which the value of the bifurcated embedded derivative is payable in cash, services, or merchandise but the debt host is payable only in cash.)

Answer 107

The bonds were issued at a premium of $40,000 ($1,040,000 – $1,000,000). The premium is amortized using straight-line, over the term of the bonds, $40,000 ÷ 10 years (from January of Year 1 to January of Year 11), or $4,000 premium amortized each year. The bonds were called on July 1, Year 6, for $1,010,000, the call price (1,000 bonds × $1,000 per bond × 1.01 call percentage). By July 1, Year 6, 5-1/2 years have gone by from the issuance on January 1, Year 1. Thus, the remaining unamortized premium on the bonds is the initial total of $40,000 – (5.5 years × $4,000), or $18,000 ($40,000 – $22,000). The call price of the bonds was $1,010,000 and the carrying value of the bonds was $1,018,000 ($1,000,000 + $18,000), so the debt was paid for less than the carrying amount, and a gain of the $8,000 difference is recognized ($1,018,000 – $1,010,000).

Answer 108

Under the book value method, the basis of the transaction is the carrying amount of the bonds converted. The entry to record the conversion is: Bonds payable 1,000,000 Discount on bonds payable 100,000 Common stock 100,000 Paid-in capital in excess of par 800,000 The increase to stockholders' equity is common stock of $100,000 and paid-in capital of $800,000 ($900,000). ======== The book value method is one of two alternative GAAP methods of accounting for a conversion transaction (convertible preferred stock or bonds). It values the new security issued (usually common stock) at the carrying value (book value) of the old (converted) security. No gain or loss is recognized on the transaction. (Contrast to the market value method.)

Answer 109

Governmental entities should recognize assets from derived tax revenue transactions in the period when the exchange transaction on which the tax is imposed occurs or when the resources are received, whichever occurs first. Revenues should be recognized, net of estimated allowances for doubtful accounts in the same period that the assets are recognized. From the entity-wide perspective, “availability” is not a criterion for recognizing revenues, so classification as “deferred” is unnecessary. Receipts current year $1,250,000 Add ending receivables 600,000 Less ending allowance for doubtful accounts (60,000) ----------- 1,790,000 Less beginning receivables (450,000) Add beginning allowance for doubtful accounts 50,000 ----------- Current-year revenue $1,390,000 ===========

Answer 110

sales price - cost to sell

Answer 111

D. The General Fund balance sheet at December 31, 20X2, would report: no Encumbrances; no Fund balance—reserved for encumbrances; Fund balance—committed, $350,000; and Fund balance—assigned, $50,000. As $350,000 of the year-end encumbrances were already recognized as a “committed” fund balance, so only the additional $50,000 of commitments need to be recognized in preparing the General Fund balance sheet. As the remaining encumbrances probably did not result from action at the highest level of government, the City Council, they would be shown as “assigned.”

Answer 112

FASB ASC 840-30-35-1 states that “the asset recorded under a capital lease shall be amortized depending on the provisions of the lease. When a bargain purchase option exists or ownership of the leased asset reverts to the lessee, depreciation should be computed over the useful life of the assets using estimated salvage value at the end of that life.” (In other cases, the lessee computes depreciation over the lease term using residual value at the end of the lease term.) Thus, Nori recognizes depreciation expenses as follows: Depreciation expense for 20X1 = (Cost - Salvage value) / Useful life = ($240,000 - $20,000) / 8 years = $220,000 / 8 = $27,500

Answer 113

The intrinsic method is the excess of the market price over the exercise price. Market price (100 x $10) $1,000 Exercise price (100 x $9) 900 ------ Intrinsic value $ 100

Answer 114

Interest Exp. COMPARED TO Interest Income Before Tax.

Answer 115

Double-declining balance (200% declining balance) is an accelerated depreciation method that applies a rate double that of straight-line (originally based on the method used for tax purposes). It is based on the assumption that the productivity or revenue-generating power of the asset is relatively greater during the earlier years of its life, or that maintenance expenses tend to increase during the later years. It produces results similar to the sum-of-the-years'-digits method. The computation is double the straight-line (SL) rate times the carrying amount of the asset: DDB depreciation expense = 200% SL rate × Carrying amount Depreciation is discontinued when the carrying amount equals the residual value. Declining balance can also be applied at a different rate, e.g., 150% of straight-line.

Answer 116

67. Five different attributes of assets (and liabilities) are used in present practice: Historical cost (historical proceeds). Property, plant, and equipment and most inventories are reported at their historical cost, which is the amount of cash, or its equivalent, paid to acquire an asset, commonly adjusted after acquisition for amortization or other allocations. Liabilities that involve obligations to provide goods or services to customers are generally reported at historical proceeds, which is the amount of cash, or its equivalent, received when the obligation was incurred and may be adjusted after acquisition for amortization or other allocations. Current cost. Some inventories are reported at their current (replacement) cost, which is the amount of cash, or its equivalent, that would have to be paid if the same or an equivalent asset were acquired currently. Current market value. Some investments in marketable securities are reported at their current market value, which is the amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation. Current market value is also generally used for assets expected to be sold at prices lower than previous carrying amounts. Some liabilities that involve marketable commodities and securities, for example, the obligations of writers of options or sellers of common shares who do not own the underlying commodities or securities, are reported at current market value. ``` Net realizable (settlement) value. Short-term receivables and some inventories are reported at their net realizable value, which is the nondiscounted amount of cash, or its equivalent, into which an asset is expected to be converted in due course of business less direct costs, if any, necessary to make that conversion. Liabilities that involve known or estimated amounts of money payable at unknown future dates, for example, trade payables or warranty obligations, generally are reported at their net settlement value, which is the nondiscounted amounts of cash, or its equivalent, expected to be paid to liquidate an obligation in the due course of business, including direct costs, if any, necessary to make that payment. Present (or discounted) value of future cash flows. Long-term receivables are reported at their present value (discounted at the implicit or historical rate), which is the present or discounted value of future cash inflows into which an asset is expected to be converted in due course of business less present values of cash outflows necessary to obtain those inflows. Long-term payables are similarly reported at their present value (discounted at the implicit or historical rate), which is the present or discounted value of future cash outflows expected to be required to satisfy the liability in due course of business. ```

Answer 117

Changes in the value of a liability for an asset retirement obligation must be measured by applying an interest method of allocation using a credit-adjusted, risk-free interest rate. Accretion expense would be: $100,000 × 0.10 = $10,000

Answer 118

Recognition is the process of formally recording or incorporating an item in the financial statements of the entity. (SFAC 6.143) Four fundamental recognition criteria are (subject to the pervasive cost-benefit constraint and the materiality threshold): Definitions: The item must meet the definition of an element of financial statements. Measurability: The item has a relevant attribute that can be quantified with sufficient reliability. Relevance: The information about it is capable of making a difference in user decisions. Faithful representation: The information is representationally faithful, complete, unbiased, and error-free. SFAC 5.63-.87 Revenues and gains are recognized when they are: realized or realizable or earned. SFAC 5.83 Expenses and losses are recognized when one of the following has occurred: Consumption (using up) of benefit Occurrence or discovery of loss of future economic benefit SFAC 5.85 “Realized” and “recognized” are not synonymous. There are seven accepted criteria for revenue recognition: Point of sale Production and delivery—recognize prepayment (magazine subscription) Percentage of completion—long-term contract With passage of time—rent, interest Completion of production (before sale)—when product is readily salable at determinable prices without significant effort Completed transaction—in exchange for noncash assets Installment basis—when cash is collected

Answer 119

Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820-10-20

Answer 120

The $151,400 amount is calculated as follows: Net income $150,000 Increase in accounts receivable ($23,000 – $29,000) (6,000) Increase in allowance for uncollectible accounts ($800 – $1,000) 200 Decrease in prepaid rent expense ($12,400 – $8,200) 4,200 Increase in accounts payable ($22,400 – $19,400) 3,000 --------- Cash provided by operating activities $151,400

Answer 121

FASB ASC 840-10-25-41 requires use of the interest rate implicit in the lease when: this rate can be determined and the implicit rate is less than lessee's incremental rate. Present value of NINE lease payments at December 31, 20X1 (at implicit rate) $316,500 Less December 31, 20X1 payment 50,000 -------- Present value of lease obligation at beginning of 20X2 $266,500 Add 20X2 interest at 10% (.10 x 266,500) 26,650 -------- Lease obligation prior to 12/31/X2 payment $293,150 Less December 31, 20X2, payment 50,000 -------- Capital lease liability on 12/31/X2 balance sheet $243,150 ========

Answer 122

This lease qualifies as a capital lease because the lease term of 10 years exceeds 75% of the asset’s useful life of 12 years (10 > 0.75 × 12 = 9). When a lease is considered a capital lease, then the lessee capitalizes the lease property and recognizes a lease obligation for the present value of the minimum lease payments. The minimum lease payments here are the $100,000 a year at the end of each year, and their present value is 100,000 × 6.15 (present value of an annuity in arrears or ordinary annuity, for 10 periods at 10%). Thus, the answer is $615,000: 100,000 × 6.15 = $615,000

Answer 123

The concept of “extraordinary” items has been eliminated from GAAP; the presentation for items that are unusual in nature or occur infrequently will be expanded to also include items that are both unusual in nature and infrequently occurring. These items should be included in the computation of net income from continuing operations prior to income tax expense.

Answer 124

FASB ASC 360-10-30-1 provides that: Quote If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset. The $186,000 should be classified as building cost and would be depreciated.

Answer 125

The costs incurred by the not-for-profit entity in carrying out its primary mission are considered program expenses. As a museum, both education and research can be considered primary to the Fenn Museum's mission. Supporting services expenses are separated into two categories: Management and general Fundraising

Answer 126

In increase in accounts receivable means that sales revenue has been included in net income but not yet received. A decrease in accounts payable means that cash has been paid for expenses but these cash payments have been deducted in arriving at net income. Net income $116,000 Increase in accounts receivable (10,000) Decrease in accounts payable (6,000) --------- Cash-basis/taxable income $100,000

Answer 127

FASB ASC 915-340-25-1 provides that: Quote Generally accepted accounting principles (GAAP) that apply to established operating entities shall determine whether a cost incurred by a development stage entity is to be charged to expense when incurred or is to be capitalized or deferred. Therefore, regular GAAP applies to costs that are expensed. Research and development $ 750,000 $ 900,000 Laboratory operations 175,000 550,000 General and administrative 225,000 685,000 Depreciation 25,000 115,000 Total $1,175,000 $2,250,000 Total: $1,175,000 + $2,250,000 = $3,425,000

Answer 128

In computing earnings per share, the weighted average of common stock outstanding is number of shares outstanding at the beginning of the year weighted by time for any change in shares outstanding. In this problem, the weighted average is: ``` Original shares outstanding 100,000 4/1 issue - 30,000 x 9/12 22,500 6/1 issue - 36,000 x 7/12 21,000 -------- 143,500 Effect of stock dividend x 1.05 -------- Treasury stock acquired: 35,000 x 4/12 (11,667) -------- Weighted average outstanding 139,008 ```

Answer 129

process of formally recording or incorporating an item into the financial statements of an entity as an asset, liability, revenue, expense, or the like.

Answer 130

An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception (FASB ASC 480-10-25-8): •embodies an obligation to repurchase the issuer's equity shares, or is indexed to such an obligation and •requires or may require the issuer to settle the obligation by transferring assets. Examples of these financial instruments include forward purchase contracts or written put options on the issuer's equity shares that are to be physically settled or net cash settled.

Answer 131

Under the current financial resources measurement focus used in governmental funds, neither capital assets nor long-term liabilities are recorded in those funds. However, the inception of a capital lease should be reported in the governmental fund from which the lease payments will be made. GASB 1800.128 states in this regard: “When a capital lease represents the acquisition or construction of a general fixed asset, the acquisition or construction of the general fixed asset should be reflected as an expenditure and (an) other financing source…” This is a “wash” entry that has no effect on fund balance.

Answer 132

Leasehold improvements on January 1, 20X1 $48,000 Amortization of leasehold improvements January 1 to June 30, 20X1 ($48,000 / 6 years left on lease) x .5 years - 4,000 -------- Leasehold improvements on June 30, 20X1 $44,000 ========

Answer 133

The sum-of-the-years'-digits depreciation method entails using a fraction with a numerator equal to the remaining useful life of the asset at the beginning of the year and a denominator equal to the sum of the years' digits. To calculate annual depreciation expense, this fraction is applied each year to the depreciable basis of the asset, which is the historical cost less any salvage value. For an asset with a 4-year estimated useful life, the denominator is 4 + 3 + 2 +1 = 10. The depreciable basis in Spiro's equipment is $20,000 less an estimated salvage value of $2,000 = $18,000. Depreciation expense for 20X1 through 20X3 is calculated as follows: 4/10 × $18,000 = $7,200; 3/10 × $18,000 = $5,400; 2/10 × $18,000 = 3,600. At December 31, 20X3, accumulated depreciation is $16,200 and the cost is $20,000, resulting in a net book value of the equipment of $3,800.

Answer 134

D. A gain of $30,000 Under IFRS (International Financial Reporting Standards), a foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction. At each subsequent balance sheet date, and at settlement, the transaction should be adjusted for the current amount, with differences being reported in profit or loss in the period incurred. At 11/1, the liability was $300,000 (€200,000 × 1.5), and on 12/31, the liability had decreased to $270,000 (€200,000 × 1.35), for a gain of $30,000.

Answer 135

A cash flow hedge is a hedge of the exposure to variability of cash flows of a recognized asset or liability, or of forecasted transactions, that is attributable to a particular risk. FASB ASC 815-10-20

Answer 136

A fair value hedge is a hedge of changes in the fair value of recognized assets, liabilities, or unrecognized firm commitments that are attributable to a particular risk. FASB ASC 815-25-20

Answer 137

A sales-type lease is a capital lease that gives rise to manufacturer's or dealer's profit (loss), i.e., the fair value of the leased asset at the inception of the lease is more (or less) than its cost or carrying value. The lessor recognizes profit at lease inception as if the lease were a regular sale of the asset. The lessee makes no distinction in accounting for this type of lease. The lessor recognizes two types of revenue: Sales revenue, and cost of goods sold, at the inception of the lease, as the manufacturer's or dealer's profit: the difference between the normal selling price and the cost to the lessor Interest revenue on the lease receivable over the lease term FASB ASC 840-10-25-43

Answer 138

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

Answer 139

Interperiod tax allocation is apportionment of the income tax expense for the current year between the tax payable in the current year and a deferred tax liability that may or may not become payable in future years. It is apportionment among accounting periods and is necessitated by differences in the treatment of certain items under GAAP for financial reporting and under the tax law for income tax purposes. Basic principles of interperiod allocation are as follows: A deferred tax liability or asset is recognized for the tax consequences of all events that have been recognized in the financial statements. The deferred tax consequences of an event are measured based on provisions of the enacted tax law to determine the amount of taxes payable or refundable.The tax consequences of earning income or incurring losses or expenses in future years or the future enactment of a change in tax laws or rates are not anticipated for purposes of recognition and measurement of a deferred tax liability or asset. Deferred tax liability/asset is recognized by the liability method (not the deferral method). All deferred tax assets and liabilities are classified as noncurrent on the balance sheet. Basic features of interperiod tax allocation are as follows: All temporary differences are related to differences in the timing of accounting recognition compared to tax recognition. All temporary differences originate, and then reverse, with a net effect of zero. Income tax expense is recognized (i.e., matched) in the period in which the tax effect is incurred rather than when it is reported on the tax return. A deferred tax liability (credit balance) represents a future tax liability; a deferred tax asset is a future tax benefit to be realized. FASB ASC 740-10-30-5

Answer 140

Intraperiod tax allocation is apportionment of the income tax expense for the current accounting period (as determined by application of the liability method to achieve interperiod tax allocation) among the components of the income statement: operating income, income from discontinued operations, accounting changes, prior-period adjustments, and other direct adjustments to capital accounts. Intraperiod tax allocation affects only the reporting, not the recording, of income tax expense. The tax effect is reported along with the particular item which gives rise to the effect. FASB ASC 740-20-05-1

Answer 141

Under the installment sales method, the gross profit on sales is deferred and recognized as cash is actually collected. The gross profit percentage is the realized gain divided by the contract price. This gross profit percentage is multiplied by any cash received to determine the gain to be included in net income. Cash received in the third year $15,000 Gross profit percentage $20,000/$50,000 = 0.40 ------- Gross profit in Year 3 $ 6,000

Answer 142

Sable will recognize a gain determined by the proportion of cash received to the total consideration. Similar trucks were exchanged in the transaction; therefore, there would be no gain. Very similar trucks would not significantly change cash flows—so the transaction would lack commercial substance. Now, add in the fact that Bensol paid Sable money. Since Sable received money, Sable now has to record a gain.

Answer 143

Other comprehensive income includes items such as gains and losses on foreign currency transactions designated as hedges, gains and losses on derivative instruments, and gains or losses associated with pension or other postretirement benefits. Therefore, for this question the correct answer is $5,000: Deferred gain on an effective cash-flow hedge ($8,000) + Foreign currency translation gain ($2,000) − Prior service cost not recognized in net periodic pension cost ($5,000) = $5,000

Answer 144

Comprehensive income is the change in equity of a business during the period from transactions and other events and circumstances from nonowner sources (i.e., all changes except those resulting from investments by and distributions to owners). It is the sum of revenues, expenses, gains, and losses resulting from exchange transactions and other transfers between the enterprise and other entities that are not its owners, the productive efforts of the enterprise, and the effects of interactions with the economic, legal, social, political, and physical environment of which it is a part (e.g., price changes, casualties, etc.). (FASB ASC 220-10-20; SFAC 6.70, .215–.220) Comprehensive income is the broad measure of the effects of transactions and other events on the entity. Comprehensive income = Earnings + / - Cumulative accounting adjustments + / - Other nonowner changes in equity

Answer 145

Other comprehensive income includes revenues, expenses, gains, and losses that, in accordance with generally accepted accounting principles, are included in comprehensive income but excluded from net income. FASB ASC 220-10-20

Answer 146

B. $73,500 At December 31, 20X1, the total lease liability was $76,364 (the sum of the current portion of $1,364 and the long-term portion of $75,000). The $9,000 payment made on January 2, 20X2, was for the $1,364 current portion and the interest of $7,636 ($9,000 - $1,364). After the January 2, 20X2, payment, the total lease liability is $75,000. Interest for 20X2 is $7,500 ($75,000 × 10% implicit rate). Therefore, the reduction in principal that will be included in the January 2, 20X3, payment will be $1,500, which is the $9,000 payment minus $7,500 interest for 20X2. This $1,500 represents the current portion of the lease liability. Therefore, the long-term portion of the liability at December 31, 20X2, is the $75,000 total lease liability less the $1,500 current portion, or $73,500.

Answer 147

The interest expense is: Principal × Interest rate × Time In this case, it is: $1,000,000 × .09 × .25 = $22,500

Answer 148

B. Benefits paid to participants The statement of changes in net assets available for benefits of an employee benefit plan must include the following: The change in fair value (or estimated fair value) of each significant type of investment, including participant-directed and self-directed investments held in brokerage accounts. Gains and losses from investments sold need not be segregated from unrealized gains and losses relating to investments held at year-end. Realized gains and losses on investments that were both bought and sold during the period should be included. This information may be presented in the accompanying footnotes. Investment income, exclusive of changes in fair value described above Contributions from employers, segregated between cash and noncash contributions (a noncash contribution shall be recorded at fair value; the nature of noncash contributions shall be described either parenthetically or in a note) (This would be an increase.) Contributions from participants, including those transmitted by the sponsor (This would be an increase.) Contributions from other identified sources (for example, state subsidies or federal grants) (This would be an increase.) Benefits paid to participants (This would be a decrease.) Payments to insurance entities to purchase contracts that are excluded from plan assets Administrative expenses FASB ASC 962-205-45-7

Answer 149

Options do not qualify for hedge accounting. The gain or loss must be currently recognized. $43 x 2,000 = $86,000; $86,000 + $400 = $86,400 $40 x 2,000 = $80,000; $80,000 + $600 = 80,600 ------- Gain = $ 5,800

Answer 150

D. A lease with transfer of title meets the criteria to be classified as a capital lease. The lessor (Able) should remove the asset from the books, record a receivable, and recognize interest revenue from the receivable.

Answer 151

A. The beginning present value of the lease did not include the present value of the bargain purchase option. The liability under capital lease obligation should be equal to the discounted present value of the minimum lease payments, which includes any bargain purchase option. If the calculated liability includes only the discounted present value of the periodic payments to be made over the 5-year lease term, the liability will be shown as paid in full with the last periodic payment. Therefore it appears Cott did not include the amount of its bargain purchase option in the minimum lease payments when calculating its lease liability.

Answer 152

Journal entry to record issuance of bonds on January 1, 20X2: DRS: Cash (400,000 + 8,000 - 12,000) $396,000 Bonds Discount (400 x $1,000 (1.00 - .97)) 12,000 CRS: Bonds payable (400 x $1,000) $400,000 Interest payable [(3/12) x (400,000 x .08)] 8,000 Following bond issuance on January 1, 20X2, Oak should report: Face amount of bonds $400,000 Less: Bond discount 12,000 -------- Bonds payable, net of discount $388,000 ========

Answer 153

C. $550,000 Here the available produced finished inventory has a buyer already under contract obligation to buy, and a sale price, so revenue recognition upon production is appropriate. The produced items are within the contract requirements and amounts. The items are ready for pickup and set aside, and available. The inventory can be carried at net realizable value, and the sales price can be recognized as revenue in Year 1, at the sale price. Thus, the produced and ready items multiplied by the sale price equal the contract revenue of $550,000: 5,000 × $110 = $550,000

Answer 154

To apply the acquisition method, one must: identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquire, and recognize and measure goodwill or a gain from a bargain purchase. The acquirer is an entity that receives control of another entity by giving up consideration. The acquisition date is the date on which the acquirer obtains control of the entity. FASB ASC 805-10-05-2 requires that as of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in FASB Concepts Statement (SFAC) 6, Elements of Financial Statements, at the acquisition date. In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions.

Answer 155

Investing activities is one of the three categories of cash flows in the statement of cash flows. The category includes all transactions related to the making or collecting of loans and the acquiring and disposing of debt; equity instruments (of other entities); property, plant, and equipment; or a business unit. FASB ASC 230-10-20

Answer 156

Financing activities is one of the three categories of cash flows on the statement of cash flows. It includes all transactions related to obtaining resources from owners and providing them with a return on, and a return of, their investment and to obtaining and repaying debt, including short-term and long-term debt, mortgages, capital lease obligations, seller-financed debt, and debt incurred to acquire treasury stock. (FASB ASC 230-10-20) In governmental accounting, there are two categories of financing activities reported on the cash flow statement of proprietary funds or governments engaged in business-type activities: “noncapital financing activities” and “capital and related financing activities.” (GASB 2450.117–.122)

Answer 157

Operating activities is one of the three categories of cash flows in the statement of cash flows. Operating activities are all transactions and other events that are not investing or financing activities. Operating activities generally include transactions that enter into the determination of net income and include production and delivery of goods and services, interest and dividends received, and payment of interest. FASB ASC 230-10-20

Answer 158

A footnote is an explanatory note or comment at the end of a financial statement. The following types of notes are typically included by management as support to the basic financial statements: Summary of significant accounting policies Additional support for summary totals found on the financial statements, usually the balance sheet Information about items not reported on the basic statements that may be significant to users in their decision making Supplementary information required by the FASB or the SEC to fulfill the full-disclosure principle

Answer 159

Under a pledge, an account receivable is used as collateral for a loan. Milton continues to collect the receivables and applies the collection to the loan balance.

Answer 160

SFAC 6, Elements of Financial Statements, contains the following definitions: Capital maintenance concept: the recovery of cost; separation of return on capital from return of capital. Financial capital concept: The effects of price changes on assets held and liabilities owed are recognized as “holding gains and losses” and included in return on capital. Physical capital concept: The effect of price changes are recognized as “capital maintenance adjustments” as a separate element of equity and would not be included in return on capital. SFAC 6 continues:

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