ROUND 2 - 2017 Studying

Question 1

Encumbrances

Answer 1

Encumbrances are commitments related to unperformed (executory) contracts for goods and services. They are recorded in the General and other governmental funds for budgetary control purposes to prevent overspending and demonstrate compliance with legal requirements. An encumbrance does not represent either expenditures or liabilities—it represents the estimated amount of expenditure which will result if unperformed contracts (purchase orders) in process are completed. (GASB 1700.127)

A debit to Encumbrance is offset by a credit to Fund Balance: Reserve for Encumbrance. When the contract is completed (the goods or services have been received), the encumbrance entry is reversed and the expenditure is recorded. The encumbrance entry is also removed at year-end 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.

For budgetary control: Unencumbered appropriations = Appropriations - Expenditures - Encumbrances.

Question 2

General Fund

Answer 2

The general fund is the primary governmental fund, used to account for all financial resources not required to be accounted for in another fund. It is an omnibus fund used to account for most routine general governmental operations—for a variety of revenue sources and a wide range of activities financed by these resources. A governmental unit will have only one general fund.

GASB 1300.104

The General fund is accounted for on the modified accrual basis. Budgetary accounts are used and integrated in the accounting records.

Revenue sources generally include property and sales taxes, fees, fines, penalties, and user-based revenues. Functions financed usually include fire and police protection, sanitation, courts, libraries, and administrative and clerical activities.

Question 3

Budgetary Account

Answer 3

As a control technique, governments use budgetary accounts to record the officially adopted budgetary estimates of revenues, expenditures (appropriations), and other changes in fund balance (or fund equity) directly in the ledgers of governmental funds. Thus, these accounts formally incorporate the budget into the fund accounting records. Accounts used are Estimated Revenues and Appropriations (or Estimated Expenditures), and Budgetary Fund Balance. Budgetary accounting procedures do not directly affect revenue and expense measurement. At the end of the budgetary period, budgetary accounts are reversed and thus completely removed from the books in the closing process.

GASB 1700.118

Question 4

Expenditures

Answer 4

“Expenditure” is a term used in governmental fund accounting that refers to a decrease in (use of) the financial resources of the entity. Expenditures are recorded under the modified accrual basis (current financial resources measurement focus) when the related liability is incurred, if measurable, except for unmatured interest and principal on general long-term debt, which should be recognized when due.

GASB 1600.116 and 1600.120

(Compare to Expense, as used in accrual accounting for proprietary funds and business enterprises.)

Expenditures should be classified by fund, function (or program), organization unit, activity, character, and principal classes of objects.

GASB 1800

Question 5

Agency Fund

Answer 5

Agency funds are fiduciary funds used to account for assets held by a governmental unit as an agent or in a custodial capacity (i.e., to account for money collected for some other entity). Custodial assets could be held for other governments, such as taxes collected for another entity (a tax agency). Custodial assets could be held for individuals and private organizations.

Agency funds are purely custodial (assets = liabilities) and do not involve the measurement of the results of operations.

Question 6

Net Income

Answer 6

Net income is operating income plus non-operating revenues minus non-operating expenses minus taxes.

NI = Op Income + Non-Op Income - Non-op Exp - Tax

Question 7

Operating Activities, Financing Activities, and Investing Activities

Answer 7

The statement of cash flows classifies cash receipts and cash payments by operating, investing, and financing activities. Transactions and other events characteristics of each kind of activity are as follows:

1. Operating activities
2. Investing activities
3. Financing activities

These business activities are briefly explained below:

Operating Activities:

Operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services and cash payments to suppliers and employees for acquisitions of inventory and expenses.

Investing Activities:

Investing activities generally involve long-term assets and include:
•Making and collecting loans.
•Acquiring and disposal of investments and productive long-lived assets.

Financing Activities:

Financing activities liability and stockholders; equity items and include:
•Obtaining cash from creditors and repaying the amounts borrowed.
•Obtaining capital from owners and providing them with a return, and return of, their investment.

Question 8

How should gains or losses from fair value hedges be recognized?

Answer 8

The gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period.

Question 9

Spot Rate

Answer 9

The price quoted for immediate settlement on a commodity, a security or a currency. The spot rate, also called “spot price,” is based on the value of an asset at the moment of the quote.

Question 10

Comprehensive income

Answer 10

Comprehensive income per SFAC 6, Elements in Financial Statements, encompasses all changes in equity of a business resulting from transactions with nonowners. Specifically:

It includes all changes in equity during a period EXCEPT FOR THOSE resulting from investments by owners and distributions to owners.

Question 11

3 Elements of OCI

Answer 11

The components of other comprehensive income are to be presented based on their nature. Under current authoritative accounting literature, three categories of elements of other comprehensive income exist:

1. Unrealized gains and losses on available-for-sale investments
2. Foreign currency items
3. Changes in unrecognized prior service costs, unrecognized gains and losses, and unrecognized transition assets or obligations related to defined benefit pension plans and defined benefit other postretirement plans

As additional authoritative standards are issued, additional components of other comprehensive income may come into existence.

Question 12

Cash Flow Statement

Answer 12

The statement of cash flows is one of the required financial statements. Cash receipts and cash payments are classified into three categories:

1. Operating activities—all transactions and other events that are not investing or financing; generally include transactions that enter into the determination of net income. These include production and delivery of goods and services, interest and dividends received, and payment of interest.
2. Investing activities—all transactions related to the making or collecting of loans and the acquiring and disposing of debt, equity instruments, or property, plant, and equipment.
3. Financing activities—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.

Separate disclosure of noncash investing and financing activities is also required. Examples of such activities include obtaining an asset by entering into a capital lease, by exchange for another asset, or by the issuance of stock or debt.

The statement of cash flows can be prepared using either the direct or the indirect method.

Question 13

Direct vs. Indirect Method of Cash Flows

Answer 13

statement of cash flows?

The main difference between the direct method and the indirect method involves the cash flows from operating activities, the first section of the statement of cash flows. (There is no difference in the cash flows reported in the investing and financing activities sections.)

Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers. In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities.

The direct method must also provide a reconciliation of net income to the cash provided by operating activities. (This is done automatically under the indirect method.)

Nearly all corporations prepare the statement of cash flows using the indirect method.

Question 14

Intrinsic value of Call Options - Intrinsic Method

Answer 14

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

Question 15

Government Fund Types

Answer 15

Special revenue funds are classified as governmental funds.

The other governmental funds are the general fund, capital projects funds, debt service funds and permanent funds.

Governmental funds use the modified accrual basis of accounting.

Enterprise funds are a type of proprietary fund and investment and pension trust funds are types of fiduciary funds. They use the accrual basis of accounting.

Question 16

Acquisition method

Answer 16

The acquisition method is required to account for the acquisition of another company. The acquisition method requires that acquisition-related costs be expensed as incurred. The costs to acquire stock or bonds must be included in the cost of the stock or bonds.

Question 17

Major Funds

Answer 17

Fronk County’s main operating fund (the general fund) should be reported as a major fund. Per GASB 2200.159, other individual governmental and enterprise funds are to be reported in separate columns as major funds based on these criteria:

• “The total of assets and deferred outflows of resources, the total of liabilities and deferred inflows of resources, revenues, or expenditures/expenses of that individual governmental or enterprise fund are at least 10 percent of the corresponding element(s) total (total assets and deferred outflows of resources, total liabilities and deferred inflows of resources, and so forth) for all funds of that category or type (that is, total governmental or total enterprise funds), and
• “The same element(s) that met the 10 percent criterion…above is at least 5 percent of the corresponding element total for all governmental and enterprise funds combined.”

Based on the aforementioned criteria, the following table depicts both the 10% and 5% thresholds:

Question 18

Enterprise Fund

Answer 18

Enterprise funds are funds that may be used to account for any activity of a governmental unit for which a fee is charged to external users for goods or services. Enterprise funds must be used when fund net revenues secure debt or if law or pricing policies require fund expenses, including capital costs (depreciation) to be covered by revenues. Enterprise funds are financed and operated in a manner similar to commercial (business) activities (e.g., utilities, swimming pools). Enterprise funds are accounted for on the accrual basis with accounts for all related assets and liabilities, including capital assets and long-term debt. Fund equity (fund net position) is reported in three categories: net investment in capital assets, restricted, and unrestricted.

GASB 1300.102 and P80.111

Question 19

Internal Service Funds

Answer 19

Internal service funds are proprietary funds used to account for any activity that provides goods or services to another fund, department, or agency of the primary government and its component units or to another government on a cost-reimbursement basis (i.e., an in-house enterprise, such as motor pool, garage, print shop, or data processing center) “Cost-reimbursement” implies that the costs of the service department are expected to be recovered through charges to the other departments (service department revenues = billings to other departments). Internal service funds are accounted for on the accrual basis.

GASB 1300.110

Internal service funds use accrual accounting and the economic resources basis of accounting, in contrast to the modified accrual method and current financial resources basis of accounting for governmental funds. Fund equity is termed “net position” and is reported in three categories: net investment in capital assets, restricted, and unrestricted. The capital assets of the service department (e.g., the copier machines) and any related long-term debt are recorded, and depreciated, in the internal service fund.

Question 20

Which of the following journal entries should a city use to record $250,000 for fire department salaries incurred during May?

A.
Salaries expense, debit 250,000; Appropriations, credit 250,000

B.
Salaries expense, debit 250,000; Encumbrances, credit 250,000

C.
Encumbrances, debit 250,000; Salaries payable, credit 250,000

D.
Expenditures—salaries, debit 250,000; Salaries payable, credit 250,000

Answer 20

D.
Expenditures—salaries, debit 250,000; Salaries payable, credit 250,000

It helps to clarify the terminology used in governmental accounting:
•Appropriations is an account created as a restriction of revenues.
•Encumbrances, similar to a purchase order, specifically designates funds for a specific future purchase of goods or services.
•Expenditures can be for capital or revenue items and means an outflow of resources, usually money.

As the salaries have already benefited the city, but simply have not been paid, the appropriate credit would be to a liability account. The only liability account listed as a credit in the answer choices is salaries payable, thereby eliminating the “Salaries expense, debit 250,000; Appropriations, credit 250,000” and “Salaries expense, debit 250,000; Encumbrances, credit 250,000” answer choices.

Question 21

Non-exchange Transactions

Answer 21

In governmental accounting, a non-exchange transaction involves a government receiving value from another party without directly providing value in return or a government providing value without directly receiving payment in return.

Examples of governments RECEIVING value in non-exchange transactions would be:

1) derived tax revenues such as sales taxes dependent on retail trade and imposed tax revenues such as property taxes

Examples of governments PROVIDING value in non-exchange transactions would include:

1) a local government providing services pursuant to a state mandate or a government providing grants or entitlements to specific recipients:

GASB N50.101

Question 22

How to report Gains on sale of Warehouses (when you immediately plan to buy a new one)

Answer 22

A: in continuing operations

The sale and purchase should be recorded separately.

The gain on the sale is reported as other income and is a component of Income from Continuing Operations.

Question 23

Special Revenues Fund

Answer 23

In governmental accounting, special revenue funds are governmental funds used to account for the proceeds of specific revenue sources (other than trusts for individuals, private organizations, or other governments or for major capital projects) that are legally restricted to expenditure for specific purposes. Special revenue funds are accounted for on the modified accrual basis.

Example

Some special revenue funds are:
gasoline excise taxes to be used for street maintenance and
hotel/motel bed taxes to be used for industrial development or to be allocated to the arts.

If the expenditures are for purposes normally financed from the general fund, the expenditures can be recorded in the general fund and the appropriate amount transferred. Accounting for special revenue funds is exactly the same as for the general fund (budgetary accounts are also used).

Question 24

Basic EPS

Answer 24

(NI - Dividends on Preferred) / Weighted Average Outstanding shares

Question 25

Diluted EPS

Answer 25

(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)

Question 26

WHen would you recognize impairment loss?

Answer 26

When estimated future cash flows are LESS THAN carrying value.

Question 27

Valuation Allowances - How they Function

Answer 27

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

Question 28

Partner’s Cap initial entry - Recording of Contributed Capital Balances

Answer 28

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

Question 29

On January 1 of the current year, Wren Co. leased a building to Brill under an operating lease for 10 years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder’s fee. The building is depreciated $12,000 per year. For the year, Wren incurred insurance and property tax expense totaling $9,000. Wren’s net rental income for the year should be:

$27,500

Answer 29

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

Question 30

Int Payable and Int Expense: Bonds

Answer 30

Int Payable = Cash Payment amount of Face * Stated = 1000 * .09 = $90

Int Expense = Carrying Amount * Effective = 1000 * .1 = $100

Question 31

Debenture Bond

UNSECURED

Answer 31

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.

Question 32

Writing Off Uncollectible Accounts Entries

Answer 32

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)

Question 33

Main, a pharmaceutical company, leased office space from Ash. Main took possession and began to use the building on July 1, 2010. Rent was due the first day of each month. Monthly lease payments escalated over the 5-year period of the lease as follows:

                 Period                       Lease Payment

July 1, 2010 - September 30, 2010—
rent abatement during move-in, construction $ 0
October 1, 2010 - June 30, 2011 17,500
July 1, 2011 - June 30, 2012 19,000
July 1, 2012 - June 30, 2013 20,500
July 1, 2013 - June 30, 2014 23,000
July 1, 2014 - June 30, 2015 24,500

What amount would Main show as deferred rent expense at December 31, 2013?

Answer 33

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

Question 34

On March 4, 2011, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, 2011, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, 2012. On September 30, 2011, LVC’s common stock had a market value, ex-rights, of $95 per share and the stock rights had a market value of $5 each.

What amount should Evan report on its September 30, 2011, balance sheet for investment in stock rights?

Answer 34

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

Question 35

Depreciable Base

Answer 35

Depreciable base is Purchase price - Salvage value

Question 36

Revenue Principle

Answer 36

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)

Question 37

The stockholders’ equity section of Brown Co.’s December 31, 20X1, balance sheet consisted of the following:

Common stock, $30 par, 10,000
shares authorized and outstanding $300,000
Additional paid-in capital 150,000
Retained earnings (deficit) (210,000)
On January 2, 20X2, Brown put into effect a stockholder-approved quasi-reorganization by reducing the par value of the stock to $5 and eliminating the deficit against additional paid-in capital. Immediately after the quasi-reorganization, what amount should Brown report as additional paid-in capital?

Answer 37

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.

Question 38

On July 1, 2011, after recording interest and amortization, York Co. converted $1,000,000 of its 12% convertible bonds into 50,000 shares of $1 par value common stock.

On the conversion date, the carrying amount of the bonds was $1,300,000, the market value of the bonds was $1,400,000, and York’s common stock was publicly trading at $30 per share.

Using the book value method, what amount of additional paid-in capital should York record as a result of the conversion?

Answer 38

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

Question 39

What do you do when you issue warrants with bonds?

Answer 39

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.

Question 40

On December 31, 20X1, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp. made under customary trade terms, is due in nine months and the note from Maxx, Inc., is due in five years. The market interest rate for similar notes on December 31, 20X1, was 8%. The compound interest factors to convert future values into present values at 8% follow:

    Present value of $1 due in nine months:       .9440
    Present value of $1 due in five years:        .6806

At what amounts should these two notes receivable be reported in Jet’s December 31, 20X1, balance sheet?

Answer 40

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

Question 41

Rate of Return on Assets

Answer 41

= NI / Average Assets

Question 42

Fund Balance

Answer 42

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

Question 43

Fund Balance: Reserved for Encumbrances

Answer 43

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.

Question 44

The following information pertains to each unit of merchandise purchased for resale by Vend Co.:

                     March 1   December 31
  Purchase price        $8          --
  Selling price         12         $15
  Price level index    110         121
  Replacement cost      --          10

Under current cost accounting, what is the amount of Vend’s holding gain on each unit of this merchandise?

Answer 44

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

Holding gain = $10 − $8 = $2

Question 45

Capital Lease - Definition

Answer 45

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.

Question 46

An unrestricted grant received from another government to support enterprise fund operations should be reported as:

Answer 46

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.

Question 47

What amount would the hospital report as net patient service revenue in its statement of operations for the current year ended December 31?

Answer 47

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

Question 48

Life Insurance Valuation?

Answer 48

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

Question 49

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

Answer 49

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.

Question 50

Not-for-Profit Accounting:

Answer 50

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.

Question 51

Non-Profit Accounting:

Fair Value Rules

Answer 51

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.

Question 52

NFP:

Cash Flow Statements:

what goes in Operating, Financing, and Investing?

Answer 52

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.

Question 53

NFP:

Basic Financial Statements

Answer 53

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.

Question 54

NFP:

Which of the following classifications is required for reporting of expenses by all not-for-profit entities?

Answer 54

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.

Question 55

NFP:

Statement of Activities

Answer 55

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.

Question 56

NFP:

Which of the following best describes a situation in which an unconditional contribution should be recognized as revenue by a private not-for-profit organization?

Answer 56

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

Question 57

NFP:

Which of the following financial categories are used in a nongovernmental not-for-profit entity’s statement of financial position?

Answer 57

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.

Question 58

The following data relates to Nola Co.’s defined benefit pension plan as of December 31, 20X1:

Accumulated benefit obligation $140,000
Plan assets at fair value 260,000
Projected benefit obligation 160,000
What amount should Nola report on its December 31, 20X1 balance sheet?

Overfunded plan assets of $100,000

Answer 58

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.

Question 59

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest revenue earned by Leaf over the life of this note?

Answer 59

$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.

Question 60

CAFR

Answer 60

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

Question 61

What is the major difference between an exchange transaction and a nonexchange transaction for governmental units?

A.
The relationship between the amount of value given and received

B.
Time requirements and whether the transaction is required by law

C.
Purpose restrictions placed upon fund balances

D.
Whether resources acquired can be further exchanged

Answer 61

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.

Question 62

Lake County received the following proceeds that are legally restricted to expenditure for specified purposes:

Levies on affected property owners to install sidewalks: $500,000
Gasoline taxes to finance road repairs: $900,000
What amount should be accounted for in Lake’s special revenue funds?

A. $1,400,000

B. $900,000

C. $500,000

D. $0

Answer 62

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.

Question 63

Chase City uses an internal service fund for its central motor pool. The assets and liabilities account balances for this fund that are not eliminated normally should be reported in the government-wide statement of net position as:

A.
governmental activities.

B.
business-type activities.

C.
fiduciary activities.

D.
note disclosures only.

Answer 63

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.

Question 64

A county’s balances in the general fund included the following:

Appropriations $745,000
Encumbrances 37,250
Expenditures 298,000
Vouchers payable 55,875

What is the remaining amount available for use by the county?

A. $353,875

B. $391,125

C. $409,750

D. $447,000

Answer 64

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
=========

Question 65

During its fiscal year ended June 30, 20X1, Cliff City issued purchase orders totaling $5,000,000, which were properly recorded as encumbrances at that time. Cliff received goods and related invoices at the encumbered amounts totaling $4,500,000 before year-end. The remaining goods of $500,000 were not received until after year-end. Cliff paid $4,200,000 of the invoices received during the year. What amount of Cliff’s encumbrances was outstanding at June 30, 20X1?

Answer 65

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.”

Question 66

Basic Financial Statements

Gov’t

Answer 66

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.

Question 67

On January 2, 2011, Nast Co. issued 8% bonds with a face amount of $1,000,000 that mature on January 2, 2017. The bonds were issued to yield 12%, resulting in a discount of $150,000. Nast incorrectly used the straight-line method instead of the effective interest method to amortize the discount. How is the carrying amount of the bonds affected by the error?

A.
December 31, 20X1: Overstated; January 2, 20X7: Understated

B.
December 31, 20X1: Overstated; January 2, 20X7: No effect

C.
December 31, 20X1: Understated; January 2, 20X7: Overstated

D.
December 31, 20X1: Understated; January 2, 20X7: No effect

Answer 67

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.

Question 68

rate of return on assets?

Answer 68

= NI / avg. assets

Question 69

On July 1, 20X1, after recording interest and amortization, York Co. converted $1,000,000 of its 12% convertible bonds into 50,000 shares of $1 par value common stock. On the conversion date, the carrying amount of the bonds was $1,300,000, the market value of the bonds was $1,400,000, and York’s common stock was publicly trading at $30 per share. Using the book value method, what amount of additional paid-in capital should York record as a result of the conversion?

Answer 69

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

Question 70

On January 1 of the current year, Lundy Corp. purchased 40% of the voting common stock of Glen, Inc., and appropriately accounts for its investment by the equity method. During the year, Glen reported earn­ings of $225,000 and paid dividends of $75,000. Lundy assumes that all of Glen’s undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividends-received deduction. Lundy’s current enacted income tax rate is 25%. Lundy uses the liability method to account for temporary differences and expects to have taxable income in all future periods. The increase in Lundy’s deferred income tax liability for this temporary difference is:

A.
$45,000.

B.
$37,500.

C.
$27,000.

D.
$18,000.

Answer 70

$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.

Question 71

“Cash provided by Operating Activities” calculation -

re: Cash Flow Stmt

Answer 71

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

Question 72

Reportable Segment

Answer 72

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).

Question 73

An entity having which of the following characteristics may not be a governmental organization?

Answer 73

Exempt from federal taxation

Question 74

Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell’s truck originally cost $23,000, its accumulated depreciation was $20,000, and its fair value was $5,000. Highway’s truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?

A.
$5,700

B.
$5,000

C.
$3,700

D.
$3,000

Answer 74

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

Question 75

Cost Recovery vs. Installment Method

Answer 75

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.

Question 76

The following information pertains to Kane Co.’s defined benefit pension plan for 20X1:

Service cost $40,000
Interest cost 15,000
Expected return on plan assets 12,000
Amortization of prior service cost 4,000
Amortization of unrecognized (gain)/loss (3,000)
Amortization of unrecognized transition
obligation 1,500
Kane should recognize pension expense for 20X1 of:

Answer 76

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
========

Question 77

In a sale-leaseback transaction, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized when:

I) the seller-lessee has transferred substantially all the risks of ownership.

II) the seller-lessee retains the right to substantially all of the remaining use of the property.

or both/neither?

Answer 77

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.

Question 78

Description of Leveling inputs for FV of assets/liabilities

Answer 78

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

Question 79

On January 2 of the current year, Cruises, Inc. borrowed $3,000,000 at a rate of 10% for three years and began construction of a cruise ship. The note states that annual payments of principal and interest in the amount of $1,300,000 are due every December 31. Cruises used all proceeds as a down payment for construction of a new cruise ship that is to be delivered two years after start of construction. What should Cruise report as interest expense related to the note in its income statement for the second year?

A.
$0

B.
$300,000

C.
$600,000

D.
$900,000

Answer 79

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.

Question 80

Impaired long-lived assets to be disposed of by sale that are subject to the reporting requirements of FASB ASC 360-10-35 are measured at:

A.
fair value.

B.
lower of the fair value less costs to sell or carrying amount.

C.
carrying amount.

D.
historical cost.

Answer 80

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.

Question 81

What are the components of the lease receivable for a lessor involved in a direct financing lease?

A.
The minimum lease payments plus any executory costs

B.
The minimum lease payments plus residual value

C.
The minimum lease payments less residual value

D.
The minimum lease payments less initial direct costs

Answer 81

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

Question 82

Which format must an enterprise fund use to report cash flow operating activities in the statement of cash flows?

Answer 82

Direct Method

Question 83

On December 31 of the previous and current year, Taft Corporation had 100,000 shares of common stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding. Additional information for the current year follows:

Stockholders’ equity at 12/31 $4,500,000
Net income year ended 12/31 1,200,000
Dividend on preferred stock year ended 12/31 300,000
Market price per share of common stock on 12/31 72

The price-earnings ratio on common stock at December 31 was:

A. 5 to 1.

B. 6 to 1.

C. 8 to 1.

D. 9 to 1.

Answer 83

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

Question 84

Payne, Inc., implemented a defined benefit pension plan for its employees on January 2, Year 3. The following data are provided for the year, as of December 31, Year 3:

Projected benefit obligation $103,000
Plan assets at fair value 78,000
Net periodic pension cost 90,000
Employer’s contribution 70,000

What amount should Payne record as additional pension liability at December 31, Year 3?

A.
$0

B.
$5,000

C.
$20,000

D.
$45,000

Answer 84

$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).

Question 85

Direct Method Statement of Cash Flows

Answer 85

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

Question 86

On December 29, Year 1, Action Corp. signed a 7-year capital lease for an airplane to transport its sports team around the country. The airplane’s fair value was $841,500. Action made the first annual lease payment of $153,000 on December 31, Year 1. Action’s incremental borrowing rate was 12%, and the interest rate implicit in the lease, which was known by Action, was 9%. The following are the rounded present value factors for an annuity due:

9% for 7 years: 5.5
12% for 7 years: 5.1
What amount should Action report as capital lease liability in its December 31, Year 1, balance sheet?

Answer 86

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

Question 87

Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease?
Depreciation expense: No; Interest revenue: Yes

Answer 87

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.

Question 88

A company enters into a 3-year operating lease agreement effective January 1, Year 1. The amounts due on the first day of each year are $25,000 in Year 1, $30,000 in Year 2, and $35,000 in Year 3. What amount, if any, is the related liability on the first day of Year 2?

Answer 88

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

Question 89

The provisions of FASB ASC 718-10-25-2, “Recognition Principle for Share-Based Payment Transactions,” apply to all of the following transactions except those related to:

Answer 89

employee stock ownership plan instruments.

Question 90

On January 2, 20X1, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a capital lease for $240,000, which includes a $10,000 bargain purchase option.

At the end of the lease, Nori expects to exercise the bargain purchase option.

Nori estimates that the equipment’s fair value will be $20,000 at the end of its 8-year life.

Nori regularly uses straight-line depreciation on similar equipment.

For the year ended December 31, 20X1, what amount should Nori recognize as depreciation expense on the leased asset?

Answer 90

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

Question 91

Retained Earnings

Answer 91

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.

Question 92

In accounting for a long-term construction contract using the percentage-of-completion method, the pro­gress billings on contracts account is a:

Answer 92

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.

Question 93

The functional currency of Nash, Inc.’s, subsidiary is the euro. Nash borrowed euros as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash’s translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash’s consolidated financial statements?

Answer 93

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.

Question 94

Webb Co. has outstanding a 7%, 10-year $100,000 face-value bond. The bond was originally sold to yield 6% annual interest. Webb uses the effective interest rate method to amortize bond premium. On June 30, Year 2, the carrying amount of the outstanding bond was $105,000. What amount of unamor­tized premium on bond should Webb report in its June 30, Year 3, balance sheet?

Answer 94

$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

Question 95

What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31?

Cash proceeds from sale of investment in Blue Co.
(carrying value $60,000) $75,000
Dividends received on Grey Co. stock 10,500
Common stock purchased from Brown Co. 38,000

Answer 95

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

Question 96

On January 2, 20X1, East Corp. adopted a defined benefit pension plan. The plan’s service cost of $150,000 was fully funded at the end of 20X1. Prior service cost was funded by a contribution of $60,000 in 20X1. Amortization of prior service cost was $24,000 for 20X1. Assuming that no amortization of unrecognized gain or loss is required in 20X1, what amount should East recognize as pension expense in 20X1?

Answer 96

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.

Question 97

Rig Co. sold its factory at a gain, and simultaneously leased it back for 10 years. The factory’s remaining economic life is 20 years. The lease was reported as an operating lease. At the time of sale, Rig should report the gain as:

Answer 97

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.

Question 98

interest method

Answer 98

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.

Question 99

Interest

Answer 99

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.

Question 100

Zinc Co.’s adjusted trial balance on December 31, 20X1, includes the following account balances:

 Common stock ($3 par)                           $600,000
 Additional paid-in capital                       800,000
 Treasury stock (at cost)                          50,000
 Net unrealized loss on marketable equity 
   securities available-for-sale                   20,000
 Net unrealized loss on marketable
   equity trading securities                       15,000
 Retained earnings appropriated
   for uninsured earthquake losses                150,000
 Retained earnings (unappropriated)               200,000 What amount should Zinc report as total stockholders' equity in its December 31, 20X1, balance sheet?

Answer 100

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
==========

Question 101

Retail Inventory Method

Answer 101

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.

Question 102

R&D

Answer 102

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.

Question 103

Pension Expense

Answer 103

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

Question 104

On November 1, 20X1, Davis Co. discounted with recourse at 10% a 1-year, noninterest bearing, $20,500 note receivable maturing on January 31, 20X2. What amount of contingent liability for this note must Davis disclose in its financial statements for the year ending December 31, 20X1?

Answer 104

“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).

Question 105

During 2011, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad’s $25 par common stock at the option of the preferred shareholder. On December 31, 2012, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to common stock and to additional paid-in capital common stock as a result of the conversion?

Answer 105

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

Question 106

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 106

$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?

Question 107

On December 30, 2011, Rafferty Corp. leased equipment under a capital lease. Annual lease payments of $20,000 are due December 31 for 10 years.

The equipment’s useful life is 10 years, and the interest rate implicit in the lease is 10%. The capital lease obligation was recorded on December 30, 2011, at $135,000, and the first lease payment was made on that date.

What amount should Rafferty include in current liabilities for this capital lease in its December 31, 2011, balance sheet?

A: $8,500

Answer 107

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.

Question 108

Change in Accounting Entity

retrospective application

Answer 108

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

Question 109

What is an unamortized bond premium?

Answer 109

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.

Question 110

Which asset is non-monetary?

A.
Advances to unconsolidated subsidiaries

B.
Allowance for uncollectible accounts

C.
Unamortized premium on bonds payable

D.
Accumulated depreciation of equipment

Answer 110

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

Question 111

Matching

Answer 111

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

Question 112

Realization

Answer 112

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.

Question 113

Recognition

Answer 113

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

Question 114

Allocation

Answer 114

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

Question 115

Hedges:

Fair value vs. Cash Flow Hedge

Answer 115

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

Question 116

How should plan investments be reported in a defined benefit plan’s financial statements?

Answer 116

Fair Value

Question 117

Governmental Expenditure Types

Answer 117

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.”

Question 118

Capital Lease - Definition

Answer 118

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.

Question 119

Minimum Lease Payment

Answer 119

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

Question 120

SFAC 8.3, “Qualitative Characteristics of Useful Financial Information”

Answer 120

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.

Question 121

On January 2, 20X1, Marx Co. as lessee signed a 5-year noncancelable equipment lease with annual payments of $200,000 beginning December 31, 20X1. Marx treated this transaction as a capital lease. The five lease payments have a present value of $758,000 at January 2, 20X1, based on interest of 10%. What amount should Marx report as interest expense for the year ended December 31, 20X1?

Answer 121

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

Question 122

Interperiod Equity

GASB

Answer 122

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

Question 123

On December 31, 20X1, Dahlia, a nongovernmental not-for-profit entity, purchased a vehicle with $15,000 unrestricted cash and received a donated second vehicle having a fair value of $12,000. Dahlia expects each vehicle to provide it with equal service value over each of the next five years and then to have no residual value. Dahlia has an accounting policy implying a time restriction on gifts of long-lived assets. In Dahlia’s 20X2 statement of activities, what depreciation expense should be included under changes in unrestricted net assets?

Answer 123

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.

Question 124

Webb Co. implemented a defined benefit pension plan for its employees on January 1, Year 5. During Years 5 and 6, Webb’s contributions fully funded the plan. The following data are provided:

                                                     Year 8       Year 7
                                                   Estimated      Actual  Project benefit obligation, December 31                 $750,000     $700,000 Accumulated benefit obligation, December 31               20,000      500,000 Plan assets at fair value, December 31                   675,000      600,000 Projected benefit obligation in excess of plan assets     75,000      100,000 Pension expense                                           90,000       75,000 Employer's contribution                                        ?       50,000

What amount should Webb contribute in order to report an underfunded pension liability of $15,000 in its December 31, Year 8, balance sheet?

A. $50,000
B. $60,000
C. $75,000
D. $100,000

Answer 124

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.

Question 125

The following items were included in Opal Co.’s inventory account on December 31, 20X1:

Merchandise out on consignment at sales price, including
40% markup on selling price $40,000
Goods purchased in transit, shipped FOB shipping point 36,000
Goods held on consignment by Opal 27,000
By what amount should Opal’s inventory account on December 31, 20X1, be reduced?

Answer 125

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

Question 126

A company reported the following information for Year 1:

Net income $34,000
Owner contribution 9,000
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

What is the amount of other comprehensive income for Year 1?

Answer 126

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

Question 127

XYZ, a not-for-profit organization dedicated to animal welfare, received a $70,000 contribution at the start of 20X1 with donor instructions to maintain the original principal as a permanent endowment and use income and net gains for wildlife rehabilitation. The endowment principal was invested in a number of equity securities and mutual funds using an investment management firm. Investment performance and transactions were as follows in 20X1 and 20X2:

   Dividends   Securities   Rehabilitation   Year-End Year   Received       Sold         Expense         Value ----   ---------   ----------   --------------   -------- 20X1     $3,000      $1,000         $3,500        $72,000 20X2      2,500           0          3,500         69,000

XYZ believes that the donor intended for the endowment to remain at least at the original contributed value. What net asset values would be reported on the statement of financial affairs for 20X2 in relation to this endowment?

A. Unrestricted net assets $(500), temporarily restricted net assets $0, permanently restricted net assets $70,000

B. Unrestricted net assets $0, temporarily restricted net assets $(1,500), permanently restricted net assets $70,000

C. Unrestricted net assets $(1,500), temporarily restricted net assets $0, permanently restricted net assets $69,000

D. Unrestricted net assets $0, temporarily restricted net assets $(500), permanently restricted net assets $69,000

Answer 127

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

Question 128

The following condensed balance sheet is presented for the partnership of Alfa and Beda, who share profits and losses in the ratio of 60:40, respectively:

Cash                         $ 45,000
Other assets                  625,000
Beda (loan)                    30,000
                             --------
                             $700,000
                             ========
Accounts payable             $120,000
Alfa (capital)                348,000
Beda (capital)                232,000
                             --------
                             $700,000
                             ========
Instead of admitting a new partner, Alfa and Beda decide to liquidate the partnership. If the other assets are sold for $500,000, what amount of the available cash should be distributed to Alfa?

Answer 128

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

Question 129

PErsonal Financial Statements FYI

Answer 129

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.

Question 130

Fair Value Measurement Option:

FASB ASC 825-10-15-4 lists the following items that are eligible for the fair value election:

Answer 130

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.)

Question 131

On January 1, Year 1, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, Year 11, but were callable at 101 any time after December 31, Year 4. Interest was payable semiannually on July 1 and January 1. On July 1, Year 6, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Fox’s gain or loss in Year 6 on this early extinguishment of debt was:

A.
$30,000 gain.

B.
$12,000 gain.

C.
$10,000 loss.

D.
$8,000 gain.

Answer 131

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).

Question 132

On January 1, Stunt Corp. had outstanding convertible bonds with a face value of $1,000,000 and an unamortized discount of $100,000. On that date, the bonds were converted into 100,000 shares of $1 par stock. The market value on the date of conversion was $12 per share. The transaction will be accounted for with the book value method. By what amount will Stunt’s stockholders’ equity increase as a result of the bond conversion?

Answer 132

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.)

Question 133

The following information is relevant to one of the City of Mullins’ General Fund’s derived tax revenues:

Fiscal year-end June 30
Beginning receivables $450,000
Beginning deferred revenues 100,000
Beginning allowance for doubtful accounts 50,000
Receipts 1,250,000
Ending receivables 600,000
Receivables collected 6/30 - 8/30 125,000
Ending allowance for doubtful accounts 60,000
The City of Mullins considers derived tax receivables collected within 60 days after the close of the fiscal year to be “available.” Furthermore, the City wrote off $30,000 of receivables as uncollectible during the year.

What amount of revenues would be reported at the entity-wide level?

Answer 133

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
===========

Question 134

net realizable value

Answer 134

sales price - cost to sell

Question 135

Blue City’s fiscal year ends December 31. In August of 20X2, the City Council formally announced a supplemental general fund appropriation for $350,000 for a new police department communications system. The finance department amended the posted budget and made a journal entry designating a portion of the General Fund balance as “committed.” There were no previous restrictions or commitments of General Fund balance. At December 31, a total of $400,000 of encumbrances remained outstanding, including the encumbrance for the communication system. The reporting would be which of the following?

Incorrect A.
The General Fund balance sheet at December 31, 20X2, would report Encumbrances, $400,000; and Fund balance—reserved for encumbrances, $400,000

B.
The General Fund balance sheet at December 31, 20X2, would report Encumbrances, $50,000; and Fund balance—reserved for encumbrances, $50,000.

C.
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, $400,000.

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.

Answer 135

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.”

Question 136

On January 2, 20X1, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a capital lease for $240,000, which includes a $10,000 bargain purchase option. At the end of the lease, Nori expects to exercise the bargain purchase option. Nori estimates that the equipment’s fair value will be $20,000 at the end of its 8-year life. Nori regularly uses straight-line depreciation on similar equipment. For the year ended December 31, 20X1, what amount should Nori recognize as depreciation expense on the leased asset?

A.
$48,000

Incorrect B.
$46,000

C.
$30,000

D.
$27,500

Answer 136

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

Question 137

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $0.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?

Incorrect A.
$50

B.
$100

C.
$200

D.
$900

Answer 137

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

Question 138

What is the “Times interest earned” ratio?

Answer 138

Interest Exp.

COMPARED TO

Interest Income Before Tax.

Question 139

Double Declining Balance

Answer 139

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.

Question 140

SFAC 5, Recognition and Measurement in Financial Statements of Business Enterprises, discusses measurement attributes of assets and liabilities.

Answer 140

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.

Question 141

At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year-end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?

A.
$10,000

Incorrect B.
$50,000

C.
$95,000

D.
$100,000

Answer 141

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

Question 142

Revenue Recognition

Answer 142

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

Question 143

The fair value for an asset or liability is measured as the:

Incorrect A.
appraised value of the asset or liability.

B.
price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants.

C.
price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

D.
cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.

Answer 143

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

Question 144

Lino Co.’s worksheet for the preparation of its statement of cash flows included the following:

                                  December 31   January 1  Accounts receivable                    $29,000      $23,000  Allowance for uncollectible accounts     1,000          800  Prepaid rent expense                     8,200       12,400  Accounts payable                        22,400       19,400

Lino’s net income is $150,000. What amount should Lino include as net cash provided by operating activ­ities in the statement of cash flows?

A.
$151,400

B.
$151,000

Incorrect C.
$148,600

D.
$145,400

Answer 144

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

Question 145

Oak Co. leased equipment for its entire 9-year useful life, agreeing to pay $50,000 at the start of the lease term on December 31, 20X1, and $50,000 annually on each December 31 for the next eight years. The present value on December 31, 20X1, of the nine lease payments over the lease term, using the rate implicit in the lease which Oak knows to be 10%, was $316,500. The December 31, 20X1, present value of the lease payments using Oak’s incremental borrowing rate of 12% was $298,500. Oak made a timely second lease payment. What amount should Oak report as the capital lease liability in its December 31, 20X2, balance sheet?

A.
$350,000

Correct B.
$243,150

C.
$228,320

D.
$0

Answer 145

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
========

Question 146

On December 30 of the current year, Haber Co. leased a new machine from Gregg Corp. The following data relate to the lease transaction at the inception of the lease:

Lease term 10 years
Annual rental payable at the end of each lease year $100,000
Estimated life of machine 12 years
Implicit interest rate 10%
Present value of an annuity of $1 in advance for
10 periods at 10% 6.76
Present value of an annuity of $1 in arrears for
10 periods at 10% 6.15
Fair value of the machine $700,000

The lease has no renewal option, and the possession of the machine reverts to Gregg when the lease terminates. At the inception of the lease, Haber should record a lease liability of:

A.
$0

B.
$615,000

C.
$630,000

Incorrect D.
$676,000

Answer 146

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

Question 147

A transaction that is unusual in nature or infrequent in occurrence should be reported as:

Incorrect A.
a component of income from continuing operations, net of applicable income taxes.

B.
an extraordinary item, net of applicable income taxes.

C.
a component of income from continuing operations, but not net of applicable income taxes.

D.
an extraordinary item, but not net of applicable income taxes.

Answer 147

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.

Question 148

During 20X1, Sloan, Inc., began a project to construct new corporate headquarters. Sloan purchased land with an existing building for $750,000. The land was valued at $700,000 and the building at $50,000. Sloan planned to demolish the building and construct a new office building on the site. What is the appropriate accounting treatment for interest of $186,000 on construction financing paid during construction?

A.
Classify as land and do not depreciate

B.
Classify as building and depreciate

Incorrect C.
Expense

Answer 148

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.

Question 149

NFP “supporting” services vs. program services

Answer 149

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

Question 150

Savor Co. had $100,000 in cash-basis pretax income for 20X2. At December 31, 20X2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 20X1, balances. Compared to the accrual basis method of accounting, Savor’s cash pretax income is:

A.
higher by $4,000.

Incorrect B.
lower by $4,000.

C.
higher by $16,000.

D.
lower by $16,000.

Answer 150

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

Question 151

Lex Corp. was a development-stage enterprise from October 10, Year 1 (inception), to December 31, Year 2. The year ended December 31, Year 3, is the first year in which Lex is an established operating enterprise. The following are among the costs incurred by Lex:

                                    For Period
                                    10/10, Yr 1        For Year
                                  to 12/31, Yr 2   Ended 12/31, Yr 3 Leasehold improvements, equipment,   and furniture                         $1,000,000         $300,000 Security deposits                           60,000           30,000 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
                                    $2,235,000       $2,580,000
                                    ==========       ========== 

From its inception through the period ended December 31, Year 3, what is the total amount of costs incurred by Lex that should be charged to operations?

Correct A.
$3,425,000

B.
$2,250,000

C.
$1,775,000

D.
$1,350,000

Answer 151

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

Question 152

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

Answer 152

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

Question 153

Recognition

Answer 153

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

Question 154

An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception:

A.
embodies an obligation to repurchase the issuer’s equity shares.

B.
requires or may require the issuer to settle the obligation by transferring assets.

Correct C.
Both embodies an obligation to repurchase the issuer’s equity shares and requires or may require the issuer to settle the obligation by transferring assets.

D.
Either embodies an obligation to repurchase the issuer’s equity shares or requires or may require the issuer to settle the obligation by transferring assets.

Answer 154

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.

Question 155

When a capital lease entered into by a governmental unit represents the acquisition of a general capital asset, the acquisition should be reflected as:

Incorrect A.
an expenditure but not as an other financing source.

B.
an other financing source but not as an expenditure.

C.
both an expenditure and an other financing source.

D.
neither an expenditure nor an other financing source.

Answer 155

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.

Question 156

Star Co. leases a building for its product showroom. The 10-year nonrenewable lease will expire on December 31, 20X6. In January 20X1, Star redecorated its showroom and made leasehold improvements of $48,000. The estimated useful life of the improvements is eight years. Star uses the straight-line method of amortization. What amount of leasehold improvements (net of amortization) should Star report in its June 30, 20X1, balance sheet?

A.
$45,600

B.
$45,000

C.
$44,000

Incorrect D.
$43,200

Answer 156

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
========

Question 157

Spiro Corp. uses the sum-of-the-years’-digits method to depreciate equipment purchased in January 20X1 for $20,000. The estimated salvage value of the equipment is $2,000 and the estimated useful life is four years. What should Spiro report as the asset’s carrying amount as of December 31, 20X3?

A.
$1,800

Incorrect B.
$2,000

C.
$3,800

D.
$4,500

Answer 157

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.

Question 158

On June 1, year 1, ABC Co. issued a 200,000 euro purchase order for equipment to be supplied by a German company. ABC’s functional currency is the U.S. dollar. The equipment was delivered to ABC on November 1, year 1, and ABC recorded a payable due to the German company. ABC paid for the equipment on January 31, year 2. The following are the exchange rates in effect:

June 1, year 1 1 euro = 1.40 U.S. dollars
November 1, year 1 1 euro = 1.50 U.S. dollars
December 31, year 1 1 euro = 1.35 U.S. dollars
January 31, year 2 1 euro = 1.30 U.S. dollars

Under IFRS, what is the foreign currency gain or loss that ABC should record for the year ended December 31, year 1?

A.	 	 A loss of $30,000

B.
A loss of $20,000

Incorrect C.
A gain of $10,000

D.
A gain of $30,000

Answer 158

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.

Question 159

Cash Flow Hedge

Answer 159

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

Question 160

Fair Value Hedge

Answer 160

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

Question 161

Sales-Type Lease

Answer 161

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

Question 162

An unrestricted cash contribution should be reported in a nongovernmental not-for-profit entity’s statement of cash flows as an inflow from:

A.
operating activities.

B.
investing activities.

C.
financing activities.

D.
capital and related financing activities.

Answer 162

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.

Question 163

Interperiod income tax allocation

Answer 163

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

Question 164

Intraperiod Tax Allocation

Answer 164

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

Question 165

Entor Co. sold equipment to Pane Co. for $50,000. The equipment had a net book amount of $30,000. The collections were $20,000 in the first year, $15,000 in the next year, and $15,000 in the last year. What is the amount of gross profit for the third year if Entor used the installment sales accounting method for the transaction?

A.
$0

B.
$5,000

C.
$6,000

D.
$15,000

Answer 165

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

Question 166

Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values. As a consequence of the exchange, Sable recognizes:

A.
a gain equal to the difference between the fair value and carrying amount of the truck given up.

B.
a gain determined by the proportion of cash received to the total consideration.

C.
a loss determined by the proportion of cash received to the total consideration.

D.
neither a gain nor a loss.

Answer 166

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.

Question 167

A company reported the following information for Year 1:

Net income $34,000
Owner contribution 9,000
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

What is the amount of other comprehensive income for Year 1?

A.
$5,000

B.
$14,000

C.
$15,000

D.
$43,000

Answer 167

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

Question 168

Comprehensive Income

Answer 168

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

Question 169

Other Comprehensive Income

Answer 169

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

Question 170

In the long-term liabilities section of its balance sheet at December 31, 20X1, Mene Co. reported a capital lease obligation of $75,000, net of current portion of $1,364. Payments of $9,000 were made on both January 2, 20X2, and January 2, 20X3. Mene’s incremental borrowing rate on the date of the lease was 11% and the lessor’s implicit rate, which was known to Mene, was 10%. In December 31, 20X2, balance sheet, what amount should Mene report as capital lease obligation, net of current portion?

A.
$66,000

B.
$73,500

C.
$73,636

D.
$74,250

Answer 170

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.

Question 171

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, what amount should World report as interest expense?

A.
$0

B.
$14,200

C.
$22,500

D.
$30,000

Answer 171

The interest expense is:

Principal × Interest rate × Time
In this case, it is:

$1,000,000 × .09 × .25 = $22,500

Question 172

Which of the following would be reported as a decrease in the statement of changes in net assets available for benefits of an employee benefits plan?

A.
Contributions from participants, including those transmitted by the sponsor

B.
Benefits paid to participants

C.
Contributions from other identified sources (for example, state subsidies or federal grants)

D.
Contributions from employers, segregated between cash and noncash contributions

Answer 172

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

Question 173

On December 1 of the current year, Bann Co. entered into an option contract to purchase 2,000 shares of Norta Co. stock for $40 per share (the same as the current market price) by the end of the next two months. The time value of the option contract is $600. At the end of December, Norta’s stock was selling for $43, and the time value of the option is now $400. If Bann does not exercise its option until January of the subsequent year, which of the following changes would reflect the proper accounting treatment for this transaction on Bann’s December 31, year-end financial statements?

A.
The option value will be disclosed in the footnotes only.

B.
Other comprehensive income will increase by $6,000.

C.
Net income will increase by $5,800.

D.
Current assets will decrease by $200.

Answer 173

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

Question 174

Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease?

A.
Depreciation expense: Yes; Interest revenue: Yes

B.
Depreciation expense: Yes; Interest revenue: No

C.
Depreciation expense: No; Interest revenue: No

D.
Depreciation expense: No; Interest revenue: Yes

Answer 174

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.

Question 175

Cott, Inc., prepared an interest amortization table for a 5-year lease payable with a bargain purchase option of $2,000, exercisable at the end of the lease. At the end of the five years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error?

A.
The beginning present value of the lease did not include the present value of the bargain purchase option.

B.
Cott subtracted the annual interest amount form the lease payable balance instead of adding it.
C.
The present value of the bargain purchase option was subtracted from the present value of the annual payments.

D.
Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period.

Answer 175

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.

Question 176

On January 1, 20X2, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, 20X1, and mature on October 1, 20X1. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, 20X1, to January 1, 20X2, amounted to $8,000. On January 1, 20X2, what amount should Oak report as bonds payable, net of discount?

A.
$380,300

B.
$388,000

C.
$388,300

D.
$392,000

Answer 176

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
========

Question 177

On January 1, Dell, Inc., contracted with the city of Little to provide custom-built desks for the city schools. The contract made Dell the city’s sole supplier and required Dell to supply no less than 4,000 desks and no more than 5,500 desks per year for two years. In turn, Little agreed to pay a fixed price of $110 per desk. During the year, Dell produced 5,000 desks for Little. At December 31, 500 of these desks were segregated from the regular inventory and were accepted and awaiting pickup by Little. Little paid Dell $450,000 during the year. What amount should Dell recognize as contract revenue in this year?

A.
$450,000

B.
$495,000

C.
$550,000

D.
$605,000

Answer 177

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

Question 178

Acquisition Method

Answer 178

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.

Question 179

Investing Activities

Answer 179

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

Question 180

Financing Activities

Answer 180

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)

Question 181

Operating Activities

Answer 181

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

Question 182

Footnotes to FS

Answer 182

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

Question 183

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?

A.
Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.

B.
Good Neighbor Financing will assume the responsibility of collecting the receivables.

C.
Milton will retain control of the receivables.

D.
Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.

Answer 183

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.

Question 184

Financial Capital (for net income and comprehensive income)

Answer 184

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: