Select Financial Statement Accounts Flashcards

Question

``` Rand, Inc. accepted from a customer a $40,000, 90-day, 12% interest-bearing note dated August 31 of the current year. On September 30, Rand discounted the note at the Apex State Bank at 15%. However, the proceeds were not received until October 1. In Rand's September 30 balance sheet, the amount receivable from the bank, based on a 360-day year, includes accrued interest revenue of A $170 B $200 C $300 D $400 ```

Answer 1

Answer is A ``` Explanation: Face amount of note $ 40,000 Add interest to maturity ($40,000 x 12% × 90/360) 1,200 Maturity value of note $ 41,200 Less bank discount ($41,200 x 15% x 60/360) (1,030) Proceeds from discounted note $ 40,170 Less face amount of note (40,000) Accrued interest revenue, 9/30 $ 170 ```

Answer 2

Answer is A Explanation: The goods out on consignment have not yet been sold and, thus, must be included in Mann's inventory at their cost of $20,000 ($26,000 / 130%). The security deposit on lease of the warehouse should be classified as a noncurrent asset. Trade accounts receivable 93,000 Less: Allowance for uncollectible accounts (2,000) Plus: Claim against shipper for goods lost in transit 3,000 Current net receivables, 12/31 $94,000

Answer 3

Answer is D Explanation: The amount of the adjustment to the uncollectible account is the difference between the existing balance and the desired ending balance. The uncollectible account currently has a debit balance of $50,000. To get the allowance account to the desired $90,000 credit balance (3% × $3,000,000) there would need to be a credit to allowance for uncollectible accounts and debit to uncollectible accounts expense for $140,000.

Answer 4

Answer is B Explanation: The correct answer is (B). Boller Co. should report uncollectible account expense in the income statement for year 2 will be at $34,000. Allowance for Uncollectible Account Write Off $40,000 Opening Balance $30,000 Allowance for Uncollectible $24,000 Bad Debt Expense (Plug) $34,000 Alternative Method: Summary Amount Write-offs in the year 2 $40,000 Bad debt expense $34,000 Ending balance from year 1 $(30,000) Allowance of uncollectible in year 2 (i.e. $300,000 x 8%)

Answer 5

Answer is C Explanation: Credit sales increase accounts receivable (A/R). Collections from customers, accounts written-off, and sales returns decrease A/R. Since the estimated future sales returns and the estimated uncollectible accounts are recorded in allowance accounts to A/R, they do not directly decrease the balance of the Accounts Receivable account. Accounts Receivable Balance, 1/1 650,000 Credit sales 2,700,000 2,150,000 40,000 75,000 Collections from customers Accounts written-off Sales returns Balance, 12/31 1,085,000

Answer 6

Answer is D Explanation: Journal entries to record the collection of an account previously written off as uncollectible are as follows. Accounts Receivable—Joe Doe XX Allowance for Uncollectible Accounts XX To reopen account to the balance it had when written off. Cash XX Accounts Receivable—Joe Doe XX To record receipt of cash in payment of the receivable These entries would increase cash and allowance for uncollectible accounts. They would have no net effect on net accounts receivable, net income, current assets, or working capital.

Answer 7

Answer is D Explanation: Factoring of receivables is in substance a sale of receivables when the transfer is without recourse (i.e., the financing institution or "factor" assumes the risk of collection).

Answer 8

Answer is A Explanation: Allowance credit balance of $10,800 - Write offs $18,000 + 3% credit sales of $13,500 (450,000 * 3%) = $6,300

Answer 9

Answer is A Explanation: Only the receivables which have aged 0-15 days are eligible for the discount. The discount is computed using 50% of the dollar amount eligible, not 50% of the discount. Only 50% of the customers take advantage of the discount. ``` Amount eligible for discount $100,000 % of customers that take discount × 50% Amount of eligible amount taken 50,000 Discount allowed × 2% Allowance for discount $ 1,000 ```

Answer 10

Answer is B Explanation: The allowance account has an ending balance of $55,000. Prior to the bad debt adjustment, the allowance balance is $35,000 ($70,000 - $35,000 in writeoffs), so an adjustment to bad debt expense and the allowance account for $20,000 is required.

Answer 11

Answer is C Explanation: Notes receivable are generally required to be recorded at their present value. At December 31, Chang is owed 9 more annual payments of $10,000. The appropriate factor to apply is the present value of ordinary annuity of $1 at 8% for 9 periods, which is given as 6.25. $10,000 x 6.25 = $62,500.

Answer 12

Answer is D Explanation: Since Beal uses the aging method, the credit sales information is irrelevant. The balance in the allowance account was a debit of $4,000 (42,000 - 46,000) prior to the year-end adjustment. Given that the year-end allowance balance should be $52,000, bad debt expense would be debited for $56,000, and the allowance account would be credited for $56,000.

Answer 13

Answer is C Explanation: The A/R balance was increased by credit sales and decreased by collections from customers and by accounts written off. Accounts recovered resulted in an increase and a decrease of equal amount to the A/R balance. Accounts Receivable Balance, 1/1 100,000 Credit sales 611,000 591,000 Customer collections Accounts reinstated 17,000 45,000 Accounts written-off 17,000 Accounts recovered Balance, 12/31 75,000

Answer 14

Answer is B Explanation: Notes receivable are claims usually not arising from sales in the ordinary course of business.Legally,the claim is evidenced by a note representing an unconditional promise to pay. The recording of notes receivable is at their present value. This is not intended to apply to receivables and payables arising from transactions with customers or suppliers in the normal course of business which are due in customary trade terms not exceeding approximately one year. Thus, the note from Alpha Co. would be reported at the $10,000 face value. The note from Omega would be discounted at $8,570 ($10,000 × .857).

Answer 15

Answer is B Explanation: Only factoring the receivables would ensure altering the timing of cash flows for the $3 million in receivables already recorded on its books. Factoring the receivables outstanding is a transfer of the receivables to a factor (transferee) without recourse and is accounted for as any other sale of an asset: debit cash, credit the receivables, and record a gain or loss for the difference. Changing the due date of the invoice, discounting the receivables outstanding, and demanding payment from customers before the due date will not necessarily get the cash for receivables any quicker and alter the timing of cash flows.

Answer 16

Answer is D Explanation: Both notes were received on the balance sheet date. Since the note from Hart arose from a transaction with a customer in the normal course of business and is due in customary trade terms not exceeding one year, it can be reported at its face amount of $10,000 despite the fact that the 3% stated interest rate of the note differs from the prevailing market interest rate of 8% for similar notes at the transaction date. On the other hand, the note from Maxx is due in more than one year. Therefore, the note from Maxx cannot be reported at its face amount because its 3% stated interest rate differs from the prevailing market interest rate of 8% for similar notes at the transaction date. Because neither the fair value of the services performed by Jet nor the fair value of the note received from Maxx is indicated, the note is reported at its present value, determined by discounting all future cash payments of the note at the prevailing (i.e., market) rate of interest for a note of this type. Principal amount $ 10,000 Interest on outstanding principal balance due on maturity date of note [($10,000 × 3%) × 5] 1,500 Amount due on maturity date of note $ 11,500 Present value factor of $1 at 8% for 5 periods × 0.680 Present value of note received from Maxx $ 7,820

Answer 17

Answer is C Explanation: Receivables may be pledged as security for loans. Control of the receivables is retained and collections on the receivables are usually required to be applied to a reduction of the loan. Good Neighbor Financing could take title to the receivables if Milton doesn’t pay the loan, does not assume the responsibility of collecting the receivables, and does not take title to the receivables until the loan is repaid.

Answer 18

Answer is A Explanation: Factoring is similar to a sale of receivables because it is generally without recourse and the factor generally handles the billing and collection function. Aloe would receive $68,000 from the factored receivables. The $80,000 factored amount less $8,000 (10% as an allowance for sales returns) and less $4,000 (for the 5% commission charged) equals $68,000.

Answer 19

Answer is A Explanation: An increase in A/R indicates that there was an excess of sales over cash collections. A write-off of receivables will offset the gross increase in A/R without affecting cash. Regardless of the accrual method used to account for uncollectible accounts, the cash collections from customers equal sales adjusted by a deduction for an increase in A/R balance and a deduction for accounts written-off during the period.

Answer 20

Answer is B Explanation: The allowance account balance would increase by the difference between the required amount and the balance at the end of the year. ``` $1,000,000 Accounts receivable balance 5% Uncollectible 50,000 Balance required - 40,000 End of year balance in allowance account $ 10,000 Adjustment to increase balance ```

Answer 21

Answer is A Explanation: The correct answer is (A). Ref Summary Amount A Total Cash $50,000 B Less: Cash used to pay Long-Term Debt $10,000 C Available Cash (A-B) $40,000 D Accounts Receivable $20,000 E Less: Allowance for doubtful debts $5,000 F Net Receivable (D-E) $15,000 G Merchandise Inventory $7,000 H Trading securities $2,000 I Total Current Assets (C + F + G + H) $64,000 The bond sinking fund is not a current asset. The bond sinking fund is reported right after current assets on the balance sheet. The bond sinking fund is part of long-term assets. Customer deposits and unearned rents represent amounts already received and included in cash in exchange for goods or services that have not yet been delivered. These items are reported in financial statements in liabilities, and not under current assets.

Answer 22

Answer is C Explanation: A company that discounts a note receivable with recourse is contingently liable to the lender. It must pay the lender the amount due at maturity if the maker of the note fails to pay the obligation. The contingent liability is usually shown in the accounts by recording the note discounted in a Notes Receivable Discounted account at the note's face amount. The Notes Receivable Discounted account is reported as a contra asset and deducted from Notes Receivable in the balance sheet. Notes receivable $XXX Less: Notes receivable discounted (XXX) $XXXExplanation: A company that discounts a note receivable with recourse is contingently liable to the lender. It must pay the lender the amount due at maturity if the maker of the note fails to pay the obligation. The contingent liability is usually shown in the accounts by recording the note discounted in a Notes Receivable Discounted account at the note's face amount. The Notes Receivable Discounted account is reported as a contra asset and deducted from Notes Receivable in the balance sheet. Notes receivable $XXX Less: Notes receivable discounted (XXX) $XXX

Answer 23

ANswer is B Explanation: The correct answer is (B). After the allowance for uncollectible accounts at 12/31 is determined, uncollectible accounts expense can be analyzed. Current year write-offs 18,000 Balance - 1/1 30,000 Uncollectible accounts recovered 2,000 Uncollectible accounts expense (plug) 11,000 Balance - 12/31 25,000

Answer 24

Answer is A Explanation: The allowance method based on aging the receivables attempts to value the receivables at their future collectible amounts. Thus, it emphasizes asset valuation rather than income measurement.

Answer 25

ANswer is A Explanation: Based on the information given, Jamin uses the percentage of sales method, under which bad debt expense is calculated as a percentage of credit sales (credit sales of $9,000,000 × 2% = $180,000), charged to Bad Debt Expense, and credited to the Allowance for Uncollectible Accounts.The allowance account balance is not considered in determining the amount of bad debt expense. Allowance for Uncollectible Accounts 260,000 Beg. bal. 1/1 Write-offs 325,000 180,000 Bad debt expense 115,000 12/31 balance

Answer 26

Answer is C Explanation: The correct answer is (C). Discounting refers to the sale of a note to a third party, usually a bank or other financial institution. The sale of a Note Receivable at a value less than the face value is Discounting. The sale of Accounts Receivables for a fee is known as Factoring. Assigning is s a lending agreement whereby the borrower assigns Accounts Receivable to the lending institution in exchange for a loan, where the Accounts Receivable serves as collateral.

Answer 27

Answer is A Explanation: An increase in the current cost of inventory items sold is a realized holding gain. An increase in the current cost of inventory items on hand is an unrealized holding gain. Current cost financial statements will measure and report both realized and unrealized holding gains.

Answer 28

Answer is A Explanation: The use of lower of cost or market may result in inventory losses that should not be deferred beyond the interim period in which the decline occurs. Recoveries of these losses in subsequent periods should be recognized as gains, but only to the extent of losses recognized in previous interim periods of the same fiscal year. Temporary market declines, however, need not be recognized at the interim dates since no loss is expected to be incurred in the fiscal year. Because Wilson expected the decline to reverse within the fiscal year, no loss should be recorded for the first quarter. Even though the recovery exceeded the previous decline by $10,000, gains are recognized only to the extent of losses recognized in previous interim periods of the same fiscal year.

Answer 29

Answer is B Explanation: In a periodic inventory system, acquisitions of inventory goods are debited to "Purchases" while issuances are not recorded. At any point in time the balance in the inventory account reflects the amount at the "beginning" of the period. The inventory on hand is "periodically" determined by physical count. In a periodic inventory system, cost of goods sold (CGS) is a residual amount obtained by subtracting the ending inventory from the sum of beginning inventory and net purchases. In a perpetual inventory system, the balance in the inventory account at any time reveals the inventory that should be on hand.

Answer 30

Answer is B Explanation: Under IFRS, inventory is carried at the lower of cost or net realizable value (best estimate of the net amounts inventories are expected to realize). ``` Item Cost Sale price Cost to sell or dispose Lower of cost/NRV Blades $41,000 $ 50,000 $ 2,000 $ 41,000 Towers 52,000 54,000 4,000 50,000 Generators 20,000 30,000 2,000 20,000 Gearboxes 80,000 120,000 12,000 ___80,000 12/31, yr 1 $191,000 ```

Answer 31

Answer is A Explanation: Inventory turnover ratio = COGS/Average inventory. In an inflationary economy, COGS reported using FIFO is low, leading to higher net profits. Inventory would be higher since it is reported at current prices. Therefore, higher Inventories and lower COGS will result in a lower inventory turnover ratio. In turnover ratios, turn-it-over to the denominator. So, higher inventory and lower COGS would lead to lower inventory ratio. Option (B) is incorrect because the inventory turnover ratio is lower as the COGS reported are higher because the costs of the units purchased are higher when compared to the cost of the units first purchased and inventory reported are lower as it consists of earlier purchases. Option (C) and (D) are incorrect as per the above explanation.

Answer 32

Answer is C Explanation: The price index is computed by dividing the ending inventory at current year cost by its base year cost. Date Layers at base year cost Price index Ending inventory at LIFO cost 01/01, year 1 $40,000 1.0000 [1] $40,000 12/31, year 1 5,000 1.2000 [2] 6,000 12/31, year 2 15,000 1.3333 [3] 20,000 $60,000 $66,000 [1] $40,000 / $40,000 [2] $54,000 / $45,000 [3] $80,000 / $60,000

Answer 33

Answer is B Explanation: Using the average cost method, Weighted average cost = Cost of goods available for sale/Number of units available for sale = $75,000/20,000 units = 3.75. COGS reported would be, Units sold x Weighted average cost = 10,000 units x $3.75 = 37,500. Date Inventory Units Cost per Unit Amount 1 – Jan 10,000 $3 $30,000 5 - Jan 5,000 $4 $20,000 15 - Jan 5,000 $5 $25,000 Total 20,000 $75,000 Option (A) is incorrect because the COGS are calculated based on the unit price of the beginning inventory. Option (C) is incorrect because it is calculated based on the average price of the units [($3 + $4 + $5)/3 = $4]; 10,000 units x $4= $40,000. Option (D) is incorrect because it represents Sales (10,000 x $10) and not COGS.

Answer 34

Answer is D Explanation: Because the outstanding purchase orders occurred in the ordinary course of business and the raw materials have not yet been received, the purchase is not required to be accrued. Since the price difference is only a market price difference occurring in the ordinary course of business, disclosure is not required.

Answer 35

Answer is A Explanation: In all cases where FIFO is used, the inventory and cost of goods sold would be the same at the end of a period whether a perpetual or a periodic system is used. This is true because the same costs will always be first in and, therefore, first out, whether cost of goods sold is computed as cost of goods sold throughout the accounting period (the perpetual system) or as a residual at the end of the accounting period (the periodic system).This is true regardless of whether inventory prices rose or fell during the period.

Answer 36

Explanation: The correct answer is (D) Cost of sales is determined by subtracting the estimated ending inventory at cost from the cost of the beginning inventory and purchases (i.e., $600,000 – $75,000 = $525,000). Under the conventional retail inventory method, the beginning inventory and the net markups are included in the cost-to-retail ratio. The net markdowns are not included in the ratio. =(920K + 40K- 780K +60K) x 62.5%*** = $ 75,000 ***Cost-to-retail ratio ($600,000 / $960,000)= 62.5%

Answer 37

Answer is A Explanation: In a period of rising prices, a moving weighted average method (perpetual system) will give a higher ending inventory figure than the weighted average method with a periodic system because with the moving weighted average method, more of the early (low) costs are released to cost of goods sold with that method than with a periodic system, leaving the higher costs for the ending inventory figure. Also, the item-by-item approach to applying the lower of cost or market rule is the more conservative method. Therefore, a higher inventory figure is obtained by use of the total inventory approach.

Answer 38

Answer is C Explanation: Cost of goods sold will be two-thirds of the goods shipped (including two-thirds of the freight), but all of the advertising and commission will be deducted from gross profit to determine net profit. Revenue $ 80,000 Less: Cost of consigned goods $ 72,000 Plus Freight for consigned goods ____7,500 Total cost of consigned goods $ 79,500 Portion sold ______2/3 Cost of Goods Sold (rounded) _(53,000) Gross Profit $ 27,000 Less advertising (4,500) Less commission __(8,000) Net Profit $ 14,500 Option (A) is incorrect because it is net profit as per above and not loss. Option (B) is incorrect because $8,000 is net of sales value of the 2/3rd inventory sold by the consignee and the cost of the merchandise shipped to the consignee ($80,000 - $72,000). Option (D) is incorrect because it does not deduct 2/3rd portion of the freight charges, advertising charges and 10% commission.

Answer 39

ANswer is A Explanation: In a periodic inventory system the inventory on hand is periodically determined by physical count. No entries are made to the inventory account during the period; the account reflects the amount at the beginning of the period until inventory is counted. A firm’s ending inventory balance being overstated by $1,000 would cause the retained earnings to be overstated by $1,000. Cost of goods sold (COGS) is obtained by subtracting the ending inventory from the sum of beginning inventory and net purchases, so COGS would be understated by $1,000. The cost of goods available is the sum of the beginning inventory and net purchases, and thus it is not affected by the ending inventory being overstated. The gross margin is a percentage used as part of the gross margin method to determine COGS. It may be used to verify the accuracy of the year-end physical count but otherwise it is not affected by the periodic inventory system.

Answer 40

ANswer is C Explanation: An agent is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services. The following are indicators that an entity is an agent – Another party is primarily responsible for fulfilling the contract. The entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping, or on return. The entity does not have discretion in establishing prices for the other party’s goods or services and, thus, the benefit that the entity can receive from those goods or services is limited. The entity’s consideration is in the form of a commission. The entity is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services. Options (A), (B) and (D) are incorrect as they are all indicators that an entity is an agent.

Answer 41

Answer is D Explanation: According to the lower of cost or market rule, market is defined as replacement cost. Market cannot exceed net realizable value and cannot be less than net realizable value less normal profit margin. In this instance, original cost is between net realizable value and net realizable value less normal profit margin. Since original cost is within the parameters for replacement cost and is less than replacement cost, the inventory should be reported at original cost.

Answer 42

Answer is D Explanation: Goods out on consignment remain the property of the consignor and must be included in the consignor's inventory at purchase price or production cost, including freight in and other costs incurred to process the goods up to the time of sale. Beginning inventory ($110,000 + $12,000) $122,000 Add: Purchases ($480,000 + $60,000) $540,000 Freight in 10,000 Transportation to consignees 5,000 Add: Total inventoriable costs 555,000 Goods available for sale 677,000 Less ending inventory ($145,000 + $20,000) 165,000 Cost of sales for the year $512,000

Answer 43

Answer is B Explanation: The dollar value LIFO method requires estimates of price-level changes for specific inventories. Under this method, goods are combined into pools and are traced by their dollar value, corrected for inflation. The annual layer added to the pool is tracked by calculating the ending inventory @ base year-end price. This is done to remove the effects of inflation from annual LIFO layers to gauge whether the increase or decreases to the inventory are real or due to inflation. The annual layer added @ base is then adjusted @current year price. Option (A) is incorrect because the conventional retail inventory method is used by retailers to estimate the cost of their ending inventory by using the relationship between the cost of merchandise and its retail price (cost-to-retail ratio) arrived at after considering both net markups and markdowns. Option (C) is incorrect because the weighted average cost method calculates the value of the ending inventory based upon the weighted average price paid. Option (D) is incorrect because the average cost retail method does not require estimates of price-level changes for specific inventories.

Answer 44

Answer is D Explanation: The term F.O.B. destination means free on board at destination; that is, the goods are shipped to their destination without charge to the buyer. Thus, the costs incurred in connection with the sale and delivery of the goods (i.e, packaging for shipment, shipping, and special handling charges) are borne by the seller. Thus, Kerr's cost of the goods purchased is $50,000.

Answer 45

ANswer is D Explanation: Beginning inventory + Purchases - COGS - Ending inventory - Available inventory = Inventory damaged in explosion. Ref Summary Amount a Beginning Inventory $40,000 b Purchase, during the year $480,000 c Total Inventory $520,000 d COGS for Inventory Sold ($620,000 x (1-0.25)) $465,000 e Proceeds from damaged Inventory $5,000 f Inventory Lost in Explosion (c-d-e) $50,000 g Proceeds from Insurance Company (f x 70%) $35,000 h Loss from Explosion (f-g) $15,000 Option (A) is incorrect because $50,000 is the loss determined. Option (B) is incorrect because $35,000 is the proceeds from insurance claim. Option (C) is incorrect as per the above explanation.

Answer 46

Explanation: The correct answer is (C) The carrying amount of the inventory item as of December 31st, year 2 is $75. Under IFRS, inventories are measured at the lower of cost or net realizable value (NRV). Inventories will be written down if needed, and a write-down can only be reversed up to the original cost. On December 31, year 1 the cost of the inventory was $80 and the net realizable value (NRV) was $60. The inventory would be valued at the lower of the two values and would be recorded at $60 in the financial statements at the end of year 1. As of December 31, year 2, the NRV of the inventory was $75. The original cost was $80. The inventory would continue to be stated at the NRV of $75 as this is lower than the original cost of $80.

Answer 47

Answer is B ``` Explanation: Compute market (i.e., NRV) and compare to cost ``` NRV = Selling price - disposal cost = [$190,000 - $10,000] = $180,000 Cost = $200,000

Answer 48

Answer is C Explanation: The price index is computed by dividing the ending inventory at current year cost by its base year cost, $200,000 / $150,000 = 1.333. Date Base year cost Current year cost 1/1, Year 1 $90,000 $90,000 Year 1 layer 20,000 30,000 12/31 year 1 $110,000 $120,000 Year 2 layer 40,000 80,000 12/31 year 2 $150,000 $200,000

Answer 49

Explanation: The correct answer is (B). 7 trees sold March 27th are assumed to come entirely from the March 20th purchase at $60/each. 6 of the 8 trees sold March 12th are assumed to come from the March 4th purchase at $55/each and balance, 2 trees will come from beginning inventory at $50/each. Cost of Goods Sold (COGS) using LIFO is [(7 x $60) + (6 x $55) + (2 x $50)] = $850

Answer 50

ANswer is C Explanation: Merchandise inventory should include freight-in, taxes, insurance while in transit, warehousing costs, and similar charges paid by the purchaser to bring the merchandise to its existing condition and location. Thus, the $1.5 million in shipping costs from overseas should be included in the inventory valuation. The shipping costs to export customers are a selling expense and should not be included in the cost of inventory. Seafood purchased $12 million in inventory during the year and has $3 million remaining in inventory at year end. The $12 million divided by $3 million means one-quarter of the inventory is still remaining. Thus, one-quarter of the $1.5 million, or $375,000, in shipping costs from overseas should be included in the year-end inventory valuation.

Answer 51

Explanation: The correct answer is (D). A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains (i.e., holds) physical possession of the product until it is transferred to the customer at a point in time in the future. Revenue should be recognized only when the customer obtains control of the product. For a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria must be met: Substantive reason for the bill-and-hold arrangement (e.g., the customer has requested the arrangement). Product must be identified separately as belonging to the customer. The product currently must be ready for physical transfer to the customer The entity cannot use the product or direct it to another customer.

Answer 52

Answer is D Explanation: Goods should be included in the purchaser's inventory when legal title passes to the purchaser. Therefore, Herc should include the $90,000 cost of goods shipped to it FOB shipping point in inventory at 12/31 of the previous year because title to these goods passed to Herc when the goods were picked up by the common carrier on 12/30. Herc should also include the $120,000 cost of goods in its shipping area in inventory at 12/31 of the previous year. These goods should be included in inventory because shipment of these goods to the customer was not made until the current year.

Answer 53

ANswer is B Explanation: Where the LIFO cost flow method is used in conjunction with a perpetual inventory system, the cost of the last goods purchased are matched against revenue every time a sale is made ($700 + $2,000 = $2,700). ``` Date Purchased Sold Balance 1/1 (1,000 @ $1) $1,000 1/7 (600 @ $3) $1,800 (1,000 @ $1) $1,000 (600 @ $3) $1,800 1/20 (600 @ $3) $1,800 (700 @ $1) $ 700 (300 @ $1) $ 300 1/25 (400 @ $5) $2,000 (700 @ $1) $ 700 (400 @ $5) $2,000 ```

Answer 54

Answer is B Explanation: In applying the lower of cost or market, one must first determine the market value. The market refers to the current replacement cost, yet it should not exceed a ceiling (the net realizable value) nor be less than a floor, the net realizable value minus normal profit. The market value is determined by comparing the ceiling, floor and replacement costs. The total inventory ceiling is $650,000 ($240,000 + $410,000), the total inventory floor is $613,000 ($208,000 + $405,000), and the total inventory replacement cost is $520,000 ($150,000 + $370,000). The middle number is selected as the market; here it is the $613,000 floor amount. The total inventory cost of $610,000 is the value of inventory at year end because it is lower than the $613,000 market value. Option (A) is incorrect because it does not use relevant information. Option (C) is incorrect because it uses NRV - Normal profit. Option (D) is incorrect because it uses NRV.

Answer 55

Answer is A Explanation: Inventory at retail, 12/31 current year adjusted ($660,000 / 1.1) $ 600,000 Beginning inventory at retail, base year price (500,000) New layer added in current year 100,000 Times: Price level adjustment × 1.1 Current year layer, at LIFO retail 110,000 Times: Cost to retail ratio × 0.70 Current year layer, at LIFO cost 77,000 Add: Beg. inventory, at LIFO cost 360,000 Ending inventory, 12/31 current year $ 437,000

Answer 56

Answer is B Explanation: Goods should be removed from the seller's inventory when legal title passes to the purchaser. Therefore, Astor should exclude the cost of the goods shipped FOB shipping from inventory at 12/31 because title of these goods passed to Day when the goods were picked up by the common carrier on 12/31. The cost of the goods is calculated by dividing the selling price by 125% ($75,000 / 1.25 = $60,000). Since the goods were erroneously in Astor's inventory at 12/31, Astor's previous year ending inventory and cost of goods sold were overstated and understated, respectively, by the $60,000 cost of the goods.

Answer 57

Answer is D Explanation: Freight-out expense is a selling expense and should not be included in the cost of inventory.

Answer 58

Answer is A Explanation: The correct answer is (A). The FIFO inventory costing method assumes that the goods first acquired are the first sold. This would maximize profits in a period of rising prices due to COGS being comprised of goods purchased at lower prices, which leads to a higher profit.

Answer 59

Answer is D Explanation: The application of the lower of cost or market (LCM) rule directly to each inventory item generally results in the lowest inventory amount because unrealized losses on inventory items cannot be offset by unrealized gains on other inventory items. Generally, a different inventory amount would be reported when the LCM rule is applied to (1) total inventory, (2) groups of similar inventory items, or (3) each inventory item. The total inventory and groups of similar items methods of applying the LCM rule for inventories would allow unrealized losses on some inventory items to be offset by unrealized gains on others. This would result in a higher inventory amount than if the LCM rules were applied to each inventory item.

Answer 60

Answer is D Explanation: The correct answer is (D). In order to compute the inventory cost, the following items are considered: Direct material, labor, and overheads Freight inwards, insurance and warehousing (up to the point of sale) Handling expenses, normal spoilage, repacking Discounts received, if any In the given case, per unit inventory cost can be computed as under: Description Amount Direct materials and direct labor 7,000 Indirect materials and indirect labor 2,000 Insurance on manufacturing equipment 3,000 Total inventory costs 12,000 Total units manufactured = 1,000 Per unit cost = 12,000/1,000 12 Closing stock = Units produced – Units sold = 1,000 – 800 = 200 units The value of the inventory in the year-end = 200 x 12 = $2,400

Answer 61

Answer is C Explanation: A loss on the purchase commitment should be calculated based only on the minimum unit purchase requirement for the remaining years on the contract. Therefore, Card should calculate its loss at 12/31 based on the two years remaining on the purchase contract. Minimum annual unit purchase requirement 100,000 Years remaining on contract (3 - 1) x 2 Minimum unit purchase requirement for remaining duration on contract 200,000 Expected loss per unit purchased ($0.10 - $0.02) x $0.08 Probable loss on purchase commitment $ 16,000

Answer 62

Explanation: The correct answer is (C). When an entity follows the LIFO method of inventory valuation, the inventory is valued at the lower of cost or market value. Market value is the middle of: Ceiling = Net Realizable Value = Selling price – costs of disposal Floor = Net Realizable Value – normal profit margin Replacement Cost In the given case, market value shall be the middle of: Ceiling: 408,000 – 20,000 = $388,000 Floor: 388,000 – 60,000 = $328,000 Current Replacement Cost: $390,000 Market value = $388,000 The inventory should be valued at the lower of $390,000 and $388,000. The final value of inventory is $388,000

Answer 63

Answer is C Explanation: The correct answer is (C). LIFO or Retail inventories are valued at the Lower of Cost or Market. FIFO, Weighted Avg, and inventories determined by methods other than LIFO or Retail use the Lower of Cost or Net Realizable Value. Ian Co. determined its inventory on a FIFO basis and its Inventory should be valued at Lower of Cost or Net Realizable Value (NRV). Cost = $258,000. NRV = Net Selling Price - Cost to complete & dispose ($275,000 - $14,000 = $261,000). As Cost is lower than the NRV, inventory is valued at cost. Option (A) is incorrect because it reduces the selling cost from the original cost of inventory. Option (B) is incorrect because it uses market value instead of taking the net realizable value for valuing inventory on a FIFO basis. Option (D) is incorrect because the cost is lower than the net realizable value.

Answer 64

Answer is B Explanation: To calculate cost of goods sold on a current cost basis, multiply the number of units sold by the average current cost of the units during the period (sum of the current cost of the units at the beginning and the end of the period, divided by two). Current cost per unit, 1/17 $ 58 Current cost per unit, 12/31 + 72 Total 130 Divide by two / 2 Average current cost per unit during the year 65 Times units sold in the year × 70,000 Cost of goods sold, average current cost $4,550,000

Answer 65

Answer is A Explanation: Inventory at retail, 12/31 current year adjusted ($660,000 / 1.1) $ 600,000 Beginning inventory at retail, base year price (500,000) New layer added in current year 100,000 Times: Price level adjustment × 1.1 Current year layer, at LIFO retail 110,000 Times: Cost to retail ratio × 0.70 Current year layer, at LIFO cost 77,000 Add: Beg. inventory, at LIFO cost 360,000 Ending inventory, 12/31 current year $ 437,000

Answer 66

Answer is B Explanation: The answer to this question assumes that the original cost, replacement cost, and net realizable value of the inventory differ in amount. Statement II is correct. Under lower-of-cost-or-market (LCM) procedures for inventory valuation, market value cannot exceed a 'ceiling' of net realizable value and cannot be below a 'floor' of net realizable value reduced by a normal profit margin. Since the inventory is reported at its replacement cost, the net realizable of the inventory exceeds its replacement cost. Statement I is incorrect. Under LCM procedures, inventory is reported at the lower of original cost or market value (which is replacement cost in this case). Since the inventory is reported at replacement cost, the original cost of the inventory is greater than its replacement cost.

Answer 67

Answer is C Explanation: Garcel should report the unfinished inventory at the lower of cost or market. Market means current replacement cost except that market should not exceed the net realizable value and market should not be less than the net realizable value minus normal profit. The net realizable value is the sales value less reasonably predictable costs of completion ($125,000 – $10,500 = $114,500) and this is the ceiling value. The normal profit is the estimated sales value times the normal profit margin: $125,000 × 30% = $37,500. The net realizable value minus normal profit ($114,500 – $37,500 = $77,000) is the floor value. The replacement cost is $75,000 but the market cannot be lower than the floor value of $77,000 so $77,000 would be the market value. The lower of cost ($85,000) or market ($77,000) is the market value of $77,000.

Answer 68

Explanation: Warehousing costs are usually treated as an expense in the period in which they are incurred, although conceptually they comprise part of the total cost of merchandise made ready for sale. Conceptually, the cost of inventory should be reduced for cash discounts available, because the acquisition cost of an asset should not exceed its cash equivalent price.

Answer 69

Answer is C Explanation: The market maximum, or ceiling, should not exceed the net realizable value (NRV), which is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. Market minimum, or floor should not be less than the net realizable value minus normal profit. Market: Ceiling (NRV) $8.80 Replacement cost $8.00 Floor (NRV minus normal profit) $7.80LIFO charges Cost of Goods Sold with the latest acquisition costs, while ending inventories are reported at the older costs of the earliest units. The 10,000 units sold reduce the 1/5 purchases, leaving 8,000 units from the beginning inventory and 2,000 units purchased on 1/5. Cost [(8,000 x $8.20) + (2,000 x $7.90)] $81,400 Market (10,000 x $8.00) $80,000$80,000 is the lowest of cost or market.

Answer 70

Explanation: The correct answer is (D). Opal’s inventory account at December 31, be reduced by $16,000 + $27,000 = $43,000. Merchandise that is out on consignment will be included in Opal’s inventory till the time it is sold by the consignor. As it is included in inventory at the sales price, including the margin on the selling price, the same will have to be adjusted for margin to reflect the cost of the inventory on consignment. The $40,000 will have be reduced by margin of 40% = $16,000 (i.e. 40% of $40,000). Goods purchased, in transit, shipped f.o.b. shipping point, will not be adjusted as they are already included in the inventory. Goods held on consignment by Opal will be included in the inventory of the consignor, so inventory will have to be reduced by $27,000.

Answer 71

Answer is A Explanation: When the retail method is employed, purchase returns is included in the calculation of both cost and retail amounts of goods available for sale (AFS). Sales returns does not appear in the computation of the cost amount of goods AFS. Net markups appears in the retail amount of goods AFS (assuming the retail method is used to approximate a lower of average cost or market figure) but not in the cost amount of goods AFS. Freight in appears in the cost amount of goods available for sale but not in the retail amount of goods AFS.

Answer 72

Explanation: The correct answer is (B). Beginning inventory + Net purchases - Ending inventory = COGS Net Purchases = Ending inventory + COGS - Beginning inventory Net Purchases = ($18,000 + $220,000 - $30,000) = $208,000. [COGS = Sales x (1- Gross Margin)] [$275,000 (1-0.2) = $220,000.] Option (A) and (D) are incorrect as per the above explanation. Option (C) is incorrect because $220,000 is the COGS, not the net purchases. Solve for Goods Available for Sale: (GAFS – COGS = EI) GAFS – $220,000 = $18,000 GAFS = $238,000 Solve for Purchases: (BI – Purch = GAFS) $30,000 – Purch = $238,000 Purchases = $208,000. Option (A) and (D) are incorrect as per the above explanation. Option (C) is incorrect because $220,000 is the COGS, not the net purchases

Answer 73

Answer is A Explanation: The correct answer is (A). Inventory was written down to its NRV of $80 (from $100). Under IFRS, Net Realizable Value (NRV) is the best approximation of how much inventories are expected to realize moving forward. IFRS only allows inventory recovery up to the point that was written off initially - i.e., $100.Although the NRV has increased to well above the original inventory cost (book value), only $20 of recovery is allowed. The B/S entry would be: Inventory $20 Expense $20 Note: Recoveries are recorded as expenses in the I/S because they are a Reduction to COGS.

Answer 74

Answer is C Explanation: Under IFRS, specific identification is required when the goods are not interchangeable; otherwise, you can use FIFO, the gross profit method (if a physical count is not possible), the retail method (in certain industries), and weighted average. LIFO is prohibited under IFRS.

Answer 75

Answer is B Explanation: Under the moving-average method, a new average unit price is computed every time a purchase is made. The inventory is then priced on the basis of this "moving average." ``` Units Unit cost Total cost Balance on 1/1 1,000 $1.00 $1,000 Purchased on 1/7 600 3.00 1,800 Balance after purchase 1,600 1.75 * 2,800 Sold on 1/20 900 1.75 1,575 Balance after sale 700 1.75 1,225 Purchased on 1/25 400 5.00 2,000 Balance after purchase 1,100 $3,225 * $2,800 / 1,600 units ```

Answer 76

Answer is B Explanation: Goods out on consignment remain the property of the consignor and must be included in the consignor's inventory at purchase price or production cost, including freight and other costs incurred to process the goods up to the time of sale. Beginning inventory $122,000 Add: Purchases $540,000 Freight in shipping 10,000 Transportation to consignees 5,000 Add: Total inventoriable costs 555,000 Goods available for sale 677,000 Less: Ending inventory ($145,000 + $20,000) (165,000) Cost of goods sold $512,000

Answer 77

Answer is D Explanation: The present value of future cash flows (which would include profits not yet earned) pertains to the time value of money and is not appropriate for measuring inventory. The primary basis for accounting for inventories is cost. The cost of an inventory item is the cash price or fair value of other consideration given in exchange for it. Historical cost, replacement cost, and net realizable value are all appropriate methods for measuring inventory.

Answer 78

Answer is A Explanation: In using LIFO, the cost of the last goods in are used in pricing the cost of goods sold. Therefore, the LIFO method will result in having cost of goods sold most closely approximate current cost. In using FIFO, the cost of the last goods are used in pricing the ending inventory. Thus, the FIFO method will result in having ending inventory most closely approximate current cost.

Answer 79

Answer is A Explanation: The amount of inventory lost in the flood is calculated by determining the difference between the estimated ending inventory using the gross margin method and the actual physical inventory not damaged by the flood. Beginning inventory, January 1 $35,000 Purchases, January 1 through May 1 200,000 Goods available for sale 235,000 Sales, January 1 through May 1 $250,000 Less: Gross margin (40% x $250,000) (100,000) Less: Estimated CGS (150,000) Estimated ending inventory 85,000 Less: Physical ending inventory (30,000) Estimated flood loss $55,000

Answer 80

Answer is C Explanation: Under the last-in, first-out (LIFO) method of inventory valuation, the units remaining in ending inventory are costed at the oldest unit costs available. Under the first-in, first-out (FIFO) method of inventory valuation, the units remaining in ending inventory are costed at the most recent unit costs available. Therefore, because inventory acquisition costs increased steadily during year 1, the FIFO method of inventory valuation would report a higher amount for ending inventory than the LIFO method. The question indicates that there were no goods in inventory at 12/31, year 2. So, cost of goods sold for year 2 is comprised of the cost of inventory purchases made in year 2 and the cost of ending inventory at 12/31, year 1. Because the cost of the ending inventory at 12/31, year 1, is higher under FIFO, cost of goods sold for year 2 would also be higher under FIFO. Option (A), (B) and (D) are incorrect as per above explanation.

Answer 81

Answer is B Explanation: The cost of the merchandise is computed by subtracting the amount of the trade discounts from the list price of the goods. ``` List price $20,000 Less: trade discount—20% 4,000 Balance 16,000 Less: trade discount—10% 1,600 Cost of the merchandise $14,400 ```

Answer 82

Answer is C Explanation: The change in inventory valuation from FIFO to LIFO is a change in accounting principle which should be accounted for retrospectively. However, because it is impracticable to determine the retrospective impact of such a change, the change will impact the current period only. As LIFO results in lower valuation of ending inventory in a period of rising prices it will decrease the net income for the period. Options (A), (B) and (D) are incorrect based on the above explanation.

Answer 83

Answer is C Explanation: The correct answer is (C). Under US GAAP, inventory is valued at the lower of cost or market (LCM) if LIFO or retail inventory method is used. FASB has issued a recent update replacing the lower of cost or market value criteria with lower of cost or net realizable value (LCNRV) for goods determined by other than LIFO or retail inventory methods. Market = Middle of the following three numbers. Ceiling = NRV. Floor = NRV - normal profit margin. Replacement cost = Cost to purchase or reproduce Cost is $85,000. Market price is $77,000. Ceiling: NRV = ($125,000 - $10,500) = $114,500. Floor: NRV- Normal profit = ($114,500 - $37,500) = $77,000. [Normal Profit: ($125,000 x 30%) = $37,500] Replacement Cost = $75,000 So Inventory should be valued at market price of $77,000 (A) is incorrect because it uses net realizable value. (B) is incorrect because it uses original cost which is higher than market. (D) is incorrect because it uses replacement cost.

Answer 84

Answer is A Explanation: Under the first-in, first-out (FIFO) retail method of inventory valuation, the goods in beginning inventory are charged to cost of goods sold during the period; therefore, the cost/retail ratio is based only on the purchases for the period. If the lower of cost or market rule is disregarded, both net additional markups and net markdowns are included in the purchases cost-to-retail ratio. Cost Retail Purchases $60,000 $110,000 Net additional markups -- 10,000 Net markdowns -- (20,000) Purchases cost-to-retail ratio amounts 60,000 100,000 Beginning inventory $12,000 $ 30,000 Goods available for sale $72,000 $130,000 Less: sales (90,000) Estimated ending inventory at retail $ 40,000 Cost-to-retail ratio ($60,000 / $100,000) x 60% Estimated ending inventory at cost $ 24,000

Answer 85

Answer is C ``` Explanation: Date Layers at Base Year Cost Price Index Ending Inventory at LIFO Cost 01/01, year1 $150,000 1.00 $150,000 12/31, year1 50,000 [1] 1.10 55,000 12/31, year2 30,000 [2] 1.20 36,000 $230,000 $241,000 [1] $200,000 - $150,000 [2] $230,000 - $200,000 ```

Answer 86

Answer is D Explanation: The cost of merchandise inventory is net of any discounts but includes freight-in, taxes, insurance while in transit, warehousing costs, and similar charges paid to bring the article to its existing condition and loca¬tion. The cost of the inventory would be the $3,750 purchase price, plus the $175 freight-in charge, plus the $900 costs of materials and labor to bring it to saleable condition, plus the $100 insurance cost during transit for a total $4,925.All costs necessary to bring an item to its salable condition are capitalized to the inventory account. All four listed costs meet this requirement. Until the goods are ready for sale, the cost of all efforts to achieve that goal are treated as product costs rather than period costs Option (A) is incorrect because it excludes costs incurred to sell the inventory and insurance charges. Option (B) is incorrect because it excludes the insurance cost incurred and freight in charges. Option (C) is incorrect because it excludes the insurance cost incurred.

Answer 87

Answer is C Explanation: When current cost of goods sold is less than historical cost, current cost income from continuing operations will be greater than historical cost income from continuing operations.

Answer 88

Answer is A Explanation: Under the FIFO cost-flow method, a perpetual system would result in the same dollar amount of ending inventory as a periodic inventory system. Under the LIFO cost-flow method, however, a perpetual system would generally not result in the same dollar amount of ending inventory as a periodic inventory system.

Answer 89

Answer is C Explanation: The in-transit insurance premium should be included in inventory costs because it is a cost necessary to get the goods in the place and condition for their intended sale. The advanced commissions represent a prepaid selling expense and thus should not be included in inventory cost.

Answer 90

Answer is D Explanation: The gross margin method rests on the assumption that the gross margin percentage is relatively stable, computes cost of goods sold by applying the gross margin ratio to sales and subtracting this amount from the sales figure, and is not generally accepted for annual financial reporting purposes. As the answers for A., B., and C. are all correct, the best answer for this question is D., all of the above.

Answer 91

Answer is C Explanation: $9.2. Units beginning inventory remaining at year-end (3,200 - 1,600)$8 = $12,800 plus 1/22 purchase: 4,800($9.60) = 46,080. Ending inventory $58,880. Ending unit cost: $58,880/6,400 = $9.20 The moving average method costs issues at the unit cost of goods on hand at that point. Thus, the issue was costed at $8.00 per unit. The cost per unit changes with each purchase. Option (A), (B) and (D) are incorrect as per above explanation.

Answer 92

Answer is C Explanation: Under the lower of cost or market rule, replacement cost cannot exceed a 'ceiling' of net realizable value (estimated selling price less estimated cost of disposal) and cannot be below a 'floor' of net realizable value reduced by a normal profit margin. ``` Replacement Cost Parameters Cost Replacement Cost Ceiling (NRV) Floor (NRV - NP) $12.00 $10.90 $13.40 [1] $11.20 [2] [1] $13.60 - $0.20. [2] $13.40 - $2.20. ``` The replacement cost is below the prescribed range; therefore, the 'floor' of $11.20 is the assigned market value. Because the assigned market value of $11.20 is below the historical cost of $12.00, the inventory item should be valued at $11.20.

Answer 93

Answer is B Explanation: Nomar Co., is the consignor and the inventory is never owned by consignee. Title remains with consignor until goods are sold by the consignee. Thus, title passes directly to the third-party buyer at point of sale. Consignee acts as an agent with a commission on sales and reimbursable expenses. At the year end, Nomar co., would report the unsold inventory of $6,000 (i.e. 30% x $20,000). Option (A) is incorrect because the ownership of the goods is with Nomar Co., and unsold inventory at year end should be reported. Option (C) is incorrect because advertising expenses of $500 are included in the inventory cost [i.e. $6,500 = (30% x $20,000) + $500]. Option (D) is incorrect because total cost of inventory is reported at the year end which includes the inventory that is sold to third party.

Answer 94

Answer is B Explanation: Medus does not transfer legal title to the shop, continues to hold control as it can demand transfer of the pens to another shop, till the pens are sold to customers by the shop. Also the shop, even though owes full payment for the pens immediately upon transfer from Medus, it is considered more of a deposit, as the Medus would refund the full amount upon return of the pens back to Medus. All the above indicators are satisfied. This is a consignment arrangement.

Answer 95

Answer is B Explanation: Under perpetual method, inventory is quantified perpetually on an ongoing basis. Unders perpetual system, each time a sale is made, the LIFO method is used to calculate cost of goods sold. When the sale is made on 1/23, the LIFO is applied to associate COGS to 1,200 units at $3 and the remaining 600 units @ $1. The remaining would be 1,400 units at $1. To this add the purchase of 800 units @$5 will be added to calculate the ending inventory. Ending inventory under LIFO perpetual would be: 1,400 units at $1.00 $1,400 800 units at $5.00 $4,000 Total $5,400 Under the periodic inventory system, inventory quantity determined periodically by physical count usually at year / month end. Under the periodic system of LIFO, the COGS of the sale of 1,800 units is considered only at month end when LIFO is applied first to the last purchase made on 1/28. Of the 1,800 units sold, 800 would be associated to $5 per unit and the remaining 1,000 units would be associated to $3 per unit. Ending inventory would consist of the remaining 200 units @ $3 per unit and 2000 units @ $1 per unit. Ending inventory under LIFO periodic would be: 2,000 units at $1.00 $2,000 200 units at $3.00 $600 Total $2,600 Options (A), (C) and (D) are incorrect based on the above explanation.

Answer 96

Answer is A Explanation: The finished goods inventory of a manufacturer must include the cost of both variable and fixed manufacturing overhead. Interest cost should not be capitalized for inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis. Freight-out is a selling expenses and should not be included in the cost of inventory. A trade discount is a deduction from the list or catalog price of merchandise to arrive at the gross selling price. Trade discounts are not recorded in the seller or purchaser’s accounting records. Options (B), (C) and (D) are incorrect as per above explanation.

Answer 97

Answer is A Explanation: The correct answer is (A). In a legal non-cancelable agreement for future purchase of Inventory, if Contract price > Market price and it is expected that loss will occur on purchase, recognize loss (Market Price - Contracted Price) at the time of decline in prices. The journal entry would be: Dr: Est. loss on purchase commitment. Cr: Accrued loss on purchase commitment. Details of the losses to be included in the footnote. Option (B) is incorrect, because apart from describing the nature of the loss in footnotes, loss needs to be accrued and recognize loss in I/S. Option (C) is incorrect because loss is accrued as a liability and not as a valuation account to reduce inventory. Option (D) is incorrect because footnote disclosure, loss recognized in I/S and a liability for accrued loss.

Answer 98

Answer is A Explanation: The "inflation component" of the increase in the current cost amount is defined as the difference between the nominal dollars and constant dollars measures. $15,000 - $12,000 = $3,000.

Answer 99

Answer is B Explanation: Inventory is reported at the lower of cost or market. As indicated in the problem, market exceeded cost, so inventory should be stated at cost, using dollar value LIFO. The inventory layer added in the current year is computed in terms of base year cost. It then must be converted to current year cost because the layer was added during the current year. The index (1.1) is computed by dividing the ending inventory at current year cost ($88,000) by the ending inventory at base year cost ($80,000). The cost of ending inventory ($83,000) is the $50,000 cost of the beginning amount and the converted Year 1 layer. ($30.000 × 1.1 = $33,000). Option (A) is incorrect because the calculation does not adjust for inflation 10% on current year inventory. Option (C) is incorrect because it adjusts the price index @ 10% on prior period inventory of $50,000. Option (D) is incorrect because it adjusts the price index of 10% on prior period and current year’s inventory

Answer 100

Answer is C Explanation: The dollar value LIFO will give Jones the lowest ending inventory when its product lines are subject to specific price increases. This is because LIFO methods operate under the assumption that the last item of inventory purchased is the first one to be sold. Thus, in the case of rising prices, the cost of the most recently acquired inventory will always be higher than the cost of earlier purchases, so the ending inventory balance will be valued at earlier costs which are lower, while the most recent costs appear in the cost of goods sold. As far as specific identification, weighted average or FIFO periodic methods, none of these would give a higher inventory value than dollar value LIFO method. Options (A), (B) and (D) are incorrect based on the above explanation.

Answer 101

Explanation: The correct answer is (C). Delar should report $500,000 as inventory at year-end. FOB destination means title and risk of loss pass to the buyer when the seller makes a proper tender of delivery of the goods at the destination. This was shipped via FOB destination and should be included in inventory because the inventory had not been delivered to the customer by year-end. Consigned goods are not sold but rather transferred to an agent for possible sale. Consigned goods are included in the inventory of the consignor (owner). Thus, the inventory that is held on consignment for one of the suppliers should be excluded from the inventory physical count as Delar is a consignee. Therefore, Delar should report $500,000 of inventory at year-end.

Answer 102

Answer is C Explanation: Under IFRS, inventory is carried at the lower of cost or net realizable value (best estimate of the net amounts inventories are expected to realize). This amount may or may not equal fair value. The net realizable value of $90,000 is lower than the historical cost of $100,000.

Answer 103

ANswer is D Explanation: Under current cost accounting, the amount of holding gain on a unit of inventory is the increase in current cost from holding the inventory from period to period. The inventory in question was purchased at $8 per unit on March 1 and has a replacement cost of $10 on December 31. Thus, under current cost accounting, Vend has a holding gain of $2 (i.e., $10 - $8) on each unit of the inventory.

Answer 104

Answer is A Explanation: To compute cost of goods sold on a current cost basis, multiply the number of units sold by the average current cost of the units during the year. (Average current cost of the units during the year is the sum of the current cost of the units at the beginning and the end of the year, divided by two.).

Answer 105

Answer is C Explanation: Under IFRS, inventory is carried at the lower of cost or net realizable value (best estimate of the net amounts inventories are expected to realize). This amount may or may not equal fair value. The net realizable value of $6.00 is lower than the historical cost of $10.00.

Answer 106

Answer is C Explanation: Cost of goods sold = Beginning inventory + Purchases - Ending inventory Beginning inventory was understated by $26,000, the beginning inventory would have been beginning inventory - $26,000. Ending inventory was overstated by $52,000, the ending inventory would have been ending inventory + $52,000. The incorrect cost of goods sold would have been Beginning inventory - 26,000 + Purchases - (Ending inventory + 52,000). Thus cost of goods sold would have been Beginning inventory + Purchases - Ending inventory - $78,000 (i.e. - $26,000 - $52,000). Cost of goods sold (COGS) would have been understated by $78,000. An alternative explanation: understatement of beginning inventory would lead to an understatement of COGS. Overstatement of ending inventory would lead to an understatement of COGS, leading to a net understatement of $78,000. Options (A), (B) and (D) are incorrect based on the above explanation.

Answer 107

Explanation: The correct answer is (B). Inventory is valued at the Lower of Cost or Market (LCM) if LIFO or retail inventory is used. Exception: FASB has issued an update replacing the LCM valuation with lower of cost or net realizable value (LCNRV) valuation for other than LIFO or retail inventory methods. Chewy Co. determined its chocolate inventory on a FIFO basis. Inventory should be valued at LCNRV. Cost = $26,000. NRV = Net selling price - Costs to complete and dispose = $40,000 - $12,000 = $28,000. Lower of the two: inventory is $26,000.

Answer 108

Explanation: The correct answer is (B). A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages. The perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are actual amounts. The disadvantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively complex and time-consuming. The disadvantage of the periodic inventory system is that it provides only a period-end record of the inventory balance

Answer 109

Answer is B Explanation: Valuation of inventory items is required at the lower of cost or replacement cost (commonly referred to as market). Market cannot exceed the net realizable value (ceiling) of the good (i.e., selling price less expected costs to sell), and market should not be less than this net realizable value reduced by an allowance for a normal profit margin (floor). In this problem, the replacement cost is between the ceiling and floor amounts, so it is used as the market value. Since the original cost is greater than replacement (i.e., market) cost, the item will be carried at the lower market/replacement cost.

Answer 110

Answer is D Explanation: Under the approximate lower of average cost or market retail method, the estimated inventory is computed as follows: Cost Retail Inventory, 1/1 $147,000 $203,000 Purchases 833,000 1,155,000 Additional markups -- 42,000 Cost-to-retail ratio amounts $980,000 $1,400,000 Less: Sales -- (1,106,000) Markdowns -- (14,000) Estimated ending inventory at retail -- $280,000 Times cost-to-retail ratio ($980,000 / $1,400,000)= 0.7 i.e 70% -- x 70% Estimated ending inventory at cost -- $196,000

Answer 111

Answer is D Explanation: Under both IFRS and US GAAP, freight cost is capitalized as part of property, plant and equipment, and interest is only capitalized on qualifying assets. Assets qualifying for interest capitalization include assets constructed or produced for self-use on a repetitive basis, assets acquired for self-use through arrangements requiring down payments or progress payments, and assets constructed or produced as discrete projects for sale or lease (e.g., ships or real estate developments). Assets not qualifying for interest capitalization include inventories that are routinely manufactured on a repetitive basis, assets in use or ready for use, and assets not in use and not being prepared for use. Without any indication otherwise, it would be determined that this machinery is ready for use and as such the interest costs would not be capitalized but instead would be immediately expensed.

Answer 112

Answer is B Explanation: The current year layer is determined by the difference of the ending inventory at base year cost and the beginning inventory (which is the base year in this case) at base year cost and applying the relevant price index to the difference. Ending inventory at base year cost $ 525,000 Less: Beginning inventory at base year cost (500,000) Current year layer at base year cost $ 25,000 Relevant price index 1.10 Current year layer at current year prices $ 27,500 Beginning inventory (1/1) at DV LIFO 500,000 Dollar-value LIFO inventory, 12/31 $ 527,500

Answer 113

Answer is D Explanation: Goods purchased f.o.b. shipping point should be included in inventory when the goods are shipped. It states the goods are in transit, so they have been shipped. The goods were erroneously excluded from ending inventory, when they should have been included, meaning that inventory is understated. Inventory is an asset, so assets are understated. An understated inventory also would lead to an overstated cost of goods sold (goods available for sale – ending inventory = cost of goods sold). An overstated cost of goods sold would lead to an understated gross profit (revenue – cost of goods sold = gross profit) which in turn results in an understated retained earnings. Options (A), (B) and (C) are incorrect as per above explanation.

Answer 114

Answer is C Explanation: The correct answer is (C). Under IFRS, inventories are valued at lower of cost or net realizable value. Net realizable value = Fair value - Estimated sales cost = $1,000 - $100 = $900. As the NRV is lower at $900 when compared to the cost of $910, inventory will be valued at $900.

Answer 115

Explanation: The correct answer is (A). Cost of goods sold (COGS) is calculated as beginning inventory plus purchases during the period minus ending inventory. Therefore, a $1,000 overstatement of the ending inventory balance will result in a $1,000 understatement of cost of goods sold. The $1,000 understatement of COGS results in a $1,000 overstatement of gross profit as well, which carries over to a $1,000 overstatement of retained earnings.

Answer 116

Answer is D Explanation: The dollar-value LIFO method is based on the aggregation of similar inventory items into pools. Acquisitions and issuances of similar materials are recorded in the same pool, even if the substitute items are not exactly the same as the replaced items. As a general rule, dollar-value LIFO uses a "double-extension method" to determine: (1) the value of the ending inventory in terms of base year prices, and (2) the value of the ending inventory at current prices. The ratio of (2) over (1), above, provides the specific price index for valuing any layers of inventory added in the period.

Answer 117

Answer is B Explanation: The inventory layer added in the current year is computed in terms of base year cost. It then must be converted to current year cost because the layer was added during the current year. Because we are converting to current year cost from base year cost, the index is computed by dividing the ending inventory at current year cost by the ending inventory at base year cost

Answer 118

Answer is B Explanation: Under U.S. GAAP, inventory is valued at the Lower of Cost or Market (LCM) if LIFO or retail inventory method is used, where Cost = Original cost of inventory and Market = middle for the following three numbers:- Net realizable Value (NRV). NRV - normal profit margin. Replacement cost. Exception: FASB has issued an update replacing the LCM valuation with lower of cost of net realizable value (LCNRV) valuation for other than LIFO or retail inventory methods. As per LCM, in the given case replacement cost is below the net realizable value and above the net realizable value less a normal profit margin, replacement cost is in middle and is the market. Cost is given to be higher than NRV, and would be higher than replacement cost or the market. Thus, the inventory will be valued at lower of cost or market, in this case, market or replacement cost. Options (A), (C) and (D) are incorrect based on the above explanation.

Answer 119

Answer is B Explanation: The correct answer is (B) Under the perpetual inventory method, COGS is updated for every inventory sale according to the valuation method followed by an entity. In the given case, Carver Co. follows a perpetual inventory method and uses the moving average method to determine the inventory’s value. The cost of goods sold on the 10th of March can be calculated as below: Date Particulars Units and unit cost Inventory (A) Inventory Units (B) Moving Avg. Cost (A/B) 3/1 Beginning 30000@ $10 = $300,000 300,000 30,000 10 3/5 Purchase 10,000@ $12 = $120,000 420,000 40,000 10.5 3/10 Sales 20,000@ $10.5 = $210,000 210,000 20,000 10.5 The 20,000 units sold on 3/10 cost $10.5 per unit and therefore, the cost of goods sold is $210,000. Note: Purchases made on 3/20 is irrelevant to compute the COGS under the perpetual inventory method since it is after the sales date. However, if the entity was using the periodic inventory method, the purchase would have been taken into account.

Answer 120

Answer is B Explanation: In a "bill and hold" transaction, a customer agrees to purchase the goods, but the seller retains physical possession until the customer requests shipment to designated locations.

Answer 121

Answer is D Explanation: Under the lower-of-cost-or-market rules, market means current replacement cost with the exception that market value should not exceed the net realizable value (ceiling) and should not be less than the net realizable value minus normal profit (floor). Because in this question replacement cost is below the floor, this would be the minimum amount at which market could be valued. This market value is then compared to the original cost, and the lower amount is used for the value of the inventory item. The question states that the original cost is above the net realizable value less a normal profit margin, thus, the market value is the lower amount.

Answer 122

Answer is A Explanation: The missing inventory is estimated by determining the difference between the estimated ending inventory using the gross margin method and the actual physical inventory on hand at year-end. ``` Beginning Inventory $ 500,000 Purchases 2,500,000 Goods available for sale 3,000,000 Less: estimated COGS Sales $3,200,000 Less: gross margin (25% x $3,200,000) 800,000 (2,400,000) Estimated ending inventory 600,000 Less: actual physical inventory (575,000) Estimated cost of missing inventory $ 25,000 ```

Answer 123

Answer is D Explanation: Some companies use LIFO for tax and external reporting purposes, but they maintain a FIFO, average cost, or standard cost system for internal reporting purposes. The difference between the inventory method used for internal reporting purposes and LIFO is often referred to as the LIFO reserve.The LIFO reserve is a contra-inventory account that must be adjusted to its required balance at the financial statement date. At 12/31 Drew’s inventory was $375,000 using average cost and $320,000 using LIFO. The required balance in the LIFO reserve at 12/31 is $55,000 (i.e., $375,000 - $320,000). Since the unadjusted LIFO reserve balance was $35,000, the reserve must be increased by $20,000 (i.e., $55,000 - $35,000).

Answer 124

Answer is C Explanation: Valuation of inventory items is required at the lower of cost or replacement cost (commonly referred to as market). Market cannot exceed the net realizable value (ceiling) of the good (i.e., selling price less expected costs to sell), and market should not be less than this net realizable value reduced by an allowance for a normal profit margin (floor). In this problem, the replacement cost exceeds net realizable value, so market is defined as NRV. Since the original cost is greater than defined market, the item will be carried at the lower of market/NRV amount. Option (A) is incorrect because original cost is higher than market. Option (B) is incorrect because the market price used should be net realizable value when replacement cost is higher. Option (D) is incorrect because the relevant information is missing related to net realizable value - normal profit. However, given the fact that the replacement clost is higher than net realizable value the middle of the three will be the net realizable value.

Answer 125

Answer is C Explanation: Assets are to be recorded at their acquisition cost. Acquisition cost is defined as the cash price, or its equivalent, plus all the costs reasonably necessary to bring it to the location and to make it ready for its intended use. The cash price, or its equivalent, would be the $4,000 down payment plus the $15,480 present value of the $6,000 payments, an ordinary annuity, (2.58 × $6,000). Add to that price of $19,480 the $2,000 in shipping charges to get the equipment to its location and the $3,500 of installation charges to get it ready for its intended use. The total capitalized cost of the equipment is $4,000 + $15,480 + $2,000 + $3,500 = $24,980.

Answer 126

Answer is B Explanation: Weir's Accumulated Depreciation account increased by $30,000 ($400,000 - $370,000) during year 2, despite the fact that $55,000 of depreciation expense was recorded during year 2. Therefore, the debit to accumulated depreciation during year 2 because of plant and equipment retirements was $25,000 (i.e., $55,000 - $30,000).

Answer 127

ANswer is B Explanation: The straight-line (SL) depreciation method is a fixed charge method where an equal amount of depreciable cost is allocated to each period. The SL formula is (historical cost - salvage value) / estimated useful life. The 200% declining balance depreciation method, also known as double-declining balance (DDB), uses a rate of depreciation twice the SL rate applied to the book value (i.e., declining balance) of the asset to obtain the depreciation expense for the period. The salvage value is not used in the calculation except as a lower bound for the asset’s book value. The DDB formula is (2 / estimated useful life) × (historical cost - accumulated depreciation). year 2: (2/10) × ($100,000 - 0) = $20,000 year 3: (2/10) × ($100,000 - $20,000) = $16,000.

Answer 128

Answer is A Explanation: Assets are recorded at their acquisition cost. Acquisition cost is the cash price, or its equivalent. [($110,000-$5,000) / 10 years = $10,500 / year.].

Answer 129

Answer is B Explanation: Land must be recorded at its acquisition cost. Generally, acquisition cost is defined as the cash price, or its equivalent, plus all other costs reasonably necessary to make it ready for its intended use. Such additional costs include demolition of an old building, less any scrap proceeds received. Purchase price of land $100,000 Add: Cost to raze old building 50,000 Less: Proceeds from sale of scrap materials (10,000) Capitalized value of land $140,000

Answer 130

Answer is C Explanation: Equipment cost, 12/31, year 4 $344,000 Cost of year 5 purchase 50,000 Equipment cost without sale $394,000 Equipment cost, 12/31, year 5 (379,000) Cost of equipment sold $ 15,000 Carrying value of equipment sold (9,000) Accumulated depreciation of equipment sold $ 6,000 Accumulated depreciation, 12/31, year 4 $128,000 Accumulated depreciation of equipment sold (6,000) Balance without year 5 depreciation $122,000 Accumulated depreciation, 12/31, year 5 (153,000) Depreciation expense year 5 $ 31,000

Answer 131

Explanation: A Costs that extend the service life of the asset, increase its output rate, or lower production costs are betterments or improvements and are capitalized.

Answer 132

Explanation: C The asset would be recorded at $135,000, its acquisition cost to the new owners. The salvage value would be the $15,000 estimated by the new owners. The carrying amount and residual value of the previous owners does not matter to the new owners. The depreciable base would be $120,000; the $135,000 acquisition cost less the $15,000 estimated salvage value.

Answer 133

Explanation: Equipment purchased by the issuance of securities is recorded at its fair value or the fair value of the securities issued, whichever is more clearly determinable. The fair value of the note would be $75,132 ($100,000 less the $24,868 discount). Gold also paid $10,000 cash that would need to be included in the fair value of the equipment. $75,132 + $10,000 = $85,132.

Answer 134

Explanation: The installation of new walls and offices are leasehold improvements since they are not separable from the leased property and revert to the lessor at the end of the lease term. They are amortized over the lease term. The prepayment of the last month’s rent was made to secure the lease and should be reported as a leasehold within intangible assets. Current year expense is $66,000 ($60,000 rent for December and $6,000 amortization of leasehold improvements [$360,000/60]).

Answer 135

Answer is B Explanation: An estimated salvage value is directly incorporated into the formulas for computing annual depreciation expense under the straight-line and productive output methods. Straight-line depreciation expense = Historical cost - Estimated salvage value Estimated useful life in time Productive output depreciation expense = Historical cost - Estimated salvage value x current output Estimated productive outputTherefore, if estimated salvage value is excluded from either depreciation computation, the depreciable base (i.e., historical cost minus estimated salvage value) would be overstated. Thus, in the first year of the life of the asset, depreciation expense would be overstated and net income would be understated under both methods.

Answer 136

ANswer is B Explanation: Recognition of an impairment loss is required only if a long-term asset’s, or asset group’s, carrying amount is not recoverable and exceeds its fair value.

Answer 137

Answer is C Explanation: Impaired assets are divided into three categories: held for use, held for disposal by sale, and held for disposal other than by sale. For assets held for use, any subsequent reversal of a previously recognized impairment loss is prohibited. For assets held for disposal by sale, the asset is measured at the lower of its book or fair value less cost to sell and its depreciation (or amortization) discontinues. Increases in the fair value, up to but not exceeding book value, would be recognized.

Answer 138

Explanation: The correct answer is (A). The subsequent reversal or restoration of a previously recognized impairment loss is prohibited under GAAP.

Answer 139

Explanation: The correct answer is (D). Depreciation allocates the total cost of an asset over the periods that derive benefit from the asset. This is in line with the matching principle whereby firms recognize revenues and their related expenses in the same accounting period. The equipment was installed and placed in service on February 1, year 2. It is only from this date that the benefit from the asset can be derived and depreciation will also begin from February 1, year 2. Purchase Order, Shipping and Receiving are irrelevant to depreciation for this piece of equipment.

Answer 140

Explanation: The correct answer is (D) Under IFRS, if a tangible asset has significant identifiable components with different values and estimated lives, they should record and depreciated separately. Hence, depreciation can be calculated as under: Components Value (in $ million) Useful life (years) Depreciation Two components comprising 80% of total value 80 20 4 Component 3 10 4 2.5 Component 4 10 5 2 Total Depreciation 8.5

Answer 141

Explanation: The correct answer is (D). An Asset Retirement Obligation (ARO) involves the retirement of a tangible, long-lived asset that depends on a future event beyond the control of an obligated party. An ARO is an essential part of producing fair and accurate financial statements. So the entity should not capitalize the asset retirement cost at its undiscounted cash flow value. Initial recognition of liability is at fair value (FV) or present value (PV) of expected future restoration cost using adjusted risk-free rate. (A), (B) and (C) are incorrect because these are the legal obligations associated with the retirement of long-lived assets.

Answer 142

Answer is B Explanation: Changes in depreciation method, residual value, and useful economic life are treated as a change in accounting estimate requiring prospective treatment under both US GAAP and IFRS. Both IFRS and US GAAP require a provision for asset retirement costs to be recorded when there is a legal obligation. Under US GAAP, eligible borrowing costs do not include exchange rate differences and under IFRS eligible borrowing costs include exchange rate differences from foreign currency borrowings. Under US GAAP, investment property is not separately defined and, therefore, is accounted for as held for use or held for sale whereas under IFRS investment property is separately defined.

Answer 143

Answer is D Explanation: Interest cost during construction is to be capitalized on assets constructed for an enterprise's own use (including assets constructed by others for which progress payments have been made), or assets intended for sale or lease that are constructed as discrete projects. However, interest cost shall not be capitalized for inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis. Once the constructed assets are completed, all interest should be expensed as incurred. In the question at hand, it is not clear, but it is assumed that the machinery constructed for sale is routinely manufactured in large quantities on a repetitive basis. Therefore, the interest during construction should be capitalized only for the equipment constructed for Bay's own use. The interest incurred during construction of the inventory items should be expensed. The interest incurred after completion should be expensed on both groups of equipment.

Answer 144

Answer is D Explanation: The depreciation pattern corresponding to the sum-of-the-years'-digits (SYD) method is the straight sloping line (II) and the pattern corresponding to the double-declining-balance (DDB) method is the curved line (III). The straight line parallel with the horizontal axis (I) describes the pattern of the straight-line (SL) method of depreciation because the SL method results in a constant amount of depreciation each period. The line for the pattern of the SYD method is a straight sloping line because the method results in a decreasing depreciation charge based on a decreasing fraction of depreciable cost where each fraction has the same denominator (sum of the years). The line for the pattern of the DDB method will be a curved sloping line because that type of method employs a constant percentage multiplied by a decreasing balance to obtain a decreasing charge for depreciation.

Answer 145

Explanation: The correct answer is (A). The interest cost incurred during the construction period needs to be capitalized to the asset. The interest to be capitalized is lower of the following: Weighted Average Accumulated Expenditure * Interest rate. The actual interest cost incurred. Interest: ($500,000 x 3/12 (April - June) x 5%) + ($300,000 x 2/12 (May - June) x 5% ) + ($700,000 x 1/12 (June) x 5%) = $11,667. The company has a June 30th year-end and the question only asks for that, therefore, any information beyond June 30th is irrelevant. Interest until June 30th is 5%. As of June 30, the interest amount to be capitalized is $11,667.

Answer 146

Answer is C Explanation: The composite depreciation method refers to the depreciation of a collection of assets that are dissimilar. The group depreciation method refers to the depreciation of a collection of assets that are similar in nature. From an accounting standpoint, there is no distinction between the two methods. The same procedures are followed for both, and both can utilize the straight-line depreciation method.

Answer 147

Answer is A Explanation: An asset retirement obligations (ARO) must be recorded at fair value in the accounting period in which it occurs and in which its amount can be reasonably measured. AROs incur depreciation and accretion expenses each year. Accretion expense is offset with an increase to the liability account, and, at the end of the asset's life, the liability account will have a balance equal to the amount needed to settle the retirement obligation. Accretion expense is calculated by multiplying the balance of the recorded liability by the company's credit-adjusted discount rate each year, so the amount of accretion expense for the year is $10,000 ($100,000 x 10%).

Answer 148

Explanation: The correct answer is (B). The question is asking to calculate depreciation expense for the bus for the year ended December 31, year 1. Calculate the depreciation separately for each Item. Depreciation for each item: Bus: $100,000 - $25,000 (engine) - $10,000 (seat) = $65,000 / 20 years = $3,250 depreciation for the bus. Engine: $25,000 / 10 = $2,500. Engine is replaced every 10 years. Seats: $10,000 / 8 = $1,250. Seats are replaced every 8 years. Total Depreciation = $3,250 + $2,500 + $1,250 = $7,000.

Answer 149

Answer is B Explanation: This question requires the determination of how using the sum-of-the-years' digits method of depreciation instead of the double declining balance method of depreciation affects the gain or loss on the sale of a fixed asset with a five-year estimated useful life and no residual value that is sold at the end of the second year of its useful life. A gain or loss on the sale of a fixed asset is computed by comparing the proceeds received from its sale to its carrying amount at the date of sale. To determine the carrying amount of the fixed asset at the sale date, two years of depreciation must be subtracted from its cost. Because the cost of the fixed asset is not given, there are two options: (1) determine depreciation as a percent or fraction of the unknown cost of the fixed asset, 'x,' or (2) plug in any value for the cost of the machine, and simply compute depreciation under both methods based on this amount. We chose the latter approach, assigning to the machine a cost of $300. Now we can compare the carrying amount of the fixed asset at the sale date under both methods. The fixed asset has a greater carrying amount at the date of sale under the sum-of-the-years'-digits method. Therefore, using the sum-of-the-years'-digits method of depreciation instead of the double-declining-balance method of depreciation decreases any gain and increases any loss recognized on the sale of the fixed asset. : ``` Cost of fixed asset $300 Depreciation to date of sale: Yr. 1: 5/15 x ($300 - $0) (100) Yr. 2: 4/15 x ($300 - $0) (80) Carrying amount, date of sale, SYD 120 Cost of fixed asset $300 Depreciation to date of sale: Yr. 1: 2/5 x ($300 - $0) ($120) Yr. 2: 2/5 x ($300 - $120) (72) Carrying amount, date of sale, DDB $108 ```

Answer 150

Answer is D Explanation: Under both the group depreciation and the composite depreciation methods, assets are depreciated on the basis of their average lives. New assets are recorded at cost, and retirements are accounted for by crediting Assets for the original cost of the equipment and debiting Accumulated Depreciation for the original cost less proceeds received; thus, no gain or loss is recognized on disposal. The theoretical justification for this is that some assets will be retired early, while some will be used longer than originally estimated. The same approach is used under both group and composite depreciation--the only difference is that "group depreciation" refers to pools of assets that are similar in nature, whereas "composite" refers to essentially dissimilar assets.

Answer 151

Explanation: The correct answer is (B). Leasehold improvements are improvements made by the lessee to the leased property. The improvements are not separable from the leased property and revert to the lessor at the end of the lease term. Of the items listed, only the general improvements made to the leased premises represent a leasehold improvement. As such, it should be amortized over the lesser of the lease term (i.e., 8 years) or the estimated useful life of the leasehold improvement (i.e., 10 years). The likelihood of lease renewal is too uncertain to warrant apportioning the cost over the sum of the remaining term of the lease and the period covered by the renewal option (i.e., 12 years). Therefore, the accumulated amortization to be reported in the 12/31, year 1 balance sheet with respect to the leasehold improvements is $15,000 ($120,000 / 8 years). Office furniture and equipment are fixed assets and depreciated (not amortized) and the depreciation of $5,000 ($50,000/10) is not included in accumulated amortization.

Answer 152

Explanation: The correct answer is (B). Interest cost incurred during the construction period needs to be capitalized to the asset. The interest to be capitalized is lower of the following: Weighted average accumulated expenditure x Interest rate The actual interest cost incurred. The amount of capitalized interest is based on the weighted average amount of accumulated expenditures. Weighted average amount of accumulated expenditures is: $1,000,000 (12/12) + $1,000,000 (0/12) = $1,000,000 $1,000,000 * 8% = $80,000 The full $80,000 should be capitalized because the total interest on the loan is $240,000 ($3,000,000 * 8%). (A) is incorrect because Interest is capitalized at $80,000, not $0. (C) is incorrect because it calculated on $2,000,000 x 8% = $160,000. (D) is incorrect because it is the actual interest cost incurred

Answer 153

Answer is A Explanation: The condemnation of the forest land represents an example of an involuntary conversion of a nonmonetary asset to a monetary asset. Any gain or loss realized on the property converted be recognized in income even though the enterprise reinvests or is obligated to reinvest the monetary assets in replacement nonmonetary assets. Since any gain or loss realized on the property converted is recognized in income, the replacement nonmonetary asset is recorded at cost. Because the cost of the replacement forest land exceeds the condemnation award which exceeds the condemned forest land's carrying amount, the debit to Forest Land to record the cost of the replacement property exceeds the credit to Forest Land to remove the carrying amount of the condemned property, and thus the carrying amount of Forest Land in the balance sheet increases by the amount of the excess.

Answer 154

c Explanation: Sometimes a structure is constructed on a newly acquired site with an existing building on it. If the existing building is sold and the buyer assumes the costs for its removal, the entire amount of the proceeds from the sale of the building should be deducted from the cost of the land.

Answer 155

Explanation: The correct answer is (C). The cost of assets constructed for the use of the business should include all directly-related costs: cost of direct materials, cost of direct labor, additional overhead incurred, and interest costs incurred during the construction period. If the average accumulated expenditures of an asset exceed the amount of any specific borrowings associated with the asset, the excess should be capitalized at the weighted average of interest rates applicable to other borrowings of the business. There was no specific borrowing mentioned, so the interest rate would simply be the weighted average. (($6,000,000 × 0.08) + ($8,000,000 × 0.09)) / $14,000,000 = 0.0857.

Answer 156

C Explanation: Wasting assets are natural resources, such as minerals and gas and oil deposits that are subject to exhaustion through extraction. Land is deemed to have an indefinite life and is not depreciated.

Answer 157

b Explanation: Both the building modification costs and the production line rearrangement costs should be capitalized because they have resulted in an overall reduction of production costs, the benefits of which extend beyond the current period.

Answer 158

d Explanation: Under IFRS, components with a different estimated useful life must be depreciated separately. The equipment would have $1,800 depreciation ($18,000/10 years) and the component would have $750 depreciation ($3,000/4 years), for total depreciation expense of $2,550 annually.

Answer 159

a Explanation: An impairment loss shall be recognized only if the carrying amount of a long-lived asset, or asset group, is not recoverable and exceeds its fair value. The carrying amount (book value) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The amount of an impairment loss is the difference between an asset’s book and fair value. The $120,000 carrying value of the company’s longlived does not exceed the $130,000 undiscounted future cash flows expected to result from the asset so there is no impairment loss.

Answer 160

c Explanation: The capitalization of interest cost incurred during the construction of most assets having an extended construction period is required. Capitalized interest is included in the cost of the asset in the same manner as any other construction cost; it is then written off over the life of the asset as part of the periodic depreciation charges.

Answer 161

b Explanation: A fixed asset should never be depreciated below its salvage value under any method of depreciation. The depreciable base of a plant asset is its acquisition cost less any estimated salvage value. The depreciable base is allocated to expense over the life of the asset in a systematic and rational manner. At the end of its estimated useful life, the accumulated depreciation would equal the depreciable base of the asset.

Answer 162

c Explanation: The expenditure to install an improved electrical system represents a betterment (or improvement); that is, the substitution of a better asset for an existing asset. The expenditure increases the service potential of the electrical system. Because this increased service potential is a benefit that will be enjoyed throughout the life of the electrical system, the expenditure should be capitalized and depreciated over the life of the system. Revenue expenditures, on the other hand, are recurring expenditures that do not add to the service potential of a plant asset; they serve merely to maintain a given level of services. Revenue expenditures should be expensed when incurred.

Answer 163

d Explanation: In an exchange with commercial substance, the transaction is recorded at the fair value of the asset received or the asset given up, whichever is more clearly evident, and a gain or loss is recognized on the exchange. The fair value of the equipment received is given in the scenario, therefore, it is more clearly evident than the fair value of the equipment given up. The journal entry to be recorded in Vey's books is: ``` Cash 30,000 New Equipment 120,000 Accumulated Depreciation 40,000 Old Equipment 100,000 Gain on Exchange 90,000 ```

Answer 164

c Explanation: The carrying amount of the equipment at the date of sale is computed by subtracting the accumulated depreciation on the equipment from the cost of the equipment. Under the straight-line method, the accumulated deprecation on the equipment at the date of sale is equal to 40% of the original cost of the equipment [i.e., (100% - 20%) x 1/10 x 5]. Thus, under the straight-line method, the carrying amount of the equipment at the date of sale is 60% (i.e., 100% - 40%) of the original cost of the equipment. Since the equipment was sold for only 50% of its original cost, use of the straight-line method would have resulted in a loss being recognized on the sale equal to 10% (i.e., 60% - 50%) of the original cost of the equipment.

Answer 165

b Explanation: The amount of interest that may be capitalized is based on the weighted-average amount of accumulated expenditures. The weighted-average amount of accumulated expenditures applies the avoidable interest concept. This concept limits the amount of interest to be capitalized to the lower of the actual interest cost incurred during the period or avoidable interest. Avoidable interest is the amount of interest cost incurred during the period that theoretically could have been avoided if expenditures for the asset had not been made.

Answer 166

Explanation: The correct answer is (A). The question is asking for which statement is false. Donated assets should be recorded at fair value along with any incidental costs incurred and not at Book Value.

Answer 167

D Explanation: Criteria to determine when long-lived assets are held for sale include requirements that: (a) the asset is available for prompt sale as is, subject only to customary and usual sales terms for such assets; and (b) the asset sale is probable and generally to be completed within 12 months. The asset is reclassified to a current asset, and is measured at the lower of its book or fair value less cost to sell and its depreciation (or amortization) discontinues.

Answer 168

Explanation: The machine had a depreciable basis of $80,000 ($85,000 cost - $5,000 salvage value) and was depreciated at a rate of $8,000 per year ($80,000 / 10-year useful life). At the time of sale, Victor depreciated the machine for 5.5 years and its carrying amount was equal to $41,000, i.e., [$85,000 - (5.5 × $8,000)]. Thus, a $4,000 gain ($45,000 - $41,000) should be recognized.

Answer 169

Explanation: Assets are to be recorded at their acquisition cost, which is defined as the cash price or its equivalent. The acquisition cost of the office building and the land together is $1,000,000; the total of the $750,000 cash and $250,000 mortgage. The property is assessed with 60% allocated to the building. Cart would record the building at $600,000 ($1,000,000 x 60%) and the land at the remaining $400,000.

Answer 170

Explanation: Under the double-declining-balance method of depreciation, the annual depreciation charge is computed by multiplying the carrying amount of the plant asset (i.e., cost minus accumulated depreciation) by a rate equal to 200% of the straight-line rate (e.g., 200% x 25% = 50%). Salvage value is not used in the depreciation formula, but the plant asset cannot be depreciated below its salvage value. First year expense [50% x ($80,000 - $0)] = $40,000 Second year expense [50% x ($80,000 - $40,000)] = $20,000 Third year expense [50% x ($80,000 - $60,000)] = $10,000

Answer 171

D Explanation: Assets are to be recorded at their acquisition cost. Acquisition cost is defined as the cash price, or equivalent, plus all costs reasonably necessary to bring it to the location and to make it ready for its intended use. Both the $12,000 rearrangement cost and $3,000 removal cost were necessary to bring the asset to its location and make it ready for its intended use. Talton would capitalized $200,000 ($185,000 + $12,000 + $4,000 = $200,000).

Answer 172

Explanation: The correct answer is (B). Calculate Depreciation: Depreciation under straight-line method each year = Cost of the asset / Useful life = $90,000 / 10 years = $9,000 per year. Calculate Accumulated Depreciation& Carrying Value So the total accumulated depreciation for 9 ½ years (January 2, year 1 to June 30, year 10) @ $9,000 each year = $9,000 x 9.5 years = $85,500. The carrying value of the machine on July 1, year 10 = $4,500 [i.e. $90,000 (historical cost) - $85,500 (accumulated depreciation)]. Calculate Gain/Loss on Sale: The amount of gain on disposal of a machine is equal to the selling price of machine less the carrying value of the machine on the date of sale. $4,500 Carrying value - Selling price of $5,000 = $500 Gain.

Answer 173

Explanation: The correct answer is (B). An Asset Retirement Obligation (ARO) involves the retirement of a tangible, long-lived asset that depends on a future event beyond the control of an obligated party. An ARO is an essential part of producing fair and accurate financial statements so those viewing them can have a better idea of a company's obligations, as well as its overall value. An ARO liability must be recorded when the asset is placed into service. An accretion expense, which is a periodic expense recognized as the present value of a balance sheet liability increases, will be recognized at the end of each period, gradually increasing the ARO to its full $20,000,000 million amount when due in 10 years. The discounted value of the liability is $9,000,000 million using the company's credit-adjusted, risk-free rate. The expense will be $0.

Answer 174

A Explanation: A significant decrease (not increase) in the market price of a long-lived asset (asset group) would be an example of an event or change in circumstances indicating that the carrying amount of the asset or asset group may not be recoverable.

Answer 175

Explanation: The correct answer is (B) The change in the liability is recognized in profit or loss. A decommissioning liability is the estimated cost to put the property into a usable or saleable condition when it is no longer going to be used for its original purpose. The liability is reviewed and adjusted to reflect changes in the estimated cost with increases or decreases recognized as adjustments to the carrying value of the property. When the property is fully depreciated, any adjustment to the decommissioning liability is recognized as a profit or loss since it is too late to recognize it as an adjustment to depreciation or amortization. (A), (C) and (D) are incorrect as per the above explanation.

Answer 176

Explanation: The correct answer is (D) US GAAP permits only the following techniques for measuring the fair value of an asset or liability: Market approach Income approach Cost approach However, net realizable value approach is not considered to be a valid technique for fair value measurement and is not appropriate.

Answer 177

B Explanation: Building carrying amount, 12/31 $250,000 Removal and clean-up costs 12,000 Amount to determine gain or loss on involuntary conversion $262,000

Answer 178

A Explanation: The damaged portion of the building was refurbished with upgraded materials which indicates that a 'betterment' is involved. There are benefits to future periods as a result of the refurbishing expenditures; thus, they should be capitalized. The cost and related accumulated depreciation of the damaged portion of the building are identifiable so they should be removed from the books (with a resulting debit to 'loss' for the difference) because this portion of the building has been replaced to a certain extent and upgraded.

Answer 179

Explanation: If several dissimilar assets are purchased for a lump sum, the total amount paid should be allocated to each individual asset on the basis of its relative fair value. The allocation formula: Asset Y = Total cost of assets × FV of Y / Total FV. In this case: $200,000 × $150,000 ÷ $250,000 = $120,000.

Answer 180

Explanation: The legal fees for contracts to purchase land are part of the cost of the land. The cost of demolishing the old building (net of any scrap proceeds) is a reasonable and necessary cost to get the land ready for its intended use. Purchase price of land $ 60,000 Legal fees for contracts to purchase land 2,000 Demolition of old building on site 5,000 Sale of scrap from old building (3,000) Cost of land $ 64,000 Architect's fees $ 8,000 Construction cost of new building 350,000 Cost of building $358,000

Answer 181

Explanation: The amount of interest cost to be capitalized is the interest cost incurred during the acquisition period that could have been avoided if expenditures for the asset had not been made. If a specific interest rate is associated with the asset, that rate should be used to the extent that the average accumulated expenditures on the asset do not exceed the amount borrowed at the specific rate. ``` Average expenditures during year $120,000 × 12/12 $120,000 150,000 × 4/12 50,000 Average expenditures 170,000 Specific borrowing rate 10% Capitalized interest expense $ 17,000 ```

Answer 182

Explanation: The correct answer is (C). Interest cost incurred during the construction period needs to be capitalized to the asset. The interest to be capitalized is lower of the following: * Weighted-average accumulated expenditure x Interest rate. * The actual interest cost incurred. The weighted-average accumulated expenditures for the purpose of capitalization of borrowing costs can be calculated as under: Date Particulars Amount Capitalization Period Weighted-average accumulated expenditures April 1 Payment to architect for building plans $30,000 9/9 $30,000 July 1 Progress payment to contractor $60,000 6/9 $40,000 October 1 Progress payment to contractor $150,000 3/9 $50,000 For the purpose of capitalizing interest, what is Fountain's weighted-average accumulated expenditures for the year ended December 31, year 1?

Answer 183

Explanation: A long-lived asset shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Impairment is the condition that exists when the carrying amount of a long-lived asset, or asset group, exceeds its fair value. An impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount (book value) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The amount of an impairment loss is the difference between an asset's book and fair value. The new book value is used as a basis for depreciation. Since the carrying amount of $170,000 exceeds the undiscounted cash flows of $150,000 an impairment loss must be recognized. The $35,000 impairment loss is the difference between the book value of $170,000 and the fair value of $135,000.

Answer 184

Explanation: Units-of-output depreciation takes into account salvage value and the number of units produced by the asset. (Cost - salvage) / expected output x current output: $864,000 - $72,000 = $792,000 $792,000 / 1,800,000 = $0.44 $0.44 x 300,000 = $132,000

Answer 185

B Explanation: If an outlay will provide a service benefit beyond the current period, it is a capital expenditure and is recorded as an asset.

Answer 186

Explanation: The correct answer is (B). In the case of a basket purchase, the purchase price is allocated based on the appraised fair value of individual items. The cost of building reported will be calculated as a proportion of total fair value at 60% ($150,000/$250,000). Proportion of the purchase price allocated to building: $120,000 = 60% x $200,000. Summary Fair Value ($) Proportion of the FV paid Cost of Acquisition ($) Inventory 50,000 20% 40,000 Land 50,000 20% 40,000 Building 150,000 60% 120,000 Total 250,000 100% 200,000 (A) is incorrect because it is calculated based on the proportionate share of the carrying value instead of using fair value to determine the proportionate share, $100,000 (50% x 200,000). Proportionate share using carrying value: ($110,000/$220,000 = 50%). (C) is incorrect because it is the actual fair value of the building. Quick should report at proportionate share derived from the fair values of the assets purchased. (D) is incorrect because it is the actual cost paid by the quick to acquire inventory, land, and building.

Answer 187

Explanation: The correct answer is (A). An exchange of non-monetary assets that is not expected to change Isle Co’s cash flows significantly lacks commercial substance. Therefore, accounting for a non-monetary exchange is based on the carrying amount of the assets given up. Also, there is no boot, so no gain is recognized. The computer received by Isle Co is recorded at the carrying amount of the copy machine of $3,000 ($5,000 - $2,000) and no gain or loss is recognized in the income statement.

Answer 188

Explanation: Two journal entries are required when an asset accounted for under the revaluation model is sold. First, transfer the related revaluation surplus of $9,000 to retained earnings. Second, record the sale and gain/ loss as usual. Since the machine’s net book value is $80,000, and cash of $150,000 was received, the gain on sale would be $70,000.

Answer 189

Explanation: The acquisition cost of the machine includes all of the costs incurred to get it ready for its intended use. Thus, the costs incurred in shipping, installing and testing the machine are capitalized and added to its purchase price, resulting in an acquisition cost for the machine of $138,000 ($126,000 + $3,000 + $4,000 + $5,000).

Answer 190

Explanation: All of the expenditures related to the purchase of the new machine ($75,000 + $14,000) and the rearrangement of the assembly line to install this machine ($40,000 + $18,000) should be capitalized. The costs associated with the rearrangement of the assembly line are capitalized because the rearrangement has resulted in significantly more efficient production, the benefits of which extend beyond the current period.

Answer 191

Explanation: The collating and stapling attachment is an addition to the printing press and so its cost (including installation cost) should be capitalized. The overhaul resulted in a significant increase in the productivity of the printing press; therefore, its cost (replacement parts, labor and overhead) should also be capitalized. The total cost capitalized is $160,000 (i.e., $84,000 + $36,000 + $26,000 + $14,000).

Answer 192

``` Explanation: Purchase price of mine $2,640,000 Development costs to prepare mine for production 360,000 Estimated restoration costs 180,000 Estimated residual value (300,000) Depletion base of mine $2,880,000 Estimated tons of removable ore / 1,200,000 Depletion charge per ton $ 2.40 Tons sold in the year x 60,000 Depletion expense for the year $ 144,000 ```

Answer 193

Explanation: Under neither the straight-line method or the double-declining balance method of depreciation would the accumulated depreciation equal the original cost at the end of the asset's estimated useful life. The straight-line method depreciates the cost less salvage value evenly over the estimated useful life of the asset. The double-declining balance method uses a rate of depreciation twice that of the straight-line rate, but the asset cannot be depreciated below the salvage value.

Answer 194

Explanation: In a troubled debt restructuring, the creditor, Mene, records the assets and/or equity securities (real estate transferred) at fair value.

Answer 195

A Explanation: To determine whether Sun’s performance obligation is to provide the specified goods or services itself (i.e. the entity is a principal) or to arrange for another party to provide those goods or services (i.e. the entity is an agent), the following is considered. Sun has promised to provide the customer with specialized equipment; however it has subcontracted the manufacturing of the equipment to a supplier. In determining whether Sun obtains control of the equipment before control transfers to the customer and whether Sun is a principal, the entity considers the below: Sun is primarily responsible for fulfilling the contract. Although Sun subcontracted the manufacturing, it is ultimately responsible for ensuring that the equipment meets the specifications for which the customer has contracted. Sun has inventory risk because of its responsibility for corrections to the equipment resulting from errors in specifications, even though Ralph has inventory risk during production and before shipment. Sun has discretion in establishing the selling price with the customer, and the profit earned by Sun is an amount that is equal to the difference between the selling price negotiated with the customer and the amount to be paid to Ralph. Sun’s consideration is not in the form of a commission. Sun would conclude that its promise is to provide the equipment to the customer. On the basis of the above indicators Sun controls the equipment before it is transferred to the customer. Thus, Sun is a principal in the transaction and recognizes revenue in the gross amount of consideration to which it is entitled from the customer in exchange for the equipment

Answer 196

Explanation: Under the relative sales value method, the total cost of the individual units purchased at a single lump-sum price should be allocated to the various units on the basis of their relative sales value. The total cost includes the purchase price of $1,200,000 plus the additional costs of $300,000 to prepare the land for sale. Lot Class Number of lots Sales price per lot Total sales for class A 100 $24,000 $2,400,000 B 100 16,000 1,600,000 C 200 10,000 2,000,000 Total $6,000,000Class A lots ($2,400,000) / Total sales value ($6,000,000) = relative Class A sales value (40%). The total cost ($1,500,000) x the Class A lots relative value percentage (40%) = costs allocated to Class A lots ($600,000).

Answer 197

Explanation: The amount of cost that should be used to determine the gain on condemnation is $581,000 (i.e., the property''s carrying amount of $575,000 plus the $2,500 appraisal fee plus the $3,500 attorney fees for the closing with the state). The attorney fees to review the contract and the title insurance are costs of acquiring the replacement property.

Answer 198

Explanation: The correct answer is (C). Non-monetary exchanges with commercial substance, use fair value to measure the transaction and treat as if two unrelated events have occurred. The realized gains / losses are recognized immediately. Bayberry Co. should recognize gain on the exchange at $20,000. Steps Exchange with Commercial Substance FV is determinable Calculations Amount 1 Calculate realized gain or loss FV of asset given up - CV of asset given up. = $100,000 - $80,000 $20,000 2 Recognize the realized gain or loss Recognize all the realized gain / loss (Irrespective of whether no boot involved, boot paid / received) $20,000 3 Record the new asset FV of the asset given up + cash paid (if any) - cash received (if any) = $100,000 $100,000 The Journal entry is as follows: Equipment (Driftwood) $100,000 Accumulated Depreciation $120,000 Equipment (Bayberry) $200,000 Gain on Exchange $20,000

Answer 199

Explanation: The correct answer is (A). Testing for impairment occurs when events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset groups may not be recoverable. The impairment test is a one-step process: An indefinite-lived intangible asset is impaired when the fair value is less than its carrying amount. Goodwill is tested for impairment at least annually, using a one-step process, and the goodwill impairment test may be performed any time during the fiscal year, provided the test is performed at the same time every year. To identify potential impairment, we compare the reporting unit’s fair value with its carrying amount, including goodwill i.e. performing a recoverability test on the carrying amount of the division's assets If the fair value exceeds its carrying amount, the reporting unit’s goodwill is considered not impaired. If the carrying amount exceeds its fair value, then the Impairment Loss of the reporting unit recognized is calculated as Carrying Value – Fair Value.

Answer 200

Explanation: The correct answer is (C) Under the straight-line method of depreciation, the asset is supposed to be depreciated equally over its useful life. The formula for calculating deprecation is as under: Depreciation every year = (Cost of asset – salvage value)/Estimated useful life When the useful life of the equipment was decided to be 7 years, the depreciation every year was = (70,000-0)/7 = $10,000 per year. However, any revision in the useful life of the asset is to be accounted for prospectively. Hence, the depreciation expense is to be recalculated on the revision of useful life. Depreciation expense = (Cost – salvage value – accumulated depreciation) / Revised remaining useful life. Hence, revised depreciation expense = (70,000 – 0 – 20,000) / (5-2) = $16,667 per year. Particulars $ Cost of equipment $70,000 Less: Depreciation per year (when useful life was 7 years) First-year depreciation ($10,000) Second-year depreciation ($10,000) Written Down Value of asset at the beginning of 3rd year $50,000 Less: Depreciation per year (when useful life was revised to 5 years) Third-year depreciation ($16,667) Fourth-year depreciation ($16,666) Fifth-year depreciation ($16,666) Written Down Value of asset at the beginning of 5th year $0

Answer 201

Explanation: Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value. The amount of an impairment loss is the difference between an asset’s book and fair value. The new book value is depreciated over the remaining useful life. Subsequent reversal of a previously recognized impairment loss is prohibited. This is classified as a change in accounting estimate and is reported in the period of change. There are no pro forma reports for prior periods, and amounts reported in financial statements of prior periods are not restated. Randall should report $20,000 ($250,000 cost - $100,000 accumulated depreciation - $30,000 impairment loss = $120,000 remaining basis depreciated over 6 years of remaining life) as depreciation expense in its income statement for the next year.

Answer 202

Explanation: Natural resources, such as mineral, gas, and oil deposits, and standing timber, are subject to exhaustion through extraction and their costs must be allocated to inventory by the application of depletion charges.

Answer 203

Explanation: Assets are to be recorded at their acquisition cost. Acquisition cost is the cash price, or its equivalent, plus all costs reasonably necessary to bring it to the location and to make it ready for its intended use. Depletion refers to periodic allocation of acquisition costs of natural resources. A per-unit depletion rate is computed by dividing the acquisition cost of the natural resource (i.e., purchase price, and other development costs), less any estimated residual value, by the estimated number of units of the resource available for extraction. Purchase price of coal mine $2,000,000 Plus: Mine preparation costs 500,000 Mine total acquisition cost $2,500,000 Less: Value at end of useful life (100,000) Net depletable amount $2,400,000 Divided by: Estimated number of units available for extraction 750,000 Depletion amount per ton $ 3.20

Answer 204

Explanation: Assets qualifying for interest capitalization include assets constructed or produced as discrete projects for sale or lease; for example, ships or real estate developments.

Answer 205

B Explanation: The amount of interest cost to be capitalized is that portion of interest cost incurred during the asset's acquisition periods that theoretically could have been avoided if expenditures for the asset had not been made. In this question, the amount of interest cost to be capitalized in the current year is determined by applying the interest rate on the specific new borrowing to the average accumulated expenditures for the asset in the previous year and current year.

Answer 206

Explanation: When several dissimilar assets are purchased for a lump sum, the amount paid should be allocated to each asset on the basis of its relative fair value. Land cost = (Total cost of assets) × (FMV of land) / Total FMV. Land = $540,000 × $200,000 / $500,000 = $216,000.

Answer 207

Explanation: The correct answer is (C). The company should record its acquisition of the land in its financial statements at a value of $1,020,000. All costs necessary to acquire an asset and prepare it for its intended use may be included in the total cost of the asset. The Purchase price of $1,000,000 + Real estate taxes in arrears or $15,000 + Attorney fees of $5,000 were all necessary expenditures to buy the land. Finance costs, such as debt issuance costs, are generally not capitalizable into the purchase price of an asset

Answer 208

C Explanation: Incidental costs incurred in the acquisition of replacement property are capitalized as costs of acquiring the replacement property. The incidental costs do not affect the gain or loss recognized due to the involuntary conversion.

Answer 209

Explanation: An asset retirement obligations (ARO) must be recorded at fair value in the accounting period in which it occurs and in which its amount can be reasonably measured. If an active market for the ARO doesn’t exist to provide fair value, the expected present value technique using discounted cash flows is the best way to determine the fair value of the asset. AROs incur depreciation and accretion expenses each year. Accretion expense is offset with an increase to the liability account, and, at the end of the asset’s life, the liability account will have a balance equal to the amount needed to settle the retirement obligation. So the amount reported for the asset retirement obligation in this year’s balance sheet would be the starting amount of $257,000 from last year’s financial statements less $87,000 paid towards settlement of previously recorded AROs plus the $68,000 cash flow estimate for newly acquired AROs plus the $26,000 accretion expense. $257,000 - $87,000 + $68,000 + $ 26,000 = $264,000 .

Answer 210

C Explanation: Depreciation is the process of allocating the depreciable cost of fixed assets over their estimated useful lives in a systematic and rational manner. This process matches the depreciable cost of the asset with revenues generated from its use.

Answer 211

B Explanation: Recoverability is associated with an impairment loss. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount (book value) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment shall be based on the carrying amount of the asset at the date it is tested for recoverability. A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.

Answer 212

B Explanation: A gain or loss on the involuntary conversion (e.g., casualty, condemnation, theft) of a nonmonetary asset should be recognized in income even if the proceeds received as a result of the involuntary conversion are reinvested in a replacement nonmonetary asset. The normal maintenance performed on the van (i.e., the various repairs) should not be capitalized. Normal maintenance does not enhance the service potential of the van, it serves only to maintain a given level of services from the van. On the other hand, the cost of the new engine should be capitalized because the expenditure for the new engine is nonrecurring in nature, enhances the service potential of the van, and is expected to yield benefits over a number of accounting periods. Insurance proceeds $3,500 Carrying amount of van at date of conversion: Carrying amount, 7/1 $2,500 Cost of new engine installed prior to involuntary conversion 700 3,200 Gain recognized on involuntary conversion $ 300

Answer 213

Explanation: The cost of assets constructed for the use of the business should include all directly related costs, such as direct materials, direct labor, and additional overhead incurred. Interest costs incurred during the construction period must be capitalized. The amount of interest cost to be capitalized is the interest cost incurred during the acquisition period that could have been avoided if expenditures for the asset had not been made. If a specific interest rate is associated with the asset, that rate should be used to the extent that the average accumulated expenditures on the asset do not exceed the amount borrowed at the specific rate. The interest rate is applied to the average amount of accumulated expenditures for the asset during the period. The average accumulated expenditure is computed as [($0 + $2,000,000) /2] = $1,000,000. Then $1,000,000 × 8% interest = $80,000 capitalized interest cost for the current year. The total interest cost capitalized in a period may not exceed the total interest cost incurred during that period. With an 8% three-year construction loan of $3,000,000 Sea incurs $80,000 of interest costs each year.

Answer 214

A Explanation: The units-of-production depreciation method allocates the cost of plant assets on the basis of units produced (i.e., activity). Depreciation for a period is computed by multiplying the number of units produced during the period by the amount of depreciation per unit. The amount of depreciation per unit is determined by dividing the depreciable base of the plant asset (i.e., cost minus estimated salvage value) by the estimated number of total units to be produced. Thus, an estimate of total units to be produced must be available to use this method.

Answer 215

A Explanation: None of the interest is expensed; it is all capitalized. Assets qualifying for interest capitalization include assets constructed or produced for self-use on a repetitive basis, assets acquired for self-use through arrangements requiring down payments or progress payments, and assets constructed or produced as discrete projects for sale or lease (e.g., ships or real estate developments).

Answer 216

B Explanation: Obligations for dismantlement, restoration, and abandonment costs are accounted for as asset retirement obligations. Upon initial recognition of a liability for an asset retirement obligation, an entity capitalizes an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability. An entity subsequently allocates that asset retirement cost to expense using a systematic and rational method over its useful life. Application of a systematic and rational allocation does not preclude an entity from capitalizing an amount of asset retirement cost and allocating an equal amount to expense in the same accounting period. The company increased the carrying amount of the depot the $150,000 cost to dismantle and amortized it over the 10 years. In this case, only the extra $5,000 ($155,000 actual cost - $150,000 estimate) would be expensed in year 10. Editor's Note: The AICPA provided item (b) as the unofficial solution. The editors believe the company could have, and perhaps should have, chosen to expense the $150,000 evenly over 10 years in what is termed an accretion expense. If it had done so, the expense in year 10 would have been $20,000 (the $15,000 original allocation plus the additional $5,000 in actual cost). Given that $20,000 was not an answer option, one must assume that the company did not do so. Candidates need to prepare to answer questions with the best solution choice possible.

Answer 217

B Explanation: On December 31, year 3 Turtle reports $32,000 + $6,000 = $38,000 as accumulated depreciation. Double-declining-balance is computed using twice the straight-line rate, which in this case is 40% (1/5 = 0.20; 0.20 x 2 = .40). In year 3, depreciation is computed by dividing the remaining life of 3 years = $6,000. Book value beginning of year Rate Depreciation Expense Accumulated Depreciation Book Value End of Year Year 1 $50,000 40% $20,000 $20,000 $30,000 Year 2 30,000 40% 12,000 32,000 18,000

Answer 218

C Explanation: Assets are to be recorded at their acquisition cost. Acquisition cost is defined as the cash price, or equivalent, plus all other costs reasonably necessary to make it ready for it's intended use. The land is recorded at the $135,000 cash paid for the land plus the additional costs: the $2,500 for county assessment for sewer lines, the $625 for title search fees, and the $16,000 for removal of old building less salvage value ($21,000 - $5,000) = $154,125. The $21,000 excavation cost for construction of a basement is part of the cost of the new building, not the land.

Answer 219

Explanation: The correct answer is (C). The sale of the warehouse by the company is in the ordinary course of business and its proceeds are used to acquire a new warehouse. Therefore, the gain from the proceeds over the carrying value of the warehouse will be reported in the income from continuing operations under non-operating Items. Option (A) is incorrect because the gain from the sale of the warehouse cannot be used to reduce the cost basis of the new warehouse. Option (B) and (D) is incorrect because the sale was part of continuing operation, not from discontinued operations.

Answer 220

A Explanation: The building constructed on the leased property in lieu of rent represents a leasehold improvement because the building will revert to the lessor at the end of the lease term. The $840,000 cost of the building is allocated equally over the remaining 20-year period of the lease, resulting in annual amortization of $42,000. Thus, the building's carrying amount at the end of the building's first year is $798,000 ($840,000 cost minus $42,000 amortization to date).

Answer 221

B Explanation: Under the composite or group method of depreciation, no gain or loss is recognized upon the retirement of a plant asset. This practice is justified because some assets will be retired before the average service life and others after the average service life. Accumulated depreciation is debited for the difference between original cost and the cash received; no gain or loss is recorded on the disposition. The net carrying amount of these composite asset accounts is decreased by the cash proceeds received of $3,000 (cost removed of $18,000 minus accumulated depreciation removed of $15,000). Cash 3,000 Accumulated Depreciation 15,000 Truck 18,000To record sale of truck

Answer 222

C ``` Explanation: Asset Cost $20,000 Year 1 [(4/10)($20,000 - 2,000)] $7,200 Year 2 [(3/10)($20,000 - 2,000)] 5,400 Year 3 [(2/10)($20,000 - 2,000)] 3,600 (16,200) Carrying amount 12/31, year 3 $ 3,800 ```

Answer 223

A Explanation: Under IFRS, revaluation is a permitted accounting policy if fair value can be reliably measured (i.e., the revaluation model).

Answer 224

C Explanation: The cost of assets constructed for the use of the business should include all directly related costs; cost of direct materials, cost of direct labor, additional overhead incurred, and interest costs incurred during the construction period. If the average accumulated expenditures of an asset exceed the amount of any specific borrowings associated with the asset, the excess should be capitalized at the weighted average of interest rates applicable to other borrowings of the business. ``` Average expenditure during year $200,000 x 12/12 $ 200,000 600,000 x 8/12 400,000 300,000 x 1/12 25,000 Average expenditures $ 625,000 Specific borrowings 500,000 x 12% $ 60,000 Excess expenditures 125,000 x 10% 12,500 Total capitalized interest $ 72,500 ```

Answer 225

B Explanation: Goodwill is recognized and recorded at an amount equal to the excess of the cost of the enterprise acquired over the fair value of the identifiable net assets (INA). Purchase price of 30% of Sled Co''s O/S common stock $200,000 Fair value of Sled's INA $600,000 Times: Percentage acquired by Birk x 30% Less: Sled's INA acquired by Birk (180,000) Goodwill $ 20,000

Answer 226

Explanation: The correct answer is (D). On 12/31 of the previous year, the required balance of the Market Adjustment--AFS account was a $20,000 credit ($100,000 - $80,000). On 12/31 of the current year, the required balance of the Market Adjustment--AFS account is a $15,000 credit ($100,000 - $85,000). Therefore, in the current year, the required balance of the Market Adjustment--AFS account decreased by $5,000. Changes in the Market Adjustment account related to the available-for-sale category are included in other comprehensive income. Lee does not recognize any gain or loss from a change in the Market Adjustment--AFS account on its income statement.

Answer 227

Explanation: The correct answer is (D). Impairment for Available-for-Sale Securities is calculated as the difference between Amortized Cost (i.e. Carrying Value) and the Fair Value of the security. However, Credit Losses on the Income Statement are limited to Amortized Cost – Present Value (calculated the same way as a Held-to-Maturity investment) because if the unrealized loss at any given time is more than the expected credit loss till maturity, the Investor can minimize the loss by holding the security. Excess losses are charged to OCI. Carrying Value of the Bond on January 1, Year 1: ⇒ $1,000 x Present Value of $1 at 5% for 14 periods + $40 x Present Value of Ordinary Annuity $1 at 5% for 14 periods ⇒ $1,000 x 0.505 + $40 x 9.8986 ⇒ $505 + $395.94 ⇒ $900.94 Carrying Value of the Bond on January 1, Year 5 (after 8 Periods): ``` Period Interest Income (5%) Interest Received (4%) Interest Received (4%) Carrying Value 0 $900.94 1 $45.05 40 $5.05 $905.99 2 $45.30 40 $5.30 $911.29 3 $45.56 40 $5.56 $916.86 4 $45.84 40 $5.84 $922.70 5 $46.13 40 $6.13 $928.83 6 $46.44 40 $6.44 $935.27 7 $46.76 40 $6.76 $942.04 8 $47.10 40 $7.10 $949.14 In the given case, Present value of the bond on January 1, Year 5 (after 8 Periods): ⇒ $1,000 x Present Value of $1 at 5% for 6 years ⇒ 1,000 x 0.746 ⇒ $746 ``` Expected Credit Loss = Carrying Value – Fair Value = $949.14 - $650 = $299.14 Expected Credit loss = $949.14 - $746 = $203.14. Loss Charged to Income Statement = $299.14 - $203.14 = $203.14 Loss Charged to OCI = $96

Answer 228

A Explanation: Dividend income is not recognized under the equity method of accounting for investments in common stock. Under this method, the investor’s share of dividends declared by the investee reduce the carrying amount of the investment. Pal recognized dividend income from the investment in the current year. Hence it must account for the investment by the fair method. Under this method, investment income reported for the year is usually the investor’s share of dividends declared by the investee during the year. The exception is where the investor’s share of dividends declared by the investee exceeds the investor’s share of investee earnings subsequent to the date of the investment. In this case, the excess amount represents a liquidating dividend that is recorded as a reduction of the carrying amount of the investment and not as dividend income. Since only part of the dividends that Pal received in the current year was recorded as dividend income, only a portion of the current year dividends represent earnings subsequent to the date of Pal’s investment (i.e., the balance of the current year dividends represent liquidating dividends). Options (B), (C) and (D) are incorrect as per above explanation.

Answer 229

A Explanation: If there is a change in the classification of a marketable debt security between trading and available-for-sale, the security is transferred between the corresponding portfolios at the fair value at the date of transfer. If fair value is less than cost, the fair value becomes the new basis, and the difference is accounted for as if it were a realized loss and included in the determination of net income.

Answer 230

A Explanation: When calculating an investor's income share, deduct the cumulative preferred dividends from net income first.. Moss' share of preferred dividends = 20% x 10% x $100,000 = $2,000 Earnings available to common shareholders = $60,000 - 10% x $100,000 = $50,000 Moss' share of common earnings = 40% x $50,000 = $20,000 Moss' total equity in Dubro earnings = $2,000 + $20,000 = $22,000 FASB ASC 323-10-35-16 states: “If an investee has outstanding cumulative preferred stock, an investor shall compute its share of earnings (losses) after deducting the investee's preferred dividends, whether or not such dividends are declared.” Option (B), (C) and (D) are incorrect as per above explanation.

Answer 231

Explanation: The correct answer is (A). Investee has a significant technological or transactional dependency on the investor. Investor has representation on the board of directors of the investee company. Investor is a major customer or supplier of the investee. Material inter-company transactions between the investor and investee company. Investor company’s participation in the operating or financial policy-making decisions of the investee company. Interchange of managerial personnel between the investor and investee. Investor recommendation for the investee to hire a specific executive does not imply exercising significant influence.

Answer 232

Explanation: The correct answer is (B). Trading securities are the debt securities bought and held principally for the purpose of selling them in the near term. Trading debt securities are carried at market value. Rim Co. investments in bonds will be classified as trading debt securities and reported on the balance sheet at $105,000. (A) is incorrect because investment in equity securities should be classified as “Fair value through net income” if the market value of securities is readily determinable. There is no longer a trading or available for sale classification for equity securities. (C) is incorrect because it uses cost instead of market value to report the debt securities purchased. (D) is incorrect because it includes the market value of both debt and equity securities.

Answer 233

Explanation: Cobb owns only a 2% interest in Roe. Thus, Cobb does not have the ability to exercise significant influence over Roe by virtue of the investment, and the investment should be accounted for under the cost method. Therefore, Cobb should report the cash dividend received from Roe as dividend income. No income is recognized from the receipt of the stock dividend from Roe, since Cobb's proportionate interest in Roe has not changed and Roe's underlying assets and liabilities have also not changed. Shares of Roe purchased 2/12 10,000 Add: Shares of Roe received from stock dividend, 3/31 2,000 Shares of Roe held, 9/15 12,000 Times: Cash dividend per share x 1.50 Dividend income, year ended 10/31 $18,000

Answer 234

B Explanation: End Corp. has a holding of 25% in Turf Co. and uses the equity method to report its investment in Turf Co. Initial purchase amount $ 550,000 Share of income ($65,000 × 25%) 16,250 Share of dividends ($30,000 × 25%) __(7,500) Escrow liability end of year $ 558,750 Option (A) is incorrect because it is the cost of the initial investment, which should be adjusted for proportionate share in net income which would increase the investment account and dividends received at proportionate share of 25% which would reduce the investment account. Option (C) is incorrect because it should also adjust for dividends received at 25% proportionate share. Option (D) is incorrect because dividends received is added to the investment; instead of deducting it.

Answer 235

xplanation: If fair value exceeds the net assets' carrying value, the excess is allocated among most undervalued assets. Then consideration is given to the existence of goodwill. As the related undervalued asset is depreciated or sold, the investment account is adjusted. Straw's fair value is $900,000 + $100,000 = $1,000,000. Puff's investment in Straw is 40% x $1,000,000 = $400,000, the same as the purchase price. Puff offsets its share of Straw's income with the depreciation of its share of the difference in the carrying and fair value of equipment. [$150,000 - ($100,000 / 5 years)] x 40% = $52,000.

Answer 236

B Explanation: The future value factor is equal to 1 divided by the present value factor. An investment in two years would accumulate to the principal multiplied by the future value factor. In this case the $10,000 x 1/0.826 = $12,107. Editors Note: This question appears exactly as it was received from the AICPA. The AICPA provided $12,107 (derived as explained) as the correct answer. The question stated that Lean Co. made an investment on $10,000 on Jan 1 of the current year and provided no further details. Also provided is a three year table for the present value of $1.00 discounted at a 10% interest rate. In lieu of other information, you have to assume the prevailing rate of interest is 10% and you are to use the table provided.

Answer 237

Explanation: The correct answer is (A). Recording expected credit losses cause a decrease in the earnings of an entity since the credit loss expense is reflected in the Income Statement. Consequently, the indirect effect is lower retained earnings due to a lower net income.

Answer 238

D Explanation: Under the equity method of accounting for investments in common stock, the investment is recorded at cost. Changes in the market value of the investee's common stock do not affect the Investment account or the Investment Income account. The investor recognizes as income its share of the investee's earnings or losses in the periods in which they are reported by the investee. Dividends declared by the investee represent a distribution of earnings previously recognized and, thus, do not affect the Investment Income account.

Answer 239

Explanation: The correct answer is (A). The bonds purchased included accrued interest. The interest component in the purchase price of the bond will be the interest for two months (January and February, year 1), which will be $4,000 (i.e. $200,000 x 12% x 2 /12). This means that the purchase price of the bond is $196,000 (i.e. $200,000 - $4,000). The discount of $4,000 will be amortized for 16 months (from March 1, year 1 to June 30, year 2). The discount amortized for 10 months, which will be added to the carrying value of the bond for year 1, will be $2,500 (i.e. $4,000 x 10 /16). The carrying value of the bond at the end of year 1 will be $198,500 (i.e. $196,000 + $2,500). (b) is incorrect because this will be the result when the discount is not amortized and the bond is reported at the purchase price, which is $196,000. (c) is incorrect because this will be the result when discount amortized is reduced from the purchase price of the bond, which will be $193,500 (i.e. $196,000 - $2,500). (d) is incorrect because this will be the result when accrued interest is completely ignored and the discount is not considered.

Answer 240

Explanation: The correct answer is (B). Trading securities are the debt securities bought and held principally for the purpose of selling them in the near term. The trading securities are carried at market value. Flax Co. investments which are held as trading securities and reported on the balance sheet at $2,500 (i.e. 250 per bond x $10). (A) is incorrect because 250 bonds are valued at $1 instead of valuing at a market price of $10. (C) is incorrect because 250 bonds are valued at $11 instead of valuing at market price of $10 (i.e. $2,750 = 250 x $11). (D) is incorrect because 250 bonds are valued at $15 instead of valuing at market price of $10 (i.e. $3,750 = 250 x $15).

Answer 241

A Explanation: A noninterest-bearing note exchanged for property, goods, or services should not be recorded at its face amount. Since there is not an established exchange price for the equipment and the question does not indicate the fair value of the note, the note should be recorded at its present value, which is computed by discounting all future payments of the note at the prevailing rate of interest for a note of this type. Present value of note ($600,000 x .75) $ 450,000 Carrying amount of machinery (480,000) Loss on sale of machinery $ (30,000)

Answer 242

Explanation: This investment should be accounted for under the equity method because Denver's purchase of 30% (i.e., 3,000 / 10,000) of Eagle's common stock on 7/1 gives Denver the ability to exercise significant influence over the operating and financial policies of Eagle by virtue of the investment. Denver should recognize investment income only for its share of Eagle's net income subsequent to the date of the investment. While dividends declared by Eagle reduce the carrying amount of the investment, they do not affect the amount of investment income that Denver recognizes. Therefore, in the year, Denver should report income from the equity method investment of $18,000 (i.e., $120,000 x 6/12 x 30%).

Answer 243

A Explanation: The total receivable from Sabe should be separately reported in Pare's financial statements since Sabe is not a subsidiary of Pare (i.e., Pare has only a 15% interest in Sabe). Pare would have to own a majority voting interest (i.e., > 50%) in Sabe in order for Sabe to be considered a subsidiary.

Answer 244

A Explanation: On 1/1, Point purchased 10% of Iona's common stock. On 8/1, when Point increased its investment in Iona's common stock from 10 percent to 40 percent, Point gained the ability to exercise significant influence over the financial and operating policies of Iona and accordingly should report its investment using the equity method. The change from the cost method of reporting the investment to the equity method should be made by prospectively.

Answer 245

Explanation: The correct answer is (B). Any decrease in expected loss shall call for a decrease in the allowance, thereby causing a reversal of the credit loss expense on the income statement. The decrease in the loss of $300 should be accounted for by decreasing the pre-existing loss allowance.

Answer 246

Explanation: Stock dividends are recorded as memorandum entries only, reducing the unit cost of the stock owned. No dividend revenue is recorded and the total cost of the stock owned remains the same.

Answer 247

Explanation: When an entity accounts for an investment in common stock under the equity method, it is required to disclose the names of each of its investee with its ownership percentage in the investee companies, the company’s accounting policies for investment in common stock, and the difference between the carrying value of the investment and the entity’s underlying equity in the investee’s net assets and the accounting treatment of the difference. Entity is not required to disclose the reason for having made the investment, the names and ownership percentage of the other stockholders in the investee company, or whether the investee company is involved in any litigation. Options (A), (B) and (D) are incorrect based on the above explanation.

Answer 248

Explanation: Well should use the equity method to account for its investment in Rea because it can exercise significant influence over the operating and financial policies of Rea. Purchase price, 1/1 $400,000 Add: Share of Rea''s income ($500,000 x 10%) 50,000 Less: Share of dividends paid ($150,000 x 10%) (15,000) Investment carrying amount, 12/31 $435,000

Answer 249

Explanation: Total interest revenue earned over the life of the note is determined as the excess of the summation of the required annual year-end payments over the present value of the note. Summation of required annual year-end payments ($5,009 x 5) $25,045 Less: Present value of note (19,485) Interest revenue earned over life of note $ 5,560 q

Answer 250

B Explanation: The excess of the fair value of Tun's FIFO inventory over its carrying amount would decrease Park''s reported equity in Tun's earnings and the excess of the fair value of Tun''s land over its carrying amount would have no effect on Park's reported equity in Tun's earnings.

Answer 251

Explanation: The correct answer is (C) As per FASB issued accounting standards update 2016-01, investment in marketable equity securities should be measured at fair value through net income (FVTNI). All type of changes in fair value of equity securities whether temporary or permanent needs to be routed through net income only. Also, there is no longer classification of equity investments as trading or Available For Sale (AFS), and there is no longer a requirement to recognize unrealized holding gains and losses on equity securities in other comprehensive income as previously required. (A) is incorrect because loss is not realized and hence should not be reported as realized loss as part of net income. (B) & (D) are incorrect because unrealized and realized are both types of losses that should be reported as part of net income, not as a part of other comprehensive income.

Answer 252

Explanation: The correct answer is (B). Trading debt securities that are bought and held principally for the purpose of selling them in the near term. They are reported at fair value (market value) and any unrealized holding gains and losses are included in current earnings. At the end of year 1, the trading debt securities would have been valued at $92,000 and a gain of $6,000 ($92,000 year-end market value - $86,000 cost) would have been reported on the income statement. In year 2, there would be a gain of $12,500 ($104,500 selling price - $92,000 beginning value) from the initial set of securities and a $2,000 loss ($71,000 year-end market value - $73,000 cost) from the newly acquired trading debt securities. The net impact of these stock activities would be a $10,500 gain on the income statement in year 2.

Answer 253

Explanation: Otto recognized $8,000 amortization for the current year due to the excess of fair value over book value of these assets. The depreciable assets had a remaining useful live of 5 years, which indicates Otto would recognize a total of $40,000 ($8,000 × 5) amortization over the 5 years. Otto was only responsible for 40% of the total of the excess in fair value over book value, so the total fair value over book value must have been $100,000 ($40,000 ÷ 40%). The total fair value would have been $1,100,000 ($1,000,000 book value + $100,000 excess) on January 2 of the current year.

Answer 254

D Explanation: Bang Inc. holds more than 40% stake in Boom Inc. and also further no other group of shareholders has any majority ownership and exercise total control, the investment will be accounted using equity method in the books of Bang Inc. Under equity method following journal entries will be passed: At the time of purchase of investment (Recording investment at cost): Investment in Boom Inc. $120,000 Cash $120,000 Recording dividend income: Cash (i.e. 40% of $10,000) $4,000 Investment in Boom Inc. $4,000 Recording percentage of earnings: Investment in Boom Inc. $32,000 Equity in earnings $32,000 Write off excess purchase price paid over book value of Boom Inc: Excess of purchase price over book value = $120,000 – (40% x $200,000) = $40,000. Of $40,000, $20,000 [i.e. 40% of (30,000 + 20,000)] is attributable to higher fair values of land and equipment. Thus, balance $20,000 will be the goodwill. Impairment of goodwill = 10% of $20,000 = $2,000. Depreciation on increased fair value of equipment (Bang Inc’s share) = 40% x $30,000 / 10 years = $1,200. No depreciation is charged on land. Land is sold during the year. Bang Inc. will write off its share of increased fair value of land, i.e. $8,000 (i.e. $20,000 x 40%). The journal entry would be: Equity in earnings $11,200 (i.e. $2,000 + $1,200 + $8,000) Investment in Boom Inc. $11,200 Thus, investment income recorded in the statement of income of Bang Inc. concerning investment in Boom Inc. for the year 1 would be $20,800 (i.e. $32,000 - $11,200).

Answer 255

Explanation: The correct answer is (C). The realized loss reported from the sale of the equity securities is determined as the difference between the proceeds received (i.e., the gross selling price of the shares less any brokerage commissions and taxes incurred in the sale) and the carrying value of the securities. Equity securities are recorded at fair value with unrealized gains and losses included in earnings. Gross selling price of 2,000 share @ $14 $28,000 Less: brokerage commissions and taxes incurred (1,400) Proceeds received from sale of securities 26,600 Carrying Value of Securities Sold ($31,500 - $2,000) (29,500) Realized Loss in current year ($ 2,900)

Answer 256

B Explanation: Grant acquired 30% of South Co. and exercises significant influence, it will account for this investment under equity method. The cost of investment on January 2, Year 3 is $200,000. This is increased by Grant’s share in South’s earnings for Year 3, in this case it is 30% of $80,000 income. This amounts to $24,000 equity in earnings of South Co, which is recognized as a revenue in the statement of income and increase in the investment value by that amount. Option (A) is incorrect because $15,000 is Grant’s 30% share in $50,000 dividend declared by South. Grant accounts for this investment under equity method. This dividend would reduce the investment value and not be recognized as dividend income in the statement of income. Option (C) is incorrect because $50,000 is the total dividend declared by South in Year 3. Option (D) is incorrect because $80,000 is the total income earned by South in Year 3.

Answer 257

Explanation: The correct answer is (C) If it is estimated that all of the investments in Held-to-Maturity Securities (principal or/and interest) will not be collected. The difference between the Amortized Cost and Present Value of Interest and Principal that will be collected is recognized as a credit loss and the investment will now be reported at present value of the principal and interest that is expected to be collected. Amortized Cost of the Bond is the Carrying Value of the Bond. Carrying Value of the Bond on January 1, Year 1: ⇒ $1,000 x Present Value of $1 at 5% for 14 periods + $40 x Present Value of Ordinary Annuity $1 at 5% for 14 periods ⇒ $1,000 x 0.505 + $40 x 9.8986 ⇒ $505 + $395.94 ⇒ $900.944 Carrying Value of the Bond on January 1, Year 5 (after 8 Periods): ``` Period Interest Income (5%) Interest Received (4%) Interest Received (4%) Carrying Value 0 $900.94 1 $45.05 40 $5.05 $905.99 2 $45.30 40 $5.30 $911.29 3 $45.56 40 $5.56 $916.86 4 $45.84 40 $5.84 $922.70 5 $46.13 40 $6.13 $928.83 6 $46.44 40 $6.44 $935.27 7 $46.76 40 $6.76 $942.04 8 $47.10 40 $7.10 $949.14 In the given case, Present value of the bond on January 1, Year 5 (after 8 Periods): ⇒ $1,000 x Present Value of $1 at 5% for 6 years ⇒ 1,000 x 0.746 ⇒ $746 ``` White's credit loss = $949.14 – $746 = $203.14

Answer 258

A Explanation: Of the dividends received, only the $1,500 cash dividend from Amal should be reported as dividend revenue. Neil owns less than a 2% (i.e., 6,000 / 309,000) interest in Amal; thus, Neil does not have the ability to exercise significant influence over Amal by virtue of the investment, and the investment should be accounted for under the cost method. The investment in B&K should be accounted for under the equity method since Neil's level of ownership gives it the ability to exercise significant influence over the financial and operating policies of B&K. Thus, the cash dividend from B&K should not be reported as dividend revenue; instead, it reduces the carrying amount of the investment in B&K that is reported in Neil's balance sheet. No income is recognized from the receipt of the stock dividend from Amal since Neil's proportionate interest in Amal has not changed and Amal's underlying assets and liabilities have not changed.

Answer 259

C Explanation: If it is not practicable to estimate the fair value of a financial instrument, disclosures are required that include: (1) the information pertinent to estimating the fair value of that financial instrument, such as the carrying amount, effective interest rate, and maturity; and (2) the reasons why it is not practicable to estimate fair value.

Answer 260

D Explanation: Available-For-Sale (AFS) debt securities are accounted for at fair value, determined on the balance sheet date. The excess of cost over fair value or fair value over cost for AFS debt securities is recorded as a credit or debit in a Market Adjustment account. The offsetting unrealized gain or loss is excluded from earnings and should be reported in Other Comprehensive Income until realized. The company would report the change in fair value as an unrealized loss of $11,500 as part of Other Comprehensive Income.

Answer 261

Explanation: The correct answer is (D). Marketable debt securities classified as available-for-sale (AFS) are to be reported at fair value. The amount by which the aggregate cost of an AFS debt portfolio exceeds its fair value should be accounted for as a credit to the Market Adjustment-AFS account. In addition, an amount equal to the balance of the Market Adjustment-AFS account should be reported separately within equity in accumulated other comprehensive income. The balance in the Market Adjustment-AFS account at year-end is a $10,000 credit ($296,000 aggregate cost - $286,000 aggregate market value). Any changes in the Market Adjustment-AFS account is recognized in other comprehensive income, not in net income.

Answer 262

B Explanation: The recorded value of the Note Receivable is $300,000 [400,000 x .75]. Interest income is $30,000 [300,000 x .10]

Answer 263

D Explanation: When an investment is made in debt securities that are publicly traded, and the investment is not large enough to provide the investor with any significant influence over the investee, the accounting for the investment will depend on the below classifications: - Trading or Held-for-trading (HFT) securities. Available-for-sale (AFS) securities. Held-to-maturity (HTM) securities. Trading or Held-for-trading (HFT) securities are debt securities bought and held principally for the purpose of selling them in the near term. They are initially recorded at cost and then carried at Fair Market Value (FMV), as trading securities are marketable and there is intent to sell in the near term.Alpha company should report the marketable debt securities that it has classified as trading at Fair Market value and all holding or unrealized gains and losses are included in earnings.

Answer 264

Explanation: Dividend income on preferred shares is $75,000 ($100,000 x 75%). When the ownership of the common stock is between 20-50%, it implies that the investor has a significant voting influence over the investee and would apply the equity method. Under the equity method, dividends are recognized as a reduction of the investment and not as dividend income. Option (B) is incorrect because $80,000 is shown as a reduction in the investment under the equity method. Options (C) and (D) are incorrect as per the above explanation.

Answer 265

D Explanation: Investments in equity securities with a readily determinable market value are to be classified as Fair Value Through Net Income (FVTNI) - i.e., measured at fair value with changes in the fair value recognized through net income (the AFS classification is no longer applicable where unrealized gains/losses were recognized as OCI). Options (A) and (B) are incorrect because only debt securities are classified as trading or available-for-sale. Option (C) is incorrect because only debt securities are classified as held-to-maturity.

Answer 266

D Explanation: Of the dividends listed, only the $4,000 (i.e., $200,000 × 2%) cash dividend receivable from Bow should be reported as dividend income. Wray owns only a 2% interest in Bow; thus, Wray does not have the ability to exercise significant influence over Bow by virtue of the investment. Therefore, the investment should be accounted for under the cost method. The cash dividend received from Seco should be recorded as a reduction of the carrying amount of the investment in Seco reported in Wray's balance sheet because the investment should be accounted for under the equity method (i.e., Wray owns a 30% interest in Seco and a majority of Wray's directors are also directors of Seco). The liquidating dividend received from King should be recorded as a reduction of the carrying amount of the investment in King reported in Wray's balance sheet.

Answer 267

Explanation: The correct answer is (A) As long as a security is held for sale, all the unrealized holding gain/loss resulting from changes in the value of such a security shall be classified under Other Comprehensive Income. However, transferring the security into trading category requires the entire portion of the unrealized gain or loss previously recognized as OCI to be recognized in earnings.

Answer 268

B Explanation: Grant acquired 30% of South Co. and exercises significant influence. It will account for this investment under equity method. The investment account for Year 3 will be as follows: Cost of 30% investment as on January 2, Year 3 $200,000 Add: 30% share of profit for the year (i.e. $80,000 x 30%) $24,000 Less: 30% share of dividends paid (i.e. $50,000 x 30%) $15,000 Carrying amount as at December 31, Year 3 $209,000 Option (A) is incorrect because $200,000 is only the cost of Grant’s investment in South Co. Option (C) is incorrect because $224,000 is the cost of Grant’s investment $200,000 and its proportionate share in South’s earnings for Year 3 $24,000. It does not account for a reduction in value for proportionate share in dividend distributed $15,000. Option (D) is incorrect because $230,000 is arrived as cost of Grant’s investment $200,000 plus its 30% share in South’s earnings of $100,000 for the first 6 months of Year 4.

Answer 269

A Explanation: Marketable securities classified as either trading or available-for-sale are to be accounted for at market.

Answer 270

B Explanation: Determining the proceeds received from discounting a note receivable consists of three steps: Determine the maturity value of the note. This amount is based on the face amount, the stated rate of interest, and the time to maturity of the note. Apply the bank's discount rate to the maturity value of the note to obtain the amount of the discount charged by the bank. Subtract the discount charged by the bank from the maturity value of the note to obtain the proceeds received from the bank.

Answer 271

Explanation: The correct answer is (A). The transfer of a debt security from the trading category of investments should be accounted for at fair value. The unrealized holding loss resulting from the decrease in market value while classified as trading debt securities is included in earnings. As of the date of transfer, June 30 of the current year, the securities had experienced a decline in fair value of $45,000 ($575,000 - $530,000) from the end of the prior year. Upon transfer to a different category of investment, this unrealized loss is required to be included in earnings. (The decline from $650,000 to $575,000 would have been included as an unrealized loss on the previous year's income statement.) CLOSE

Answer 272

Explanation: The correct answer is (C). When Pare purchased an additional 20,000 shares of Tot at 12/31, it increased its investment in Tot's common stock from 10% to 30% [i.e., (10,000 shares + 20,000 shares) ÷ 100,000 shares = 30%]. On 12/31, Pare gained the ability to exercise significant influence over the financial and operating policies of Tot and accordingly should report its investment in Tot using the equity method in its 12/31 balance sheet. The change from the cost method of reporting the investment in Tot to the equity method should be made by prospectively as of the date significant influence is acquired and going forward. On the December 31 Balance Sheet would be the original investment of $50,000 plus the price paid for additional 20,000 shares - i.e. $150,000 - which will be equal to $200,000. Pare will begin using equity method from January 1, Year 2 and proportionate earnings will be included from year 2 and not year 1.

Answer 273

B Explanation: The common stock investment should be accounted for under the equity method since Sage has the ability to exercise significant influence over the operating and financial policies of Adams by virtue of the investment. To determine Sage's reported amount of equity in income in Adams, the cost of the investment must first be allocated as follows: Purchase price $ 400,000 Percentage of carrying amount acquired ($900,000 x 40%) (360,000) Payment in excess of purchase price 40,000 Excess payment associated with specific assets: Plant assets ($90,000 x 40%) 36,000 Inventory ($10,000 x 40%) (4,000) Goodwill $ 0The amount that Sage should report in its income statement from its investment in Adams can now be determined as follows: Interest in Adams net income ($120,000 x 40%) $ 48,000 Less: Amortization of excess payment associated with plant assets ($36,000 / 18) (2,000) Excess payment associated with inventory sold (4,000) Equity in income of Adams $ 42,000The cash dividends paid by Adams to Sage reduce the carrying amount of the investment in Sage's balance sheet, they do not effect Sage's reported amount of equity in income in Adams

Answer 274

Explanation: The correct answer is (D). An unrealized loss in year 8 on investment in marketable debt securities classified as available-for-sale would be shown as an other comprehensive income item rather than as an income statement item. The market price decline in the year 8 was less than the increase in market price during the year 9 because there was a realized gain reported on the year 9 income statement which means that the security was sold for a price exceeding its cost. Thus, in year 9, the market price increased enough to recover the unrealized loss experienced in year 8 and to produce a gain on the sale of the investment. An unrealized loss in year 8 on investment in marketable debt securities classified as trading debt securities would be reported in the income statement rather than in other comprehensive income. Trading debt securities would be written to fair value at the end of year 8. If a trading debt security did report a realized gain in the year 9 it would be indeterminable as to whether any market price declined or not in year 8.

Answer 275

D Explanation: Trading debt securities are reported at fair value and unrealized holding gains and losses are included in current earnings on the Income Statement.

Answer 276

Explanation: The correct answer is (D). If it is estimated that not all of the investments in held-to-maturity securities (principal or/and interest) will be collected, the difference between the amortized cost and present value of Interest and principal that will be collected is recognized as a credit loss and the investment will be reported at present value of the principal and interest that is expected to be collected.

Answer 277

Explanation: The correct answer is (D). With the CECL (Current Expected Credit Loss) model, Credit losses expected over the lifetime of a Held-to-Maturity and Available-for-Sale debt Security are to be recognized upon the initial recognition of the asset. Bonds payable is a liability and not an asset. The CECL model is not applicable to it. Investments in common and preferred stock are not debt securities. Bonds receivable is a debt security that is generally held till maturity by the bondholder and can be impaired using the CECL model.

Answer 278

Explanation: The correct answer is (B). Grant acquired 30% of South Co. and exercises significant influence. It will account for this investment under the equity method. The investment account will be as follows for years Year 3 and Year 4: Cost of 30% investment as on January 2, Year 3 $200,000 Add: 30% share of profit for the year (i.e. $80,000 x 30%) $24,000 Less: 30% share of dividends paid (i.e. $50,000 x 30%) $15,000 Carrying amount as at December 31, Year 3 $209,000 Add: 30% share of profit for six months ended June 30, Year 4 (i.e. $100,000 x 30%) $30,000 Carrying value as of June 30, Year 4 $239,000 Carrying amount of 50% of investment (i.e. $239,000 x 50%) $119,500 Proceeds from the sale of 50% of investment $150,000 Profit on sale of investment $30,500

Answer 279

C Explanation: Larkin Co would apply equity method to account for its investments. The earnings from Devon Co., will increase the amount of its investment and dividend will reduce the investment account. Ref Equity Method Amount ($) a Investment in Devon Co. 200,000 b Net Income ($600,000 x 25%) 150,000 c Dividend ($400,000 x 25%) (100,000) d Investment reported at year end (a+b-c) 250,000 Option (A) is incorrect because net income’s proportionate share at 25% is not included, which would increase the investment account. Option (B) is incorrect because it is the cost of the initial investment, which should be adjusted for proportionate share in net income which would increase the investment account and dividends received at proportionate share of 25% which would reduce the investment account. Option (D) is incorrect because it should adjust for dividends received at 25% proportionate share which would reduce the investment account.

Answer 280

Explanation: The correct answer is (D). Available-for-sale debt securities are initially recorded at cost and carried at the fair market value on the balance sheet and any unrealized gain/loss is reported in the statement of comprehensive income and cumulatively accumulates in the balance sheet. (A) is incorrect because the debt securities that the entity has the positive intent and ability to hold to the maturity date are classified as Held-to-Maturity (HTM). The HTM securities are initially recorded at cost and carried at amortized cost. (B) is incorrect because trading debt securities are the debt bought and held principally for the purpose of selling them in the near term. They are carried at market value and any unrealized gain/loss at year end are reported in the profit and loss statement. (C) is incorrect because this is not a classification type. Note: The updated standard doesn’t change the guidance for classifying and measuring investments in debt securities or loans.

Answer 281

c Explanation: Gilman’s earnings would reflect a loss of $1,200 attributable to the Meteor stock. In electing fair value option, the stock would be valued at $32,000 at December 31, year 3, which denotes a loss of $3,000 from the $35,000 purchase price of the stock during year 3. Gilman also received $1,800 in of dividends from the stock which would be income for year 3. The net between the two transactions is a loss of $1,200.

Answer 282

C Explanation: Wood owns 10% of Arlo’s preferred stock and would have received $24,000 ($240,000 dividends × 10%) in dividends in the current year on this preferred stock. Although this amount represents the dividend preference for the previous year, due to the 6% cumulative feature of the stock (2,000 shares x $100 x .06 = $12,000/year), as well as for the current year, the revenue is not recognized until the dividends are actually declared. In the current year the dividends for the current and prior year are both recognized. The 5% stock dividends received are not recognized as income because they are not a distribution, division, or severance of the corporate assets.

Answer 283

B Explanation: The debt securities that the entity has the positive intent and ability to hold to maturity date are classified as Held-to-Maturity (HTM). The HTM securities are initially recorded at cost and carried at amortized cost. As HTM are not going to be sold, fluctuations in market prices are ignored. The difference between cost and maturity value is amortized over the life of the security. Thus, Kale should account for these bonds at amortized cost. Option (a) is incorrect because HTM are initially recorded at cost, and later carried at amortized cost. Option (c) is incorrect because the fluctuations in market prices are ignored and accounted based on amortized cost not fair value. Option (d) is incorrect because inventory is reported at lower of cost or market not HTM securities which is at amortized cost.

Answer 284

Explanation: The correct answer is (A). Unrealized holding losses for available-for-sale (AFS) debt securities are excluded from earnings and reported in other comprehensive income until realized. The decrease in fair value over the time period in which the securities were classified as trading debt securities would have been reported in earnings. However, the loss occurring after the transfer to the AFS category, $40,000 ($530,000 - $490,000), would be reflected in OCI.

Answer 285

C Explanation: The total amount of interest revenue to be earned by King over the life of the note is determined as the excess of the summation of the required annual year-end payments over the present value of the note discounted to yield 9% to King. Summation of required annual year-end payments [5 × $5,010 (as determined below)] $ 25,050 Face amount of note $20,000 Divide by: PV factor of an ordinary annuity of $1 for 5 periods at 8% / 3.992 Required equal annual year-end payments under note $ 5,010 Times: PV factor of an ordinary annuity of $1 for 5 periods at 9% × 3.890 Less: present value of note (19,490) Interest revenue to be earned over the life of the note's life $ 5,560

Answer 286

D Explanation: Since Kean owns a 30% interest in Pod, the investment should be accounted for under the equity method. Under the equity method, the carrying amount of the investment is increased for Kean's share of Pod's income, decreased for Kean's share of any dividends paid by Pod and decreased by the amortization of the excess payment associated with plant and equipment. To determine the carrying amount of Kean's investment in Pod at 12/31, the original cost of the investment must first be allocated. The carrying amount of the investment at 12/31 is determined as follows:

Answer 287

Explanation: The correct answer is (C) Impairment for Available-for-Sale Securities is calculated as the difference between Amortized Cost (i.e. Carrying Value) and the Fair Value of the security. However, Credit Losses on the Income Statement are limited to Amortized Cost – Present Value (calculated the same way as a Held-to-Maturity investment) because if the unrealized loss at any given time is more than the expected credit loss till maturity, the Investor can minimize the loss by holding the security. Excess losses will be charged to OCI. Carrying Value of the Bond on January 1, Year 1: ⇒ $1,000 x Present Value of $1 at 5% for 14 periods + $40 x Present Value of Ordinary Annuity $1 at 5% for 14 periods ⇒ $1,000 x 0.505 + $40 x 9.8986 ⇒ $505 + $395.94 ⇒ $900.94 Carrying Value of the Bond on January 1, Year 5 (after 8 Periods): ``` Period Interest Income (5%) Interest Received (4%) Interest Received (4%) Carrying Value 0 $900.94 1 $45.05 40 $5.05 $905.99 2 $45.30 40 $5.30 $911.29 3 $45.56 40 $5.56 $916.86 4 $45.84 40 $5.84 $922.70 5 $46.13 40 $6.13 $928.83 6 $46.44 40 $6.44 $935.27 7 $46.76 40 $6.76 $942.04 8 $47.10 40 $7.10 $949.14 In the given case, Present value of the bond on January 1, Year 5 (after 8 Periods): ⇒ $1,000 x Present Value of $1 at 5% for 6 years ⇒ 1,000 x 0.746 ⇒ $746 ``` Expected Credit Loss = Carrying Value – Fair Value = $949.14 - $800 = $149.14 Expected Credit loss = $949.14 - $746 = $203.14. All of the loss is recognized on the Income Statement.

Answer 288

B Explanation: Under IFRS, the cost model or the revaluation model is used to value intangible assets. Revaluation model may be used only for intangibles that are traded with active market prices (as revaluation model requires fair value determination from active market): Cost Model CV = Cost - Accumulated Amortization (if finite life) -Accumulated Impairment. Revaluation Model CV = Fair Value from active market @revaluation date -Subsequent Accumulated Amortization (if finite life intangibles) – Subsequent Accumulated Impairment. Options (a), (c) and (d) are incorrect because the fair value model is not used

Answer 289

D Explanation: The balance in the Prepaid Royalties account is $65,000 + $25,000 = $90,000.

Answer 290

D Explanation: Trademarks are amortized over their estimated useful life. Legal fees in a successful defense are capitalized because they offer probable future benefits. They are amortized over the remaining useful life of the trademark. Amortization of original cost ($400,000 /16 years) $25,000 Amortization of legal defense cost, ($60,000 / 12 remaining years) 5,000 Total amortization expense, year 7 $30,000

Answer 291

A Explanation: Research and development costs are expensed as incurred. Only the costs of acquiring a patent should be capitalized. Thus, only the cost of registering the patent, $34,000, is capitalized. The capitalized cost of an intangible asset, is amortized over the asset's economic life. One-half year of amortization is $1,700 ($34,000 / 10 years x 1/2 year). ($34,000 - $1,700) = $32,300.

Answer 292

C Explanation: The $200,000 of goodwill acquired in connection with the purchase of Shef should be capitalized. The $80,000 of expenditures to maintain the goodwill should be expensed when incurred because costs of developing, maintaining, or restoring goodwill should not be capitalized.

Answer 293

B Explanation: Accrual accounting recognizes expenses in the period they are incurred. Accrual accounting does not recognize expenses merely in the period they are paid. Royalties paid should not be recognized as an expense at the date the royalty agreement began or the date the royalty agreement expires.

Answer 294

A Explanation: An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value.After an impairment loss is recognized,the adjusted carrying amount of the asset is its new accounting basis.Subsequent reversal of a previously recognized impairment loss is prohibited under US GAAP. Option (b), (c) and (d) are incorrect because US GAAP does not allow reversal of impairment losses.

Answer 295

B Explanation: Intangible assets are assets without physical substance that provide economic benefits through the rights and privileges associated with their possession. Intangibles may be classified as identifiable or unidentifiable and externally acquired or internally developed.

Answer 296

Explanation: The correct answer is (D) An expenditure which is expected to yield revenue for more than one accounting year is an example of deferred revenue expenditure. IFRS does not permit capitalization of such expenditures. Hence, the entire expenditure of $220,000 needs to be posted on the Income Statement instead of being capitalized.

Answer 297

Explanation: The correct answer is (D). This is an Accounting Error question. Ott follows an incorrect method of accounting. On 1/1 The balance on Prepaid Royalties Account: $65,000. Ott makes no adjustments to this account until the year-end. The 12/31 balance on this account would still be $65,000. On 10/31, the following journal entry was recorded. This included advance for next year's royalties. However, under Ott's system, all such payments are debited to royalty expense when paid, and any necessary adjustments to prepaid royalties are made at year-end. Royalty Expense 110,000 Cash 110,000 On 12/31, the following journal entry was recorded: Prepaid Royalty Expense 25,000 Royalty Expense 25,000 The balance in Prepaid Royalties would be $90,000 ($65,000 Opening Balance + $25,000 Current Year Prepaid).

Answer 298

c Explanation: The patented product was withdrawn from sale under governmental order. Therefore, the unamortized cost of the patent at December 31, year 4, should be charged to income. Purchase price of patent $ 90,000 Less amortization recorded prior to year 4 ($90,000 x 3/10) (27,000) Unamortized cost of patent charged to income in year 4 $ 63,000

Answer 299

c Explanation: The acquisition cost of the franchise is determined as follows: Cash payment, July 1, Year 1 $40,000 Add: Present value of periodic annual payments: Periodic annual payments $20,000 Times: Present value of an ordinary annuity of 1 at 14% for 4 periods x 2.91 58,200 Franchise acquisition cost $98,200

Answer 300

Explanation: The correct answer is (C). The cost of developing a new idea for a product should be expensed as R&D. The legal cost for applying for the patent license and the amount spent to defend the patent from the competitor are capitalized $90,000 ($40,000 + $50,000) (a) is incorrect because it does not capitalize the amount spent to successfully defend the rights of the patent. (b) is incorrect because it does not capitalize the expenses incurred in applying for the patent license. (d) is incorrect because it capitalizes the cost of developing a new idea for a product, which should be expensed

Answer 301

B Explanation: A trademark is an intangible asset. The cost of an intangible asset is the cash equivalent price and includes purchase price, nonrefundable taxes, and direct costs of preparing the intangible asset and bringing it to an appropriate condition for its intended use. In this case, the cash equivalent price would include the one-time trademark purchase price, the nonrefundable VAT taxes, and the legal costs incurred to register the trademark ($100,000 + $5,000 + $10,500 = $115,500). The training, research, and salary expenditures would be expensed as incurred.

Answer 302

b Explanation: The cost of a successful legal defense of an existing patent is capitalized because it offers probable future benefits. Original cost of patent (year 1) $ 45,000 Amortization (3 yrs. x $45,000/15) (9,000) Carrying value 12/31, year 3 $ 36,000 Capitalization of legal costs 15,000 Carrying value of patent (year 4) $ 51,000 Proceeds from sale (year 1) $ 75,000 Carrying value of patent (51,000) Gain from sale $ 24,000

Answer 303

d Explanation: Under both IFRS and U.S. GAAP, an intangible asset is defined as identifiable nonmonetary assets without physical substance. The recognition criteria for both accounting models require that there be probable future economic benefits and its cost, not its fair value, can be reliably measured. The item need not be expected to be used in the production or supply of goods or services nor be part of the entity's activities aimed at gaining new scientific or technical knowledge.

Answer 304

b Explanation: The difference between the purchase price paid to the investee and the fair value of its net assets is accounted as goodwill by the investor. On the date of purchase, the fair value of net assets is $600,000. The proportionate amount of the fair value of investment is $180,000 (i.e. 30% of $600,000). Hence, the goodwill amount will be $20,000 (i.e. $200,000 - $180,000). Option (a) is incorrect because goodwill is recorded at $20,000 and not $0. Option (c) is incorrect because it is taking the difference in the proportionate share of stockholders’ equity $150,000 (i.e. 30% of $500,000) with the fair value of investment is $180,000 (i.e. 30% of $600,000). Option (d) is incorrect because it is taking the difference in the proportionate share of stockholders’ equity $150,000 (i.e. 30% of $500,000) instead of using the proportionate share of fair value of the net assets $180,000 (i.e. 30% of $600,000).

Answer 305

D Explanation: Accounting for goodwill is based on reporting units as an aggregate view of goodwill. Goodwill is tested for impairment at a reporting unit level. A reporting unit is an operating segment or one level below an operating segment, referred to as a component. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component.Option (a), (b) and (c) are incorrect as per the above explanation

Answer 306

Explanation: The correct answer is (A). Testing for impairment occurs when events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset groups may not be recoverable. The impairment test is a one-step process: An indefinite-lived intangible asset is impaired when the fair value is less than its carrying amount. Goodwill is tested for impairment at least annually, using a one-step process, and the goodwill impairment test may be performed any time during the fiscal year, provided the test is performed at the same time every year. To identify potential impairment, we compare the reporting unit’s fair value with its carrying amount, including goodwill i.e. performing a recoverability test on the carrying amount of the division's assets If the fair value exceeds its carrying amount, the reporting unit’s goodwill is considered not impaired. If the carrying amount exceeds its fair value, then the Impairment Loss of the reporting unit recognized is calculated as Carrying Value – Fair Value i.e. $100,000,000 - $80,000,000 = $20,000,000. Options C and D are incorrect because Carrying (and Fair) value plus salvage value is greater than fair (and carrying) value is a nonsense distractor.

Answer 307

d Explanation: All three activities are examples of activities that typically are included in research and development and should be expensed. $150,000 + $200,000 + $175,000 = $525,000.

Answer 308

D Explanation: The external acquisition costs of a patent,which includes the legal costs associated with obtaining a patent on a new product,qualifies for asset capitalization. Cost of materials used in prototype testing, costs of testing a prototype and modifying its design,and salaries of engineering staff developing a new product are all examples of research and development costs.These research and development costs are not capitalized, but instead expensed in the year in which incurred.Costs incurred to legally protect product and process ideas resulting from R&D. Following costs are capitalized: Costs include costs of patent application. Costs of purchase if the patent is purchased from another party. Costs incurred in successful defense of a patent if infringed during its economic life Option (a), (b) and (c) are incorrect because these are R&D costs which are expensed when incurred

Answer 309

Explanation: The correct answer is (A) According to IFRS, internally generated goodwill cannot be recognized as an asset. Goodwill is recognized only if it is externally acquired. Internally developed intangible assets under IFRS are normally recognized only if: It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity. It is easy and clear to measure the cost of an asset. (B), (C) and (D) are incorrect as per IFRS Accounting Standards

Answer 310

C Explanation: Legal fees in a successful defense are capitalized because they offer probable future benefits. They are amortized over the remaining useful life of the patent.

Answer 311

Explanation: The correct answer is (D). The R&D costs include: New knowledge or new technology. Model or prototype. Application of new research findings. Costs incurred for the two projects are expensed as incurred, regardless of the likelihood that efforts will result in future benefits. Miley should report R&D costs of $150,000 ($100,000 + $50,000). (A) is incorrect because all laboratory research aimed at discovering new knowledge will be reported as R&D costs. (B) is incorrect because Project I costs of $100,000 should also be expensed regardless of the high probability. (C) is incorrect because Project II costs of $50,000 should be expensed as R&D costs.

Answer 312

Explanation: Copyrights are amortized over the shorter of useful or legal life. The market trends indicate that the copyrighted materials will generate positive cash flows for approximately 25 years which is shorter than the remaining legal life of 30 years.Thus, Company will amortize copyright for 25 years.Option (a) is incorrect because copyrights are amortized.Option (c) is incorrect because copyrighted material is amortized over 30 years of remaining legal life, while it should be amortized at 25 years useful life.Option (d) is incorrect because copyrighted material was initially amortized over 38years of legal life, now the useful life is reassessed at 25 years which is shorter than the remaining useful legal life, and amortized over 25years.

Answer 313

c Explanation: The $500,000 acquisition cost of the trademark is amortized over the useful life, resulting in accumulated amortization of $10,000 at 12/31. The unamortized cost on Krug’s books is irrelevant in determining Judd’s acquisition cost.

Answer 314

Explanation: The correct answer is (D). Intangible assets are long-lived legal rights and competitive advantages developed or acquired by a business. Intangible assets do not have physical substance. Examples of intangible assets include patents, copyright, goodwill, trademark etc. Patents are costs incurred to legally protect product and process ideas resulting from research and development. Cost of patent registration is capitalized as patent and is reported in the balance sheet as an intangible asset as a patent does not have physical substance.

Answer 315

A ``` Explanation: Amortization of intangible assets over their estimated useful lives is required under both U.S. GAAP and IFRS, with one minor exception in U.S. GAAP. Under U.S. GAAP, development costs are expensed as incurred, not capitalized, unless addressed by a separate standard. Under IFRS, advertising and promotional costs are expensed as incurred. Under U.S. GAAP, revaluation is not permitted. Under IFRS, revaluation to fair value of intangible assets other than goodwill is a permitted accounting policy election for a class of intangible assets. ```

Answer 316

D Explanation: Intangible assets are long-lived legal rights and competitive advantages developed or acquired by a business. Intangible assets do not have physical substance.Examples of intangible assets includes patents, copyright, goodwill, trademark etc.Patents are costs incurred to legally protect product and process ideas resulting from research and development. Cost of patent registration is capitalized as patent and is reported in the balance sheet as an intangible asset as a patent does not have physical substance. Option (a) is incorrect because derivative securities is not an intangible asset.Derivative securities usually takes the form of an agreement to buy or sell an asset or item (commodity, property, security) at a fixed price on or before a certain date.Derivative securities are traded on exchanges like other financial instruments, and their value varies with the value of the underlying assets. These have physical substance and are not intangibles. Option (b) is incorrect because even though research and development (R&D) is an intangible, the cost of R&Dis typically expensed as a period cost and is not reported as an asset on the balance sheet. Research is a discovery of new knowledge for anew or significantly improved product or process while development is conversion of the knowledge into plan / design for application.Option (c) is incorrect because a leasehold improvement made by the lessor is capitalized as an asset and depreciated. Only a leasehold improvement made by the lessee is treated as an intangible asset in the lessee's books.

Answer 317

D Explanation: Only the purchased goodwill of $125,000 from the acquisition of the net assets of Apex should be reported. Costs of developing, maintaining, or restoring goodwill should be expensed when incurred

Answer 318

A ``` Explanation: Goodwill is recognized only in a business combination under both US GAAP and IFRS. With the exception of development costs, internally developed intangibles are not recognized as an asset under either US GAAP or IFRS. Under US GAAP, revaluation is not permitted. Under IFRS, revaluation to fair value of intangible assets other than goodwill is a permitted accounting policy election for a class of intangible assets. Under IFRS, development costs are capitalized when technical and economic feasibility of a project can be demonstrated in accordance with specific criteria. Amortization of intangible assets over their estimated useful lives is generally required under both US GAAP and IFRS. If there is no foreseeable limit to the period over which an intangible asset is expected to generate net cash inflows, the useful life is considered indefinite and the asset is not amortized. ```

Answer 319

c Explanation: The costs incurred in successful defense of patents are capitalized. Costs on failure to defend patent are expensed as no legal benefit would exist. Thus, legal costs associated with unsuccessful outcomes is expensed at $100,000.Option (a) is incorrect because it includes legal costs associated with successful defense of the patent which should be capitalized. ($500,000 = $400,000 + $100,000).Option (b) is incorrect because legal costs associated with successful defense of the patent are expensed, instead of capitalizing it. Option (d) is incorrect because the legal costs for unsuccessful out comes are expensed

Answer 320

d Explanation: All of the factors listed are considered adverse qualitative factors related to testing goodwill impairment.

Answer 321

a Explanation: Under IFRS, a one-step approach requires that an impairment test be done at the cash-generating unit (CGU) level by comparing the CGU’s carrying amount, including goodwill, with its recoverable amount. Any impairment loss on the CGU (amount by which the CGU’s carrying amount, including goodwill, exceeds its recoverable amount) is allocated first to reduce goodwill to zero, then, subject to certain limitations, the carrying amount of other assets in the CGU are reduced pro rata, based on the carrying amount of each asset. In this case, the entire impairment loss of $13,000 ($45,000 – $32,000) would be allocated to goodwill (leaving a balance of $2,000).

Answer 322

B Explanation: For identifiable intangibles with definite life straight line method (SLM) is used to amortize the intangible assets over the lower of useful life or legal life. The intangibles with indefinite life cannot be amortized and must be tested for impairment. Therefore only Johan Co. will report amortization in its financial statements.Option (a), (c) and (d) are incorrect because Abco Co., should test goodwill for impairment since it is an Intangible asset with indefinite life.

Answer 323

B ``` Explanation: Under IFRS, revaluation to fair value of intangible assets other than goodwill is a permitted accounting policy election for a class of intangible assets. Revaluation to fair value requires an active market for the specific type of intangible. Though a reliable useful life and cost are used for amortization, they are not elements required for use of the revaluation model. By definition, intangible assets are nonmonetary assets. ```

Answer 324

c Explanation: The intangibles with indefinite life cannot be amortized and must be tested for impairment. Goodwill is an unidentifiable intangible asset that represents capitalized excess earning power. Goodwill is not amortized but tested for impairment annually.If the carrying value of reporting unit is greater than the fair value, an impairment loss for the excess of carrying value of goodwill is reported in the I/S.Option (a) is incorrect because goodwill is not amortized.Option (b) is incorrect because gain on goodwill is not reported.Option (d) is incorrect because restoration of previously recognized impairment loss is not allowed, unless the asset is held for disposal.

Answer 325

a Explanation: A trademark is an identifiable tangible asset.With an externally acquired trademark, normally the acquisition costs are capitalized and amortized over the useful life of the trademark.If an intangible asset has an indefinite life, as is the case with the trademark in this question, it is not amortized but rather tested at least annually for impairment until its useful life is determined to be no longer indefinite.If the trademark had been internally developed the costs would have been expensed as incurred. Option (b) is incorrect because trademark is amortized over 40 years. ($15,000 =$600,000/40). Option (c) is incorrect because trademark is amortized over 15 years. ($40,000 =$600,000/15). Option (d) is incorrect because trademark is amortized over 5 years. ($120,000 =$600,000/5)

Answer 326

Explanation: The correct answer is (A). Amount to be capitalized is equal to the fair value of the consideration given or the fair value of the asset acquired, whichever is more clearly evident. When both are given, the fair value of the consideration given is used i.e. $50,000. Amortization for an identifiable intangible with a definite life is done using the straight-line method. Amortization per year = (Capitalized amount less value of the asset at the end of its useful life) / Lower of useful life or legal life of the asset. The amount of an intangible asset to be amortized is the amount initially assigned to that asset ($50,000) less any residual value ($10,000). The amount to be amortized is $40,000 ($50,000 - $10,000) over 10 years, or $4,000 a year. Note: The residual value is the estimated fair value of the intangible asset at the end of its useful life to the reporting entity less any disposal costs.

Answer 327

c Explanation: Goodwill is not a factor to be considered in the estimate of a finite useful life. Goodwill has an indefinite, not finite, useful life and is not amortized, but rather is tested at least annually for impairment.

Answer 328

d Explanation: Costs of goodwill from a business combination accounted for as a purchase should be capitalized.However, costs of developing, maintaining, or restoring goodwill should be expensed when incurred.Thus, the good will of $125,000 from the acquisition of the net assets of Apex should be capitalized,while the additional costs of developing good will should be expensed as incurred. Option (a) is incorrect because it includes both additional costs of developing goodwill, by training Apex employees ($50,000) and hiring additional Apex employees($25,000) which should be expensed off. Option (b) is incorrect because it includes cost of training Apex employees ($50,000) which should be expensed off. Option (c) is incorrect because it includes cost of hiring additional Apex employees($25,000) which should be expensed off.

Answer 329

a Explanation: The capitalized costs of research and development (R&D) is amortized for the greater of (a) cost x ratio of current year revenue of software to the total revenue expected or (b) straight-line method which is cost / economic life of product. The ratio of current year revenue of software to the total revenue expected is given as 30% and the straight-line rate will be 20% (1 / 5 years). Thus, the amortization would be at the greater of the two percentages = 30%. The percentage of original capitalized cost to be reported in the balance sheet would therefore be 70% (i.e.100% - 30%). Capitalized software cost should be reported at the lower of carrying value (70% of original cost) or net realizable value (90% of original cost). Thus, the software cost would be reported at 70%. Options (b), (c) and (d) are incorrect because of above explanation.

Answer 330

Explanation: The correct answer is (B). Costs associated with computer software may be capitalized once technological feasibility has been established. The costs will continue to be capitalized until the date the software is released for sale. The software was determined to be technologically feasible on June 30th and was released for sale on October 1st. Between July 1st and September 30th, costs of $750,000 are capitalized. All costs incurred prior to June 30th and after October 1st are expensed. Examples of expensed items include sales revenue and R&D. (A) is incorrect because $275,000 costs incurred after software sales begin are inventories and included in COGS. (C) is incorrect because $1,300,000 should be expensed as these costs incurred prior to technical feasibility was established. (D) is incorrect because it includes expenses incurred prior to the technical feasibility was established and the costs incurred after the product was available for release ($2,050,000 = $1,300,000 + $750,000).

Answer 331

a Explanation: An intangible asset with an indefinite useful life is not amortized. If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life, it is considered to be indefinite. The term indefinite does not mean infinite. Goodwill and intangible assets with indefinite useful lives are not amortized, but rather are tested at least annually for impairment.

Answer 332

Explanation: The correct answer is (D). Indefinite life intangibles should be tested for impairment annually or more frequently if needed. If the circumstances indicating impairment exist, then the indefinite life intangible is tested for impairment by comparing its carrying value with its fair value. If the carrying value of the indefinite life intangible exceeds its fair value then it is impaired and the difference between the two values is recorded as an impairment loss and the value of the asset is reduced by that amount. Thus, the carrying value and the fair value of the indefinite life intangible are compared to determine the amount of possible impairment loss

Answer 333

a Explanation: A franchise represents a special right to operate under the name and guidance of another enterprise over a limited geographic area. A franchise is always externally purchased; it cannot be internally developed. Capitalize all significant costs incurred to acquire the franchise (e.g., purchase price, legal fees, etc.). If the acquisition cost of the franchise requires future cash payments, these payments should be capitalized at their present value using an appropriate interest rate. On the other hand, periodic service fees charged as a percentage of revenues are not capitalized; these costs represent a current operating expense of the franchisee. The $60,000 frinchise purchase divided by the five years of useful life would mean the intangible asset-franchise would be amortized $12,000 per year. $60,000 - $12,000 = $48,000.

Answer 334

Explanation: The correct answer is (B) Anchor Co. is experiencing financial difficulties. Anchor negotiated a settlement of $100,000 in debt owed to Bowden Inc. in exchange for Anchor’s gross accounts receivables of $100,000. This is a troubled debt restructuring, and the debt is settled by a transfer of assets (A/R). The debtor recognizes a gain equal to the excess of the carrying amount of the debt over the carrying amount of the assets. The carrying amount of the receivables transferred is $75,000 because $25,000 is deemed uncollectible. Anchor will recognize a $25,000 gain on restructuring of payables.

Answer 335

b Explanation: Convertible bonds provide the bondholder the option of converting the bond to capital stock, typically common stock. Using the book value method, the conversion of the bonds into common stock is generally recorded by crediting the paid-in capital accounts for the carrying amount of the debt at the date of the conversion, less any cost associated with the conversion. The carrying amount of the bonds on the date of conversion is the $1,000,000 face value less the $100,000 unamortized discount. The market value is not considered when using the book value method. The journal entry: Bonds Payable 1,000,000 Bond Discount 100,000 Common Stock (100,000 × $1 par) 100,000 APIC (to balance) 800,000The $100,000 credit to common stock and $800,000 credit to APIC would increase stockholders’ equity $900,000.

Answer 336

b Explanation: The note payable arose from a transaction with a vendor in the normal course of business and is due in customary trade terms not exceeding one year; therefore, the note can be reported at its face amount of $10,000, despite the fact that the 3% stated interest rate of the note does not approximate the prevailing market interest rate of 8% for similar notes at the date of the transaction.

Answer 337

c Explanation: Interest paid = Face value x Stated interest rate. On 30th Jun the interest paid is semi-annual, hence $12,000 x 2 = $24,000 represents annual interest paid. $12,000/$200,000 = 6% which is semi-annual rate. To arrive at the annual stated interest rate for the debenture of 12%, semi-annual rate should be multiplied by 2. 12% = (6% x 2). (OR) using annual amount 24,000/$200,000 = 12%. Option (A) is incorrect because it represents the semi-annual rate 6% ($12,000/$200,000). Option (B) is incorrect because 7% is calculated on discounted amount and effective interest expense ($13,016/$185,953) for semi-annual period. Option (D) is incorrect because 14% is the annualized effective interest rate (7% x 2).

Answer 338

b Explanation: The loss on the early extinguishment of debt is calculated as the difference between the cost of reacquiring the bonds and the carrying amount of the bonds. Face amount of bonds (2,000 × $1,000) $2,000,000 Less unamortized discount at extinguishment: Discount at issuance ($2,000,000 - $1,920,000) $80,000 Amortized to date of extinguishment ($80,000 × 6/10) 48,000 32,000 Bond carrying amount at extinguishment 1,968,000 Cost to reacquire ($2,000,000 × 101%) 2,020,000 Loss on early extinguishment of debt, before taxes $ 52,000

Answer 339

A Explanation: When cash is transferred to a sinking fund account, the sinking fund balance increases for the amount of cash transferred. When this cash is used to purchase investments, there is no effect in the balance of sinking fund, only the composition changes - cash becomes investments or a current asset becomes a non-current asset. Revenue earned on the investments is reported as income in the income statement and is added to the sinking fund account. Therefore, the sinking fund increases with the revenue earned on investments and is not affected when investments are purchased.Option (b) and (d) are incorrect because statement III has no impact on bond sinking fund account. Cash transferred to sinking fund account which was current asset is now reported as non-current investments.Option (c) is incorrect because statement II increases the bond sinking fund investment account and statement III has no impact because cash is converted to investments and classified from current to non-current assets.

Answer 340

A Explanation: When bond is issued for less than face value i.e. $98, the bond is issued at discount. J/E for bond issued at discount: DR Cash $49,000 DR Discount on bond issuance $1,000 CR Bonds payable $50,000 Option (B) is incorrect because bonds payable is credited at $50,000 and not at discounted value. Option (C) is incorrect because the bond is issued at discount, not premium. Option (D) is incorrect because bonds payable is a liability and should be credited not debited.

Answer 341

b Explanation: Short-term obligations are those scheduled to mature within one year or operating cycle, whichever is longer. Generally, short-term obligations are classified as current liabilities since they will require use of working capital during the ensuing period. If they are to be refinanced on a long-term basis they will not require the use of working capital and appropriately are classified as noncurrent liabilities. Exclusion from current liabilities requires that two conditions be met: (1) the enterprise must intend to refinance the obligation on a long-term basis, and (2) the enterprise must have the ability to consummate the financing. Evidence of the ability to consummate the refinancing is provided by either a refinancing that occurs after the balance sheet date but before the balance sheet is issued or a financing agreement before the balance sheet is issued that permits the refinancing and extends beyond one year or operating cycle. If any violation of the agreement has occurred, a waiver from the lender must be obtained. Further, the lender must be expected to be financially capable of honoring the agreement. This problem initially involves the refinancing of a short-term note payable (due within a year) on a long-term basis (because the agreement does not expire within a year). The note payable meets the first reclassification requirement to exclude it from current liabilities in that the enterprise intends to refinance the obligation on a long-term basis. The enterprise also provides an ability to consummate the refinancing because the agreement was signed on January 20, year 3, after the balance sheet date of December 31, year 2, but before the balance sheet is issued, March 31, year 3. Because the lender wasn't expected to be financially capable of honoring the agreement, the note must be classified as a current liability.

Answer 342

D Explanation: The carrying amount of the bonds is the sum of their face amount and the unamortized premium. Therefore, premium amortization will reduce the carrying amount of the bonds. Bond premium amortization will increase income because it will reduce the interest expense associated with the bonds.

Answer 343

c Explanation: The note was issued on 12/1, year 1. Principal and interest on the note are due in monthly installments, beginning 1/1, year 2. Therefore, at 12/31, year 1, Tigg should report one month of accrued interest receivable, the amount of which is determined by multiplying the face amount of the note by 1/12 of the note’s stated annual interest rate, as follows: Face amount of note, issued 12/1, year 1 $200,050 Times 1/12 stated annual interest rate of note (12% ÷ 12) × 1% Accrued interest receivable, 12/31, year 1 $ 2,000 A helpful way of looking at this problem is making the journal entries that Tigg Company made at 12/1, year 1 and 12/31, Year 1. 12/1, Year 1 Notes Receivable $200,050 Loan Orig. Fees $6,221 Cash $193,829 ``` 12/31, Year 1 Accrued Int. Rec. (200,050 × 12% × 1/12) $2,000 Amort. Loan Orig. Fees (Plug) $164 Interest Income (193,829 × 13.4% × 1/12) $2,164 1/1, Year 2 Cash $4,450 Accrued Interest Receivable $2,000 Notes Receivable $2,450 ```

Answer 344

a Explanation: Under the book value method, the paid-in capital accounts are credited for the carrying amount of the debt; no gain or loss is recognized on the conversion. The market price per common share is irrelevant under this method. Bonds payable 600,000 Bond premium 12,000 Common stock [($600,000 / 1,000) × 10 shs. × $50 PV] 300,000 Additional paid-in capital (to balance) 312,000

Answer 345

D Explanation: Interest expense for the period would be interest to be paid from 1st Jun to 31st Dec, which is for 7 months ($300,000 x 8% x 7/12) = $14,000. Option (A) is incorrect because $6,000 is the accrued amount for interest from the last payment date of 1st Oct for 3 months ($300,000 x 8% x 3/12) = $6,000. Option (B) is incorrect because $8,000 is the interest to be paid on 1st Oct for period of 4 months from 1st Jun to 1st Oct ($300,000 x 8% x 4/12) = $8,000. Option (C) is incorrect because it represents the semi-annual interest payment ($300,000 x 8% x 6/12) = $8,000.

Answer 346

a Explanation: Carrying value of the bonds Payable = Face value of the bond - Unamortized discount on bond Issue. Ending carrying value of bond = Beginning balance + Amortization expense. When bond is amortized, Beginning period balance is added to amortized portion to arrive at ending carrying value of the bonds $360,000 = ($363,600 - $3,600). Amortization of $3,600 is reduced from the $363,600 carrying value at the end of the year which is otherwise added to the beginning value. Option (B) is incorrect because it is adding the semi-annual amortization for period 0.5 to the ending balance. Option (C) is incorrect because $476,400 is reducing amortizing expense $3,600. Option (D) is incorrect because $480,000 is the bonds payable at maturity.

Answer 347

c Explanation: Since after the date of the enterprise's balance sheet but before the balance sheet was issued, $1,500,000 (100,000 x $15) of common stock was issued for the purpose of refinancing the note payable on a long-term basis, $1,500,000 of the note payable should be excluded from current liabilities at the balance sheet date.

Answer 348

b Explanation: The straight-line method is acceptable only when the premium or discount is immaterial, because it fails to determine the periodic interest expense in terms of the effective rate of interest.

Answer 349

C Explanation: Unamortized bond premium, 6/30, year 2 ($105,000 - $100,000) $5,000 Bonds payable carrying amount, 6/30, year 2 $105,000 Times: Annual effective interest rate × _ 6% Interest expense, 6/30, year 2 - 6/30, year 3 $ 6,300 Annual interest payment ($100,000 × 7%) _(7,000) Bond premium amortization, 6/30, yr 2 - 6/30, yr3 __ (700) Unamortized bond premium, 6/30, year 3 $4,300 Option (A), (B), and (D) are incorrect due to improper calculations

Answer 350

A Explanation: A gain is recognized because the cost to redeem the bonds is less than the carrying amount of the bonds. Face amount of bonds retired (600 × $1,000) $ 600,000 Add: Unamortized bond premium _ 65,000 Bond carrying amount at retirement date $ 665,000 Less: Cost to retire ($600,000 × 102%) __(612,000) Pretax gain on retirement of bonds $ 53,000 Option (B) is incorrect because gain is reported for the difference between carrying value and amount paid. Option (C) is incorrect because retirement of bonds resulted in a gain and not a loss. It incorrectly treats unamortized premium as loss instead of adding it to the face value of the bonds to be retired to arrive at its carrying value. Once the carrying value is computed, amount paid to retire bonds is deducted from carrying value of the bonds to arrive at gain or loss. Option (D) is incorrect because this option is adding the redemption premium of $12,000 to the unamortized premium of $65,000 to get the total loss. Refer explanation above.

Answer 351

b Explanation: Subsequent to purchase, debt securities classified as held-to-maturity are carried in the investment account at cost, net of premium or discount amortization to date, with a separate valuation account for any difference between unamortized cost and fair value. If there is a decline in market value which is deemed permanent, then the security should be written down to fair value by a credit to the investment account, and a realized loss is recognized. Debt securities purchased between interest dates should be recorded separately from accrued interest. Investment in marketable debt securities XX Accrued interest receivable XX Cash (cost of security plus accrued interest) XX

Answer 352

d Explanation: Bond premium or discount, if material, should be amortized using the effective interest method prescribed.

Answer 353

a Explanation: When bonds are issued at a discount, the Discount on Bonds Payable account is a contra-liability account to Bonds Payable, i.e., it reduces the carrying amount of the bonds. Thus, as the bond discount is amortized, the carrying amount of the bonds increases. The bond discount amortization increases the interest expense on the bonds, and so net income decreases.

Answer 354

d Explanation: The portion of long-term debt due within the next fiscal period is not classified as current if the maturing portion will be paid from the proceeds of a new bond issue or noncurrent assets.

Answer 355

d Explanation: Serial bonds are bonds issued at the same time but having different maturity dates. These are also called installment bonds because they provide a series of installments for repayment of principal. Debenture bonds are unsecured bonds; they are not supported by a lien or mortgage on specific assets, but they mature at the same time. Term bonds all mature on a specified date. Variable rate bonds have a fluctuating interest rate, but mature at the same time.

Answer 356

c Explanation: The total amount consists of 2 calculations: the present value of the interest annuity and the present value of the principle. Present value is computed using the market/yield/effective interest rate.

Answer 357

b Explanation: If bonds are purchased between interest payment dates, the purchaser/borrower will also include the accrued interest through the purchase date in the total cash paid for the bonds. When a bond is purchased at a discount, the carrying value of the bond will be lower than the face value of the bond. Therefore, a bond purchased between interest dates at a discount has a carrying amount that is lower than both the cash paid to the seller and the face value of the bond. Options (A), (C) and (D) are incorrect as per above.

Answer 358

d Explanation: Notes payable, like bonds payable, have a principal component and interest component that must be calculated each period. If the interest rate is not stated, the note is recorded at the fair value of the property, goods, or services exchanged or at the amount that approximates the market value of the note, whichever is more clearly determinable. In the absence of established exchange prices for the related services or evidence of the market value of the note, the note is recorded at its present value by discounting all future payments on the note using an imputed interest rate. The note payable is not presented at the just the full face amount and there is no separate deferred asset or credit calculated for the discount.

Answer 359

b Explanation: A noninterest-bearing note exchanged for property, goods, or services should not be recorded at its face amount. Since there is not an established exchange price for the equipment and the question does not indicate the fair value of the note, the note should be recorded at its present value, which is computed by discounting all future payments of the note at the prevailing rate of interest for a note of this type. ``` Face amount of note $ 600,000 Less: Imputed interest [$600,000 × (1 - 0.75)] (150,000) Carrying amount of note, 1/2 450,000 Times: Effective interest rate × 10% Interest income $ 45,000 ```

Answer 360

c Explanation: Amortization of a bond premium decreases interest expense and the carrying amount of the bond for the issuer, while the amortization of a bond discount increases the issuer’s interest expense and the carrying amount of the bond. If a premium on a bonds payable transaction is not amortized, then interest expense would be overstated and total stockholders’ equity would be understated. Options (A), (B) and (D) are incorrect as per above explanation.

Answer 361

Explanation: The correct answer is (B). Debt securities (e.g., bonds) that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Only debt securities classified as either trading debt securities or available-for-sale debt securities are reported at fair value. Debt securities generally should not be reported at cost or lower-of-cost-or-market if they are accounted for as held-to-maturity securities.

Answer 362

d Explanation: The market price of a bond is equal to the present value of the bond’s interest and principal payments, discounted using the market interest rate for that type of bond.

Answer 363

c Explanation: The correct answer is (C). A Bond issue cost is a cost directly associated with bond issuance e.g., printing & engraving costs, legal & accounting fees, underwriter commissions, promotion costs, etc. Per the FASB standard update issued in 2015, bond issue costs should be deducted from the carrying value of bonds and amortized using the effective interest method (i.e., bond issue costs are treated similar to the discount/premium on bonds payable and is reported as an adjustment to bond payable liability). Gain or loss on extinguishment of debt is the difference between cash paid at retirement and the carrying value of the bond at retirement and is recognized in the year of redemption in income from continuing operations.

Answer 364

c Explanation: Noninterest-bearing notes must be recorded at the fair value of the property, goods, or services exchanged, or at an amount which approximates the market value of the note, whichever is the more clearly determinable. If neither of these amounts can be determined, the note should be recorded at its present value, computed by discounting all future payments of the note at the prevailing rate of interest for similar notes. The difference between the face amount of the noninterest-bearing note payable and the amount at which it is recorded is amortized as interest expense over the life of the note by the effective interest method.

Answer 365

Explanation: The correct answer is (B). Bond issue cost is the cost directly associated with bond issuance e.g., printing & engraving costs, legal & accounting fees, underwriter commissions, promotion costs, etc. As per FASB standard update issued in 2015, bond issue costs should be deducted from the carrying value of bonds and amortized using effective interest method i.e., bond issue costs is treated similar to discount/premium and is reported as an adjustment to bond payable liability. Prior to this update, bond issue costs were capitalized and deferred as a separate asset on a company’s balance sheet and amortized using the straight-line method. In either of the two methods of reporting- either as a deferred asset or as a reduction in the liability, the same amount will be deducted as an expense in the income statement using the effective interest method.

Answer 366

Explanation: The correct answer is (A). FASB issued Accounting Standards Update 2015-03 requiring Bond Issue Costs to deducted from the CV of bonds and amortized using effective interest method i.e., Bond Issue Costs are treated similar to discount/premium & reported as an adjustment to Bond Payable liability. The Bonds Payable liability is $1,000,000 - $10,000 - $35,000 = $955,000. Face amount of bonds ($1,000 x 1,000) $1,000,000 Bond Issue Costs (35,000) Discount on bonds [$1,000,000 - ($1,000,000 x 99%)] (10,000) Amount to be reported as bond liability, 6/30 $ 955,000 The journal entry would be as follows: DR Cash 955,000 DR Bond issue Costs 35,000 DR Discount on Bonds Payable 10,000 CR Bonds Payable 1,000,000

Answer 367

D Explanation: The principal payments on the long-term debt that are due in the next year are reported as current maturities of long-term debt at 12/31 of the current year. 14 1/2% term note, due next year $ 3,000 8% note, principal due 12/31 next year ($110,000 / 11) 10,000 Current maturities of long-term debt, 12/31 of current year $13,000

Answer 368

Explanation: The correct answer is (C). In a debt restructuring, the debtor follows a two-step process: 1. Revalues the asset to its fair value and recognizes a gain or loss and then 2. Determines restructuring gain = Carrying Value of debt - Fair Value of asset given up. In the given case, Ace first recognizes a gain for revaluing the real estate to its Fair Value = Fair Value of real estate - Carrying Value of the real estate Revaluation = $100,000 - $75,000 = $25,000 gain Ace then would recognize a restructuring gain for the difference between the Carrying Value of the liability and the Fair Value of the real estate transferred. Restructuring = $150,000 - $100,000 = $50,000 gain Option (A), (B) and (D) are incorrect as per above explanation.

Answer 369

c Explanation: An entity must evaluate whether early debt extinguishment is extraordinary using the same criteria as other events

Answer 370

d Explanation: When bonds are issued at a premium, the Premium on Bonds Payable account is added to the Bonds Payable account to determine the initial carrying amount of the bonds. As the bond premium is amortized, the carrying amount of the bond decreases.

Answer 371

c Explanation: In determining the carrying amount of bonds, an adjustment is made for premium or discount amortization to the date of sale. Amortization of a bond premium decreases interest expense and the carrying amount of the bond, while the amortization of a bond discount increases the issuer's interest expense and carrying amount of the bond. ``` Date Interest Paid (4%) Interest Expense (5%) Amortization Carrying Value 1/1 $46,139 6/30 $2,000 $2,307 $307 46,446 12/31 2,000 2,322 322 46,768 $46,139 + $307 + $322 = $46,768 . ``` Option (A) is incorrect because $46,139 is the discounted value of the bond at issuance on1st Jan. Option (B) is incorrect because $46,446 is the carrying value of the bond on Jun 30. Option (D) is incorrect because $47,106 is the carrying value at the end of 1.5 years.

Answer 372

b Explanation: The amount of interest revenue recognized is determined as follows: Bond investment carrying amount, January 1 $375,600 Effective interest rate × 10% Interest revenue recognized in the current year $ 37,560

Answer 373

a Explanation: When bonds are issued, only the face amount of the bonds is recorded in the "Bonds Payable" account

Answer 374

d Explanation: If a bond is sold at a discount, it is sold for less than its face value. Therefore, the discount is a direct reduction from the face amount of the note. 'Addition to the face amount of the note' describes a premium, not a discount. Discounts and premiums directly determine the carrying amount of the bond; they are not handled as deferred charges or credits.

Answer 375

d Explanation: When bonds are issued between interest dates (April 1 and October 1), the issue price will also include the accrued interest from the date of the last interest payment (April 1) till the date of issue (July 1). This accrued interest will be a current liability and will serve to reduce the subsequent payment of interest for the time period the bond was not held. ``` Bond Price ($1,000 × 99% × 600 bonds) $594,000 Plus: Accrued interest at stated interest rate (10% × $1,000 × 600 bonds × 3/12) $ 15,000 Proceeds from bond issuance $609,000 Option (A) is incorrect because accrued interest should be added to bond issue price received, not subtracted. Option (B) is incorrect because accrued interest is also received along with the bond issue price. Option (C) is incorrect because bond is issued at a discount and therefore only $594,000 will be received and accrued interest of $15,000 should be added. ```

Answer 376

a Explanation: In a partnership liquidation, creditors have priority on any distribution.

Answer 377

Explanation: The correct answer is (B). Step 1 : PV of Bond Market Interest Rate of 8% (PV of $1) x Principle PV of Bond = $100,000 x .68058 = $68,058 Step 2: PV of Interest Calculate Bond Interest: Bond Interest Rate of 5% x Principle = $100,000 x 5% = $5,000 PV of Ordinary Annuity Due on 12/31 at 8% x Bond interest = $5,000 * 3.99271 = $19,964 Step 3: PV of bond + PV of interest $68,058 + $19,964 = $88,022 Step 4: Calculate the amortization for this discount bond. Effective Interest = $88,022 x 8% = $7,041.76 Interest Paid = $5,000 Amortization of Discount = Effective Interest - Interest Paid = $7,041.76 - $5,000 = $2,041.76 Step 5: Add the amortization back to the Carrying Value $88,022 + $2,041.76 = $90,064 (rounded) (A) is incorrect as this represents the value of net bonds payable at the beginning of the year. (C) is incorrect because this is the face value of the bonds. (D) is incorrect because of improper calculations.

Answer 378

d Explanation: Current liabilities are obligations whose liquidation is expected to require the use of existing current assets or the creation of other current liabilities. Current assets are assets that are reasonably expected to be converted into cash or used during the normal operating cycle of the business or one year, whichever is longer. Therefore, current liabilities are expected to be liquidated within the normal operating cycle of the business or one year whichever is longer. Even though the bank loan appears to be long term, it is in violation of the loan agreement. The creditor has not waived their rights to demand payment of the loan, therefore, Wilk should report the entire balance of the loan as a current liability, not just the amount that would be due within one year if it was not in violation of the loan agreement. The "other bank loan" will mature in less than one year and is classified as a current liability. Of course, accounts payable and short-term borrowings are also current. $750,000 + $400,000 + $3,500,000 + $1,000,000 = $5,650,000 CLOSE

Answer 379

a Explanation: When bonds are issued with detachable stock warrants, the proceeds must be allocated between the warrants and the debt security based on relative fair values.

Answer 380

d Explanation: Because the bond sinking fund is earmarked for the retirement of long-term debt, its entire balance (i.e., all contributions to the fund plus all interest accumulations added to the fund balance to date) should be reported as a noncurrent asset in the investments section of the balance sheet.

Answer 381

D Explanation: Three interest dates exist from 1/2, year 2 to 6/30, year 3. Gill Co. should have amortized 15% (3 interest dates ÷ 20) of the bond issue costs at 6/30, year 3. $250,000 - $37,500 = $212,500 Bond issue costs, 1/2, year 2 $ 250,000 Divide by: Number of semi-annual interest dates (10 x 2) / 20 Semiannual amortization of bond issue costs $ 12,500 Times: Number of interest dates from 1/2, year 2 to 6/30, year 3 x 3 Amortization, 1/2, year 2 to 6/30, year 3 (37,500)

Answer 382

c Explanation: The correct answer is (C) Detachable Warrant is a security that can be sold / exercised by the bondholder while retaining the bond. Since the warrant is separable from the bond, a value is assigned to both bond and warrant.Value for the detachable warrants is recorded in Additional Paid in capital (APIC). If FMV of both bonds and warrants are known relative fair market value is assigned to bond and warrant. However, If FMV of only warrant is known. The FMV of warrants is assigned to warrants and balance is assigned to Bonds.

Answer 383

d Explanation: A bond issue will sell for less than its face amount (i.e., at a discount) when the nominal or stated interest rate is less than the market rate.

Answer 384

a Explanation: The effective interest method of amortization calls for recognizing interest expense at the effective interest rate at which the bonds were sold. Thus, this interest method overcomes the criticism of the straight-line method because it offers a more accurate measurement of interest expense. To amortize a premium using the effective interest method, multiply the carrying amount of the bond issue by the effective yield. This equals interest expense for the period. The difference between the cash interest payment and the interest expense equals the amount of premium amortization for the period. The cash payment is always computed by multiplying the face amount of the bond by the face or stated interest rate. Option (B) is incorrect because it is the interest expense in the year 1. Option (C) is incorrect as per the above explanation. Option (D) is incorrect because it is used to calculate the interest expense at any point of time before bond matures.

Answer 385

c Explanation: Bond investment carrying amount, 7/1 $1,198,000 Times: Effective interest rate (8% / 2) x 4% Interest income, 7/1 - 12/31 $ 47,920 Semiannual interest payment [$1,000,000 x (10% / 2)] (50,000) Amortization of bond premium, 12/31 $ (2,080)

Answer 386

d Explanation: Bonds purchased at a discount are purchased at less than their face amount. The subsequent amortization of the discount increases the carrying amount of the bond investment and the amount of interest income recognized. Simple interest 7/1 - 12/31, year 1 [$500,000 x (8% / 2)] $20,000 Amortization of discount on bond investment (given) 1,800 Interest revenue recognized in year 1 $21,800

Answer 387

d Explanation: Face amount of note on 7/1, year 1 $100,000 Less: Payment of first installment on 12/31, year 1 (50,000) Face amount of note on 12/31, year 1 (due 12/31, year 2) 50,000 Add: Interest to maturity ($50,000 × 10% × 12/12) 5,000 Maturity value of remaining portion of note 55,000 Less: Bank discount ($55,000 × 12% × 6/12) (3,300) Proceeds from discounted note $ 51,700

Answer 388

c Explanation: A line-of-credit (LOC) is an agreement that provides the borrower with the option to make multiple borrowings up to a specified maximum amount, to repay portions of previous borrowings, and to then reborrow under the same contract. Short-term obligations are those that are scheduled to mature within one year (or the operating cycle, if applicable) after the date of an entity’s balance. Long-term obligations are those scheduled to mature beyond one year (or the operating cycle, if applicable) from the date of an entity’s balance sheet. Total current liabilities would be $400,000 – the amount outstanding on the LOC ($250,000) and the current amount due on the secured note ($750,000/5 = $150,000). Total long-term liabilities would be $900,000 – the remaining $600,000 secured note and the $300,000 balloon note (i.e., no payment is due until the third year).

Answer 389

Explanation: The correct answer is (D). In a debt restructuring, the debtor follows a two-step process:- Revalues the asset to its Fair Value and recognizes a gain or loss and then Determines Restructuring Gain = Carrying Value of debt - Fair Value of asset given up. In the given case, Casey first recognizes a gain for revaluing the real estate to its fair value = Fair Value of real estate - Carrying Value of the real estate Revaluation Gain = $120,000 - $85,000 = $35,000 gain Casey then would recognize a restructuring gain for the difference between the carrying value of the liability and the fair value of the real estate transferred Restructuring Gain = $185,000 - $120,000 = $65,000. Option (A), (B) and (C) are incorrect as per above explanation.

Answer 390

Explanation: When the interest date does not coincide with the end of the accounting period, the issuer must accrue interest expense through year-end. Therefore, bond interest expense for the year ended December 31, is for a period of seven months--from the date of issuance of June 1 to year-end of December 31.

Answer 391

$0 Explanation: A loss is recognized on the redemption because the cost to redeem the bonds exceeds the carrying amount of the bonds. Face amount of bonds $ 500,000 Discount at issuance [$500,000 - ($500,000 x 98%)] $ 10,000 Amortization to extinguishment date ($10,000 × 12/15*) (8,000) Less unamortized discount at extinguishment $ (2,000) Bond issue costs incurred $ 20,000 Amortization to date of extinguishment ($20,000 × 12/15*) (16,000) Less unamortized bond issue cost at extinguishment (4,000) Bond carrying amount at extinguishment 494,000 Cost to redeem ($500,000 × 102%) (510,000) Pretax loss on early debt extinguishment $ (16,000)* The interest on the 15-year bonds was payable annually. Thus, there were 15 interest dates over the life of the bonds. The discount and bond issue costs must be amortized up to the extinguishment date (i.e., year 13--the twelfth interest date).

Answer 392

d Explanation: A trustee in a bankruptcy case takes over the assets of the debtor corporation and is accountable for those assets until released by the bankruptcy court. In liquidation cases, the trustee often establishes a new set of books for the bankruptcy estate. The assets are recorded on the trustee's books at carrying amounts rather than at expected realizable values because of the subjectivity involved in estimating realizable amounts at the time of filing. The trustee records gains and losses and liquidation expenses directly in the Estate Equity account. Any unrecorded assets or liabilities that are discovered by the trustee are also entered in the Estate Equity account. Therefore, $9,000 [i.e., $1,000 + ($20,000 - $12,000)] should be debited to Estate Equity as a result of the discovery of the unrecorded invoice and the sale of the truck.

Answer 393

c Explanation: When bonds are issued with detachable stock purchase warrants, the proceeds are allocated between the bonds and the warrants with the amount allocated to the warrants is recorded in additional paid-in capital (APIC). Thus, the amount allocated to warrants is recorded as contributed capital. The proceeds are allocated in the ratio of the relative fair market values of the bonds and the warrants. Since the aggregate market value of those securities exceeds the proceeds, the amount allocated to each security, in proportion of the market value, would be lower than its actual market value. Options (A), (B) and (D) are incorrect based on the above explanation.

Answer 394

c Explanation: The account Discount on Bonds Payable reduces the carrying amount of the bonds by the amount of the discount. Thus, as the bond discount is amortized, the carrying amount of the bond increases until it reaches the face amount of the bond. The account Premium on Bonds Payable increases the carrying amount of the bonds by the amount of the premium. Thus, as the bond premium is amortized, the carrying amount of the bond decreases toward the face amount of the bond.

Answer 395

d Explanation: Although an investor entity initially records bonds held for investment at an amount equal to the purchase price of the bond plus other direct costs of acquisition, such as broker’s fees, it is also true that: (1) if it buys bonds between interest dates, it will have to pay an additional amount for the interest accrued on the bond since the last interest date (or the bond date, if before the first interest date); and (2) it must record the additional amount paid due to purchasing the bonds between interest dates as purchased interest, such as interest receivable, rather than adding it to the cost of the bond investment. Since the answers for (A), (B), and (C) are all correct, the best answer for this question is D., all of the above.

Answer 396

a Explanation: Convertible debt securities are debt securities that are convertible into common stock of the issuer or an affiliated company at a specified price at the option of the holder. The terms of such securities generally include (1) an interest rate that is lower than the issuer could establish for nonconvertible debt, (2) an initial conversion price that is greater than the market value of the common stock at time of issuance, and (3) a conversion price that does not decrease except pursuant to antidilution provisions.

Answer 397

c Explanation: The proceeds from the sale of debt with stock purchase warrants should be allocated between the two instruments based on the relative fair values of the debt security without the warrants and the warrants themselves. The portion of the proceeds allocated to the warrants is accounted for as paid-in capital. The remainder is allocated to the face amount of the bond, and to the extent remaining, to premium on bonds payable..

Answer 398

a Explanation: The correct answer is (A). The market value of a bond consists of two parts: The present value of cash flows from interest (calculated at the stated rate) and discounted at market rate, and The present value of the principal discounted at the market rate of interest. These two amounts are added together to get the market price or selling price of the bond.

Answer 399

c Explanation: The term current liabilities is used primarily to designate obligations whose liquidation is reasonably expected to require the use of existing resources classified as current assets, or the creation of other current liabilities. Accounts payable is a type of current liability. Short-term obligations are those scheduled to mature within one year or operating cycle, whichever is longer, and generally are classified as current liabilities. However, if they are to be refinanced on a long-term basis they will be appropriately classified as long-term liabilities. Exclusion from current liabilities requires two conditions be met; 1) the enterprise must intend to refinance the obligation on a long-term basis, and 2) the enterprise must have the ability to consummate the financing. A refinancing that occurs after the balance sheet date but before the issuance of the balance sheet is evidence of intent and ability.

Answer 400

d Explanation: The purchaser of a bond acquires the right to receive two cash flows: a lump sum paid at maturity for the face amount of the bond, and an annuity consisting of periodic interest payments over the life of the bond. The price the market is willing to pay for the bond is equal to the present value of these two cash flows, discounted at the prevailing market interest rate for bonds having the same maturity and perceived degree of risk. When interest rates increase, the present value of the two cash flows decreases, causing the market value of the bonds to decline. The issuance of a stock dividend should not cause a decline in the market value of the bonds. If the bonds currently are quoted at a small discount and the bonds are expected to be called at a premium (i.e., above face amount), this situation would most likely have the effect of causing a rise in the market value of the bonds. A decline in interest rates would cause a rise in the bond’s market value. Option (A) is incorrect because issuing a stock dividend will not affect the market value of a bond. Option (B) is incorrect because market value of bond does not depend on what amount it is going to be called at in future. Option (C) is incorrect because interest rates would have increased not decreased which would lead to a decline in the bond value.

Answer 401

a Explanation: In a troubled debt restructuring, the total fair value of the consideration given to discharge the obligation will always be less than the recorded amount of the debt.

Answer 402

Explanation: The correct answer is (D). The par bonds being sold at 97 indicate that they are being sold at a 3% discount. Total Discount is 3% x $2,000,000 = $60,000. Discounts on bonds held long-term must be amortized from date of acquisition to maturity date, normally using the interest method to amortize these differences. Other methods of amortization (straight-line) may be used if the effects are not material. Bond issue costs should be classified as a deferred charge (i.e., asset) and amortized over the life of the bonds as an increase to interest expense. When all or part of a bond issue is retired before maturity, it is necessary to write off both the principal and the pro-rata portion of the unamortized premium or discount on the retired bonds. If bond issue costs were incurred and recorded as an asset (i.e., as a deferred charge), it is also necessary to write off a pro-rata portion of the bond issue costs (when retired before maturity). The amount of such write-off increases any loss or reduces any gain recognized on retirement. The sale of bonds results in a gain or loss equal to the difference between the carrying amount of the bonds and the proceeds received on their disposal. In determining the carrying amount of the bonds, an adjustment must be made for the discount amortization to date of sale. Bonds Payable (Face Value) $2,000,000 Unamortized Discount [($60,000 / 30) × 20 yrs.] ($40,000) Unamortized Issue costs [($120,000 / 30) × 20 yrs.] ($80,000) Carrying amount of bonds retired $1,880,000 Purchase price ($2,000,000 × 103%) $2,060,000 Loss on bond retirement, before income taxes ($180,000)

Answer 403

d Explanation: The amount paid to the stockholders at the end of the fifth year should be the accumulated annual interest, $4,500,000 × 10% × 5 yrs = $2,250,000 over the five years, plus the notes payable issue amount of $4,500,000.

Answer 404

a Explanation: Unamortized bond discount, 7/1, year 1 $61,000 Amortization, 7/1, year 1 - 6/30, year 2: Bonds payable carrying amount, 7/1, year 1 $939,000 Effective interest rate x 10% Interest expense, 7/1, year 1 - 6/30, year 2 $ 93,900 Interest payment ($1,000,000 x 9%) (90,000) Bond discount amortization, 7/1, year 1 - 6/30, year 2 (3,900) Bonds payable carrying amount, 7/1, year 2 ($939,000 + $3,900) $942,900 Effective interest rate x 10% Interest expense, 7/1, year 2 - 6/30, year 3 $ 94,290 Interest payment ($1,000,000 x 9%) (90,000) Amortization for 7/1, year 2 - 6/30, year 3 (4,290) Unamortized bond discount, 6/30, year 3 $52,810

Answer 405

Explanation: The correct answer is (A). When bonds are issued with detachable warrants, the value for such detachable warrants is posted in Additional Paid-in Capital (APIC). A value is given to both the bond and the warrant for the simple reason that warrants are clearly separable from the bond. If the fair market values of both the securities are known, values are determined as per relative FMV approach. However, in case the FMV of only one of the security is known, the other security’s value is derived using a plug. In the given problem statement, the fair value of only the detachable warrant is known i.e. $1 x 200,000 = $200,000. Since the bonds were issued at 101, the cash inflow = $4,000,000 x 101 = $4,040,000. The value of bonds i.e. long-term debt = 4,040,000 – 200,000 = $3,840,000.

Answer 406

c Explanation: World’s interest rate on the $1,000,000 note payable was 9%. The loan is outstanding for three months interest for the year. The interest expense is $1,000,000 × .09 × 3/12 = $22,500.

Answer 407

b Explanation: $62,000 - $1,900 = $60,100 Bonds payable carrying amount, 5/1 ($1,000,000 + 62,000) $1,062,000 Semiannual effective interest rate (10% / 2) × 5% Interest expense, 5/1 - 10/31 $ 53,100 Semiannual interest payment due 11/1 [$1,000,000 × (11% / 2)] (55,000) Bond premium amortization, 5/1 - 10/31 $ (1,900)

Answer 408

d Explanation: The net proceeds of a bond issuance is determined by calculating the present value of the projected cash flows of the bonds at the yield rate (market rate) of interest and then deducting bond issuance costs. The stated rate of interest is used to determine the amount of cash to be paid at each payment date, but the market rate is the rate used to discount the cash flows to present values.

Answer 409

b Explanation: Serial bonds are a set of bonds issued at the same time but having a different maturity date; thus providing a series of installments for repayment of principal. Option (A) is incorrect because debenture bonds are unsecured bonds. Option (C) is incorrect because term bond single maturity date with entire principal maturing on a single date at the end of the term. Option (D) is incorrect because sinking fund bond may be set up for the retirement of bonds (may even be required as per bond indenture). Explanation: Serial bonds are a set of bonds issued at the same time but having a different maturity date; thus providing a series of installments for repayment of principal. Option (A) is incorrect because debenture bonds are unsecured bonds. Option (C) is incorrect because term bond single maturity date with entire principal maturing on a single date at the end of the term. Option (D) is incorrect because sinking fund bond may be set up for the retirement of bonds (may even be required as per bond indenture).

Answer 410

Explanation: The correct answer is (A). Bond issues maturing on a single date are called term bonds, whereas bond issues maturing in installments are called serial bonds. Since the registered bonds and the commodity-backed bonds both mature in installments, the total amount of serial bonds is $475,000 (i.e., $275,000 + $200,000). Debenture bonds are unsecured bonds; they are not supported by a lien or mortgage on specific assets. Since the registered bonds and the convertible bonds are unsecured, the total amount of debenture bonds is $400,000 (i.e., $275,000 + $125,000).

Answer 411

b Explanation: Interest payable is the amount of interest due to the bondholder from the date of last payment of interest (October 1, 20X1) till the year end (December 31, 20X1), irrespective of the date of issue of the bond (November 1, 20X1). Interest payable = Face value x Stated interest rate x period since last payment = $8,00,000 x 8% x 3/12= $16,000. Option (A) is incorrect because interest payable is calculated using total proceeds received and market interest rate. Interest payable should be calculated based on the face value and stated interest rate. Option (C) is incorrect because interest payable is calculated using total proceeds received and market interest rate for a period of two months calculated from date of issue (November 1). Interest payable should be calculated based on the face value and stated interest rate for a period of three months from date of last interest payment (October 1). Option (D) is incorrect because interest payable is calculated for a period of two months from date of issue (November 1). It should be calculated for a period of three months from date of last interest payment (October 1)

Answer 412

b Explanation: A gain is recognized because the cost to redeem the bonds is less than the carrying amount of the bonds. Face amount of bonds $5,000,000 Add: Unamortized bond premium 30,000 Less: Unamortized bond issue costs (50,000) Bond carrying amount at redemption date $ 4,980,000 Cost to redeem ($5,000,000 × 98%) (4,900,000) Pretax gain on redemption of bonds $ 80,000

Answer 413

b Explanation: Long-term liabilities are all obligations not expected to be liquidated by the use of existing current assets or by the creation of current liabilities. Examples include: (1) long-term notes payable, (2) refinancing of short-term obligations, and (3) bonds payable. The binding agreement to refinance the existing note payable, extending the maturity date three years, changed the note payable classification from a current liability to a long-term liability. A note payable would not be reported as a receivable.

Answer 414

Explanation: The correct answer is (B). Nu Corp recognizes an ordinary gain on the early extinguishment of debt equal to the excess of the carrying amount of the obligation settled over the fair value of the asset transferred. Nu Corp also recognizes an ordinary loss equal to the excess of the carrying amount over the fair value of the asset transferred, which is reported in income from continuing operations. [($9,000 - $13,000 = (4,000)]. Carrying amount of obligation at extinguishment date $105,000 Fair value of asset transferred (96,000) Gain on early debt extinguishment $ 9,000 Carrying amount of asset transferred $109,000 Fair value of asset transferred (96,000) Loss on transfer of asset ($13,000) Total Net Gain (Loss) ($4,000)

Answer 415

c Explanation: Since the fair market value of the bonds is not determinable, the incremental method is used to determine the value of the bonds and warrants. That is, the market value is used for the warrants and the remainder of the purchase price is allocated to the bonds. Issuance Price (1,000 bonds × $1,000 × 109%) $1,090,000 Fair value of the warrants (1,000 × 50 × $4) (200,000) Portion allocated to bonds $ 890,000 Face value of bonds $1,000,000 Portion allocated to bonds (890,000) Discount on bonds $ 110,000Answers (a), (b), and (d) are incorrect because the market value of the warrants is known and, therefore, must be used to determine the portion of the total issuance price that is allocated to the warrants.

Answer 416

c Explanation: A bond will sell at a discount (less than par) when the stated interest rate is less than the market rate. The amount of the discount will be equal to the difference between the bond payable amount and the cash received. The bond discount is recorded in a separate account in the balance sheet as a direct deduction from the face amount of the bond. The discount will be amortized over the period from the date of sale to the maturity date as interest expense. Thus, the total interest expense over the term of debt equals the cash interest paid plus the discount amount at issue.

Answer 417

a Explanation: The total amount consists of 2 calculations: the present value of the interest annuity and the present value of the principle. Interest is paid semi-annually, so there are 20 compounding periods. The discount rate is always the market/yield rate, which is 10% annually or 5% semi-annually. The semi-annual interest payment is (computed using the face/stated interest rate) $40,000 [$1,000,000 * 8% * 6/12]. The total amount for the bonds is $875,480: the pv of the interest annuity $498,480 [$40,000 * 12.462] + the pv of the principle $377,000 [$1,000,000 * .377].

Answer 418

b Explanation: The amount that should be reported as the noncurrent portion of Note Payable to Contest Winner at 12/31 of year 1 is $418,250, the cost of the annuity purchased to provide for the $950,000 of prize money to be paid after 12/31 of year 2. This is the most objective available evidence of the present value of the prize money due.

Answer 419

Explanation: The correct answer is (D). When the bond is issued on June 1, the bond issuer is liable to pay the interest for a period starting from the date of issue. In the given case, interest for 4 months (June to September) should be paid on October 1. Further, interest for 3 months (October to December) is accrued and paid on April 1, year 2. In total, there are 7 months of interest expense

Answer 420

c Explanation: When bonds are issued with detachable stock warrants there must be an allocation of the proceeds between the warrants and the debt security based on relative fair values. Vent would debit Cash $450,000, credit Bond Payable $500,000, and credit APIC-Stock Warrants for their fair value of $20,000 (2,000 detachable warrants at the market price of $10). The entry needs a $70,000 debit to balance and that is the discount on the debentures.

Answer 421

c Explanation: The note should not be recorded at its face amount because its stated interest rate of 16% does not approximate the market rate of interest of 11% for similar notes. When a note which does not bear the market rate of interest is exchanged for property, goods, or services, the note is to be recorded at the fair value of the property, goods, or services or the fair value of the note, whichever is more clearly determinable. Since neither of these amounts are determinable for the note in question, the note should be recorded at its present value. The interest rate to be used in the discounting process is the borrower's incremental borrowing rate (market rate) at the date the note is issued (11% in this case). Because the market rate of 11% is less than the stated rate of the note of 16%, the present value of the note is greater than the face amount of the note. Therefore, the correct journal entry at the date the note was issued would involve a debit to Purchases for the present value of the note, a credit to Note Payable for the face amount of the note, and a credit to Premium on Note Payable for the excess of the note's present value over its face amount. Fleur recorded the purchase at the note's face amount which understated the cost of the merchandise which was subsequently sold in the prior year. Therefore, prior year cost of goods sold is understated by the amount of the unrecorded premium on the note (i.e., the excess of the note's present value over its face amount).

Answer 422

c Explanation: Long-term liabilities are all obligations not expected to be liquidated by the use of existing current assets or by the creation of current liabilities. Examples include long-term notes payable, refinancing of short-term obligations, and bonds payable.

Answer 423

d Explanation: Face amount of bonds (1,000 × $1,000) $1,000,000 Premium at issuance ($1,040,000 - $1,000,000) $40,000 Amortized to extinguishment date ($40,000 × 11/20*) _ (22,000) Add unamortized premium at extinguishment 18,000 Bond carrying amount at extinguishment 1,018,000 Cost to reacquire ($1,000,000 × 101%) _(1,010,000) Pretax gain on early extinguishment of debt $ 8,000 *The interest on the 10-year bonds was payable semiannually. Therefore, there were 20 (i.e., 10 × 2) interest dates over the life of the bonds. The premium must be amortized up to the date of retirement (i.e., 7/1, year 6 — the eleventh interest date). Option (A) is incorrect because this does not take into account of the amortized premium. Option (B) is incorrect because this calculates the amortized premium based on 4.5 years instead of 5.5 years. Option (C) is incorrect because this is the difference between the face value and the carrying value.

Answer 424

c Explanation: The market price of a bond is equal to the present value of the principal amount due at the end of the bond period and the present value of all future interest payments (present value of all cash flows of the bond), irrespective of whether it is issued at a discount or a premium. The present value is always computed using the bond’s market (effective) rate of interest. The principal amount of a $1,000 to be paid at the end of 10 years. Interest payment payable at the end of each period = $1,000 x 6% = $60 per year for 10 years. Present value for the principal and the interest would be the bond issue price, to be calculated using the bond's effective/ yield rate of interest = 9% as under: Amount Present Value factor Present Value Principal Amount $1,000 0.422 $422 Interest Payment $60 6.418 $385 Issue Price of the Bond $807 Option (A) is incorrect because it is the face value of the bond at maturity. It should consider the present value of the principal and present value of interest payment using present value factors at market rate of 9%. Option (B) is incorrect because interest payments are discounted at stated rate of 6% using the present value factor at 7.36, instead of using present value factor 6.418 [($1,000 x 0.422) + ($60 x 7.36) = $864]. Option (D) is incorrect because present value of the principal amount is calculated at stated interest rate of 6% using present value factor 0.558 and the present value of interest payments are calculated using the future value factor of 2.367 instead of using the present value factor at market rate of 9% for both principal and the interest payments [($1,000 x 0.558) + ($60 x 2.367) = $700].

Answer 425

Explanation: Amortization of a bond premium decreases interest expense and the carrying amount of the bond for the issuer, while the amortization of a bond discount increases the issuer’s interest expense and the carrying amount of the bond. Pension cost interest is part of net pension expense. Deferred compensation plan interest is part of compensation expense. Interest incurred to finance a software development for internal use is capitalized as part of the cost of the software.

Answer 426

Explanation: Amortization of a bond discount increases the carrying amount of the bond. Adding the bonds' year 1 carrying amount (cell E2) the discount amortization (cell D3) would net the bond's carrying amount at the end of year 2 (cell E3). Amortization of a bond premium decreases the carrying amount of the bond. Interest expense is not subtracted or added to the carrying amount directly.

Answer 427

c Explanation: Fox purchased bonds with a full 6 months interest accrued. Discounts are typically not shown in a separate account for bond investments, but netted against the carrying amount. The most efficient method to determine the carrying amount for the bond investment is to plug the following journal entry: Investment in Bonds $371,660 Plug Interest Receivable 16,000 $400,000 * 8% * 6/12 Interest Income 18,460 $369,200 * 10% * 6/12 Cash 369,200 given in problem

Answer 428

d Explanation: Engraving and printing costs, accounting and legal fees, commissions paid to underwriters, promotion costs, and other similar charges are incurred when bonds are issued. Bond issue costs should be recorded as a deferred charge and amortized over the life of the debt, in a manner similar to that used for discount on bonds. Therefore, $245,000 (i.e., $20,000 + $25,000 + $200,000) should be recorded as bond issue costs to be amortized over the term of the bonds.

Answer 429

c Explanation: To compute the amount at which the bonds payable should be reported, the proceeds from the bonds and the detachable stock warrants must be allocated between the two securities based on their aggregate relative fair values at the date of issue. Since the bonds are allocated $900,000 of the proceeds received, they were issued at a discount of $100,000 (i.e., $1,000,000 - $900,000). Therefore, the bonds should be reported in the balance sheet at face amount less unamortized discount. Relative aggregate fair value FMV % Proceeds to be allocated Proceeds allocated to each Bonds payable $1,080,000 90% $1,000,000 $ 900,000 Stock warrants 120,000 10% $1,000,000 100,000 $1,200,000 100% $1,000,000

Answer 430

a Explanation: The proceeds from the issuance of debt with detachable warrants is to be allocated to paid-in capital (the warrants) and to debt (the bonds) based on the relative fair values of the two securities at the time of issuance. When only the market value of the warrant is known, it is used to record the paid-in capital attributable to the issuance of the warrants. The remainder of the proceeds is recorded in debt accounts. A journal entry approach will be helpful in thinking through the rest of the question. Paid-in Capital is to be credited for the market value of the warrants. Bonds Payable is to be credited for the face amount of the bonds. Cash is to be debited for the cash proceeds. Because the question says that the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds, the entry needs a debit to balance. That debit has to relate to the bonds so it must be to Discount on Bonds Payable. Thus, the amount of proceeds allocated to debt is less than the face amount of the bonds so the bonds are issued at a discount.

Answer 431

c Explanation: A major characteristic of the book value method is that neither a gain nor a loss is recognized on the conversion of bonds to stock; the carrying amount of debt is taken out of the debt accounts and recorded in stockholders’ equity accounts. The market value method may result in a gain or loss because the stock is to be recorded at the market value of the stock (or bonds) and the carrying amount of the debt is to be removed from liability accounts. A difference between the market value of the stock and the carrying amount of the debt is to be recorded as a gain or loss, whichever is appropriate. Because of the relationships of amounts involved, it is evident that the market value of the stock exceeds the carrying amount of the debt; therefore, a loss will be recorded on the conversion. Those relationships are as follows: (1) the aggregate par value of the stock was equal to the total face amount (par value) of the bonds, (2) the market value of the stock is 50% above its par, and (3) the carrying amount of the debt is less than 5% above its par (the bonds were issued in a prior year at a 5% premium and at least 30% of that premium had been amortized prior to year 4)..

Answer 432

b Explanation: FASB ASC 470-10-45-14 requires that short-term obligations be reported as long-term liabilities if a company (1) intends to refinance the short-term obligation on a long-term basis and (2) demonstrates the ability to refinance it a long-term basis. The intent is stated in the problem. Verona's issuance of common stock for $400,000 before the statements were issued demonstrates the ability to refinance $400,000 of the short-term obligations on a long-term basis. The balance of the obligation ($100,000) must be reported as a current liability.

Answer 433

d Explanation: Special purpose funds result from the setting aside of specific assets, usually under the custody of a trustee for a particular purpose. Some funds may be voluntarily created, such as preferred stock acquisition funds and plant expansion funds. Other funds result from contractual obligations, such as debt retirement funds. The funds may or may not be under the custody of a separate trustee. The accounting depends on the specific nature of the fund, legal requirements, etc. Since answers A., B., and C. are correct, answer D., all of the above, is the best choice

Answer 434

b Explanation: $469,500 + $975 = $470,475 Bonds payable carrying amount, 1/2 $ 469,500 Effective interest rate (10% × 6/12) × 5% Interest expense, 1/2 - 6/30 $ 23,475 Interest payment [$500,000 × (9% × 6/12)] (22,500) Amortization of discount, 6/30 $ 975

Answer 435

b Explanation: The note’s 12% rate of interest and the bank’s 0.5% loan origination fee are based upon the face amount of the note. The cash received by the note holder is the face amount of the note less the loan origination fee. Since less cash is received than the amount on which the interest rate and loan origination fee is computed, the effective interest rate is more than 12.5%..

Answer 436

b Explanation: Allocation of the proceeds between the bond and the detachable stock purchase warrants, based on their relative fair values at the date of issue, is required. If the relative fair values are not known, then the fair value of either security is used. The question provides the fair value of the warrants, but not the fair value of the bonds without the warrants; therefore, the $4 fair value of the warrants is used. A stockholders'' equity account, paid-in capital--stock purchase warrants, is increased by $120,000 [($750,000 / $1,000) bonds × 40 warrants × $4 fair value].

Answer 437

a Explanation: Convertible bonds provide the bondholder the option of converting the bond to capital stock, typically common stock. Using the book value method, the conversion of the bonds into common stock is generally recorded by crediting the paid-in capital accounts for the carrying amount of the debt at the date of the conversion, less any cost associated with the conversion. The carrying amount of the bonds on the date of conversion is the $775,000 face value less the $23,000 unamortized discount. The journal entry would be: Bonds Payable 775,000 Bond Discount 23,000 Common Stock (90,000 × $5 par) 450,000 APIC (to balance) 302,000 Option (B) is incorrect because $325,000 does not account for unamortized discount which should be credited. Option (C) is incorrect because unamortized discount is debited, instead of crediting it. Option (D) is incorrect because it is the sum of bonds payable and unamortized discount ($775,000 + $23,000). Unamortized discount should be credited and further common stock issued at par also needs to be credited.

Answer 438

c Explanation: The market value method recognizes a gain or loss on retirement equal to the difference between the carrying amount of the debt at the date of the conversion and the fair value of the shares issued upon conversion.

Answer 439

Explanation: The correct answer is (B). This question is asking to use the effective interest method for amortizing premiums on bonds payable. On June 1, Greendale Corp. issued $700,000, five-year bonds at 8%, with interest payable annually on May 31. The bonds sold for $728,700 when the market rate of interest was 7%. The balance on bonds payable subsequent to first interest payment: Interest paid = $700,000 x 8% = $56,000 Interest expense = $728,700 x 7% = $51,009 Premium amortization = $28,700 ($728,700 - $700,000) - $4,991 ($56,000 - $51,009) = $23,709.

Answer 440

b Explanation: When an interest-bearing instrument is sold between interest payment dates, the seller collects accrued interest from the buyer. The buyer will later collect interest for a full interest period at the next interest payment date. In the case at hand, inventory is being exchanged for the note. Because the market rate of interest is equal to the note's stated rate, the note's present value is equal to the face amount of the note plus the one month's accrued interest. The journal entry to record the exchange involves a debit to Note Receivable for its face amount, a debit to Interest Receivable for the one month of accrued interest, and a credit to Sales Revenue for the sum of the note's face amount and the one month of accrued interest.

Answer 441

a Explanation: The factor for the present value of an annuity in advance is used because the first payment of the note was made immediately (i.e., 12/30, year 7). In addition, the carrying amount of the note at 12/31, year 7 is reduced by the $20,000 payment on 12/30, year 7. Periodic annual payments $ 20,000 Times: Present value of an annuity in advance of $1 at 11% for 8 periods × 5.712 Present value of all cash flows 114,240 Less: Payment, December 30, year 7 (20,000) Carrying amount of note, December 31, year 7 $ 94,240

Answer 442

b Explanation: The bond sinking fund balance increases as a result of the additional investment and the income on the investments in the fund (i.e., the dividend and interest revenue). It decreases due to the expenses of the fund (i.e., the administrative costs incurred). The carrying amount of the bonds payable does not affect the bond sinking fund balance. Bond sinking fund balance, 12/31, year 1 $450,000 Add: Additional investment, year 2 90,000 Dividends on investments 15,000 Interest revenue 30,000 Less: Administrative costs (5,000) Bond sinking fund balance, 12/31, year 2 $580,000

Answer 443

d Explanation: The carrying amount of the bonds at 12/31, year 3 is determined by subtracting the amortization of the bond premium from the date of purchase from the cost of the bond investment. Bond investment cost, 10/1, year 2($220,000 - $5,000) $215,000 Bond investment cost, 10/1, year 2 $ 215,000 Less: face amount of bonds (200 x $1,000) (200,000) Bond premium $ 15,000 Divided by: months to maturity (10/1, yr 2 to 1/1, yr 9) / 75 Monthly premium amortization $ 200 Times: Months from issue × 15 Less amortization of premium to 12/31 (3,000) Bond carrying amount, 12/31 of year 3 $212,000

Answer 444

a Explanation: The carrying amount of the bond investment is the amortization of the bond discount from the purchase date plus the cost of the bond investment ($906,000 + $5,300 = $911,300). Bond investment cost ($946,000 - $40,000) $906,000 Times: effective interest rate (10% / 2) × 5% Interest income, 7/1 - 12/31 45,300 Portion of annual interest payment applicable to 7/1 - 12/31 [($1,000,000 x 8%) / 2] (40,000) Amortization of bond premium to 12/31 $ 5,300

Answer 445

Explanation: The correct answer is (D). The par bonds being sold at 98 indicate that they are being sold at a 2% discount. Total Discount is 2% x $1,500,000 = $30,000. Discounts on bonds held long-term must be amortized from date of acquisition to maturity date, normally using the interest method to amortize these differences. Other methods of amortization (straight-line) may be used if the effects are not material. Bond issue costs should be classified as a deferred charge (i.e., asset) and amortized over the life of the bonds as an increase to interest expense. When all or part of a bond issue is retired before maturity, it is necessary to write off both the principal and the pro rata portion of the unamortized premium or discount on the retired bonds. If bond issue costs were incurred and recorded as an asset (i.e., as a deferred charge), it is also necessary to write off a pro rata portion of the bond issue costs (when retired before maturity). The amount of such write-off increases any loss or reduces any gain recognized on retirement. The sale of bonds results in a gain or loss equal to the difference between the carrying amount of the bonds and the proceeds received on their disposal. In determining the carrying amount of the bonds, an adjustment must be made for the discount amortization to date of sale. Bonds Payable (Face Value) $1,500,000 Unamortized Discount [($30,000 / 30) × 20 yrs.] ($20,000) Unamortized Issue costs [($90,000 / 30) × 20 yrs.] ($60,000) Carrying amount of bonds retired $1,420,000 Purchase price ($1,500,000 × 102%) $1,530,000 Loss on bond retirement, before income taxes ($110,000)

Answer 446

b Explanation: The new 10-year bond was issued at its face amount which, from the facts, either equals or exceeds the face amount of the 15-year bond which exceeds the carrying amount of the 15-year bond because the 15-year bond was issued at a discount (a price less than the face amount). The excess of the retirement price (face amount) of the 15-year bond over its carrying amount will be recorded as a loss at retirement. Therefore, the issuance of the new bond and the retirement of the old bond will have the net effect of increasing the total of long-term liabilities by the excess of the new bond's face amount over the old bond's carrying amount.

Answer 447

d Explanation: Bond issues maturing on a single date are called term bonds. Bond issues maturing in installments are called serial bonds. Since the debentures due in year 17 and the bonds due in year 20 each mature on a single date, the total amount of term bonds is $1,300,000 (i.e., $700,000 + $600,000). The total amount of serial bonds is $300,000.

Answer 448

a Explanation: When bonds are issued at a discount, the Discount on Bonds Payable account is deducted from the Bonds Payable account to determine the initial carrying amount of the bonds. As the bond account discount is amortized (written off), there is a smaller amount subtracted from the bonds and the carrying amount of the bond increases. Therefore, the carrying amount of the bonds in question at December 31, year 7, would be higher than their carrying amount at December 31, year 6.

Answer 449

c Explanation: The portion of long-term debt due within the next fiscal period is classified as a current liability if payment is expected to require the use of current assets or the creation of other current liabilities. Short-term debt expected to be refinanced on a long-term basis is to be excluded from current liabilities when the enterprise has the intent and ability to refinance the obligation on a long-term basis. One way intent and ability are demonstrated is by post-balance-sheet-date issuance of a long-term obligation or equity securities. Separate disclosure of such refinancing is required.

Answer 450

b Explanation: A bond that is issued with a stated rate of interest that is less than the effective rate on the issuance date is a bond issued with a discount. A bond issued at a discount will have an increasing carrying value and an increasing amount of interest expense. On the first interest payment date the company should report an interest expense that is greater than the cash payment made to bondholders.

Answer 451

b Explanation: Since the bond was purchased at a discount, the initial carrying value of the bond investment is $10,000 less than the face amount. The amortization of the discount increases the bond investment and so, on the date of sale the bond investment is carried on Jent Corp.’s books at $8,000 less (i.e., $10,000 – 2,000) than the face amount. Therefore, the sale of the bond at a premium (i.e., at $14,000 more than the face amount of the bond) results in recognition of a $22,000 gain (i.e., $8,000 + $14,000). Option (A)is incorrect because the amortization is added to the discount number ignoring the premium on sale. Option (C) is incorrect because this is the difference between the discount and premium ignoring the amortization. Option (D) is incorrect because here the amortization is added to the difference rather than deducted

Answer 452

b Explanation: The straight-line method is acceptable only when the premium or discount is immaterial because it fails to determine the periodic interest expense in terms of the effective rate of interest.

Answer 453

Explanation: The correct answer is (D) Under GAAP, if a company demonstrates both the intent and ability to refinance short-term obligations on a long-term basis after the balance sheet date but before the issuance of the financial statements, then the obligations may be categorized as long-term on the financial statements and will be classified as a non-current liability. As Andro Co. issued the bonds to refinance the notes payable, both these conditions are satisfied. The note payable will be classified as a non-current liability. Per the disclosure requirements, if a short term obligation is excluded from current liabilities, the notes to financial statements should include the description of the financing agreement and the terms of the new obligation incurred or expected to be incurred issued as a result of refinancing.

Answer 454

b Explanation: The bonds payable account should reflect only the principal amount and does not include accrued interest. Therefore, the bonds payable account should be reported by Oak Co. as $388,000 (400 bonds x (1,000 x 97%)).

Answer 455

Explanation: The correct answer is (B). FASB issued Accounting Standards Update 2015-03 requiring Bond Issue Costs to deducted from Carrying Value of bonds and amortized using effective interest method - i.e., Bond Issue Costs is treated similar to discount/premium & reported as an adjustment to Bond Payable liability.

Answer 456

d Explanation: A premium or discount on bonds arises when the stated interest rate of the bonds is higher or lower, respectively, than the current market interest rate for similar securities. Premiums or discounts on bonds held as a long-term investment must be amortized from date of acquisition to maturity date and the interest method should be used to amortize these differences. To estimate the proceeds to be received from the issuance of bonds payable (ignoring bond issue costs), the present values of the bond principal and interest payments must be determined. A bond will sell at a premium (more than par) when the stated interest rate is greater than the market rate for similar debt. Present value of principal payment [$800,000 × 0.67556 (PV of $1 for 10 periods at 4%)] $ 540,448 Present value of periodic interest payments [($800,000 × 10% / 2) × 8.11090] __324,436 Amount received from the issuance of the bonds $ 864,884 The stated rate of interest (10%) is above the market rate (8%); therefore, these bonds were sold at a premium. The following entry is made to record the bond issuance. Cash 864,884 Bonds Payable 800,000 Bond Premium (difference) 64,884 Option (A) is incorrect because it uses incorrect PV factors. Amount($) PV Factor Amount($) Principal 800,000 0.61391 491,128 Interest @ 5% 40,000 7.72173 308,869 799,997

Answer 457

d Explanation: At the end of the year, interest is accrued. At the date of declaration, April 1, year 1, the journal entry is as follows. Retained Earnings 100,000 Notes Payable to Stockholders 100,000 And then on December 31, year 1 Interest Expense ($100,000 × 10% × 9/12) 7,500 Interest Payable 7,500The interest portion of the payment is not treated as part of the dividend. When the dividend is declared, it becomes a liability and is reported on the balance sheet at that time. If the entry to accrue the interest expense is made on December 31, year 1, and is reversed on January 1, year 2, then interest expense would be debited for $10,000 on March 31, year 2. However, since answer (c) does not state this, assume that the reversing entry was not made

Answer 458

a Explanation: The declaration of a'small' stock dividend (i.e., less than 20-25% of the number of common shares outstanding) should be recorded by capitalizing a portion of retained earnings equal to the fair value of the shares to be issued. Fluctuations in the fair value of the shares between the declaration date and the issuance date are not recorded. The amount credited to Additional Paid-in-Capital is the excess of the fair market value of the stock over its par value, since Common Stock is credited for par value. Retained earnings [(3,000 × 10%) × $9 FMV] 2,700 Common stock dividend distributable [(3,000 × 10%) × $2 PV] 600 Additional paid-in capital (to balance) 2,100To record the declaration of the 10% stock dividend.

Answer 459

d Explanation: On the declaration date, May 8, the liability for dividends payable is recorded by a debit to Retained Earnings and a credit to Cash Dividends Payable . Since the declaration of the cash dividend increases current liabilities without affecting current assets, working capital is decreased on this date. On May 23, the date of record, which stockholders will receive the cash dividend is determined. Assuming that the common shares outstanding did not change between the date of declaration and the date of record, no journal entry is made on the date of record and, thus, working capital is not affected on this date. On the payment date, June 3, the cash dividend is paid and is recorded by a debit to Cash Dividends Payable and a credit to Cash . Since current assets and current liabilities decrease by the same amount, working capital is not affected on this date.

Answer 460

c Explanation: The final settlement of Mill's interest exceeded his capital balance. The excess payment represents Mill's share of the unrecorded goodwill of the partnership. Under the bonus method, this excess payment would be recorded as a decrease in the remaining partners' capital accounts.

Answer 461

c Explanation: If stock is issued for noncash consideration, the property received and amount of contributed capital should be recorded at the fair value of the property received or the market value of the stock, whichever is more objectively determinable. If fair values are not determinable, then appraised values or values set by the board of directors may be used. The fair value of the stock is not determinable because it is not yet traded publicly. The fair value of the services is $6,000 (48 hours × $125 per hour). The common stock account would increase by the 1,000 shares × $5 par value = $5,000. The remaining $1,000 would be an increase to the additional paid-in capital account.

Answer 462

d Explanation: The sole proprietor's drawing of $500 is recorded as a reduction of her capital account under both the cash-basis and accrual-basis methods of accounting. Cash Accrual Revenue for services provided in April, payment received May $3,200 $3,200 April expenses, paid June -- (1,500) Proprietorship's income for two months ended May 31 $3,200 $1,700

Answer 463

a Explanation: Using historical costs for assets such as inventory, land, or equipment would be inequitable to any partner investing appreciated property. Therefore, the contribution of noncash assets to a partnership should be recorded based on fair values. The land was sold on the same date for $18,000 so that would be used for its fair value amount.

Answer 464

c Explanation: A stock right issue generally is recorded by memorandum entry only (but must be disclosed in the financial statement notes). When the rights are exercised, common stock is credited at its par value, regardless of the option price or the stock's FMV. The difference between the option price and the par value of the stock (i.e., $15 - $10 = $5) is credited to Additional Paid-In Capital when the stock is issued.

Answer 465

b Explanation: When there is a profit, Flat receives 20% of the profits before the bonus and 40% of the remaining 80% (i.e., 32%), for a total of 52% of the profits. In loss situations, Flat receives only 40% of the loss. Thus Flat has a greater advantage whether the partnership has a profit or loss.

Answer 466

d Explanation: If a cumulative preferred stock dividend is not paid in any given year, it becomes a dividend in arrears. No liability exists until the board of directors declares a dividend; a dividend in arrears is not accrued, but is disclosed in the financial statement notes. No dividend was declared in year 2, resulting in a dividend in arrears of $15,000 ($100 × 5% × 3,000 shares). Therefore, in its year 3 financial statements, Apex reports dividends in arrears of $20,000 ($15,000 from year 2 + $5,000 from year 3). Dividend amount ($100 × 5% × 3,000 shares) $ 15,000 Less: Dividend paid, year 3 (10,000) Dividend in arrears, year 3 $ 5,000

Answer 467

Explanation: The correct answer is (B). Calculation of Weighted average common stock outstanding: Date Particulars No. of months outstanding Calculation Total outstanding 1/1 Outstanding 400,000 shares 12 months 400,000 x 12 /12 400,000 4/1 Issued 200,000 new shares for cash 9 months 200,000 x 9 /12 150,000 7/1 Issued new shares as a result of a 2 for 1 stock split (retroactively adjusted from the time of issue) Retroactively (400,000 x 2) + (150,000 x 2) 1,100,000 10/1 Purchased as treasury stock 300,000 3 months 300,000 x 3 /12 (75,000) Weighted average common stock outstanding 1,025,000

Answer 468

c Explanation: The shareholder has no income as a result of the stock dividend, because the stock dividend (or stock split) is not a distribution division or severance of the corporate assets.

Answer 469

b Explanation: No-par value stock avoids the contingent liability involved with the issuance of par value stock at a price below par (discount).

Answer 470

a Explanation: Common Stock should be credited for $375,000 [i.e., (5,000 × 3) × $25], the par value of the common shares issued to effect the conversion. Additional Paid-in Capital--Common Stock should be credited for $175,000, the excess of the carrying amount of the preferred stock converted over the par value of common shares issued to effect the conversion [i.e., (5,000 x $110) - $375,000].

Answer 471

d Explanation: Since the 100% stock dividend exceeds 20 to 25% of the number of shares outstanding, it is considered to be a 'large' stock dividend. Thus, it should be recorded by capitalizing a portion of Retained Earnings equal to the par value of the shares issued. As a result of the stock dividend, Retained Earnings will decrease and Common Stock will increase by the par value of the shares issued. Additional Paid-in Capital will not change as a result of the 'large' stock dividend.

Answer 472

a Explanation: Stock rights have no impact on net income. No entry is required when stock rights are issued to existing stockholders (other than a memorandum entry). Therefore, APIC was not affected when the stock rights were issued. Stock issued upon the exercise of stock rights is recorded the same as any other issuance; therefore, when the stock rights were exercised APIC increased by the excess of the $30 exercise price over the $20 par value of the common stock.

Answer 473

b Explanation: Common shares outstanding, 1/1 100,000 Adjustment for 2-for-1 stock split, 3/15 × 2 Common shares outstanding, declaration date 200,000 Times: Cash dividend per common share × $0.50 Cash dividends declared during year $100,000

Answer 474

a Explanation: The acquisition of services by issuance of common stock is a nonmonetary exchange that should be recorded at the fair value of the stock issued or the services performed, whichever is more clearly evident. The fair value of the stock issued should be used to record this transaction because (1) on the date of issuance, the stock was trading on a public exchange and thus had the more clearly evident fair value and (2) the fair value of the stock issued is less than the amount usually billed for the services received. Thus, the increase in Additional Paid-in Capital as a result of the transaction is the excess of the fair value over the par value of the common stock multiplied by the number of common shares issued [i.e., $140 - $5 = $135 × 1,000 = $135,000].

Answer 475

a Explanation: Young received $16,000 ($160,000 × 10%) and Zinc received $10,000 ($100,000 × 10%) for the interest on average capital balances. This makes the residual loss $22,000 ($4,000 - $16,000 - $10,000). As the residual loss is evenly divided between the two partners, Zinc gets $11,000 of loss. Zinc's interest allowance less Zinc's portion of the residual loss is the change in Zinc's capital balance. $10,000 - $11,000 = $1,000 decrease.

Answer 476

Explanation: The correct answer is (A). The earnings per share must be reported on the face of a public company’s income statement for the following items: Income from continuing operations. Income from discontinued operations. Net income. Earnings per share is the amount of current-period earnings that can be associated with a single share of a corporation’s common stock. All corporations must report per-share amounts for income from continuing operations and net income on the face of the income statement. (B), (C) and (D) are incorrect as per the above explanation.

Answer 477

a Explanation: APIC = $580,000 + $240,000 = $820,000. If Hyde has only one APIC account, the issuance of the common and preferred stock would be recorded as follows. Cash (20,000 × $30) 600,000 Common Stock (20,000 × $1) 20,000 Additional Paid-In Capital (to balance) 580,000 Cash (6,000 × $50) 300,000 Preferred Stock (6,000 × $10) 60,000 Additional Paid-In Capital (to balance) 240,000

Answer 478

d Explanation: Under the bonus method, the excess of the partner's contribution over the amount credited to the new partner's capital account is viewed as a bonus to the original partners. The bonus is allocated to the original partners based upon their old profit and loss ratio.

Answer 479

Explanation: The correct answer is (A) Dividends become a liability at the date of declaration. On this date, the board of directors commit to the dividend. On March 9, the liability will be recorded. Retained earnings XXX Dividends payable XXX (B) is incorrect because it is the date of record, on this date shareholder are identified as the ones entitled to the dividends. No J/E is passed. (C) is incorrect because on the date of payment the dividend declared is distributed to the shareholders. Below J/E is passed: Dividends Payable XXX Cash XXX

Answer 480

c Explanation: The goodwill method looks upon this transaction as an indication that the partnership possesses an actual value of $360,000 ($180,000 / 50%) prior to Eddy's retirement. The partnership is reporting $320,000 in net assets, so a $40,000 valuation adjustment is required. This adjustment is recorded as goodwill and is allocated to Eddy, Fox, and Grimm by their respective profit and loss sharing percentages. Immediately after Eddy's retirement, Fox's capital account balance should be $108,000 ($96,000 + $12,000) and Grimm's capital account balance should be $72,000 ($64,000 + $8,000). Goodwill 40,000 Eddy, Capital ($40,000 × 50%) 20,000 Fox, Capital ($40,000 × 30%) 12,000 Grimm, Capital ($40,000 × 20%) 8,000 Eddy, Capital ($160,000 + $20,000) 180,000 Cash 180,000To record the payment of $180,000 to Eddy.

Answer 481

c Explanation: The answer to this question assumes that the cost method is used to account for the treasury stock. Under the cost method, if treasury stock is sold at a price that exceeds its cost, the excess should be credited to Additional Paid-in Capital . The excess is not reported as a gain in the income statement or as a credit to Retained Earnings under either the cost or par methods. Retained earnings may be decreased, but never increased, by treasury stock transactions.

Answer 482

c Explanation: The portion of partnership profit allocated to Axel is bonus and one-third of residual partnership profit ($204,000 × 1/3 = $68,000). ($40,000 + $68,000 = $108,000). Profit prior to distribution $ 250,000 Deduct bonus to Axel [($100,000 × 10%) + ($250,000 - 100,000) × 20%] (40,000) Less: Bonuses to Berg and Cobb [$250,000 - ($150,000 + $40,000)] × 5% × 2] (6,000) Residual partnership profit $ 204,000

Answer 483

b Explanation: In a treasury stock retirement, the Common Stock account decreases for the par value and the Additional Paid-In Capital account decreases up to the original increase to the APIC account when the retired shares were first issued. Immediately after the shares were retired, the APIC balance would be $2,470,000 ($2,550,000 - $120,000 + $40,000). Common Stock (20,000 × $20 PV) 400,000 APIC - CS [20,000 × ($26- $20 PV)] 120,000 Cash (20,000 × $24) 480,000 APIC - Retirement of CS (to balance) 40,000To record retirement of common stock.

Answer 484

Explanation: Cash contributed $30,000 Common stock contributed (3,000 shares × $18 fair value) 54,000 ESOP compensation expense $84,000

Answer 485

c Explanation: The balance in the capital account at March 31, is the beginning balance plus the service revenues received less the owner's draw. The expenses incurred in February and paid in April are not included in the calculation, as Tory has a cash basis of accounting. $2,000 + $5,000 - $1,000 = $6,000.

Answer 486

a Explanation: All identifiable assets (e.g., cash, inventory, land, patents, etc.) contributed to a partnership are recorded by the partnership at their fair values at the date of contribution.

Answer 487

d Explanation: The purpose of a retained earnings appropriation is to restrict a portion of retained earnings as to availability for dividends. A retained earnings appropriation is not used to absorb a fire loss when a company is self-insured, provide for a contingent loss that is probable and reasonably estimable, or to smooth periodic income.

Answer 488

Explanation: The correct answer is (C). The compensatory stock option expense is reported by the company based on the estimated FV of the options when granted. On the execution date, the fair value of the services is $6,000 ($125 x 48 hours). Since Jensen received 1,000 shares of $5 par value Common Stock, $5,000 will be recorded as an increase to common stock with the excess of $1 per share or $1,000 to additional paid-in capital. (A) is incorrect because it is the amount credited to APIC, not to C/S. (B) is incorrect because it is the BV of the share, while the C/S is credited with the par value of the shares (D) is incorrect because it is the total cost of the legal services provided by Jensen.

Answer 489

c Explanation: All identifiable assets contributed to a partnership are recorded by the partnership at their fair values. All liabilities that the partnership assumes are recorded at their present values. The contributing partner's capital account is credited for the fair value of the property less the assumed mortgage. Smith's capital account would be the fair value of the property of $80,000 less the mortgage assumed by the partnership of $35,000, for a balance of $45,000.

Answer 490

c Explanation: Total assets equal the sum of liabilities and stockholders' equity. Total liabilities, 12/31 (given) $ 94,000 Proceeds from issuance of stock $500,000 Net income for the year 25,000 Cash dividend declared (2,000) Total stockholders' equity, 12/31 523,000 Total liabilities and stockholders' equity (and thus total assets) at 12/31 $617,000

Answer 491

c ``` Explanation: No entry (other than a memorandum entry) is made when stock rights are issued to existing stockholders. However, the redemption of the rights resulted in an outflow of cash. As this did not increase a noncash asset or reduce liabilities, it must affect an equity account. Stockholders' equity was reduced by 120,000 shares × $0.10 per share = $12,000. ```

Answer 492

a Explanation: The date of declaration date is the date on which dividends are declared by the board of directors. Declared cash dividends are a liability. The journal entry required at the date of declaration includes a debit (decrease) to Retained Earnings . No journal entry is required at the date of record. The journal entry on the payment date reduces Cash and the liability, but has no effect on Retained Earnings.

Answer 493

a Explanation: Stock dividends operate to transfer a part of the retained earnings to contributed capital (capitalization of retained earnings). In recording the stock dividend, a charge is made to retained earnings (thereby making a portion of retained earnings no longer available for distribution) and credits are made to paid-in capital accounts. Because the declaration and issuance of a stock dividend decreases retained earnings and increases paid-in capital by equal amounts, total stockholders’ equity is not affected.

Answer 494

c ``` Explanation: No entry (other than a memorandum entry) is made when stock rights are issued to existing stockholders without consideration. ```

Answer 495

a Explanation: A corporation's equity consists of three main components: contributed capital, which includes capital stock and additional paid-in capital; retained earnings; and the accumulated balance of OCI

Answer 496

d Explanation: Stock dividends received on common stock may be recorded only by memorandum entry, regardless of whether the investment is accounted for by the cost or equity method. Under the cost method, the cost of the common stock investment would be divided by the number of common shares owned after the stock dividend to compute a new cost basis per share. Under the equity method, the carrying amount of the investment would be divided by the increased number of common shares owned as a result of the stock dividend to compute a new carrying amount per share. These amounts would be used to determine any gain or loss on a subsequent disposal of the shares.

Answer 497

b Explanation: When a new partner's asset contribution is greater than the ownership interest s/he is to receive, the excess assets are accounted for as goodwill attributable to the old partners.

Answer 498

b Explanation: The net income for the current year is overstated, because no gains or losses are recognized on treasury stock transactions.

Answer 499

b Explanation: Any dividend not based on earnings must be a reduction of additional paid-in capital and, to that extent, is a liquidating dividend. Retained earnings XX Additional paid-in capital XX Cash dividends payable XXTo record a partially liquidating cash dividend..

Answer 500

d Explanation: Any dividend not based on earnings must be a reduction of corporate paid-in capital and, to that extent, is a liquidating dividend. Since no portion of the dividend is based on accumulated past earnings, Paid-in Capital decreases by the full dividend amount, while Retained Earnings is unaffected. The following journal entry illustrates the effects of the declaration of a $100,000 liquidating cash dividend. Additional paid-in capital 100,000 Cash dividends payable 100,000

Answer 501

d Explanation: The proceeds should be allocated between the preferred stock and the detachable stock purchase warrants based on their relative fair market values at date of issue. If the relative fair values are not known, then the fair value of either security is used. In this question, the fair value of the warrants is known, but the fair value of the preferred stock without the warrants is not. Therefore, the amount assigned to the warrants is the fair value of the warrants. The remaining amount of the proceeds are assigned to the preferred stock.

Answer 502

b Explanation: Since the market value of both securities is not determinable, the incremental method should be used to allocate the cash proceeds between the two securities. Since the market value of the bonds is known, the cash proceeds in excess of this amount are allocated to the common stock. The excess of the proceeds allocated to the common stock over the par value of the common stock is recorded as Additional Paid-in Capital. Lump sum cash proceeds $110,000 Less: Market value of bonds (40,000) Cash proceeds allocated to common stock $ 70,000 Less: Par value of common stock (1,000 × $5) (5,000) Additional paid-in capital on issuance of common stock $ 65,000

Answer 503

a Explanation: Common stock, $3 par $600,000 Additional paid-in capital 800,000 Total paid-in capital $1,400,000 Retained earnings, appropriated 150,000 Retained earnings, unappropriated 200,000 Total retained earnings 350,000 Less: Treasury stock, at cost (50,000) Less: Net unrealized loss on AFS debt securities (20,000) Total stockholders' equity $1,680,000

Answer 504

b Explanation: A redeemable feature means that preferred shareholders may redeem shares, at their option, at a specified price per share. A convertible feature means that preferred shareholders may exchange shares, at their option, for common stock.

Answer 505

b Explanation: An entry is required only when stock rights are exercised. Cash is debited for the number of common shares acquired times the exercise price of the shares. Common stock is credited for the par or stated value of the shares issued. Additional paid-in capital is credited for the excess of the cash received over the par or stated value of the shares.

Answer 506

a Explanation: The idle machinery, the cash surrender value of the life insurance on the corporate executives, and the contra account, Allowance for Decline in Market Value of Available-for-Sale Debt Securities, are all properly included in assets. The treasury stock is not an asset and should not be included in the computation. Net assets, before adjustments $875,000 Less cost of treasury stock (24,000) Net assets, 12/31 $851,000

Answer 507

d Explanation: In the goodwill method of recording the admission of a new partner, the assets are revalued at their fair values and any excess valuation implied in the purchase price is recorded as goodwill. Robb’s 25% interest for an investment of $30,000 implies that total net assets are valued at $120,000 ($30,000/25%). ``` Net assets $120,000 Less: Robb investment (30,000) Eagle capital (45,000) Falk capital (25,000) Goodwill $20,000 ```

Answer 508

c Explanation: The effect of the acquisition and retirement of each common share is to decrease APIC by $10 (i.e., $15 - $5). A corporation cannot record a gain or loss on the acquisition and retirement of its own common stock. Retained earnings can be decreased, but never increased, as a result of the acquisition and retirement of its own common stock. Common stock 10 APIC--common stock 15 Cash 20 APIC--retirement of stock 5To record the acquisition and retirement of one share of Fogg's own common stock.

Answer 509

c Explanation: Financial instruments can be issued with an unconditional obligation on the part of the issuer to redeem the instruments by transferring assets to the purchaser at a specified date or upon an event that is certain to occur (e.g., the death or termination of the individual who holds it). These are referred to as mandatorily redeemable financial instruments, and are classified as liabilities because of the embodied obligation on the part of the issuer to transfer its assets.

Answer 510

d Explanation: The question does not indicate whether the donated shares are accounted for as treasury stock under the cost or par value methods, or whether the donated shares were canceled and retired. Therefore, this question cannot be answered by constructing a journal entry to record the donation of the shares. Instead, the question can be answered by knowing that the donation of the common stock would be accounted for entirely within stockholders' equity accounts. Therefore, the amount reported for total stockholders' equity would be unchanged as a result of the donation of the stock.

Answer 511

Explanation: Additional Paid-in Capital is credited for the difference between the fair value of the net assets contributed and the stock's par value. Assets (at fair value) 240,000 Liabilities (at fair value) 20,000 Common stock (1,000 × $5) 5,000 Additional paid-in capital (to balance) 215,000

Answer 512

d Explanation: If a subscriber defaults on a subscription contract, amounts paid to the corporation may be: returned in full; retained by the corporation and an equivalent number of shares issued; or retained to cover any losses on resale, and the balance, if any, returned to the defaulted subscriber. Since the answers for A., B., and C. are all correct, the best answer for this question is D., all of the above.

Answer 513

b Explanation: Under the par value method, the recording of the acquisition of treasury stock effectively removes the treasury stock from the accounts. The excess in acquisition price over the original issuance price ($17 - $15 = $2/share) is debited to Additional Paid-In-Capital From Treasury Stock , but only to the extent of any existing balance from prior treasury stock transactions. The difference, if any, is debited to Retained Earnings . Additional Paid-In Capital: 20,000 shares @ $5/share over par, 1/ 5 $100,000 5,000 shares @ $5/share Treasury Stock, 7/14 (25,000) 5,000 shares @ ($20 - $10 par) = $10/per share, 12/27 50,000 APIC balance 12/31 $125,000

Answer 514

b Explanation: A stock split consists of a reduction in the par value per share, together with a proportional increase in the number of shares outstanding. For instance, in a 2-for-1 split, the par value per share is halved, while the number of shares outstanding is doubled. Total par value, additional paid-in capital, stockholders' equity, and total assets remain unchanged.

Answer 515

c Explanation: Acquisition of treasury stock is limited to the amount of retained earnings, not legal capital.

Answer 516

Explanation: The correct answer is (A). Each of the following transactions will cause a decrease in stockholders' equity: The declaration of a cash dividend. Dividends will reduce retained earnings in equity. A loss on the sale of a discontinued segment. A loss from a foreign currency translation adjustment. The sale of treasury stock at less than cost will not reduce equity rather increase it. This calculation involves the cost method. The sale of treasury stock at less than cost will result in debits to Cash and Additional Paid-In Capital-Treasury Stock (APIC-TS) and a credit to Treasury Stock (at cost). While APIC-TS is a stockholder equity account that will decrease, the increase in the Treasury Stock account will exceed such decrease that the net effect is still an increase to stockholder's equity. Example: If treasury stock is sold for $100,000, which is $20,000 below cost, the net effect is an $80,000 increase in stockholders' equity.

Answer 517

c Explanation: In recording a stock dividend, a charge is made to retained earnings (thereby making a portion of retained earnings no longer available for distribution) and credits are made to paid-in capital accounts; total stockholders’ equity is not affected. The amount of retained earnings capitalized depends on the size of the stock dividend and the effect the dividend has on the market value of the shares. When the stock dividend is large (greater than 25% of the outstanding shares) only the par or stated value of the additional shares is capitalized. In this case, debit Retained Earnings for $300; credit Common Stock for $300.

Answer 518

d Explanation: The 225,000 common shares outstanding are computed by subtracting the 75,000 Treasury shares from the 300,000 (i.e., 200,000 + 100,000) common shares issued. The number of common shares outstanding is not affected by the convertible preferred stock; there is no indication that any of the preferred stock converted.

Answer 519

b Explanation: The issuance of a "small" stock dividend (i.e., less than 20 to 25% of the number of shares outstanding) should be recorded by capitalizing a portion of retained earnings equal to the fair value of the shares issued. On the other hand, the issuance of a "large" stock dividend (i.e., more than 20 to 25% of the number of shares outstanding) should be recorded by capitalizing a portion of retained earnings equal to the par value of the shares issued. Thus, Retained Earnings should be debited for (1) the fair value of the 10% stock dividend ($15,000) and (2) the par value of the 28% stock dividend ($30,800), for a total of $45,800.

Answer 520

a Explanation: Capital stock is the par or stated value of the stock purchased by owners.

Answer 521

d Explanation: Allen, the withdrawing partner, is to receive cash or other assets equal to his current capital balance plus his share of unrecorded goodwill. If the bonus method were to be used to account for this transaction, the payment made to Allen for his share of the unrecorded goodwill would be recorded as a decrease in the remaining partners' capital accounts. If the goodwill method were to be used to account for the withdrawal, a revaluation of partnership assets would be required. This adjustment would be recorded on the partnership's books as goodwill and allocated among the existing partners (i.e., Allen, Beck, and Chale) by their respective profit and loss sharing percentages, thereby increasing their respective capital accounts. Since the capital accounts of the remaining partners (i.e., Beck and Chale) decreased as a result of the settlement, the withdrawal could only have been recorded using the bonus method.

Answer 522

b Explanation: During the year, stockholders' equity increased by $62,000 (i.e., $89,000 - $27,000). Since paid-in capital increased by $66,000 (i.e., $60,000 + $6,000), retained earnings must have decreased by $4,000 (i.e., $66,000 - $62,000). Since the only charge to retained earnings was for a $13,000 dividend payment, net income for the year must have been $9,000.

Answer 523

d Explanation: Low's bonus results in a residual loss for the partnership for the year. Low's equity would still increase due to the bonus Low received. Partnership profit prior to distributions $ 50,000 Less: Bonus to Low (15% × $50,000) (7,500) Salary to Low (45,000) Residual partnership loss $ (2,500) Times: Rhu's loss percentage × 50% Decrease in Rhu's equity in partnership $ (1,250)

Answer 524

b Explanation: Each partner should be allocated their full salary allowance. Any gain or loss subsequent to this allocation should be allocated to each partner based on their profit and loss ratios. The division of partnership profits and losses must be based on the method specified in the partnership agreement. Therefore, the profit or loss allocated to each partner should be calculated after deducting the salary allowances due to each partner. $20,000 × 60% = $12,000 Partnership Profit Red White Partnership profit prior to salary allowances $80,000 Deduct salary allowances (100,000) $55,000 $45,000 Residual partnership loss $(20,000) 60% of loss allocated to Red (12,000) 40% of loss allocated to White (8,000) Credit to each partner's capital account $43,000 $37,000

Answer 525

c Explanation: The balance in the additional paid-in capital account after the quasi-reorganization is the beginning balance, plus the difference in the old and new par values times the number of issued shares [($30 - $5) × 10,000 = $250,000], less the retained earnings deficit. $150,000 + $250,000 - $210,000 = $190,000.

Answer 526

d Explanation: Under the bonus method, the total capital of the new partnership will equal the sum of the original partners' capital balances plus the fair value of the identifiable asset (i.e., land) contributed by the new partner. Immediately after admission, the balance of the new partner's capital account equals the total capital of the new partnership multiplied by the new partner's capital interest. Original partnership capital ($60,000 + $20,000) $80,000 Fair value of identifiable asset contributed by Grant 15,000 Total recorded capital of new partnership 95,000 Grant's capital interest × 20% Credit to Grant's capital account $19,000 Journal entry: Land (fair value) 15,000 Kern, capital ($4,000 x 60%) 2,400 Pate, capital ($4,000 x 40%) 1,600 Grant, capital (above) 19,000To record Grant's admission into the partnership.

Answer 527

c Explanation: Property dividends are recorded at the property's fair value at the declaration date. The excess of the fair value over the carrying amount of the property distributed is recognized as a gain by the distributing corporation at the declaration date. Because there is no mention of a specific declaration date, we have to infer that the declaration date and distribution date are the same. Fair value of distributed shares (100,000 × $2.50) $ 250,000 Less: Distributed shares' carrying amount (100,000 × $2.00) (200,000) Pretax gain on distributed shares $ 50,000

Answer 528

d Explanation: The book value per preferred share is the portion of stockholders’ equity distributable to preferred stockholders in the event of liquidation (Liquidation value + Dividends in arrears), divided by the number of preferred shares outstanding. [($105 × 1,000 sh.) + (10% × $100,000)] / 1,000 shares = $115 share..

Answer 529

b Explanation: Cash dividends declared in year 2 $44,000 Dividends in arrears at 12/31, year 1 $12,000 Dividends for year 2 (4,000 × $100 × 6%) 24,000 Cash dividends payable to preferred stock: (36,000) Cash dividends payable to common stock $ 8,000

Answer 530

b Explanation: Common Stock is credited $5,000 (500 shares × $10 per share), with the remaining $15,000 credited to Additional Paid-in Capital.

Answer 531

d Explanation: Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Cor is given an initial capital balance of $60,000, equal to the fair value of the identifiable assets Cor contributed to the partnership. Eng is also given an initial capital balance of $60,000. Since Eng only contributed identifiable assets with a fair value of $20,000, Eng must have also contributed an unidentifiable asset (i.e., goodwill) with a fair value of $40,000. ``` Cash 20,000 Identifiable noncash assets 60,000 Goodwill 40,000 Cor, capital 60,000 Eng, capital 60,000 ```

Answer 532

b Explanation: Because the total capital of the partners following the admission of Lind will be equal to the sum of the original partner's capital balances plus the cash contributed by Lind (i.e., $60,000 + $50,000 + $40,000 = $150,000), no goodwill is recognized. Blau's capital balance, pre-admission $60,000 Credit to Lind for 1/3 of new partnership capital ($150,000 × 1/3) $50,000 Less: Cash contributed by Lind 40,000 Bonus to Lind from Blau and Rubi $10,000 Times Blau's share of bonus [60% / (60% + 40%)] × 60% Decrease in Blau's capital account (6,000) Blau's capital balance, post admission $54,000

Answer 533

b Explanation: A troubled debt restructuring has occurred because the unsecured creditors, for reasons related to Hale's financial difficulties, granted concessions to Hale that they would not otherwise consider [i.e., the unsecured creditors accepted $400,000 cash and 80,000 shares of Hale's common stock worth $100,000 (80,000 x $1.25 FMV) in satisfaction of Hale's $1,200,000 debt]. Hale recognizes a $700,000 [$1,200,000 - ($400,000 + $100,000) gain on the restructuring equal to the excess of the carrying amount of the debt over the sum of the cash and the fair value of the equity interest transferred to the unsecured creditors. If income taxes are ignored, Hale's retained earnings account increases by the full amount of the gain. In addition, Hale's paid-in capital accounts increase by the $100,000 fair market value of the common shares issued to effect the restructuring. Thus, Hale's total stockholders' equity had a net increase of $800,000 (i.e., $700,000 + $100,000). Although not required, the following journal entry would be used to record the troubled debt restructuring on Hale's books: Liabilities 1,200,000 Cash 400,000 Common stock (80,000 x $1) 80,000 APIC-CS [(80,000 x ($1.25 - $1.00)] 20,000 Gain on restructuring [$1,200,000 - ($400,000 +$100,000)] 700,000 Alternatively, this question can be solved using the accounting equation. Since assets decreased by $400,000, and liabilities decreased by $1,200,000, Hale's stockholders' equity must have increased by $800,000.

Answer 534

b Explanation: The correct answer is (B). The goodwill method looks upon this transaction as an indication that the partnership possesses an actual value of $560,000 ($140,000/25%) after Hamm's admission. Since, even with Hamm's investment, the partnership is reporting only $460,000 ($320,000 + $140,000) in net assets, a valuation adjustment of $100,000 is required. This adjustment is recorded as goodwill and is allocated to the original partners—Eddy, Fox, and Grimm—by their respective profit and loss sharing percentages. Immediately after admission of Hamm, Eddy's capital account balance is $210,000 ($160,000 + $50,000). Goodwill 100,000 Eddy, Capital ($100,000 x 50%) 50,000 Fox, Capital ($100,000 x 30%) 30,000 Grimm, Capital ($100,000 x 20%) 20,000 Cash 140,000 Hamm, Capital 140,000

Answer 535

a Explanation: The date of declaration, March 9, is the date on which dividends are formally declared by the board of directors and the declared dividends become a liability. On that date Aldrich would debit Retained Earnings and credit Dividends Payable. The date of record, April 15, is the date used to establish those stockholders who will receive the declared dividends. No journal entry is required unless the number of shares outstanding have changed from the date of declaration. The distribution of assets is made on the date of payment, May 19. On that date Aldrich would credit Cash and debit Dividends Payable. December 31 is merely the end of the year; once the dividends were paid on May 19 they would no longer be a liability.

Answer 536

c ``` Explanation: The amount of the proceeds received that should be allocated to the preferred stock is $48,000 [i.e., ($54,000 / $90,000) × $80,000]. Since the fair value is available for each class of security, the lump sum received should be allocated to the two classes of securities by their relative fair value, as follows: ``` Fair value of common stock (1,000 × $36) $36,000 Fair value of preferred stock (2,000 × $27) 54,000 $90,000

Answer 537

b Explanation: Treasury stock is the corporation’s common or preferred stock that has been reacquired by purchase, by settlement of an obligation to the corporation, or through donation. The cost method views the purchase and subsequent disposition of stock as one transaction. The treasury stock is recorded (debited), carried, and then reissued at acquisition cost. If the stock is reissued at a price in excess of the acquisition cost, the excess is credited to an appropriately titled paid-in capital (PIC) account. If the stock is reissued at less than the acquisition cost, the deficit is first charged against any existing balance in the treasury stock paid-in capital account and then excess, if any, is then charged against retained earnings. Porter reissued the 500 shares of treasury stock at a price ($10 per share) in excess of the acquisition cost ($6 per share). The excess ($10 - $6 = $4 per share × 500 shares = $2,000) is credited to the PIC account related to treasury stock on Porter’s balance sheet for the current year.

Answer 538

c Explanation: A transfer of a nonmonetary asset to a stockholder in a non-reciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset equal to the difference between the fair value and carrying amount of the asset. After all nominal accounts (e.g., Gain on Disposition of Investment) are closed, the effect of this property dividend is to decrease Retained Earnings by $60,000 (i.e., $78,000 - $18,000). Nilo records the following entries at the declaration date. Marketable securities ($78,000 - $60,000) 18,000 Gain on disposition of investment 18,000 Retained earnings 78,000 Property dividend payable 78,000

Answer 539

d Explanation: The correct answer is (D). Dividend paid in the form of property is recorded at Fair Market Value as on the declaration date and any difference between the fair value and book value is recognized as gain or loss as if the asset is sold at the fair value. In this question, the merchandise's market value is less than its carrying amount and therefore a loss has to be recognized for the difference as a reduction in income from continuing operations. The retained earnings would be reduced for the amount of dividend payable and amount of loss on property transferred. Options (A), (B) and (C) are incorrect as per above explanation.

Answer 540

c Explanation: Dividends in arrears are not a liability; however, they should be disclosed parenthetically or in the footnotes to the financial statements.

Answer 541

a Explanation: If the agreement specifies how profits are to be shared, but is silent as to losses, losses are to be shared in the same manner as profits. Conversely, if the agreement specifies the sharing of losses, but is silent as to profits, profits are shared in the same manner as losses.

Answer 542

c Explanation: A sole proprietorship's equity consists of a single proprietor's equity account, Owner's Equity or Net Worth. This is the sum of the beginning capital balance, plus additional investments during the period, plus net income (or minus net loss) minus withdrawals. The proprietor's draw is not reported separately on the income statement, but rather is included in Owner's Equity or Net Worth. Depreciation is not included in the Owner's Equity or Net Worth account. It is reported on the income statement of a proprietorship.

Answer 543

d Explanation: The common stock's par value is recorded as Common Stock Subscribed, and the excess of the subscription price over the common stock's par value is recorded as Additional Paid-In Capital. Cash (20% down payment) XX Subscriptions receivable (balance due) XX Common stock subscribed (shares × par value) XX Additional paid-in capital (to balance) XX

Answer 544

d Explanation: A transfer of a nonmonetary asset to a stockholder in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset. Bain records the following entries at the declaration date. Investment in Stock of Tell Corp. ($300,000 - $180,000) 120,000 Gain on Disposal of Investment 120,000 Retained Earnings 300,000 Property Dividend Payable 300,000

Answer 545

a Explanation: Since the 5% stock dividend is less than 20 to 25% of the number of shares outstanding, it is considered to be a'small' stock dividend. Therefore, it should be recorded by capitalizing a portion of Retained Earnings equal to the fair value of the shares issued. As a result of the'small' stock dividend, Retained Earnings will decrease by the fair value of the shares issued, Common Stock will increase by the par value of the shares issued, and Additional Paid-in Capital will increase by the excess of the fair value over the par value of the shares issued.

Answer 546

a Explanation: The maximum possible loss assumes that nothing will be received from the disposition of the remaining $100,000 of other assets. The January 5 sale generates an additional $120,000 of cash and includes a $30,000 loss. This $30,000 loss is allocated to Cobb ($15,000), Davis ($9,000), and Eddy ($6,000). From the $170,000 balance of cash, the $60,000 debts are paid, leaving $110,000 in cash. As the maximum possible loss is $100,000, this amount is tenatively distributed to the capital accounts [Cobb ($50,000), Davis ($30,000), and Eddy ($20,000)] to determine the remaining amount in each capital account. This remaining amount is the safe cash distribution [Cobb ($15,000), Davis ($51,000), and Eddy ($44,000)] for each partner.

Answer 547

b Explanation: A stock dividend is not income under the cost or equity methods of accounting for equity investments, but it does impact the number of shares owned at the dividend declaration date. (10,000 + 2,000) × $2 = $24,000.

Answer 548

b Explanation: A cash dividend reduces retained earnings (and, therefore, net stockholders' equity) on the date of declaration. A cash dividend will have no effect on net stockholders' equity at the date of distribution. A cash dividend is recorded when declared by a debit to Retained Earnings and a credit to Cash Dividends Payable . There is no adjusting entry at the end of the period. The entry at the payment date includes a debit to Cash Dividends Payable and a credit to Cash. Generally, the dividend reduces stockholders' equity only at the declaration date. The fact that the accounting period ends between the declaration date and the payment date has no effect on stockholders' equity.

Answer 549

d Explanation: Total current capital ($348,000 + $232,000) $580,000 Divided by: Percentage current capital is of new total capital (100% - Capp @ 20%) / 80% Total new capital, including Capp $725,000 Less: Alfa & Beda Capital (current capital) (580,000) Capp's contribution for 20% interest $145,000

Answer 550

Explanation: The correct answer is (D). The Retained Earnings account is used to close out all profit and loss accounts. The balance represents the accumulated income of the corporation less dividends paid (not declared) and amounts transferred to paid-in capital accounts. Retained earnings should not include the following: Gains from treasury stock transactions Gifts of property Additions to owners' equity attributable to reappraisals of property Accumulated balance of other comprehensive income

Answer 551

a Explanation: Smith's capital balance of $195,000 is reduced by his $20,000 loan from the partnership ($195,000 - $20,000). The cash available to be distributed to each partner is determined after the loss on the sale of other assets is figured and the payment of liabilities. $175,000 - $39,000 = $136,000.

Answer 552

a Explanation: Jones should report 105,000 shares outstanding (50,000 shares x 1.05 x 2)

Answer 553

a Explanation: Capital--Smith, 1/2 (i.e., cost of net assets contributed by owner at 1/2) $ 350,000 Add: Income of sole proprietorship 60,000 Less: Smith's drawings (20,000) Capital--Smith, 12/31 $ 390,000

Answer 554

a Explanation: Common shares outstanding, 12/31, previous year 300,000 10% stock dividend, 1/31 (300,000 × 10%) 30,000 Treasury shares purchased, 6/30 (100,000) Treasury shares reissued, 8/1 50,000 2-for-1 stock split, 11/30 (300,000 + 30,000 - 100,000 + 50,000) 280,000 Common shares outstanding, 12/31, current year 560,000

Answer 555

d Explanation: Carr must have made an intangible contribution to the partnership because Abel and Carr have agreed to divide initial capital equally, even though Carr contributed less in identifiable assets ($84,000 < $100,000). Because the bonus method is used to record the formation of the partnership, and the bonus method assumes that an intangible contribution does not constitute a partnership asset with a measurable cost, no unidentifiable asset (i.e., goodwill) is recognized by the partnership. The partnership formation adjusts the capital accounts of the two partners without recognizing goodwill. Identifiable Assets ($100,000 + $84,000) 184,000 Abel, capital ($184,000 × 50%) 92,000 Carr, capital ($184,000 × 50%) 92,000

Answer 556

b Explanation: Total available cash is distributed after allowing for loan and loss on sale of other assets. Cash $ 45,000 Plus: Sale of other assets 500,000 Less: Accounts payable (120,000) Total cash to distribute $ 425,000 Total (100%) Alfa (60%) Beda (40%) Beginning capital $580,000 $348,000 $232,000 Reduce Beda capital for loan (30,000) (30,000) Allocate loss on sale of assets ($500,000 - $625,000) (125,000) (75,000) (50,000) Distribution of cash $425,000 $273,000 $152,000

Answer 557

b Explanation: Any dividend that does not come out of retained earnings is a reduction of corporate paid-in capital and, to that extent, is a liquidating dividend. Dividend $400,000 Retained earnings (300,000) Liquidating dividend $100,000

Answer 558

d Explanation: Under the cost recovery method, no profit is recognized until cash payments by the buyer exceed the seller's cost of goods sold. Therefore, Ryan should not recognize any income in year 2 from the real estate sale and its financing because the accumulated cash payments from the buyer are less than the carrying amount of the real estate. [($300,000 down payment + $300,000 year 2 payment + $270,000 year 2 interest payment) < $2,000,000]

Answer 559

Explanation: Answer (A): The output method is one of the two methods for recognizing revenue over time. If the performance obligation is met by the "over time " entity, the revenue is also recognized as "over time " according to the following two methods: * Output Method: Revenue shall be recognized by the value of the goods and services transferred to the customer to date. * Input Method: The revenue is recognized on the basis of the efforts of the entity or its inputs.

Answer 560

Explanation: When the buyer has the right to return the product, revenue should be recognized at the time of sale only if certain conditions are met. One of those conditions is that the amount of future returns can be reasonably estimated. Clothes can estimate the $5,000 of exchanged goods, but not the amount of returns. If the conditions are not met, revenue must be recognized when the return privilege has substantially expired or when the conditions are subsequently met, whichever comes first. There was no indication the conditions were ever met, so the revenue would be recognized 12 months after the sale date when the return privilege expired.

Answer 561

Explanation: The correct answer is (B). Significant risks and rewards of ownership of the asset are with the customer. All other options are the criteria for revenue to be recognized over time. To recognize revenue at a point in time, the following criteria must be met: * Entity currently has a right to collect payment for the asset * The legal title for the asset is with the customer * Physical possession of the asset is transferred by the entity to the customer * Significant risks and rewards of ownership of the asset are with the customer * Asset has been accepted by the customer

Answer 562

a Explanation: Zee has the right to return the machine to Lin if Zee is not able to resell the machine before expiration of the 90-day payment period. If an enterprise sells its product but gives the buyer the right to return the product, revenue from the sales transaction is not recognized at the time of sale if the buyer is obligated to pay the seller and the obligation is contingent upon resale of the product.

Answer 563

c Explanation: In the given example, two kinds of warranty are given:- Promise was given by Big Ltd. that these laptops complied with agreed upon specifications and would operate as promised for one year from the date of purchase and Big Ltd. also agrees to send its personnel every four months for a period of two years for an on-site maintenance of the laptops as Small Ltd. was one of its major customers. The first promise is an assurance type of warranty as the customer does not have the option of purchasing it separately and it just gives assurance that the product complies with the agreed upon procedures. This type of warranty is not a separate performance obligation, and thus no transaction price is allocated to it. To account for an assurance-type warranty, the vendor should estimate and accrue a warranty liability when the promised good or service is delivered to the customer. Service type of warranty arises when (1) a customer has the option to purchase it separately or (2) it provides service beyond assuring that the product complies with promised specifications. A service-type warranty represents a distinct performance obligation, thus a portion of the transaction price is allocated to it. Revenue is recognized as the warranty obligation is fulfilled, which is likely over the term of the warranty. Thus, for $10,000 Big Ltd. agrees to give 10 laptops and provide maintenance service for 2 years. The value of maintenance service would be $1,000 + 20% per annum = $1,200. The service is promised for two years and would have revenue worth $2,400. This revenue has to be recognized over time as and when Big Ltd. provides the maintenance service. As revenue has to be recognized over time, the revenue will be recognized either using the output method or the input method. The first maintenance service is due only in January the following year, there would be no output or input as of December this year towards maintenance service and no revenue has to be recognized for this year for the maintenance service. This implies the revenue to be recognized this year for the sale of the laptop would be $10,000 - $2,400 = $7,600. As revenue is already credited with $10,000, the correcting entry would be to debit revenue with $2,400. Options (A), (B) and (D) are incorrect based on the above explanation

Answer 564

c Explanation: Knob reports a $10,000 (i.e., $100,000 - $90,000) ordinary loss equal to the excess of the carrying amount over the fair value of the real estate transferred. Knob also reports a $60,000 gain on the debt restructuring. The net gain is reported in income from continuing operations [($10,000) + $60,000 = $50,000].

Answer 565

a Explanation: Deferred revenue or unearned revenue is accounted when the cash is received, but revenue is not earned as the entity has not yet satisfied its performance obligation. It is accounted as a liability till the entity satisfies the performance obligation.

Answer 566

a Explanation: Initial franchise fees from franchise sales ordinarily must be recognized (with provision for estimated uncollectible amounts) when all material services or conditions relating to the sale have been substantially performed or satisfied by the franchisor. North’s services per the agreement were not complete in the current year so no franchise revenue would be reported by North in the current year.

Answer 567

c Explanation: Todd Care received $9,900 [i.e., ($500 × 15) + ($200 x 12)] of initial payments on its 12-month contracts for the 9/1 year 1 through 8/31 year 2 contract year. Since four months of the initial payments on the contracts have been earned as of 12/31 of year 1, eight months of the initial payments on the contracts should be reported as deferred revenue at that date (i.e., $9,900 × 8/12 = $6,600).

Answer 568

d Explanation: The $60,000 received in year 1 was for services already performed and is, therefore, recognized as income in year 1. The three payments of $30,000 have not yet been earned as of the signing of the agreement because Rice is required to perform substantial future services. Such payments may not be recognized as revenue until the services are performed. The annual payments should be discounted and reported as unearned franchise fees at their present value of $72,000 at 12/31, year 1.

Answer 569

a Explanation: When the redeemable gift certificates are sold, the sales price collected represents unearned revenue and an unearned revenue account is credited (i.e. increased). As the certificates are redeemed, the earned revenue is recognized, decreasing the unearned portion. Lapsed certificates would also decrease unearned revenue, but would increase Gain on Lapsed Certificates rather than Revenue account. In either case, the Deferred Revenue account is decreased.

Answer 570

Explanation: The correct answer is (A) Given the facts, the profit recognized from the contract in year 2 can be computed by subtracting the contract costs incurred in year 2 from the increase in the Construction In Progress account during year 2. Construction in progress, 12/31, year 2 $ 364,000 Construction in progress, 12/31, year 1 (122,000) Increase during year 2 (contract costs incurred and profit recognized in year 2) $ 242,000 Contract costs incurred in year 2 (192,000) Profit recognized in year 2 $ 50,000 Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 571

Explanation: The correct answer is (C). Unearned revenue is when the cash is received, but revenue is not earned. Unearned revenue is accounted for as liability (as it is an obligation to perform a service in the future) and revenue is recognized as 'earned'. As on December 31, Yr2, the balance sheet of Regal should report unearned revenue at $50,000 calculated as: Ref Summary Amount a Gift certificates sold in Yr2 $250,000 b Expected redemption of gift certificates (i.e. $250,000 x 0.9) $225,000 c Gift certificates redeemed in Yr2 $175,000 d Unearned revenue for Yr2 (b-c) $50,000 Note: Any gift certificate unredeemed will be recognized as revenue at the expiry of the gift certificate validity period as the contract will be deemed terminated and consideration received is non-refundable.

Answer 572

a Explanation: The correct answer is (A). Gross Profit recognized in each period of the contract on accrual basis and is calculated as follows: Gross Profit = [(Cost incurred to date / Total Estimated Cost) x Estimated Profit] - Profit Already Recognized Total Contract Price $300,000 $300,000 Actual Cost to Date $70,000 $180,000 Estimated Costs to Complete $200,000 $92,000 Estimated Total Costs at Completion $270,000 $272,000 Estimated Gross Profit $30,000 $28,000 Profit Recognized $7,778* $10,751** *Year 1: ($70,000/$270,000) x $30,000 = $7,778 **Year 2: ($180,000/$272,000) x $28,000 - $7,778 = $10,751 Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 573

Explanation: The correct answer is (A). Howard Co., recognizes revenue over time and would report a gross loss of ($1,000,000). Construction cost (actual + estimate) exceeds the value of the contract resulting in a loss. Summary Amount Actual costs incurred $2,000,000 Estimated costs to complete $6,000,000 Total cost to complete $8,000,000 Total contract value $7,000,000 Gross loss on the construction contract $(1,000,000)

Answer 574

a Explanation: Deferred revenue is revenue collected or collectible in cash but not yet earned. When a company provides services to customers, deferred revenue is a liability until the service has been performed because the company has not yet earned that revenue.

Answer 575

b Explanation: Accrual accounting recognizes and reports the effects of transactions and other events on the assets and liabilities of a business enterprise in the time periods to which they relate rather than only when cash is received or paid. The accrual-based revenue for year 2 would be all the $275,000 total cash receipts from customers for year 2 sales ($200,000 in year 2 + $75,000 in year 3 = $275,000).

Answer 576

b Explanation: Revenue generally is recognized when both the earnings process is complete and an exchange has taken place. Deferred revenue is revenue collected, but not yet earned. Royalty revenue to Boulder would be $30,000 ($300,000 × .10). The remaining $20,000 balance of Castle's payment against future royalties is deferred revenue.

Answer 577

c ``` Explanation: Collection of fees in the year $200,000 Less: Accounts receivable, 1/1 (40,000) Plus: Accounts receivable, 12/31 60,000 Less: Unearned revenue, 12/31 ( 5,000) Service revenue for the year $215,000 ```

Answer 578

Explanation: The correct answer is (D). The customer can benefit from the goods or services either on a standalone basis or with other resources that the customer can easily access is one of the criteria for a distinct good or service. The 5-Step approach to Revenue Recognition: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Answer 579

Explanation: The correct answer is (B). Sale with a Right of Return: In some contracts, an entity transfers control of a product to a customer and also grants the customer the right to return the product for various reasons (such as dissatisfaction with the product) and receive any combination of the following: Full or partial refund of any consideration paid Credit that can be applied against amounts owed or that will be owed, to the entity Another product in exchange To account for the transfer of goods with a right of return (and for some services that are provided subject to a refund), an entity should recognize all of the following: Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled; therefore, revenue would not be recognized for the products expected to be returned Refund liability based on expectations about the number of refunds Asset (and the corresponding adjustment to cost of sales) for its right to recover products from customers on settling the refund liability. The company will have to make a provision for returns from the sales revenue amount. The actual returns in the prior months will not affect the provision to be made for future months. Thus the net sales revenue for the month will be $450,000 [500,000 - (500,000 x 10%)]. (A) is incorrect because it also deducts the returns of sales in prior months (C) is incorrect because it adds the returns of sales in prior months. (D) is incorrect because it does not make provision for returns from the sales.

Answer 580

Explanation: The correct answer is (A). Gross Profit recognized in each period of the contract on accrual basis and is calculated as follows: Gross Profit = [(Cost incurred to date / Total Estimated Cost) x Estimated Profit] - Profit Already Recognized Total Contract Price $300,000 $300,000 $300,000 Actual Cost to Date $70,000 $180,000 $273,000 Estimated Costs to Complete $200,000 $92,000 N/A Estimated Total Costs at Completion $270,000 $272,000 $273,000 Estimated Gross Profit $30,000 $28,000 $27,000 Profit Recognized $7,778* $10,751** $8,471*** *Year 1: ($70,000/$270,000) x $30,000 = $7,778 **Year 2: ($180,000/$272,000) x $28,000 - $7,778 = $10,751 ***Year 3: ($273,000/$273,000) x $27,000 - $18,529 = $8,471 Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 581

Explanation: Answer (B): The legal title for the asset is with the customer is one of the criteria for recognizing revenue at a point in time, not over time. An entity transfers control of goods or services over time and fulfills an obligation to perform and recognizes revenue over time if one of the following criteria is met: * Simultaneous receipt and consumption of customer benefits as and when the company performs. * The performance of the entity creates or enhances an asset controlled by the customer. * The performance of the entity does not create an asset with an alternative use of the entity and the entity has an enforceable right to payment for the completed performance to date.

Answer 582

Explanation: The correct answer is (C) An agent is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services. The following are indicators that an entity is an agent – a. Another party is primarily responsible for fulfilling the contract. b. The entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping, or on return. c. The entity does not have discretion in establishing prices for the other party’s goods or services and, thus, the benefit that the entity can receive from those goods or services is limited. d. The entity’s consideration is in the form of a commission. e. The entity is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services. (A), (B) and (D) are incorrect as they are all indicators that an entity is an agent

Answer 583

d Explanation: Revenue from sales when the buyer has the right to return the product should be recognized at the time of sale only if all of several conditions are met. One condition is that the buyer has paid the seller, or is obligated to pay the seller, and the obligation is not contingent on resale of the product. While the amount of returns can be estimated based on past experience, the obligation for Jensen to pay Devlin is contingent upon Jensen reselling the goods. Thus, Devlin has no sales revenue for this transaction.

Answer 584

d Explanation: The completed contract method is not allowed under IFRS. IFRS requires the percentage of completion method for long-term construction projects. If the percentage cannot be reasonably estimated, then revenue is recognized only to the extent of cost.

Answer 585

b Explanation: H&S has received payment and has transferred physical possession of the boxes, which are indicators that control has transferred. However, because shops can return the boxes and H&S can require shops to ship the boxes to other shops, the risks and rewards of ownership have not transferred. Additionally, legal title remains with H&S. In aggregate, it appears the customer is not able to obtain substantially all of the remaining benefits or the boxes of direct the use of the boxes. Furthermore, all three indicators of a consignment arrangement (control by the vendor, vendor’s ability to require return or transfer and no unconditional obligation of consignee to pay) are present. Consequently, this arrangement is a consignment. Because of this, revenue recognition must be deferred until the subsequent sale to the end-consumer.

Answer 586

d Explanation: The correct answer is (D). Both the sale on Consignment Basis and Percentage of Completion methods report revenue based upon satisfaction of performance obligation based on ASC 606's five-step approach to recognizing revenue.

Answer 587

Explanation: The correct answer is (A) Revenue recognized over time reflects the periodic recognition of income as it is earned. Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 588

b Explanation: When the refundable merchandise coupons are sold, the sales price collected represents unearned revenue and an unearned revenue account is credited. Earned revenue will be recognized later when the coupons are redeemed.

Answer 589

a Explanation: Side agreements are used to alter the terms and conditions of recorded sales transactions to entice customers to accept the delivery of goods and services. They may create obligations or contingencies relating to financing arrangements or to product installation or customization that may relieve the customer of some of the risks and rewards of ownership.

Answer 590

Explanation: The correct answer is (A). Cash collection is neither a critical event for income recognized at a "Point in Time" or "Over Time" under ASC 606. Performance Obligation Satisfied at a “point in time”: If an obligation to perform is not fulfilled over time, the obligation to perform is fulfilled at a point in time: * Entity currently has a right to collect payment for the asset * The legal title for the asset is with the customer * Physical possession of the asset is transferred by the entity to the customer * Significant risks and rewards of ownership of the asset are with the customer * The asset has been accepted by the customer Performance Obligation Satisfied “over time”: An entity transfers control of goods or services over time and fulfills an obligation to perform and recognizes revenue over time if one of the following criteria is met: * Simultaneous receipt and consumption of customer benefits as and when the company performs. * The performance of the entity creates or enhances an asset controlled by the customer. * The performance of the entity does not create an asset with alternative use of the entity and the entity has an enforceable right to payment for the completed performance to date. If the performance obligation is met by the "over time " entity, the revenue is also recognized as "over time " according to the following two methods: * Output Method: Revenue shall be recognized by the value of the goods and services transferred to the customer to date. * Input Method: The revenue is recognized on the basis of the efforts of the entity or its inputs.

Answer 591

c Explanation: When the aggregate payments under new terms of an impaired loan are less than the amount of the obligation, the debtor records a gain equal to the difference between the carrying amount of the payable, including accrued interest, and the aggregate future cash payments required under the new terms. May Corp. is the debtor and owes $1,000,000 principal plus $40,000 of accrued interest. Under the new terms, May is required to pay future cash payments of $950,000 plus $30,000. The gain, before taxes, is $1,040,000 - $980,000 = $60,000. Note that the creditor (in this case, the bank) would use the present value, not the aggregate, of the future cash payments in its accounting for this loan.

Answer 592

c Explanation: The amount of cash paid by Little to Dell does not affect the amount of revenue to be recognized. The contract revenue should be accounted for under the completion of production method. Therefore, Dell should recognize the full amount of revenue pertaining to the desks produced in the year. Revenue should be recognized only for those units produced by year-end, despite the 5,500 maximum. Dell should recognize contract revenue of $550,000 (5,000 × $110) in the year. Dell properly recognizes the full amount of the contract revenue pertaining to the 5,000 desks produced in the year because (1) the number of desks produced is within the parameters of the contract for the year and (2) the earnings process is virtually complete.

Answer 593

Explanation: The correct answer is (B). Proceeds from the advance sale of tickets for a theatrical performance should be reported as unearned revenue as the services/performances are not yet rendered. Revenues will be recognized when the product is delivered or services are rendered to customers. The fact that the tickets are non-refundable doesn't impact the performance obligation. The company still has to perform. Deferred revenue or unearned revenue is accounted when the cash is received, but revenue is not earned as the entity has not yet satisfied its performance obligation. It is accounted as a liability until the entity satisfies the performance obligation. Revenue should be recognized when it is realized and earned. The 5-step approach to revenue recognition: Step 1: Identify the Contract(s) with a customer. Step 2: Identify the Performance obligations in the contract. Step 3: Determine the transaction price (i.e., Amount). Step 4: Allocate transaction Price to Performance obligations in the contract. Step 5: Revenue Recognition when/as the entity satisfies a performance obligation.

Answer 594

Explanation: The correct answer is (C). When an entity sells goods on right to return basis, we recognize revenue and the corresponding cost of goods sold for the portion of goods not expected to be returned. ``` Estimated returns: 200,000 x 5% = 10,000 units Net Sales = 200,000 – 10,000 = 190,000 units Sales (190,000 x $2) $380,000 Cost of Sales ($190,000 x $1) -190,000 Gross Profit 190,000 Less processing costs -10,000 Operating Profit 180,000 ```

Answer 595

d Explanation: Consignment sales revenue is recognized at the time of sale. Thus, consignment sales revenue of $10,000 (10 freezers × $1,000 sales price) is reported in the current year. The transportation costs and the 15% commission are reported as selling expense; they are not netted against sales revenue. Cash 8,500 Consignment sales commissions 1,500 Consignment sales revenues 10,000To record consignment sale

Answer 596

d Explanation: Royalty revenue and royalty expense are recognized under the rules of accrual accounting, royalties received in advance are not recognized as revenue at the date of the royalty agreement, and an entity generally should compute the amount of royalty revenue or expense for a period by multiplying the period's sales applicable to the royalty agreement by the royalty percentage. Since answers A., B., and C. are all correct, answer D., all of the above, is the best answer choice.

Answer 597

d Explanation: Under the conservatism principle, the full amount of an anticipated loss must be recognized immediately under both revenue recognition methods. The recognition of an anticipated loss cannot be deferred to future periods under either method.

Answer 598

d ``` Explanation: Accrual accounting (1) recognizes revenue in the period it is earned rather than only when the related cash is received and (2) recognizes expenses in the period incurred rather than only when the related cash is paid. ``` Cash basis pretax income, year 2 $60,000 Add: Increase in accounts receivable--revenues earned but not yet collected in cash ($40,000 - $20,000) 20,000 Add: Decrease in accounts payable--payments made not not representing current year expenses ($30,000 - $15,000) 15,000 Accrual basis pretax income, year 2 $95,000

Answer 599

b Explanation: Revenues are only considered earned when the entity has accomplished substantially what it must do to be entitled to the revenues. Acme has only delivered 50,000 gallons to Karn during year 1. Therefore, Acme should only recognize revenue of $150,000 (i.e., 50,000 gallons × $3) during year 1 from this sale.

Answer 600

d Explanation: Accrual accounting recognizes revenue in the period(s) it is earned. Therefore, the revenue should be recognized evenly over the contract year as the services are performed.

Answer 601

a Explanation: The $2,800 increase in rentals receivable represents rental revenue earned but not yet received in cash. The $8,000 decrease in unearned rentals represents rental revenue earned that had been received in cash in a prior period. ``` Cash (given) $80,000 Rentals Receivable ($12,400 - $9,600) 2,800 Unearned Rentals ($32,000 - $24,000) 8,000 Rental Revenue (to balance) $90,800 ```

Answer 602

Explanation: Answer (D): Entity currently has a right to collect payment for the asset. All other options are criteria to recognize revenue over time. To recognize revenue at a point in time, the following criteria must be met: * Entity currently has a right to collect payment for the asset * The legal title for the asset is with the customer * Physical possession of the asset is transferred by the entity to the customer * Significant risks and rewards of ownership of the asset are with the customer * Asset has been accepted by the customer

Answer 603

c Explanation: The correct answer is (C). A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains (i.e., holds) physical possession of the product until it is transferred to the customer at a point in time in the future. Revenue should be recognized only when the customer obtains control of the product. For a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria must be met: i. Substantive reason for the bill-and-hold arrangement (e.g., the customer has requested the arrangement). ii. Product must be identified separately as belonging to the customer. iii. Product currently must be ready for physical transfer to the customer. iv. Entity cannot use the product or direct it to another customer.

Answer 604

d Explanation: $4,000. The $20,000 warranty is for a 5 year period and must be recognized as unearned revenue at the inception of the contract. The warranty revenue can only be realized over the life of the warranty. So each year $4,000 of revenue can be recognized. Therefore on December 20X5 the balance in the unearned warranty revenue account will be $16,000. On December 31, 20X6 it will be $12,000. On December 31, 20X7 it will be $8,000. On December 31, 20X8 it will be $4,000 and finally on December 31, 20X9 it will be fully recognized.

Answer 605

d Explanation: The first steps of revenue recognition under IFRS 15 are: (1) Identify the contract with a customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations in the contract; (5) Recognize revenue when (or as) the entity satisfied a performance obligation. Therefore “D” is not a step in the revenue recognition process.

Answer 606

d Explanation: The decrease in accounts receivable represents collections in the current period of credit sales of a prior period. ``` Gross cash sales $ 80,000 Less: Returns and allowances (4,000) Receipts from cash sales $ 76,000 Gross credit sales 120,000 Less: Discounts (6,000) Net credit sales 114,000 Add: Decrease in accounts receivable ($40,000 - $30,000) 10,000 Receipts from credit sales 124,000 Receipts from cash and credit sales $200,000 ```

Answer 607

c Explanation: The entity does not recognize revenue when control of the product transfers to the customer on December 1, Y1. This is because of the existence of the right of return and the lack of relevant historical evidence about the product returns. This means that the entity cannot for sure conclude that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Consequently, revenue is recognized only after ninety days on March 1, Y2 when the right of return lapses. The contract includes a significant financing component. This is evident from the difference between the amount of promised consideration of $121 and the cash selling price of $100 at the date that the goods are transferred to the customer. The contract includes an implicit interest rate of 10 percent (that is, the interest rate that over 24 months discounts the promised consideration of $121 to the cash selling price of $100). Thus, revenue is recognized on March 1, Y2 for $100. Until the entity receives the cash payment from the customer, interest income would be recognized consistently. The entity would accrete the receivable up to $121 from the time the right of return lapses until customer payment.

Answer 608

Explanation: The correct answer is (A). Under the input method prescribed in ASC 606 that recognizes revenue at a point in time, gross profit is recognized only on completion of the contract. Since the project started in Year 1 and at the end of Year 2 $720,000 of the cost is yet to be incurred. The project is not complete and accordingly, no revenue will be recognized. Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 609

Explanation: | The milestone method of revenue recognition is, at its core, an application of the proportional performance method.

Answer 610

Explanation: The correct answer is (A) Since revenue is recognized over time, the performance by Barr does not create an asset with an alternative use, and Barr has an enforceable right to payment for the completed performance to date, the gross profit recognized in the first year of the contract is determined by multiplying the estimated total gross profit of the , by the estimated percentage of completion. ``` Contract price $4,200,000 Costs incurred to date $1,750,000 Estimated costs to complete $1,750,000 Less estimated total costs $(3,500,000) Estimated total gross profit $700,000 Costs incurred to date $1,750,000 Estimated total costs /$3,500,000 Times estimated % of completion × 50% Gross profit recognized $350,000 ```

Answer 611

Explanation: The correct answer is Option (A). Some costs incurred to obtain or fulfill a contract with a customer are capitalized along with cost incurred in fulfilling a contract. A. Incremental costs of obtaining a contract are the costs that the entity would not have incurred if the contract had not been obtained. The incremental costs incurred by S&S were: Particulars Amount Cost to print pamphlets to obtain contract $750 Travel cost of the marketing team to ABC Ltd. to obtain the contract $1,000 Legal fees for drafting the contract $250 Sales commissions to marketing department $1,000 However, only costs incurred because the contract had been obtained has to be capitalized. The cost of pamphlets and travel cost of marketing department would have been incurred even if the contract would not have been obtained. Thus, only the legal fee to draft the contract and the sales commissions given because of obtaining the contract has to be capitalized (i.e. $250 + $1,000) = $1,250. B. Costs incurred in fulfilling a contract are capitalized if: Relate directly to a contract (or a specific anticipated contract). Generate or enhance resources of the entity that will be used in satisfying performance obligations in the future. Are expected to be recovered. S&S has to consider the following costs to determine if it has to be capitalized. Particulars Amount Rationale Building a removable stage, that could be used for all future programs organized by S&S $1,200 This has to be capitalized as this relates directly to the contact to provide entertainment for the conference and also enhances the resources of S&S as this can be used for all the entertainment programs organized by S&S during the two year contract with ABC. Making props for the show which could be used for any future programs of S&S $800 This also has to be capitalized as this relates directly to the contact to provide entertainment for the conference and also enhances the resources of S&S as this can be used for all the entertainment programs organized by S&S for ABC or outside Printing brochures about S&S to be distributed to members of the conference $750 This should not be capitalized as this does not relate to the contract . This is a mere advertisement for S&S to obtain future business Salary of employee employed primarily to organize events at ABC $2,250 This employee could also be used for other shows of S&S. Though the employee salary is incurred to organize the entertainment and relates directly to the contract, these costs do not generate or enhance resources of the S&S, thus, should not be capitalized and must be recognized as payroll expense when incurred Total cost incurred while fulfilling the contract that has to be capitalized = $1,200 + $800 = $2,000. Total cost to be capitalized = Incremental cost of $1,250 + Cost to fulfill the contract $2,000 = $3,250. Options (B), (C) and (D) are incorrect based on the above explanation as these use a different combination of the costs incurred by S&S.

Answer 612

Explanation: To account for transfer of goods with a right of return (and for some services that are provided subject to a refund), an entity should recognize all of the following: Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled; therefore, revenue would not be recognized for products expected to be returned. Revenue cannot be recognized at the time of sale because neither collection of payment from the buyer is reasonably assured nor can the company reasonably estimate the returns. The buyer’s right to return expires only after 12 months after which revenue can be recognized. The right to exchange goods is not a consideration for revenue recognition as an exchange does not affect the amount of collection. Therefore Aqua Co. will recognize revenue after twelve months after date of sale.

Answer 613

8 907 2J Revenue Recognition Incorrect 00:00:02 9 903 2J Revenue Recognition Incorrect 00:00:04 10 512 2J Revenue Recognition Incorrect 00:00:09 11 901 2J Revenue Recognition Correct 00:00:03 12 567 2J Revenue Recognition Incorrect 00:00:03 13 914 2J Revenue Recognition Incorrect 00:00:11 14 939 2J Revenue Recognition Incorrect 00:00:02 15 930 2J Revenue Recognition Incorrect 00:00:01 16 3642 2J Revenue Recognition Incorrect 00:00:02 17 876 2J Revenue Recognition Incorrect 00:00:02 18 874 2J Revenue Recognition Correct 00:00:02 19 908 2J Revenue Recognition Incorrect 00:00:02 20 883 2J Revenue Recognition Correct 00:00:04 21 919 2J Revenue Recognition Incorrect 00:00:03 22 932 2J Revenue Recognition Incorrect 00:00:02 23 933 2J Revenue Recognition Incorrect 00:00:02 24 923 2J Revenue Recognition Correct 00:00:02 25 940 2J Revenue Recognition Incorrect 00:00:02 26 955 2J Revenue Recognition Incorrect 00:00:08 27 1504 2J Revenue Recognition Incorrect 00:00:02 28 3518 2J Revenue Recognition Incorrect 00:00:01 29 948 2J Revenue Recognition Incorrect 00:00:04 30 928 2J Revenue Recognition Incorrect 00:00:01 31 557 2J Revenue Recognition Correct 00:00:03 32 960 2J Revenue Recognition Incorrect 00:00:02 33 946 2J Revenue Recognition Incorrect 00:00:02 34 598 2J Revenue Recognition Incorrect 00:00:02 35 952 2J Revenue Recognition Correct 00:00:01 36 942 2J Revenue Recognition Incorrect 00:00:03 37 954 2J Revenue Recognition Incorrect 00:00:02 38 897 2J Revenue Recognition Correct 00:00:02 39 910 2J Revenue Recognition Incorrect 00:00:02 40 925 2J Revenue Recognition Incorrect 00:00:02 41 878 2J Revenue Recognition Incorrect 00:00:02 42 1005 2J Revenue Recognition Correct 00:00:25 43 867 2J Revenue Recognition Incorrect 00:00:02 44 864 2J Revenue Recognition Incorrect 00:00:03 45 922 2J Revenue Recognition Correct 00:00:25 46 937 2J Revenue Recognition Incorrect 00:00:02 47 3552 2J Revenue Recognition Incorrect 00:00:02 48 3551 2J Revenue Recognition Correct 00:00:02 49 882 2J Revenue Recognition Incorrect 00:00:05 50 902 2J Revenue Recognition Correct 00:00:01 51 934 2J Revenue Recognition Incorrect 00:00:03 52 950 2J Revenue Recognition Incorrect 00:00:02 53 911 2J Revenue Recognition Correct 00:00:19 54 3517 2J Revenue Recognition Incorrect 00:00:03 55 600 2J Revenue Recognition Incorrect 00:00:03 56 894 2J Revenue Recognition Incorrect 00:00:02 57 604 2J Revenue Recognition Correct 00:00:01 58 926 2J Revenue Recognition Incorrect 00:00:03 59 941 2J Revenue Recognition Correct 00:00:03 60 917 2J Revenue Recognition Incorrect 00:00:02 61 945 2J Revenue Recognition Incorrect 00:00:04 62 913 2J Revenue Recognition Incorrect 00:00:03 63 957 2J Revenue Recognition Incorrect 00:00:03 64 3520 2J Revenue Recognition Correct 00:00:02 65 912 2J Revenue Recognition Correct 00:00:04 66 920 2J Revenue Recognition Incorrect 00:00:19 67 921 2J Revenue Recognition Incorrect 00:00:02 68 595 2J Revenue Recognition Incorrect 00:00:01 69 916 2J Revenue Recognition Incorrect 00:00:02 70 509 2J Revenue Recognition Incorrect 00:00:02 71 909 2J Revenue Recognition Correct 00:00:03 72 918 2J Revenue Recognition Incorrect 00:00:02 73 936 2J Revenue Recognition Incorrect 00:00:03 74 927 2J Revenue Recognition Incorrect 00:00:05 75 924 2J Revenue Recognition Incorrect 00:00:05 76 872 2J Revenue Recognition Incorrect 00:00:02 77 3516 2J Revenue Recognition Correct 00:00:02 78 947 2J Revenue Recognition Incorrect 00:00:04 79 935 2J Revenue Recognition Incorrect 00:00:02 80 601 2J Revenue Recognition Incorrect 00:00:02 81 949 2J Revenue Recognition Incorrect 00:00:02 82 953 2J Revenue Recognition Incorrect 00:00:03 83 592 2J Revenue Recognition Correct 00:00:02 84 3508 2J Revenue Recognition Incorrect 00:00:02 85 938 2J Revenue Recognition Correct 00:00:05 86 3569 2J Revenue Recognition Correct 00:00:03 87 944 2J Revenue Recognition Incorrect 00:00:03 88 873 2J Revenue Recognition Correct 00:00:02 89 931 2J Revenue Recognition Incorrect 00:00:02 90 951 2J Revenue Recognition Incorrect 00:00:02 51 52 53 54 55 56 57 58 59 60 Question #604, Blueprint Area: Revenue Recognition Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of forty cents on the dollar. Hale holds a $30,000 noninterest-bearing note receivable from Seco collateralized by an asset with a book value of $35,000 and a liquidation value of $5,000. The amount to be realized by Hale on this note is A $ 5,000 B $12,000 C $15,000 D $17,000

Answer 614

Explanation: Answer (B): The performance of the entity creates or enhances an asset controlled by the customer is one of the criteria for recognizing revenue over time, not a point in time. To recognize revenue at a point in time, the following criteria must be met: * Entity currently has a right to collect payment for the asset * The legal title for the asset is with the customer * Physical possession of the asset is transferred by the entity to the customer * Significant risks and rewards of ownership of the asset are with the customer * Asset has been accepted by the customer

Answer 615

Explanation: The correct answer is (D). The Input Method prescribed in ASC 606 recognizes revenue over time for long term contracts and is used when costs to complete and estimates of progress towards completion are reasonably dependable. Revenue is recognized on each period in the contract on an accrual basis in proportion to cost incurred. Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 616

Explanation: The correct answer is (D) Given the facts, the gross profit recognized in the second year of the contract is determined by multiplying the estimated total gross profit of the contract by the estimated percentage of completion and then subtracting the gross profit recognized in the first year. Contract price $3,000,000 Costs incurred to date $1,800,000 Estimated cost to complete 600,000 Less estimated total costs (2,400,000) Estimated total gross profit $600,000 Costs incurred to date $1,800,000 Estimated total costs / 2,400,000 Times estimated % of completion × 75% Gross profit recognizable to date $ 450,000 Less: Gross profit previously recognized 300,000 Gross profit recognized in year 2 $ 150,000 Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 617

Explanation: The cost recovery method defers the recognition of all gross profit until cash collections of revenue are equal to the cost of the item sold; all remaining cash collections are recorded as gross profit. No profit was recognized on the year 1 sales for the year ended 3/31, year 1 because the $7,000 collected in the period did not recover the $8,000 cost of sales. For the year ended 3/31, year 2: (1) collections to date on the year 1 sales were $10,000 (i.e., $7,000 + $3,000), permitting the recognition of $2,000 profit above the year 1 cost of sales of $8,000 and (2) collections on the year 2 sales were $12,000, permitting the recognition of $3,000 profit above the year 2 cost of sales of $9,000. Therefore, the amount of gross profit that Fox should recognize for the year ended 3/31, year 2 is $5,000 (i.e., $2,000 + $3,000).

Answer 618

Explanation: Answer (A): Enhances the interchangeability of revenue recognition practices. ASC 606 enhances the comparability of revenue recognition practices. 5 Benefits of the revenue recognition standard under ASC 606: * Eliminates inconsistencies and weaknesses of existing revenue requirements * Provides a more robust revenue management framework * Enhances the comparability of revenue recognition practices. * Provides users of financial statements with more useful information through improved disclosure requirements * Simplifies the preparation of financial statements by reducing the number of requirements referred to by an organization.

Answer 619

Explanation: Revenue from sales when the buyer has the right to return the product should be recognized at the time of sale only if all of several conditions are met. Since the amount of returns can be estimated based on past experience, the amount reported for net sales should be reduced for the 5% of sales expected to be returned within 90 days. Net sales would not be reduced for returns from prior months, as that sales revenue would have already been reduced in compliance with the matching concept. Sales, current month $200,000 Less: Estimated sales that will be returned [$200,000 × 5%] 10,000 Net sales, current month $190,000

Answer 620

Explanation: Upon receipt of a prepayment from a customer, an entity should recognize a contract liability (deferred revenue in this case). Thereafter, entity should derecognize that contract liability (and recognize revenue) when it transfers those goods or services and, therefore, satisfies its performance obligation. The deferred revenue account is credited when gift certificates are sold. When the certificates are redeemed, sales revenues are recognized by debiting deferred revenues. When certificates lapse, deferred revenues are reduced as they are not a liability anymore.

Answer 621

Explanation: The correct answer is (B) Year 1 Year 2 Contract price $10,000 $10,000 Estimated total cost at completion (7,500) (8,000) Estimated gross profit $ 2,500 $ 2,000 Estimated total cost at completion $ 7,500 $ 8,000 GP recognized to date $ 500 $ 1,200 Estimated total GP / 2,500 / 2,000 Percentage of completion × 20% × 60% Contract costs to date 1,500 4,800 Contract costs, prior years (0) (1,500) Contract costs, current year $ 1,500 $ 3,300 Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 622

Explanation: The correct answer is (D). Costs incurred in fulfilling the contract should be recognized as an asset only if they meet all the following criteria: * The costs pertain directly to a contract or to an expected contract. * The costs generate or enhance the entity's resources to fulfill performance obligations in the future. * The costs should be recovered.

Answer 623

Explanation: The correct answer is (D) Given the facts, in the final year of the contract, the final revenue recognition would take place. The calculation would be the total revenue earned over the entire contract less the actual total costs incurred less the revenue previously recognized. Contract price $2,500,000 Costs incurred to date (2,000,000) Estimated total gross profit $ 500,000 Costs incurred to date $2,000,000 Estimated total costs / 2,000,000 Times estimated % of completion × 100% Gross profit recognizable to date $ 500,000 Less: Gross profit recognized in year 1 & 2 350,000 Gross profit recognized in year 3 $ 150,000 Gross Profit recognized in year 1 & 2: (Cost Incurred to Date/Estimated Total Cost) x Estimated Total Gross Profit = Gross Profit Recognized. ($1,400,000/$2,000,000) x $500,000 = 70% x $500,000 = $350,000 Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 624

Explanation: The correct answer is (A). The debtor recognizes a gain or loss equal to the difference between the fair value and the carrying amount of the asset transferred. The amount is reported in income from continuing operations. The debtor recognizes a gain on the troubled debt restructuring equal to the difference between the carrying amount of the obligation settled and the fair value of the asset transferred. Both the ordinary gain and gain on troubled debt restructuring is reported as income from continuing operations at $200,000 ($110,000 + $90,000). Debt principal $500,000 Add: Accrued interest at restructure date 60,000 Carrying amount of obligation at restructure date $560,000 Less fair value of land transferred (450,000) Gain on restructure $110,000 Fair value of land transferred $450,000 Less: Carrying amount of the land (360,000) Gain on disposition $ 90,000

Answer 625

Explanation: The correct answer is (D) Given the facts, Pell recognizes a gross profit of $20,000 on the two projects because (1) $40,000 of the estimated gross profit on Project 1 is recognized in the year, and (2) the full amount of the $20,000 anticipated loss on Project 2 is recognized in the year because no portion of the anticipated loss can be deferred to future periods. Project 1 Project 2 Contract price $420,000 $300,000 Costs incurred to date $240,000 $280,000 Estimated costs to complete 120,000 40,000 Estimated total costs (360,000) 320,000 Estimated total gross profit (loss) $60,000 ($20,000) Costs incurred to date $240,000 Estimated total costs / 360,000 Percentage-of-completion × 2/3 Gross profit recognized in the year $ 40,000 Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 626

Explanation: Because the deferred subscription revenues at 12/31 of the previous year were earned in the current year, they do not affect the computation of deferred subscription revenue at 12/31 of the current year. Cash receipts from customers during the year $3,600,000 Portion received after 9/30 cutoff date to be earned in the future × 3/12 Deferred subscription revenue at 12/31 $ 900,000

Answer 627

Explanation: Royalty revenue is recognized in the period(s) the royalties are earned. The $75,000 is an advance and has not yet been earned. There were $600,000 in gross sales with $6,000 (1% of gross sales) estimated for returns leaving a total of net sales at $594,000. With royalties calculated at 10% of net sales there would be $59,400 ($594,000 × 0.10) earned and reported as royalty income for the year.

Answer 628

Explanation: The correct answer is (D). All of the answer choices are criteria for recognizing revenue over time, not a point in time. To recognize revenue at a point in time, the following criteria must be met: * Entity currently has a right to collect payment for the asset * The legal title for the asset is with the customer * Physical possession of the asset is transferred by the entity to the customer * Significant risks and rewards of ownership of the asset are with the customer * Asset has been accepted by the customer

Answer 629

Explanation: The correct answer is (C). An entity that recognizes revenue over time allows revenue to be deferred and recognized each year in proportion to the work done during that year. Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 630

Explanation: If revenue is recognized at a point in time, Pell recognizes a gross loss of $20,000 on the two projects because: (1) no portion of the $60,000 estimated gross profit on Project 1 can be recognized in the current year since the performance obligation has not been satisfied: * Entity currently has a right to collect payment for the asset * The legal title for the asset is with the customer * Physical possession of the asset is transferred by the entity to the customer * Significant risks and rewards of ownership of the asset is with the customer * Asset has been accepted by the customer (2) the full amount of the $20,000 anticipated loss on Project 2 must be recognized in the current year because the anticipated loss cannot be deferred to future periods. Amounts below have been rounded (000s). Project 1 Project 2 Contract price $420,000 $300,000 Cost incurred to date $240,000 $280,000 Less: Estimated costs to complete 120,000 40,000 Less: Estimated total costs (360,000) (320,000) Estimated total gross profit $ 60,000 $(20,000)

Answer 631

d Explanation: At 12/31, year 1, the estimated total gross profit of the contract is $150,000, determined as follows: Contract price $600,000 Estimated total costs: Actual costs incurred $225,000 Estimated cost to complete 225,000 (450,000) Estimated total gross profit $150,000 Because none of the performance obligations were satisfied in year 1, no portion of the estimated gross profit can be recognized in year 1. The full amount of the gross profit of the contract should be recognized in year 2, the final year of the contract. Contract price $600,000 Actual cost incurred ($225,000 + $255,000) (480,000) Total gross profit of contract $120,000 The amounts billed to and received from the customer do not enter into the computation of the amount of gross profit recognized from the contract.

Answer 632

b Explanation: Accrual accounting recognizes and reports the effects of transactions and other events on the assets and liabilities of a business enterprise in the time periods to which they relate rather than only when cash is received or paid. Revenues are recognized when earned. A deferred (prepaid) expense is an expense paid or payable in cash but not yet incurred. A prepaid expense is reported in the financial statements as an asset.

Answer 633

c Explanation: Contract modifications is a change in the scope or price (or both) of a contract that is approved by the parties to the contract. This is to be accounted for as a separate contract if BOTH of the following conditions are present: Scope of contract increases due to promise of additional goods / services that are distinct. Price of contract increases by an amount of consideration that reflects the entity’s standalone selling prices (less any adjustments / discounts) of the additional goods / services. A good or service is distinct if both of the following criteria are met: Capable of being distinct - Customer can benefit from the good / service either on its own or together with other resources that are readily available to the customer. Distinct within the context of the contract - The promise to transfer the good / service is separately identifiable from other promises in the contract. The extension of the contract is deemed to be distinct because the customer will benefit from the extended warranty service separately and this service is separately identifiable. The standalone selling price of the contract per year is $80,000 at the beginning of third year when the warranty period is extended. Thus, the standalone selling price of the contract for three years would be $240,000 (i.e. $80,000 x 3). The contract has been modified and the price payable for the third year of the existing contract is $80,000. The customer however has already paid $100,000, that is $20,000 more. This $20,000 could be adjusted in the future payments due from the customer. Under the extension of the contract for another three years the customer agrees to pay $220,000. This would be the standalone price of the contract (i.e. $240,000 less the $20,000 paid extra in the third year) As both the above conditions are satisfied the contract is a separate contract with revenue of $80,000 recognized each year. (A) is incorrect because the contact is treated as a modification if the increase in the scope of the contract is not treated as distinct (B) is incorrect because termination of existing contract and creating a new contract will be done only if the extended contract does not reflect the standalone price of the service. If such is the case the revenue would be recognized for the remaining agreed price of the contract divided by the remaining period = ($80,000 + $220,000) / 4 = $75,000. (D) is incorrect because the changes to the contract are to be recognized in the year of change

Answer 634

Explanation: The correct answer is (C). When revenue is recognized at a point in time, gross profit is recognized only on completion of the contract. Since the project started in Year 1 and is completed in Year 3 as evidenced by the fact that the estimated remaining costs the end of Year 3 is $0. The project is completed and accordingly, all of the profit will be recognized i.e. $27,000 ($300,000 – 273,000). Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 635

Explanation: The correct answer is (A). The amount to be recognized is the amount of consideration to which the entity expects to be entitled. Since the actual sales are unknown, the royalty revenue for the period between July to December Year 3 would be based on estimated sales of $60,000. Royalty revenue Year 3 = Revenue for Jan to June Year 3 + Revenue for Jul to Dec Year 3 = $17,000 + 9,000 (i.e. 15% of $60,000) = $26,000. (B) is incorrect because it is taking the royalty revenue received on March 15, Year 3 and September 15, Year 3. The royalties received on March 15, Year 3 should not be included as they are royalties received for sales in July to December Year 2. Also, royalties received for the period July to December Year 3 needs to be included. (C) is incorrect because it is taking the royalty revenue received on March 15, Year 3, September 15, Year 3 and for the period July through December, Year 3. The royalties received on March 15, Year 3 should not be included as they are royalties received for sales in July to December Year 2. (D) is incorrect because it is taking the royalty revenue on September 15, Year 2, September 15, Year 3 and for the period July through December Year 3. The royalties received on September 15, Year 2 should not be included as they are royalties received for sales in January to June Year 2.

Answer 636

a Explanation: Accounting for debtors when the restructuring is a modification of terms is determined by whether the sum of the cash payments under the new terms (not discounted to present value) equal or exceed the amount of the obligation.

Answer 637

a Explanation: The correct answer is (A). When income is recognized over time per ASC 606, Gross Profit is calculated using the following: [ (Cost incurred to date / Total Estimated Cost) x Estimated Profit) ] - Profit already recognized The ratio included in the formula is the total costs to date to the total estimated costs.

Answer 638

a Explanation: The amount reported for net sales should not be reduced for the 15% of sales expected to be exchanged for merchandise of equal or greater value. However, net sales should be reduced for the 7% of sales expected to be returned within 30 days and the additional 3% of sales expected to be returned within 90 days Sales, December $1,000,000 Less: Estimated sales that will be returned [$1,000,000 × (7% + 3%)] 100,000 Net sales, December $ 900,000

Answer 639

d Explanation: The correct answer is (D). The debtor recognizes a loss equal to the excess of the carrying amount over the fair value of the computer equipment transferred [$75,000 - $80,000 = ($5,000)] and a gain equal to the difference between the carrying amount of the obligation and the fair value of the equipment transferred at the restructure date [$100,000 - $75,000 = $25,000]. The net ordinary gain equals $20,000 [($5,000) + $25,000]. Unusual and/or Infrequent is always classified as Income from Continuing Operations.

Answer 640

b Explanation: The company will have to make a provision for returns from the sales revenue amount. The actual returns in the prior months will not affect the provision to be made for future months. Thus the net sales revenue for the month will be $190,000 [200,000 - (200,000 x 5%)]. Option (A) is incorrect because it also deducts the returns of sales in prior months. Option (C) is incorrect because it adds the returns of sales in prior months. Option (D) is incorrect because it does not make provision for returns from the sales

Answer 641

Explanation: The correct answer is (B). Gross Profit recognized in each period of the contract on an accrual basis and is calculated as follows: Gross Profit = (Cost incurred to date / Total Estimated Cost) x Estimated Profit Total Contract price $300,000 Actual cost to date $70,000 Estimated costs to complete $200,000 Estimated total costs at completion $270,000 Estimated Gross Profit $30,000 Profit Recognized in Year 1 ($70,000/$270,000) x $30,000 $7,778 Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 642

Explanation: The correct answer is (C) A 5-step approach for revenue recognition: Step 1: Identify the Contract(s) with a customer. Step 2: Identify the Performance obligations in the contract. Step 3: Determine the transaction price (i.e., Amount). Step 4: Allocate transaction Price to Performance obligations in the contract. Step 5: Revenue Recognition when/as an entity satisfies a performance obligation. Recognize revenue for the transferred products in the amount of consideration to which the entity expects to be entitled; therefore, revenue would not be recognized for the products expected to be returned. Revenue cannot be recognized at the time of sale because neither collection of payment from the buyer is reasonably assured nor can the company reasonably estimate the returns. The buyer's right to return expires only 12 months, during which revenue can be recognized. The right to exchange goods is not a consideration for revenue recognition as an exchange does not affect the amount of collection. Therefore, Clothes Co. will recognize revenue after twelve months after the day of sale.

Answer 643

Explanation: The correct answer is (D). In many cases, even though a nonrefundable upfront fee relates to an activity that the entity is required to undertake at or near contract inception to fulfill the contract, that activity does not result in the transfer of a promised good/service to the customer. Instead, the upfront fee is an advance payment for future goods/services and, would be recognized as revenue when those future goods/services are provided. Revenue recognition period may extend beyond the initial contractual period if the entity grants the customer the option to renew the contract and that option provides the customer with a material right. If the nonrefundable upfront fee relates to a good/service, the entity should evaluate whether to account for the good/service as a separate performance obligation. In this case, the renewal option creates a material right for additional services for the customer. Based on historical data, the company expects each customer to renew for one additional year before changing service providers. With the upfront fee of $192 received, Go has a performance obligation for the next two years if the additional $72 is paid each month. The estimate of the total consideration to be received is $192 + (24 months x $72) = $1,920. The company would recognize $80 dollars per month over the two years ($1,920/24). (A) and (B) are incorrect because the upfront fee paid is to be recognized over the period of the contract based on the above explanation. (C) is incorrect because the upfront fee paid is divided over a period of only 12 months. However, it is estimated that the contract will most likely be renewed for about 12 months, the upfront fee is to be divided over a period of 24 months.

Answer 644

b Explanation: Of the $20,000 Hayworth received, $18,000 should have been for sales revenue from the equipment and $2,000 should have been allocated to the two-year service contract. Because only one year has passed, Hayworth has only earned $1,000 from that service contract and still has a liability for the next year. Recording the transaction the way Hayworth did means net income will be overstated, the financial statements are not correct, total assets are not affected, and total liabilities will be understated.

Answer 645

Explanation: The correct answer is (A). Under ASC 606, when an entity recognizes revenue at a point in time, gross profit is recognized only on completion of the contract. Since the project started in Year 1 and $200,000 of the cost is yet to be incurred. The project is not complete and accordingly, no revenue will be recognized. Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

Answer 646

c Explanation: Amar recognizes revenue of $210,000 (i.e., 300,000 lbs. × $0.70/lb.) in year 1 for the cotton produced in year 1. It is appropriate for Amar to recognize revenue when the cotton is produced because (1) there is a relatively stable market for the cotton, (2) Amar's costs of selling and distributing the cotton are immaterial and can be reasonably estimated, and (3) the units of cotton are homogeneous.

Answer 647

Explanation: The correct answer is (D) The cost of the services received from employees in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the options. The Stock Options Outstanding account is increased on the grant date. The subsequent exercising, forfeiture, or lapsing of the stock options reduce this account. Therefore, the Stock Options Outstanding account is increased on the grant date and reduced on the exercise date.

Answer 648

b Explanation: The pension liability in year 8 would be the amount the projected benefit obligation exceeded the fair value of plan assets.(i.e., $750,000 – $675,000 = $75,000).In order to report a pension liability of $15,000 in its 12/31, year 8 balance sheet, Webb must make a funding payment of $60,000 (i.e., $75,000 – $60,000) in year 8.

Answer 649

d Explanation: Prior service cost amortization is the spreading of the cost of retroactive benefits generated by a plan amendment that granted increased benefits based on service rendered in prior periods. Retroactively increasing benefits increases the projected benefit obligation at the date of the amendment and the cost shall be recognized as a charge (increase) to other comprehensive income.

Answer 650

a Explanation: Employers with more than one postretirement benefit plan are required to aggregate all overfunded plans and report one net asset amount ($300,000) and to aggregate all underfunded plans and report one net liability amount ($200,000). The current and noncurrent portions of the liability are reported separately in a classified balance sheet. A current liability is reported for the amount by which the fair value of plan assets is exceeded by the expected benefits to be paid over the next 12 months or over the operating cycle if it is longer. Net postretirement benefit assets will always be classified as noncurrent.

Answer 651

b Explanation: The amount of pension liability to be shown on the balance sheet is the amount the projected benefit obligation exceeds the fair value of plan assets. Projected benefit obligation $ 5,700,000 Fair value of plan assets (3,450,000) Unfunded projected benefit obligation $ 2,250,000

Answer 652

c Explanation: The correct answer is (C). Stock options may not only be granted as inducements to employees to purchase company stock but also as compensation in many cases. Fair value on the grant date is used to recognize the expense on a straight-line basis over the period of service required by the employee before the option can be exercised. The service period required is 4 years (January 1, year 1 to December 31, year 4). The corporation must recognize the expense at $12,500 for 4 years [i.e. ($5 x 10,000 stock) / 4]. (A) is incorrect because $50,000 is the total expense which should be recognized on a straight line basis over the period of service required (4 years) instead of recognizing complete expense at once when options are exercised. (B) is incorrect because $50,000 is the total expense which should be recognized on a straight line basis over the period of service required (4 years) instead of recognizing complete expense at once when options are granted. (D) is incorrect because option expense should be spread over 4 years instead of 5 years [i.e. $10,000 = ($5 x 10,000) / 5].

Answer 653

a Explanation: The pension benefit formula is the basis for determining payments to which participants may be entitled under a pension plan. Pension benefit formulas usually refer to the employee's service or compensation or both.

Answer 654

c Explanation: The correct answer is (C). A company has multiple defined benefit pension plans. A pension asset reported in the statement of financial position represents the amount by which the fair value of plan assets exceeds the projected benefit obligation for the company's overfunded plans. Fair value of plan assets > Projected benefit obligation = Overfunded plan. Fair value of plan assets < Projected benefit obligation = Underfunded plan.

Answer 655

d Explanation: The correct answer is (D). Under a defined contribution plan, an employer contributes specific periodic amounts of contributions to the plan during the time the employee is in service such that after retirement, the employee would receive these contributions and along with any returns generated. The two required financial statements of a defined contribution retirement plan are a Statement of Net Assets Available for Benefits of the Plan and a Statement of Changes in Net Assets Available for Benefits.

Answer 656

b Explanation: The attribution period for accruing the expected postretirement health care benefit obligation begins with the date of hire and ends at the full eligibility date. Bounty provides postretirement health care benefits to employees who have completed at least 10 years of service and are aged 55 years or older when retiring. Fletcher is hired at 48 years old. Therefore, the attribution period for accruing Bounty's expected postretirement health care benefit obligation to Fletcher is during the period when Fletcher is aged 48 to 58, because at age 58, Fletcher will have completed 10 years of service and be 55 years or older. CLOSE

Answer 657

Explanation: The correct answer is (B) Overfunding = FV of plan assets > PBO = Pension asset. Underfunding = FV of plan assets < PBO = Pension liability. Planis underfunded by $15,000,000 (i.e. $45,000,000 - $60,000,000) resulting in liability. Expected Benefit payments for next year will not affect the Pension plan asset or liability in the current year.

Answer 658

a Explanation: The correct answer is (A). The funded status of the pension plan is equal to the fair value of plan assets less the projected benefit obligation. This funded status must be reported on the balance sheet as either an asset (when plan assets exceed the projected benefit obligation) or a liability (when the projected benefit obligation exceeds plan assets). A liability on the balance sheet represents the incremental, or unfunded, portion of the projected benefit obligation that exceeds plan assets. Underfunding = FV of plan assets < PBO = Pension liability.

Answer 659

d Explanation: A liability is accrued at year-end for the estimated cost of material compensated absences, which include vacation days and holidays. An entity should accrue a liability if the entity customarily pays or allows compensated absences for employees with accumulated, nonvesting sick leave days, even though employees are not actually absent as a result of illness. Since the answers for A., B., and C. are all correct, the best answer for this question is D., all of the above.

Answer 660

b Explanation: Service cost $300,000 Return on plan assets (80,000) Interest cost on projected benefit obligation 164,000 Amortization of actuarial loss 30,000 Amortization of unrecognized net obligation 70,000 Pension cost for the current year $484,000

Answer 661

Explanation: The amount of the total liability to be recognized equals the unfunded projected benefit obligation. Projected benefit obligation $103,000 Less: Plan assets at fair value (78,000) Amount of total pension liability $ 25,000 Payne would have already recorded a pension liability in the difference between the net periodic pension cost and the employer's contribution. Net periodic pension cost $90,000 Less: Employer's contribution (70,000) Pension liability recognized $ 20,000 So, the additional minimum pension liability is $25,000 - $20,000 = $5,000.

Answer 662

a Explanation: Actuarial gains and losses to the extent recognized refers to changes in the amount of either the projected benefit obligation or plan assets resulting from experience different from that assumed, and also changes in assumptions. It includes both realized and unrealized gains and losses.

Answer 663

a Explanation: If Harmony is reporting a liability for its single-employer defined benefit pension plan then the plan must be underfunded, meaning the benefit obligation is larger than the fair value of plan assets. In that case a net liability equal to the unfunded projected benefit obligation should be reported. The accumulated benefit obligation is the actuarial present value of benefits attributed by the pension benefit formula to employee services rendered before a specified date and based on employee services and compensation (if applicable) before that date. The projected benefit obligation is the actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date. The vested benefit obligation the actuarial present value of vested benefits (benefits for which the employee’s right to receive is no longer contingent on remaining in the service of the employer).

Answer 664

Explanation: Increase in fair value of plan assets ($525,000 - $350,000) $ 175,000 Less: Increase due to employer contributions (110,000) Add: Decrease due to benefit payments 85,000 Actual return on plan assets for the year $ 150,000

Answer 665

c Explanation: The cost of benefit improvements is the increase in the accumulated benefit obligation as a result of a plan amendment, measured at the date of the amendment.

Answer 666

c Explanation: The accumulated benefit obligation is the actuarial present value of benefits (whether vested or nonvested) attributed by the pension benefit formula to employee services rendered before a specified date and based on employee services and compensation (if applicable) prior to that date.

Answer 667

Explanation: The correct answer is (D). Required pension disclosures include: Components of Net Periodic Pension Cost Reconciliation of Pension Benefit Obligation and of Fair Value of Plan Assets showing the components separately Accumulated Benefits Obligations for defined benefit plans Funded status of the plans Impact on Other Comprehensive Income Detailed description of the plan including employee groups covered Expected benefits & contributions Benefits expected to be paid in each of the next 5 years and in the aggregate for 5 years thereafter Contributions expected to be paid to the plan during the rest of the fiscal year Rates & Assumptions on a weighted-average basis Amortization method used to amortize prior service costs or unrecognized gains or losses on transition Explanation of any significant changes in plan assets or benefit obligations The required disclosure is for benefits expected to be paid in each of the next 5 years (not 10 years) and in the aggregate for 5 years thereafter.

Answer 668

d Explanation: The recognition of a liability, or asset, is required if the projected benefit obligation differs from the fair value of plan assets for a defined benefit pension plan. A defined pension plan that is underfunded indicates the projected benefit obligation exceeds the fair value of plan assets and a liability is required. A $500,000 increase in the fair value of plan assets would lower the amount underfunded to only $300,000 and would in effect decrease the liabilities of the entity.

Answer 669

a Explanation: Deferred compensation expense is a contra stockholders' equity account. Therefore, the net effect on stockholders' equity when the options are granted is zero. Stockholders' equity is increased $45,000 + $10,000 - $35,000 = $20,000. The journal entries follow: Deferred Compensation Cost (value of options at date of grant) 35,000 Stock Options Outstanding 35,000 To record the grant. Cash (1,000 shares × $20) 20,000 Stock Options Outstanding 35,000 Common Stock (1,000 shares × $10) 10,000 Add'l Paid-in Cap., Common (to balance) 45,000 To record the exercise of options.

Answer 670

c Explanation: An employer may provide benefits to employees in connection with their termination of employment. Special termination benefits are termination benefits that are offered for only a short period of time. An employer that offers special termination benefits to employees recognizes a liability and a loss when the employees accept the offer and the amount can be reasonably estimated. The cost of termination benefits recognized as a liability and loss is the amount of any lump-sum payments and the present value of any expected future payments. The amount to be reported as the total liability for special termination benefits at December 31, year 1, for the company in question is determined as follows: Lump-sum payments made 1/1, year 2 $475,000 Present value of periodic payments beginning 1/1, year 3 155,000 Liability for special termination benefits, 12/31, year 1 $630,000The reduction of accrued pension cost for the terminating employees does not affect the liability reported for special termination benefits.

Answer 671

Explanation: The correct answer is (D). Statement of changes in net assets available for benefits are calculated as follows: Beginning plan assets Add: Contributions during the period Add: Returns (actual) on plan assets during the period Less: Benefits paid out during the year Ending plan assets So additions in the pension plan's statement of changes in net assets available for benefits will include Contributions during the period ($340,000) and Returns (actual) on plan assets during the period which will include Dividends and interest received ($92,000) and Increase in fair value of investments at year end ($36,750) and will total to $468,750.

Answer 672

c Explanation: The transition amounts for postretirement benefits other than pensions may be recognized immediately in net income as a change in accounting principle, as an alternative to amortization. This option is not available in accounting for pension costs.

Answer 673

Explanation: The correct answer is (A) Defined benefit pension plan: Prior service costs ↑; Excess of projected benefit obligation over the fair value of plan assets ↑. Other comprehensive income (OCI) $500,000 Project benefit obligation $500,000 Since it covers employees with an average 10-year remaining service life, it will be amortized at the rate of $50,000 per year with an increase, or debit, to pension expense and a credit to OCI. Pension expense $50,000 Other comprehensive income $50,000 The net effect on OCI is a debit of $450,000. (B) is incorrect because it reflects beginning balance debit to OCI of $500,000. (C) is incorrect because it is adding amortization amount to the existing prior year cost. (D) is incorrect because OCI has a debit balance and not a credit balance.

Answer 674

Explanation: A loss on plan assets related to a subsidiary disposal is not included in the determination of net pension cost. A gain or loss directly related to a disposal is recognized as a part of the gain or loss associated with that event. Service cost $160,000 Annual interest on pension obligation 50,000 Actual and expected gain on plan assets (35,000) Amortization of prior service cost 5,000 Net pension cost $180,000

Answer 675

c Explanation: The difference in executive and non-executive plans is not a required disclosure. The components of period pension costs is a required disclosure. The amount of unrecognized prior service cost and a detailed description of the plan including employee groups covered are required disclosures.

Answer 676

Explanation: The correct answer is (A). When compensatory stock options are granted to employees, the compensation expense is reported by the company based on the fair value of the option when granted. The total compensation expense for 3 years is equal to $1,500,000 (i.e. 100,000 stock options x $15 per option). The vesting period is the period over which the employee is required to provide services. Compensation cost for share-based employee compensation classified as equity is amortized straight-line over the requisite period. The above stock options of value $1,500,000 have a vesting period of 3 years. The amount of share-based compensation expense that the company should report for the year ended December 31, year 2 = $1,500,000 / 3 years = $500,000.

Answer 677

a Explanation: GAAP guidance specifically mentions salesmen's monthly salaries as an example that fits the description of a cost that cannot be directly related to particular revenues, but rather it is incurred in order to obtain benefits that are exhausted during the period. Salespersons' commissions and transportation to customers are mentioned as examples of items that are directly related to sales revenues. Prepaid insurance is mentioned as an asset yielding benefits over several periods.

Answer 678

a Explanation: For purposes of reporting overfunded and underfunded plans, along with required disclosures, plan investments shall be measured at their fair value as of the measurement date.

Answer 679

a Explanation: The following components are included in net pension cost: (1) service cost, (2) interest cost, (3) actual return on plan assets, if any, (4) amortization of unrecognized prior service cost, if any, (5) gain or loss (including the effects of changes in assumptions) to the extent recognized, and (6) amortization of the unrecognized net obligation (and loss or cost) or unrecognized net asset (and gain) existing at the date of initial application of GAAP. The fair value of plan assets should not be included in net pension cost.

Answer 680

d Explanation: For purposes of reporting overfunded and underfunded plans, along with required disclosures, plan investments shall be measured at their fair value as of the measurement date.

Answer 681

c Explanation: Loch contributed $1,000,000 to the plan. Therefore, in its 12/31, year 2 balance sheet, Loch should report a pension asset of $480,000 (i.e., $1,000,000 - $520,000) prior to comparing the fair value of plan assets to the projected benefit obligation. Service and interest cost $620,000 Return on plan assets ($1,000,000 × 10%) (100,000) Pension cost, year 2 $520,000Note: The asset recognized on the balance sheet is the amount the fair value of plan assets exceeds the projected benefit obligation.

Answer 682

d Explanation: In the current year, East accrued pension cost of $174,000 (i.e., $150,000 service cost + $24,000 prior service cost amortization) and made funding payments of $210,000 (i.e.,$150,000 for service cost+ $60,000 for prior service cost). The amount of East’s pension asset at 12/31 is $36,000 (i.e., $210,000 funding payments – $174,000 pension cost), prior to comparing the fair value of plan assets to the projected benefit obligation.

Answer 683

c Explanation: The current and noncurrent portions of any liability are reported separately in a classified balance sheet. A current liability is reported for the amount by which the fair value of plan assets is exceeded by the expected benefits to be paid over the next 12 months or over the operating cycle if it is longer. Net postretirement benefit assets will always be classified as noncurrent.

Answer 684

a Explanation: This is a poorly worded question. It is included so candidates learn to handle such questions. The excess of the projected benefit obligation over the fair value of plan assets (i.e., $90,000) is the amount of the pension liability to be reported in the 9/30 balance sheet. The pension asset of $20,000 and the amount of liability of $90,000 to be reported are netted into one amount of the $110,000 required adjustment. The amount of the liability to be reported equals the unfunded projected benefit obligation. Projected benefit obligation $380,000 Less: Fair value of plan assets (290,000) Unfunded projected benefit obligation 90,000 Add: Pension asset on books 20,000 Additional liability to be recorded $110,000

Answer 685

b Explanation: Net income after bonus and income taxes is $360,000. The income tax rate is 40%. Therefore, income after bonus but before income taxes is $600,000 [i.e., $360,000 / (100% – 40%)]. The bonus is equal to 10% of the corporation’s income after bonus but before income taxes. Therefore, the amount of the bonus is $60,000 (i.e., $600,000 × 10%).

Answer 686

c Explanation: The cost of services received from employees in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the options. The account Stock Options Outstanding is increased on the grant date. The subsequent exercising, forfeiture, or lapsing of the stock options reduces this account. ``` January 2, Year 3 Deferred Compensation Cost (value of options at date of grant) 32,000 Stock Options Outstanding 32,000 December 31, Year 3 Wages and Compensation Expense 32,000 Deferred Compensation Cost 32,000 Cash (1,000 shares × $40) 40,000 Stock Options Outstanding 32,000 Common Stock (1,000 × $10) 10,000 Add'l Paid-in Cap., Common Stock (to balance) 62,000 ```

Answer 687

c Explanation: The service cost component of net periodic pension cost is a portion of the projected benefit obligation. Therefore, it is measured using the projected benefit obligation.

Answer 688

Explanation: The correct answer is (D). To start, prior service cost is the cost of an amendment to a pension plan that increases pension benefits granted to employees for services already rendered. It is recognized as a debit to AOCI on the date of the plan amendment. Prior service cost of $210,000 is reported as a debit balance in accumulated other comprehensive income (AOCI). The net gain of $140,000 is reported as a credit in AOCI because it was not previously recognized in net periodic pension cost. This net gain (loss) consists of asset gains or losses (the difference between the actual return on plan assets and the expected return on plan assets) and the liability gains or losses due to unexpected changes in Projected Benefit Obligation (PBO). Thus, a debit balance of $70,000 ($210,000 debit - $140,000 credit) should be reported in AOCI.

Answer 689

d Explanation: Service cost for a period is the increase in the projected benefit obligation due to services rendered by employees during that period.All information on covered employees for the previous and current year is the same, and the current year is one year closer to the payment of retirement benefits.Service cost will be greater in the current year as compared to the previous year because the present value computation will be greater due to one less year of discounting.The plan requires equal annual contributions, but service costs are less in the beginning and more later.The contribution in the previous year will exceed the previous year service costs, resulting in an over funded pension status to be reported on the previous year balance sheet.

Answer 690

d Explanation: Interest cost represents the increase in the projected benefit obligation due to the passage of time, and is computed by multiplying the projected benefit obligation at 1/1 by the assumed discount (settlement) rate. The projected benefit obligation is increased by the interest costs and service costs incurred in the year and decreased by any pension benefits paid during the year. Projected benefit obligation at 1/1 $72,000 Interest cost for the year ($72,000 × 10%) 7,200 Service costs for the year 18,000 Pension benefits paid during the year (15,000) Projected benefit obligation, 12/31 $82,200

Answer 691

c Explanation: Interest cost included in net pension cost is the increase in the projected benefit obligation due to the passage of time.

Answer 692

c Explanation: The funded-status amount is measured as the difference between the fair value of plan assets and the benefit obligation, with the benefit obligation including all actuarial gains and losses, prior service cost, and any remaining transition amounts. If the benefit obligation is larger than the fair value of plan assets, the plan is underfunded, and a net liability is reported. Conversely, if the fair value of the plan assets is larger, the plan is overfunded, and a net asset is reported on the statement of financial position (i.e. balance sheet).

Answer 693

b Explanation: Accrual accounting recognizes expenses in the period they are incurred rather than when paid. Zach pays commissions to its sales staff at the rate of 3% of net sales. For the year ended 3/31, Zach should report commission expense of $450,000 ($15,000,000 × 3%).

Answer 694

a Explanation: An award of equity interests in exchange for employee services is considered a compensatory share-based payment plan. With a compensatory share-based payment plan the compensation cost is recognized using the fair value method of option pricing and the measurement date is the date of the grant.

Answer 695

Explanation: The plan amendment granted increased benefits for services provided prior to the current year. Because the plan amendment was granted with the expectation that Tern will realize economic benefits in future periods, the cost of providing the retroactive benefits should not be included in pension cost entirely in the year of amendment. Instead, the prior service cost should be recognized during the future service periods of those employees active at the date of the amendment who are expected to receive benefits under the plan (i.e., in the current year and following years).

Answer 696

Explanation: The $180,000 of transition obligation at the beginning of year 8, is computed as the excess at that date of the projected benefit obligation over the fair value of plan assets ($780,000 - $600,000 = $180,000), since at that date all amounts accrued as net periodic pension cost had been contributed to the plan. Typically, the transition obligation should be amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. However, because the average remaining service period is less than 15 years (10 < 15), Reed may elect to use a 15-year period. Therefore, the amount of transition obligation that Reed should amortize to minimize its accrual for pension cost is $12,000 ($180,000 / 15).

Answer 697

d Explanation: Compensation costs of a stock option plan should be recognized (i.e., expensed) in the period(s) in which the employee performs the services. Deferred compensation costs are recognized on the date of the grant.

Answer 698

c Explanation: There are three fundamental aspects shape financial reporting in the application of accrual accounting to pensions.They are: delaying recognition of certain events;reporting net cost;and off setting liabilities and assets.

Answer 699

d Explanation: An accumulated benefit obligation is the actuarial present value of benefits attributed by the pension benefit formula to employee services rendered before a specified date and based on employee services and compensation prior to that date. Service and interest costs are components of the net periodic pension cost. The projected benefit obligation is the actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date.

Answer 700

Explanation: Loch contributed only $400,000 to the plan and collected 10% return on plan assets. Therefore at year-end, Loch would have a pension liability of $280,000. Service and interest costs $ 720,000 Less: Amount contributed (400,000) Less: Actual return on plan assets (10% of $400,000) (40,000) Unfunded pension liability $280,000

Answer 701

c Explanation: The cost of retroactive benefits generated by a plan amendment is amortized by assigning an equal amount to each year of future service for each employee active at the date of the amendment expected to receive benefits under the plan. The use of simplified methods is permitted, including the use of the straightline method that amortizes the cost over the average remaining service life of the active participants. The average remaining service life is 5 years, calculated by adding the expected remaining years of service of the participants (3 + 5 + 5 + 7 = 20 years) and dividing by the number of participants (4). The total credit of $100,000 would thus be amortized over 5 years, at $20,000 per year. If instead the amortization is calculated by prorating for each year over the next 7 years, during the first year 4 participants remain in active service; 4/20 x ($100,000) = $20,000. In this problem, during each of the first three years the amortization is the same under either method.

Answer 702

c Explanation: Prior service cost amortization is the spreading of the cost of retroactive benefits generated by a plan amendment that granted increased benefits based on service rendered in prior periods. These costs are to be amortized as a component of net periodic pension cost by assigning an equal amount to each year of future service of each employee active at the date of the amendment who is expected to receive benefits under the plan. The $600,000 unrecognized prior service costs divided by the 2,000 future service years equals $300 to be amortized per service year. In the current year there were 350 service years provided. Multiplying the 350 service years by the $300 to be amortized per service year results in $105,000 unrecognized prior service cost amortization for the year.

Answer 703

a Explanation: An employer sponsoring a benefit plan should disclose, among other things, the assumed health care cost trend rate(s) for the next year and a general description of the direction and pattern of change as well as the ultimate trend rate(s) and when the rate is expected to occur. The employer must also disclose the accumulated post-retirement benefit obligation.

Answer 704

a Explanation: A pension liability is recognized for the amount the projected benefit obligation exceeds the fair value of plan assets.

Answer 705

a Explanation: The editors suggest that you answer this question through process of elimination. If you are well prepared, you should recognize the terms used in choices b-d are commonly used in both pension and postretirement accounting, but per capita claims may not be as familiar to you. Per capita claims are the current cost of providing postretirement health care benefits for one year at each age from the youngest age to the oldest age at which plan participants are expected to receive benefits under the plan. Per capita costs are unique to postretirement benefits only.

Answer 706

Explanation: The correct answer is (D). When stock options are offered to a company’s employees, a stock compensation cost is required to be recognized in the books every year until the options are vested. The cost is calculated as: Stock Compensation Cost = (No. of options x fair value per option) / Vesting period In the given case, the stock compensation cost can be calculated: (5,000 x 8) / 5 = $8,000

Answer 707

c Explanation: The amount of expense recognized is the increase in the cost of the pre-current year accrued vacations and the cost of vacations earned for work performed in the current year. Liability for accrued vacations, 12/31 prior year $35,000 Less: Accrued vacations taken 1/1 to 9/30 current year (20,000) Liability for pre-current year vacations at salary increase, 10/1 15,000 Times: 10% salary increase × 10% Additional cost of pre-current year vacations $ 1,500 Cost of vacations earned for work in the year 30,000 Vacation pay expense $31,500

Answer 708

b Explanation: Net plan assets include amounts contributed by the employer (and by employees for a contributory plan) and amounts earned from investing the contributions, less benefits paid. The net change in the actuarial present value of accumulated plan benefits is not part of net plan assets.

Answer 709

a Explanation: Retroactively increasing benefits increases the projected benefit obligation at the date of the amendment and the cost shall be recognized as a charge to other comprehensive income. These costs are to be amortized as a component of net periodic pension cost by assigning an equal amount to each year of future service of each employee active at the date of the amendment whom is expected to receive benefits under the plan. Plan amendments can reduce projected benefit obligations. These reductions reduce any other prior service costs and any excess is amortized. Other comprehensive income is adjusted each period as prior service cost is amortized. The $500,000 amortized over 10 years would be $50,000 per year. Accumulated other comprehensive income would first be debited the $500,000 at the beginning of year 1 and then credited the $50,000 amortization resulting in a net $450,000 debit entry.

Answer 710

Explanation: If benefits to be accumulated in future periods are reduced, but the plan remains in existence and continues to pay benefits, to invest assets, and to receive contributions, a curtailment has occurred, but not a settlement. If a plan is terminated and not replaced by a successor, both a settlement and a curtailment have occurred. A settlement has also occurred if an employer purchases nonparticipating annuity contracts for vested benefits and continues to provide defined benefits for future service in the same plan. Since answers A. and C. are correct, answer D., both A. and C., is the best choice.

Answer 711

Explanation: The correct answer is (B). Reported Pension Liability Calculation = Projected Benefit Obligation (PBO) of $1,250,000 -Pension plan assets of $737,000 = $513,000. The $513,000 reflects the amount by which the pension plan is underfunded (PBO > Plan assets). This is a clear shortage of plan assets accumulated to pay benefits compared with the present value of those benefits or PBO. In other words, only $737,000 of PBO is covered as of the balance sheet date. Accumulated benefit obligation, prior service cost, and net gain on plan assets are not used in the calculation of pension liability on December 31st. (A), (C) and (D) are incorrect because of improper calculations. Accumulated benefit obligations, prior service cost or net gain on plan asset would not be considered for calculating pension liability.

Answer 712

d Explanation: Employers are required to accrue a liability for employee compensated absences that meet all of the following conditions: (1) the obligation is attributable to employees' services already rendered, (2) the obligation relates to rights that vest or accumulate, (3) payment of the compensation is probable, and (4) the amount can be reasonably estimated. Thus, it would appear that North should accrue a liability for both the vacation benefits and the future sick day benefits. However, an employer is not required to accrue a liability for non-vesting accumulating rights to receive sick pay benefits. Therefore, since North's employees' rights to receive sick pay benefits do not vest, North should report only the $15,000 (i.e., 150 x $100) cost of the vacation days available at 12/31 of the current year as the liability for compensated absences at that date.

Answer 713

a Explanation: Unfunded accrued pension costs consists of the net periodic pension cost adjusted for employer contributions and previous prepaid costs or accrued costs. Net Periodic Pension Cost: Service cost $19,000 Interest cost 38,000 Amortization of unrecognized prior service cost 52,000 Actual return on plan assets (22,000) Net periodic pension cost for the year $87,000 Less: Prepaid pension cost, 1/1 $ 2,000 Employer contributions 40,000 (42,000) Unfunded accrued pension cost 12/31 $45,000

Answer 714

d Explanation: $4,000- FASB issued Accounting Standards Update 2017-07 effective Dec 15, 2017, for public companies, and Dec 15, 2018, for non-public companies which changed the presentation guidelines for reporting of Service Cost. Service cost component is now reported in the same line item(s) as other compensation costs arising from services rendered by the employees during the period E.g., COGS for factory workers, Selling for Salesmen, G&A for officers. Other components of net benefit cost are required to be presented in I/S separately from the Service cost component as Non-operating item. Prior to this update components of Net Pension Expense used to be aggregated and presented as Operating Expenses on I/S.

Answer 715

d Explanation: The recognition of a liability, or asset, is required if the projected benefit obligation differs from the fair value of the plan assets. A liability is required if the projected benefit obligation exceeds the fair value of the plan assets. This liability amount equals the unfunded projected benefit obligation. An asset is recognized if the fair value of the plan assets exceeds the projected benefit obligation. The asset amount equals the overfunded projected benefit obligation.

Answer 716

c Explanation: During the year, Dell accrued pension cost of $303,400 ($220,000 + $83,400) and made funding payments of $334,400 ($220,000 + $114,400). At 12/31, Dell's pension asset, prior to comparing the fair value of plan assets to the projected benefit obligation, is $31,000 ($334,400 - $303,400). Note: The asset recognized on the balance sheet is the amount the fair value of plan assets exceeds the projected benefit obligation.

Answer 717

b Explanation: The projected benefit obligation is determined using the settlement rate and not the expected return plan assets nor the actual return on plan assets. These two rates, however, do have an impact on the determination of net periodic pension cost.

Answer 718

Explanation: The amount of the total liability to be recognized equals the unfunded projected benefit obligation. Projected benefit obligation $68,100 Less: Plan assets at fair value (62,000) Amount of total liability to be recognized $ 6,100

Answer 719

Explanation: The correct answer is (A). Stock options are granted to specific employees to purchase the entity’s stock at a price that offers special benefits. As these are a compensatory stock option, Oak Corp. would record compensation expense which is equal to grant date fair value of the options. Fair Value of the options is already given to $8,000. Also, the account Stock Options Outstanding is increased on the grant date. The subsequent exercising, forfeiture, or lapsing of the stock options reduces this account. The following Journal Entry would be recorded: Compensation Cost $8,000 Stock Options Outstanding $8,000 Note: If the fair value of the option was not available, an entity would have estimated the fair value of options using an option pricing-model as follows: Fair Value of Options = Market Price of Share – Exercise Price of Share = $20 - $15 = $5 per option or $5,000 for 1,000 options.

Answer 720

b Explanation: A projected benefit obligation is the actuarial present value, as of a date, of all benefits attributed by the pension formula to employee service rendered prior to that date. The projected benefit obligation is measured using assumptions as to future compensation levels if the pension benefit formula is based on those future compensation levels (pay-related, final-pay, final-average-pay, or career-average-pay plans).

Answer 721

c Explanation: The cost of services received from employees in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the options. The account Stock Options Outstanding is increased on the grant date. The subsequent exercising, forfeiture, or lapsing of the stock options reduces this account. ``` January 1, Year 1 Deferred Compensation Cost (option/compensation value at grant date) 300,000 Stock Options Outstanding 300,000 December 31, Year 1, 2, 3 Wages and Compensation Expense 100,000 Deferred Compensation Cost 100,000 ```

Answer 722

a Explanation: Restricted stock gives employees the right to acquire or receive shares, by gift or purchase, once certain restrictions, such as working a certain number of years. Usually, the vesting restriction lapses if the employee continues to work for the company for a certain number of years, say three to five. Restricted stock accounting parallels option accounting in most respects. If the only restriction is time-based vesting, companies account for restricted stock by recording total compensation cost using fair value on the award date. The cost is then amortized over the vesting period. In this case, one-fourth of the year 1 and onefourth of year 2 compensation cost would be recognized as compensation expense for year 2 [(10,000*$20*1/4) + (20,000*$25*1/4) = $175,000].

Answer 723

c Explanation: The net pension cost is the contribution called for by the defined contribution plan for the period in which the individual renders services.

Answer 724

Explanation: The correct answer is (B). The $75,000 of transition obligation at the beginning of the current year, the first fiscal year in which Crouse applied GAAP, is computed as the excess at that date of the accumulated pension benefit obligation over the fair value of plan assets (i.e., $500,000 - $425,000). Typically, if the transition amount is recognized on a delayed basis as a component of net periodic pension benefit cost, it should be amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. However, if the average remaining service period is less than 15 years, the employer may elect to use a 15-year period. Since in this question, the average remaining service life is 10 years, (which is less than 15, obviously), we would amortize over 15 years. If the remaining service life was 20, however, we would amortize it over the remaining life (20) in that instance. Therefore, the amount of the transition obligation that Crouse should amortize to minimize its accrual for pension benefit-cost is $5,000 (i.e., $75,000 / 15).

Answer 725

c Explanation: Where a loss situation results in a tax refund or tax savings, the provision is referred to as income tax benefit. Expenses incurred for the period are deducted from revenues earned for the period to arrive at pretax financial income. Income tax expense (often called provision for income taxes) is deducted from pretax financial income to arrive at net income.

Answer 726

c Explanation: Deferred income tax expense reported for a period is determined by the net change during the year in the deferred tax accounts on the balance sheet. For Quinn, the elimination of the beginning $9,000 net deferred tax asset and the creation of the ending $21,000 ($70,000 cumulative taxable differences × 30% effective income tax rate) net deferred tax liability results in $30,000 of deferred income expense for year 2.

Answer 727

Explanation: To determine Dunn's current federal income tax liability, Dunn's pretax financial income is adjusted to its taxable income; then, taxable income is multiplied by the current year's enacted corporate income tax rate. Pretax financial income $90,000 Rent received in advance 16,000 Income from municipal bonds, tax-exempt (20,000) Depreciation deducted for income tax purposes in excess of reported for book purposes (10,000) Taxable income 76,000 Enacted corporate income tax rate × 21% Current federal income tax liability $15,960

Answer 728

Explanation: The correct answer is (A). Tax liability is based on taxable income, so first reconcile book income of $600,000 to taxable income, then compute the tax liability. All three items listed are IN book income but are NOT in taxable income. $600,000 - 60,000 - 120,000 - 100,000 = $320,000 × 21% = $67,200. (Note that depreciation is a temporary difference and is a future taxable amount; the remaining two items are permanent differences). (B) is incorrect because income from municipal bonds is to be deducted from book income to calculate taxable income. (C) is incorrect because income from municipal bonds and excess depreciation recorded for tax purposes are to be deducted from book income to calculate taxable income. (D) is incorrect because proceeds received from life insurance due to the death of an officer and excess depreciation recorded for tax purposes are to be deducted from book income to calculate taxable income.

Answer 729

c Explanation: Deferred tax liability is always based on future taxable amounts times future tax rates. Subtotal the temporary differences in year 3 and year 4, then apply the respective future rate as follows: (900,000 × 25%) + (300,000 × 20%) = 225,000 + 60,000 = $285,000 deferred income tax liability.

Answer 730

Explanation: The correct answer is (B). Deferred tax Assets is always computed on temporary timing differences giving rise to future taxable amounts or future deductible amounts, at the future tax rate. Since Bad Debts will not be allowed as a deduction in Year 1. Tax Income is higher than Book Income giving rise to deferred tax assets.  The temporary timing differences = $1,400 × 25% = $350 Deferred Tax Assets.

Answer 731

d Explanation: A temporary difference caused by the excess of depreciation deducted for tax purposes over the depreciation reported for financial statement purposes will result in net taxable amounts in the periods the temporary difference reverses. A deferred tax liability should be reported for the amount of deferred tax consequences attributable to temporary differences that will result in net taxable amounts in future years. Deferred tax accounts are classified as current or noncurrent based on the classification of the related asset or liability. Depreciation relates to plant assets which are a noncurrent asset classification. Hence, the entire related deferred tax liability is a noncurrent liability.

Answer 732

Explanation: To determine the amount of Tell's income taxes currently payable at December 31, year 5, Tell's year 5 taxable income must be multiplied by the year's income tax rate [($38,000 - $8,000) × 35% = $10,500]. The amount of deferred income tax liability that should be reported at December 31, year 5 is computed by considering the future tax effects of the temporary difference for depreciation. While straight-line depreciation is used in computing financial income, an accelerated cost recovery method is used for tax purposes. This causes the amount of an asset to exceed its tax basis which will result in deductible amounts of $13,000 in year 6 and $3,000 in year 7 and taxable amounts of $10,000 in year 8 and $14,000 in year 9 when the asset is recovered through use. The future taxable (deductible) amounts are tax-effected at the tax rates enacted for the individual particular future years affected by this temporary difference. The $1,200 net liability amount is determined by the following schedule. Taxable in Current Year ($30,000) Taxable in Future Years Year 6 Year 7 Year 8 Year 9 Totals Future taxable amounts (deductible) $(13,000) $(3,000) $10,000 $14,000 $8,000 Enacted tax rates 30% 30% 25% 25% _____ Deferred tax liability (asset) $ (3,900) + $ (900) + $ 2,500 + $ 3,500 = $1,200

Answer 733

Explanation: The correct answer is (D). Per the Tax Cuts and Jobs Act (TCJA), C Corporations are not allowed to carry back losses. They can only be carried forward. The Net operating loss can be fully claimed. The income tax benefit realized is $27,000 (i.e. $90,000 x 30%). A deferred tax asset is to be recognized for the future tax benefits of a loss carryforward ($90,000 × 30% future tax rate = $27,000). A valuation allowance is to be established only if it is more likely than not that a portion or all of the asset will not be realized. Dorr expects to realize the asset and does not need a valuation allowance.

Answer 734

Explanation: Current portion of income tax expense is always based on the current taxable income at the current tax rate, so $129,000 × 40% = $51,600..

Answer 735

Explanation: In accounting for income taxes, an enterprise shall recognize a deferred tax liability or asset for all temporary differences. After computing the balances of deferred tax accounts at a balance sheet date, the amount of deferred income tax expense is computed by determining the change required during the period in the deferred tax asset and liability accounts. That change is a by-product of the amount of deferred taxes (asset and/or liability) to be reported on the balance sheet at the balance sheet date. The method prescribed is often called the 'liability' method or the 'asset-liability' method.

Answer 736

Explanation: The amount of the deferred tax asset is computed by considering the tax effects of the temporary difference for accrued product warranty costs. While product warranty costs are accrued in computing financial income, they are deductible for tax purposes only when they are paid. This causes the amount of a liability (i.e., product warranty liability) to exceed its tax basis (zero) which will result in deductible amounts in future years when the liability is settled. A deferred tax asset should be recognized for the expected tax benefits of the deductible amounts. Because taxable income is expected in all future years, the enacted tax rates for particular years are used to tax effect the individual deductible amounts scheduled to occur in each of those years. Black reports a deferred tax asset of $85,000 [30% ($100,000 + $50,000 + $50,000) + 25% ($100,000)].

Answer 737

Explanation: The correct answer is (A). The amount of deferred tax benefit to be applied against current income tax expense is computed by considering the tax effects of the difference for accrued product warranty costs. Product warranty costs are accrued in computing financial income and deductible for tax purposes only when paid. This causes the product warranty liability to exceed its tax basis (zero), which will result in deductible amounts in years when the warranty liability is settled. A deferred tax asset (DTA) is recognized for the tax benefit of the future deductible amounts ($60,000 × 30% = $18,000). There is no apparent need for a valuation allowance against that DTA; Lobo expects to operate profitably in the future. Lobo had no temporary differences in prior years. Recognition of the DTA requires a debit to Deferred Tax Asset and a credit to Income Tax Expense for $18,000. The insurance premiums and interest revenue do not affect the recognition of the DTA because they are events recognized in financial statements that do not have tax consequences as they are permanent differences, so they do not affect deferred taxes. Depreciation deducted for income tax purposes in excess of depreciation reported for financial statement purposes will result in a deferred tax liability.

Answer 738

``` Explanation: Income before income taxes $900,000 Less: Nontaxable gain on life insurance coverage (100,000) Income before income taxes 800,000 Applicable tax rate × 30% Provision for income taxes $240,000 ```

Answer 739

Explanation: Income taxes payable $13,000 Plus: Deferred tax expense due to valuation allowance (10% × $20,000) $2,000 Less: Deferred tax benefit due to increase in deferred tax asset ($20,000 - $15,000) $(5,000) Total Income tax expense $10,000 Option (a) is incorrect because it does not provide for the creating of valuation account of 10% thereby reducing closing balance of deferred asset by $2,000.Option (b) wrongly creates a valuation account on the opening deferred asset balance. A need for valuation account was made only in the current year and would therefore affect only the closing balance. Option (d) is incorrect because this incorrectly includes only the current tax payable and ignores the deferred tax asset for the year.

Answer 740

Explanation: Pine Corp.’s as on December 31, 20X6 balance sheet should report current federal income tax liability at $50,000. Gain on involuntary conversion was included inaccounting income will be deferred for tax purposes. Depreciation deducted for tax purposes in excess of book depreciation causes taxable income to be less than accounting income. Ref Summary Amount a Income before taxes $800,000 b Gain on an involuntary conversion (350,000) c Depreciation deducted for tax purposes in excess of depreciation deducted for book purposes (50,000) d Taxable Income (a - b - c) $400,000 e Corporate income tax rate 30% f Tax Payable (d x e) $120,000 g Federal estimated tax payments, 20X6 $70,000 h Current federal income tax liability (f - g) $50,000 Option (b) is incorrect because depreciation adjustment is not made to the taxable income {i.e. $65,000 = [($800,000 - $350,000) x 30%] - $70,000}. Option (c) is incorrect because federal estimated tax payments is not adjusted to arrive at current tax liability [i.e. $120,000 = ($800,000 - $350,000 - $50,000) x 30%]. Option (d) is incorrect because depreciation adjustment is not made to the taxable income and federal estimated tax payments is not considered in arriving at current liability [i.e. $135,000 = ($800,000 - $350,000) x 30%].

Answer 741

Explanation: Income tax expense is always computed on current taxable income at current tax rates, as follows: $715,000 x 30% = $214,500.

Answer 742

Explanation: Under GAAP, enterprises should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

Answer 743

Explanation: The tax rate that is used to measure deferred tax liabilities and deferred tax assets is the enacted tax rate(s) expected to apply to taxable income in the years that the liability is expected to be settled or the asset recovered. Presently enacted changes in tax laws and rates that become effective for a particular future year or years must be considered when determining the tax rate to apply to temporary differences reversing in that year(s). Tax laws and rates for the current year are used if no changes have been enacted for future years. Since answers A., B., and C. are correct, answer D., all of the above, is the best answer choice.

Answer 744

Explanation: The correct answer is (D). Per FASB ASU 2015-17, deferred tax assets and liabilities are always netted and treated as non-current on the Balance Sheet.

Answer 745

Explanation: At the end of each interim period, a company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis.

Answer 746

Explanation: The correct answer is (A) The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations. Valuation Account Allowance: If it is more likely (>50%) that part or all the deferred tax assets will not be realized, a valuation allowance is recognized such that the net deferred tax assets equal that portion which is more likely than not to be realized. The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.

Answer 747

Explanation: An increase in prepaid insurance can cause an increase in deferred tax liabilities because an expense deducted this period for tax purposes but deferred for financial accounting purposes will cause future taxable amounts. An increase in rent receivable can cause an increase in deferred tax liabilities because a revenue accrued for book purposes but not recognized for tax purposes until it is collected will give rise to future taxable amounts. A deferred tax liability represents the deferred tax consequences attributable to taxable temporary differences. An increase in cumulative temporary differences giving rise to future taxable amounts results in an increase in deferred tax liabilities. An increas in warranty obligation can cause an increase in deferred tax assets rather than deferred tax liabilities. An expense accrued for book purposes, but deducted for tax purposes when paid, causes a temporary difference which gives rise to future deductible amounts. A deferred tax asset is the deferred tax consequences attributable to deductible temporary differences and carry forwards.Options (a), (c) and (d) are incorrect based on the above explanation.

Answer 748

Explanation: The recognition and measurement of a deferred tax liability or asset is based on the future effects on income taxes, as measured by the provisions of enacted tax laws, resulting from temporary differences and operating loss and tax credit carry forwards at the end of the current year. An enterprise is to identify (disclose) the types and amounts of existing temporary differences and the nature and amount of each type of operating loss and tax credit carry forward (and remaining length of carry forward). Options (a), (c) and (d) are incorrect as per the above explanation.

Answer 749

Explanation: The amount to be reported for deferred taxes on a balance sheet is calculated by using future tax rates and applying them to cumulative temporary differences based on when and how the temporary differences are expected to affect the tax return in the future.

Answer 750

Explanation: The investor recognizes investment income for financial purposes based on its equity in the investee’s earnings; for income tax purposes, investment income is recognized when cash dividends are received. Deferred income taxes are recorded on this temporary difference which will result in a future taxable amount. Equity in investee’s earnings, book $ 180,000 Less: Dividends received (30,000) Temporary difference before DRD consideration 150,000 Less: Dividends-received deduction applicable to temporary difference ($150,000×80%) (120,000) Taxable portion of temporary difference 30,000 Times: Enacted tax rate for future periods × 30% Deferred tax liability $ 9,000

Answer 751

Explanation: GAAP provides guidance for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Answer 752

Explanation: Income tax expense or benefit for the year shall be allocated among continuing operations, discontinued operations, extraordinary items, and items charged or credited directly to shareholders' equity' such as prior period adjustments, certain changes in accounting principles, and changes in market values of investments in marketable equity securities classified as noncurrent assets.

Answer 753

c Explanation: The $650,000 [($300,000 + $600,000 + $850,000) - ($400,000 + $700,000)] of contract income recognized in the financial statements in excess of that included in taxable income results in taxable amounts in future years. The enacted tax rate for later years is used to determine the deferred income tax liability (i.e., $650,000 × 25% = $162,500).

Answer 754

a Explanation: Income tax expense (deferred) is reported using the 'liability method' where the income statement figure flows from the balance sheet calculations of deferred asset and liability {think of it as the balance sheet is prepared first and then the income statement}. Thus, income tax expense is as per the asset and liability approach. Options (b), (c) and (d) are incorrect based on the above explanation.

Answer 755

Explanation: The correct answer is (B). Except for certain areas such as business combinations and quasi-reorganizations, the manner of reporting the tax benefits of an operating loss carryforward or carryback is determined by the source of the income (or loss) in the current year and not by the source of the operating loss carryforward or taxes paid in a prior year. For example, the tax benefit of an operating loss carryforward reduces income tax expense from continuing operations if the source of that tax benefit is from continuing operations.

Answer 756

Explanation: The correct answer is (C). Uncertain tax positions are accounted for in the financial statements only when the management has a more-likely-than-not level of confidence that the said position will be sustained by the tax authorities on technical grounds. If so, the largest amount of tax benefits which has more than 50% likeliness to be realized is ultimately recognized in the books. In the given case, $30,000 is the largest tax benefit with a probability exceeding 50%. It is recognized as of December 31.

Answer 757

Explanation: The balance in a tax liability account is the amount of taxes expected to be paid in the future as a result of the turn-around (reversal) of the temporary difference(s). Because Cable deducted an expense from its income tax before it was reportable in the financial statements, the transaction results in a future tax liability. The amount of temporary difference is multiplied times the future tax rate(s) already enacted into law to arrive at the future tax asset or liability. ($100,000 × .40 = $40,000).

Answer 758

``` Explanation: Pretax financial income $250,000 Permanent difference - interest (25,000) Temporary difference - excess tax depreciation (75,000) Taxable income $150,000 Tax rate × 30% Current tax expense $ 45,000 ```

Answer 759

Explanation: The correct answer is (C). The Tax Cuts and Jobs Act repeals pre-enactment NOL carryback provisions. Under the new law, NOLs arising in years ending after December 31, 2017, may not be carried back (with limited exceptions for certain farming losses). For NOLs arising in tax years ending after December 31, 2017, NOLs may be carried forward indefinitely. Additionally, NOLs originating in tax years beginning after December 31, 2017, are limited to 80% of taxable income. Corporations will need to track NOLs for pre-12/31/2017 NOLs and post 12/31/2017 NOLs separately as only post 12/31/2017 losses will be subject to the 80% of taxable income limitation. For the loss incurred in 2018, a carryback would not be allowed and will only be carried forward to offset the loss in next year. In this scenario, losses would be deductible only to the extent of 80% of taxable income i.e. 80% of $1,200,000 = $960,000. The entire loss of $700,000 would be carried forward and tax payable is calculated on the remaining profit of $500,000 which will give a tax liability of $500,000 x 30% = $150,000.

Answer 760

Explanation: A deferred tax asset is recognized for the future benefits of a loss carry forward. Therefore, Dodd will increase income by $54,000 ($180,000 × 30% future tax rate) when the benefits of the NOL carry forward are recorded in the current year by a debit to Deferred Tax Asset and a credit to Benefits of Loss Carry forward (a component of income tax expense on the income statement). No valuation allowance is required (which would reduce the deferred tax asset and the described impact on income) because the company expects the benefits of the loss carry forward to be realized in the future. In addition, the potential gain of $100,000 (i.e., $200,000 offer - $100,000 carrying amount) from the possible sale of the patent should not be recognized in the current year. Dodd Corp. has not sold the patent as of December 31; it is only considering whether to sell the patent. The excess of fair value over book value of the patent does serve, however, as some positive evidence in evaluating the realizability of the deferred tax asset related to the tax loss carry forward.

Answer 761

Explanation: A deferred tax liability is computed at the date of the financial statements by applying tax law provisions to measure the deferred tax consequences of differences that will result in taxable amounts in each future year. Enacted changes in tax laws and rates that are scheduled for a particular future year (or years) are used to measure a liability for the deferred tax consequences of taxable amounts that will arise in that year (or years). Tax laws and rates for the current year are used if no changes have been enacted for future years.

Answer 762

Explanation: The correct answer is (A). The question is asking about the additional tax benefit Azax would receive for using the Double Declining Method instead of the Straight-Line Method. Using the straight-line method of depreciation, Ajax would have a depreciation expense of $10,000 ($100,000 purchase price / 10 years). The current tax benefit would be $3,000 ($10,000 depreciation expense × 30% effective tax rate). Using the 150% declining balance method of depreciation, Ajax would have a depreciation expense of $15,000 ($100,000 purchase price / 10 years × 150%). The current tax benefit would be $4,500 ($15,000 depreciation expense × 30% effective tax rate). The amount of tax benefit realized by using the 150% declining method instead of the straight-line method would be the difference ($4,500 - $3,000).

Answer 763

d Explanation: Deferred income tax expense or benefit is calculated using the asset and liability method. Under this approach, deferred income tax expense or benefit is equal to the sum of the net changes in deferred taxes assets and deferred tax liabilities on the balance sheet.

Answer 764

Explanation: Deferred tax assets and liabilities are classified as non-current only. Further, US GAAP allows separate netting of deferred tax assets and liabilities resulting in a single non-current amount to be reported on the balance sheet. The deferred tax liability is $50,000 ($75,000 - $25,000).

Answer 765

Explanation: The taxes are accounted for the total taxable income for the year. The effective tax rate is updated at each interim date and the provision for income taxes in later quarters will be based on current estimated rate applied to cumulative income reduced by provisions reported in early periods. The calculation for income tax expense in second quarter is as follows: ``` Ref Summary Amount ($) a Q1 income 10,000 b Q2 income 20,000 c Total (a+b) 30,000 d Tax expense @25% on total Income 7,500 e Less: Tax expense Q1 (1,500) f Tax expense Q2 (d+e) 6,000 Options (A), (B) and (D) are incorrect based on the above calculation. ```

Answer 766

Explanation: Deferred taxes are reported as assets or liabilities on the balance sheet, not as contra accounts. Always classify deferred tax assets and liabilities as non-current. FASB issued Accounting Standards Update 2015-17 requiring companies to classify all deferred tax assets and liabilities as non-current on the balance sheet [IFRS always had this requirement]. The Board released the new guidance as part of its simplification initiative, which,as explained in the ASU, is intended to “identify, evaluate, and improve areas of US GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of the financial statements”. This is effective from December 15, 2016 for public companies and December 15, 2017 for non-public companies. Earlier: Deferred tax assets and liabilities were segregated into current and non-current amounts. Thus, it is a taxable temporary difference resulting in a non-current deferred tax liability.Options (a), (b) and (c) are incorrect based on the above explanation

Answer 767

Explanation: The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.Options (a), (b) and (d) are incorrect as per above explanation. CLOSE

Answer 768

Explanation: The correct answer is (D). Intra-period tax allocation is allocating income taxes to key components of the income statement. Operating income is not subject to intra-period tax allocation. Tax is deducted from Income from Continuing Operations and Income (Loss) from Discontinued Operations is presented net of tax.

Answer 769

Explanation: A deferred tax liability is generated from a temporary difference that is classified as a future taxable amount, computed using future tax rates. The excess depreciation expense is deductible currently for tax purposes, but not for book purposes. The deferred tax liability is computed as follows: 60,000 × 35% = $21,000.

Answer 770

Explanation: Deferred tax liabilities and assets shall be adjusted for the effect of a change in tax laws or rates. The effect shall be included in income from continuing operations for the period that includes the enactment date.

Answer 771

Explanation: Deferred tax liabilities or assets are recognized for the future tax consequences of, among other things, revenues, expenses, gains, or losses that are included in taxable income of an earlier or later year than the year in which they are recognized. The difference in uncollectible accounts expense between the tax return and the accounting records would result is a $30,000 deferred tax asset. The difference in depreciation expense between the tax return and the accounting records would result in a $290,000 deferred tax liability. The difference in tax-exempt interest revenue between the tax return and the accounting records results in no tax asset or liability because the revenue was tax exempt. This results in a net future tax liability of $260,000. The$260,000 times the future tax rate of 40% equals $104,000.Option (a) is incorrect because it is adding the deferred tax asset on uncollectible accounts instead of deducting it from deferred tax liability and included permanent difference arising on tax-exempt revenue in deferred taxes [$148,000 = ($30,000 +$290,000 + $50,000) x 40%]. The permanent difference will not result in deferred taxes. Option (b) is incorrect because it includes tax-exempt revenue in deferred tax expense [$124,000 = ($290,000 + $50,000 - $30,000) x 40%]. Option (d) is incorrect because it uses the current year’s tax rate, instead of future tax rate at 40%. [$78,000 = ($290,000 - $30,000) x 30%].

Answer 772

Explanation: The correct answer is (D). Pretax financial statement income is determined on an accrual basis. Most revenues and expenses are reported on the tax return in the same period that they are reported on the income statement. However, tax laws often differ from the recognition and measurement requirements of financial accounting standards, and it is common to find differences between the amount of pretax financial income and the amount of taxable income for a period. The $60,000 difference for officer’s life insurance premiums is a permanent difference that does not give rise to any deferred tax assets or liabilities. The $40,000 difference for rental income received in advance is a temporary difference that will result in a deductible amount when the liability is settled.The income tax expense for the year is the $400,000 taxable income × the 30% tax rate = $120,000. Option (a) is incorrect because it calculates income tax expense based on pre tax financial statement income. ($90,000 = $300,000 x 30%). Option (b) is incorrect because it is the income tax expense if the non-deductible premiums are excluded from the taxable income. [$102,000 = ($400,000-$60,000)x 30%]. Option (c) is incorrect because it is the income tax expense if the rental income is excluded from the taxable income. [$108,000 = ($400,000-$40,000) x 30%].

Answer 773

Explanation: The amount to be reported as current tax expense is computed by multiplying taxable income by the effective income tax rate ($650,000 × 30% = $195,000).

Answer 774

Explanation: A deferred tax liability is recognized for the amount of deferred tax consequences attributable to temporary differences that will result in taxable amounts in future years. The liability is the amount of taxes that will be payable on those taxable amounts in future years based on the provisions of the tax law. On the other hand, a deferred tax asset is recognized for the amount of deferred tax consequences attributable to temporary differences that will result in tax deductions in future years which will reduce taxes payable in those future years.

Answer 775

Explanation: When there is no related, identifiable asset or liability for financial reporting, but there is a temporary difference that results from an event that has been recognized in the financial statements, that difference will result in taxable or deductible amounts in future years.

Answer 776

Explanation: The correct answer is (B). This question involves a temporary difference because the investor recognizes investment income for financial purposes based on its equity in the investor's earnings, whereas for tax purposes, investment income is recognized on the cash basis when dividends are received. Deferred taxes must be recorded on this temporary difference. The increase in the investor's deferred income tax liability for this temporary difference is computed as follows: Income per Books ($900,000 x 30%) (a) $270,000 Permanent Difference (65% DRD) [b = 65% x a] ($175,500) Taxable Income per Books (c) = (a) – (b) $94,500 Temporary Difference (c) – (d) ($63,000) Income Per Taxes (Dividend - 65% of Dividend) (Dividend x 35%) ($300,000 x 30% x 35%) (d) $31,500 Deferred Tax Liability = Temporary Difference x Tax Rate = $63,000 x 25% = $15,750

Answer 777

Explanation: Interest income on municipal obligations is a tax-exempt revenue; therefore, no current or future tax consequences will result and no deferred taxes are recorded for this difference. The $150,000 ($550,000 - $400,000) difference due to depreciation is the only temporary difference existing at the balance sheet date. It will reverse equally over the next three years, resulting in future taxable amounts of $50,000 ($150,000 / 3). Noll expects to report taxable income in all future periods; therefore, the future taxable amounts are tax effected at the rates scheduled for individual future years. Therefore, the enacted rate of 30% should be used for year 2 and the enacted rate of 25% should be used for years 3 and 4. ``` Amount Rate Deferred Tax Liability Future taxable amounts: Depreciation Year 2 $ 50,000 30% $15,000 Years 3 and 4 $100,000 25% 25,000 Deferred tax liability $40,000 ```

Answer 778

Explanation: The correct answer is (D). According to FASB, the primary objective of accounting for income taxes is to recognize the amount of: Taxes payable or refundable for the year. Deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an enterprise's financial statements or tax returns. Among the given options, the primary objective of accounting for income taxes is to recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences.

Answer 779

Explanation: Expenses that are deductible before or after they are recognized in financial income create a difference between the tax basis of an asset or liability and its reported amount in the financial statements. These differences result in taxable or deductible amounts in a future period(s) when the reported amount of the related asset or liability is recovered or settled, respectively. Temporary differences include all existing differences that will result in taxable or deductible amounts in future years.

Answer 780

Explanation: The correct answer is (B). As per the TCJA, NOLs for tax years beginning in 2018 and onwards may be carried forward indefinitely but may be deducted only up to 80% of taxable income (wherein the taxable income is computed without regard to any NOL carryover).

Answer 781

Explanation: Deferred tax liabilities and assets are classified on the balance sheet as noncurrent. Net Differences [(20) + (15) + 30] $(5,000) Future Enacted Tax Rate 21% Net Deferred Tax Assets $1,050

Answer 782

a Explanation: A difference caused by the excess of depreciation taken for tax purposes over the depreciation reported for financial statement purposes will result in taxable amounts in the periods that the difference reverses. The deferred tax liability related to this difference at the end of year 2 is calculated by scheduling the taxable amounts that are to occur in each future year because of the temporary difference and by applying enacted tax rates for those years to the amount of taxable amounts scheduled for those years. Deferred tax accounts are classified based on the classification of a related asset or liability.

Answer 783

Explanation: To adjust the reported pretax financial income to taxable income for the calculation of current income taxes, the depreciation recorded in the financial statements in excess of depreciation deducted for tax purposes must be added to pretax financial income. Pretax financial income $100,000 Less investment income (book) in excess of dividend income (tax) [$35,000 - ($25,000 × 20%)] (30,000) Add: Depreciation recorded in financial statements in excess of tax deduction 8,000 Taxable income 78,000 Effective tax rate × 30% Current provision for income taxes $ 23,400

Answer 784

Explanation: When preparing annual Financial statements, the company's taxable income for the year is known & income tax provision can be computed with full knowledge of the applicable tax rates & available tax credits. However, when computing income taxes at an interim date the company needs to estimate the effective annual tax rate that it believes will be applicable for the entire year. In the given scenario, Tech Co. expects its 20X3 effective annual income tax rate to be 25%. We need to apply this rate on income before taxes of $200,000 to arrive at a tax expense of $50,000 that Tech should report. Option (A) is incorrect because provision for tax is required to be calculated for each quarter. Tech Co. had income of $200,000 on which tax expense will be $50,000 using effective annual income tax rate of 25%. Option (B) is incorrect because we need to use effective annual income tax rate of 25% & not the effective rate of 15% that was for the first quarter of 20X3. Option (D) is incorrect because it uses the effective rate of last year rather than the effective annual income tax rate for the current year.

Answer 785

Explanation: Although an investment tax credit accounted for by the deferred method may cause temporary differences, it is also true that: (1) an increase in the tax basis of an asset because of indexing when the local currency is the functional currency may cause temporary differences; and (2) a business combination that is accounted for by the acquisition method may also cause temporary differences. The best choice for this question is answer D., all of the above.

Answer 786

Explanation: The effect of a change in the beginning-of-the-year balance of a valuation allowance that results from a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset in future years ordinarily shall be included in income from continuing operations. Only deferred tax assets, and not deferred tax liabilities, are to be reduced by a valuation allowance if it is more likely than not, a likelihood of more than 50%, that some or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. All available evidence, both positive and negative, should be considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.

Answer 787

Explanation: A deferred tax asset or liability is calculated by multiplying temporary differences by the enacted tax rate expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. Amount Rate Def. Tax Asset Years 2 through 4 $200,000 × 30% = $60,000 Year 5 100,000 × 35% = 35,000 Deferred tax asset $95,000 Options (a), (b) and (c) are incorrect because of inaccurate calculations

Answer 788

Explanation: The permanent differences only affect current taxes. The non-taxable interest received on municipal securities is a permanent difference and will not affect deferred taxes.On the other side, temporary difference effect deferred taxes. The accruals as per financial statements effect taxes only when there is a related cash flow. Excess accrual in income statement on account of long term losses is a temporary7difference and would result in more tax income today The taxes on this difference calculated as per the future enacted tax rate, would result in non-current deferred tax asset of $4,000(i.e. $10,000 x 40%). The excess depreciation in tax return is also a temporary difference and would result in more book income today. The taxes on this difference, calculated as per the future enacted tax rate would result in non-current deferred tax liability of $10,000 (i.e. $25,000 x 40%). Since both are non-current, they would be netted and would result in net deferred tax liability of $6,000 ($10,000 -$4000). Option (a) is incorrect because non-taxable interest received on municipal securities is a permanent difference and do not affect deferred taxes.Option (b) is incorrect because long-term loss accrual per income statement in excess of deductible amount per tax return would result in more tax income today and therefore would create deferred tax asset. Further, depreciation in excess of financial statement amount is a temporary difference and should also be used for the calculation.Option (d) is incorrect because non-taxable interest received on municipal securities is a permanent difference and do not affect deferred taxes.

Answer 789

Explanation: The correct answer is (A). For NOLs arising in tax years ending after December 31, 2017, NOLs may not be carried back but can be carried forward indefinitely. Additionally, NOLs originating in tax years beginning after December 31, 2017, are limited to 80% of taxable income. The deduction for NOL is limited to the lesser of: The aggregate of net operating loss carryovers to such year, or 80% of taxable income computed without regard to deduction allowable. Here, Brass Corp has an NOL of $40,000 in Year 2 which it must carry forward. The amount of deduction of loss in Year 3, is limited to the lesser of NOL carried forward to that year ($40,000) or 80% of the taxable income of Year 3 of $48,000 ($60,000 x 80%). The NOL deduction allowed is lower $40,000 in year 3 and the resultant tax benefit that Brass can realize from the loss carryforward for year 3 is $40,000 x 30% = $12,000.

Answer 790

Explanation: Always classify deferred tax assets and liabilities as non-current. GAAP allows separate netting of deferred tax assets and liabilities resulting in a single non-current amount to be reported on the balance sheet. Thus, the deferred non-current liability will be $4,000 (i.e. $15,000 - $3,000 - $8,000). Options (a), (b) and (c) are incorrect based on the above explanation.

Answer 791

Explanation: A positive temporary difference implies a deferred tax asset and a negative temporary difference implies a deferred tax liability. Y1 would have had a negative temporary difference leading to a deferred tax liability. Y2 has a cumulative positive temporary difference of $420,000, creating a total deferred asset of $168,000 (i.e. 40% of 420,000). From a deferred liability of $75,000 in Y1, Y2 has a cumulative deferred asset of $168,000 implies that to calculate the deferred portion of income tax expense for Y2, the deferred tax account must go from a credit balance of$75,000 to a debit balance of $168,000, which is equal to $243,000 (i.e. $168,000 – (-$75,000)). Option (b) is incorrect because the cumulative difference is given as $420,000, 40%of that $168,000 would be the cumulative deferred tax asset. The temporary difference of the current year has to be calculated to get the deferred portion of income tax expense of Y2.Option (c) is incorrect because this amount is arrived at by subtracting the Y2taxable income with the Y1 book income, which is not correct.Option (d) is incorrect because this amount is arrived at by subtracting $75,000 from$168,000. As $75,000 is a negative balance (or a liability), and $168,000 is a positive balance, the difference between the two would be $243,000 based on the above explanation.

Answer 792

Explanation: A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Temporary differences that will result in deductible amounts in future years when the related liabilities are settled are often called deductible temporary differences. Expenses that are recognized in financial income this year and deductible next year would result in a deferred tax asset for the current year. Expenses that would be recognized in financial income next year could never be deductible in the current year. Revenues that are recognized in financial income this year and taxable next year would be a deferred tax liability. Revenues that are recognized in financial income this year but are not subject to taxation are considered permanent differences. Events that do not have tax consequences do not give rise to temporary differences and, therefore, do not give rise to deferred tax assets or liabilities.

Answer 793

Explanation: The excess of percentage depletion, as per statutory allowance, over the cost of natural resources, is an example of a permanent difference resulting from an expense not allowed in computing financial income, but permitted in computing taxable income.

Answer 794

Explanation: The effective tax rate (28.5%) is the amount due to the government ($57,000) divided by net income before taxes ($200,000). The amount due to the government $57,000 ($190,000 x 30%) is net income before taxes adjusted for tax-exempt revenues and nondeductible expenses $190,000 ($200,000 - 20,000 + 10,000) times the current year tax rate (30%).

Answer 795

Explanation: The correct answer is (D). Permanent differences never reverse, so they are never part of the deferred tax computation. Deferred tax liability is always based on the future tax amount at the future tax rate, so $20,000 × 40% = $8,000. The balance sheet shows the total deferred income tax liability for all the cumulative temporary differences up to the balance sheet date. The closing balance at 12/31/X3 shows a cumulative temporary difference of $20,000. Deferred tax liability = temporary difference x future enacted tax rate = $20,000 x 40% = $8,000. Note: Deferred tax is calculated on the future tax rate for the year in which Deferred Tax Assets or Liabilities are expected to reverse which is 40% for all future years and hence will be calculated at total DTL X 40% = $8,000.

Answer 796

Explanation: To determine the current portion of income tax expense, taxable income is multiplied by the current year's enacted corporate income tax rate. $140,000 × 40% = $56,000.

Answer 797

Explanation: The deferred tax liability balance represents the amount of taxes expected to be paid in the future when installment receivables are collected. (The revenue from installment sales has already been included in the financial statements but will not be reported for tax purposes until the related receivables are collected.) Period Amount Rate Deferred Tax Liability Years 3 and 4 $125,000 30% $37,500 Year 5 100,000 25% 25,000 Total $62,500

Answer 798

Explanation: At the end of year 1, a cumulative difference exists which is equal to the contract profit recognized on the income statement in the previous year. The cumulative difference will result in future taxable amounts, so a deferred tax liability is established for an amount equal to the cumulative temporary difference multiplied by the tax rate enacted for the year(s) in which the temporary difference is expected to reverse. In year 2, half of the cumulative temporary difference reverses because of the recognition of a loss to offset half of the profit reported in the previous year. With no change in enacted future tax rates, this reversal results in a decrease in the related deferred tax liability account. Therefore, at the end of year 2, Cody has a deferred tax liability balance equal to half of the balance that was in that account at the end of year 1. Options (a), (c) and (d) are incorrect based on the above explanation.

Answer 799

Explanation: | Some events recognized in financial statements do not have tax consequences under the regular U.S. tax system.

Answer 800

Explanation: The best estimate of the effective tax rate to be applicable for the full fiscal year be made at the end of each interim period. This rate should reflect foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives.

Answer 801

Explanation: Deferred tax liability is based on future taxable amounts times future tax rates. The first two contracts will end in year 3 and recognize $450,000, so a liability of $112,500 is created [450,000 * 25%]. The last two contracts close in year 4 with $150,000 income, so a liability of $30,000 is created [150,000 * 20%], for a total deferred tax liability of $142,500 at the end of year 2 for temporary timing differences.

Answer 802

Explanation: The current portion of the provision for income taxes (which is the same as the amount of taxes due to the government for the current period) is computed by multiplying the taxable income figure by the statutory tax rate for the current period. The statutory tax rate is not given. However, because there are no permanent differences and because there are no temporary differences which are expected to reverse at tax rates different from the current statutory rate, the effective rate for the current year must be the same as the statutory tax rate. Thus, $450,000 × 34% = $153,000.

Answer 803

Explanation: The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an enterprise’s financial statements or tax returns. One of the following basic principles applied in accounting for income taxes at the date of the financial statements is that a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. The effective annual income tax rate for the entire year will be 25%, thus $25,000 (25% of the first quarter $100,000 income) should be reported as income tax expense in the first quarter interim income statement. The first quarter effective rate, previous year effective rate, and statutory tax rate are not considered.

Answer 804

Explanation: Tax benefits associated with positions that are highly certain and not likely to be questioned by the taxing authorities, such as deductions for ordinary salaries paid to employees, are unlikely to be affected by the guidance related to uncertain tax positions.

Answer 805

Explanation: The correct answer is (A). Income tax expense = Income tax expense (current) + Income tax expense (deferred) = Income tax expense (current) + Deferred tax liability (for the year) - Deferred tax asset (for the year). Income tax expense (current) = Taxable income x current tax rate = $120,000 x 35% = $42,000. Deferred tax liability (for the year) = Deferred tax liability, end of the year - Deferred tax liability, beginning of the year = $55,000 - $50,000 = $5,000. Deferred tax asset (for the year) = Deferred tax asset, end of the year - Deferred tax asset, beginning of the year = $16,000 - $10,000 = $6,000. Income tax expense = $42,000 + $5,000 - $6,000 = $41,000.

Answer 806

Explanation: There would be a deferred tax Liability if there is More Book income today that is, there is a temporary difference that will reverse in future years. Permanent difference would not lead to deferred taxes since permanent differences do not reverse in future years. Depreciation of tangible assets is a temporary difference due to the difference of depreciation methods between the financial books and the tax books. That would create a deferred tax liability if there is greater depreciation in the tax books compared to the financial books, as IRS allows accelerated depreciation. Options (a), (b), and (d) are incorrect because penalties, life insurance proceeds on key employees and municipal bond interest are all permanent differences and would not lead to deferred taxes.

Answer 807

Explanation: Differences between book and taxable income resulting from temporary differences are those which occur due to items which will reverse themselves in a matter of time (timing difference). Thus, an item included in the calculation of net income in one year and in taxable income in a different year would lead to a temporary difference. Options (a) and (c) are incorrect because both would lead to a permanent difference. Option (d) is incorrect because if accrual basis of accounting is used for both book and taxable income, this would not lead to a difference.

Answer 808

Explanation: A deferred tax asset is generated from a temporary difference that is classified as a future deductible amount, computed using future tax rates. The warranty expense is not deductible currently for tax purposes but will be in the future once the expense is paid, although it is estimated that 10% will never be realized. The deferred tax asset is computed as follows: (50,000 – 5,000) × 35% = $15,750

Answer 809

Explanation: The correct answer is (A). Expenses that are recognized in financial income this year and deductible next year in tax return would create a scenario of a deferred tax asset for the current year. A deferred tax asset results from a temporary timing difference between what is reported on the financial statements and what is reported on the tax forms. A deferred tax asset is recognized when taxable income reported on the tax return exceeds pre-tax income on the income statement. The expense would be recorded in the current year on the income statement but may not be deductible on the tax forms until the next year. This will cause pretax income to be lower on the income statement than taxable income on the tax forms. (B) and (C) are incorrect because it results in deferred tax liability, not asset. (D) is incorrect because they will be a permanent difference, not a deferred tax asset.

Answer 810

Explanation: The calculation to determine a deferred tax effect is based on a future tax rate, which in this problem is 40%. Thus, 40% of the $250,000 difference is $100,000. Because the financial reporting basis exceeded the tax basis, the $100,000 represents the amount of tax expected to be paid in future years as a result of the turn-around of this temporary difference. This is shown on the balance sheet as a deferred tax liability.

Answer 811

Explanation: The correct answer is (B). As per the TCJA, NOLs for tax years beginning in 2018 and onwards may be carried forward indefinitely but may be deducted only up to 80% of taxable income (wherein the taxable income is computed without regard to any NOL carryover).

Answer 812

Explanation: The deferred portion of Clark's provision for income taxes (which means the deferred portion of income tax expense) is determined by the net change during the year in deferred tax accounts on the balance sheet. The temporary difference due to depreciation will result in taxable amounts in future years; the temporary difference due to accrued warranty expense will result in deductible amounts in future years. ``` Future taxable amounts: Amount Rate Deferred Tax Accts. Depreciation Expense Year 3 $ 80,000 30% $24,000 Years 4 - 5 120,000 25% 30,000 Deferred tax liability $54,000 Future deductible amounts: Warranty Expense Year 3 $ 10,000 30% $ 3,000 Years 4 - 5 40,000 25% 10,000 Deferred tax asset $13,000 Deferred tax liability $ 54,000 Deferred tax asset (13,000) Tax expense - deferred $ 41,000 The net deferred tax liability is $41,000 [i.e., $54,000 + $(13,000)]. ``` There is no mention of a beginning balance of deferred taxes; therefore, the entry to record the $54,000 deferred tax liability and the $13,000 deferred tax asset will involve a credit to Deferred Tax Liability for $54,000, a debit to Deferred Tax Asset for $13,000, and a debit to Income Tax Expense for $41,000. This debit to expense represents deferred income tax expense, and it is referred to as the deferred portion of the provision for income taxes.

Answer 813

``` Explanation: Pretax financial income before depreciation $ 100,000 Depreciation for tax purposes (20,000) Taxable income $ 80,000 Tax rate expected × 30% Current income tax expense $ 24,000 Estimated tax payments (0) Current income tax liability $ 24,000 ```

Answer 814

Explanation: The correct answer is (A). Except for certain areas such as business combinations and quasi-reorganizations, the manner of reporting the tax benefits of an operating loss carryforward is determined by the source of income or loss in the current year and not by the source of the operating loss carryforward or taxes paid in a prior year. Therefore, the tax benefit of the operating loss in question reduces income tax expense from income from continuing operations because the realization of the tax benefit results from income from continuing operations.

Answer 815

Explanation: The current income tax = current taxable income x current income tax rate.Cere's taxable income is $280,000 and the difference between book income and taxable income is on account of permanent differences which will not reverse in future and will not affect current taxes. Therefore, Cere would report $84,000 (i.e. $280,000 x 30%) as its current income tax expenses in its income statement.Options (a) is incorrect because this represents the current tax liability. We do not need to deduct the estimated tax payments.Option (b) is incorrect because this represents the estimated tax payments made.Option (d) is incorrect because income tax expense is based on the taxable income and not the financial statement income.

Answer 816

Explanation: The correct answer is (D). This question involves a temporary difference because the investor recognizes investment income for financial purposes based on its equity in the investor's earnings, whereas for tax purposes, investment income is recognized on the cash basis when dividends are received. Deferred taxes must be recorded on this temporary difference. The increase in the investor's deferred income tax liability for this temporary difference is computed as follows: Income per Books ($200,000 x 35%) (a) $70,000 Permanent Difference (80% DRD) [b = 80% x a] ($56,000) Taxable Income per Books (c) = (a) – (b) $14,000 Temporary Difference (c) – (d) ($11,200) Income Per Taxes (Dividend - 80% of Dividend) (Dividend x 20%) ($40,000 x 35% x 20%) (d) $2,800 Deferred Tax Liability = Temporary Difference x Tax Rate = $11,200 x 30% = $3,360

Answer 817

Explanation: The proceeds from the officer’s life insurance policy is a tax-exempt revenue; therefore, no current or future tax consequences will result and no deferred taxes are to be recorded for this difference. The $120,000 ($370,000–$250,000) difference due to depreciation is the only temporary difference existing at the balance sheet date. The tax rate that is used to measure the deferred tax consequences is the enacted tax rate(s) expected to apply to taxable income in the years that this difference reverses. ``` Amount Rate Deferred Tax Liability Depreciation Years 2 - 3 $90,000 35% $31,500 Years 4 - 5 $30,000 25% 7,500 Deferred tax liability $39,000 ```

Answer 818

Explanation: The investor recognizes investment income for financial purposes based on its equity in the investee’s earnings; for tax purposes,investment income is recognized on the cash basis when dividends are received. Deferred taxes are recorded on this temporary difference. In this question, we are told to ignore the 80% dividends-received deduction (DRD). Equity in investor's earnings, book ($225,000 × 40%) $90,000 Less: Dividends received ($75,000 × 40%) 30,000 Temporary difference (without consideration of the dividends-received deduction) 60,000 Times enacted tax rate for future periods × 30 % Increase in deferred tax liability $18,000

Answer 819

Explanation: The lessor should report the full amount of the $500 refundable security deposit as a liability until the lessor has earned a portion of it by cleaning or repairing vacated apartments. Revenue is not recognized until it has been earned. Deferred revenue is reported as a liability.

Answer 820

Explanation: The entire $200,000 balance of the 16% note is properly excluded from short-term obligations because before the balance sheet was issued, Lee refinanced the note by issuance of a long-term obligation. The $125,000, 14% note is also properly excluded from short-term obligations because before the balance sheet was issued, Lee entered into a financing agreement that clearly permits Lee to refinance the short-term obligation on a long-term basis on terms that are readily determinable, and all of the following conditions are met: (1) the agreement is noncancelable as to all parties and extends beyond one year; (2) at the balance sheet date and at the date of its issuance, Witt is not in violation of the agreement; and (3) the lender is financially capable of honoring the agreement.

Answer 821

Explanation: The correct answer is (B). Current liabilities are obligations owed by an entity that are reasonably expected to require the use of existing resources during the entity’s operating cycle or, generally, within one year. On December 31, year 2, Gold would be liable for the second annual installment of $300,000 within one year. Gold would also be responsible for 3 months' interest (from October 1 through December 31). The interest is calculated as follows: $600,000 balance × 5% interest × 3/12 time period = $7,500. The total current liability reported on December 31, year 2, would be $307,500.

Answer 822

Explanation: The correct answer is (A). Pane should report interest payable as $4,875 on December 31st. Accrued interest payable at 12% on $100,000 for 3 months (3/12) = $3,000. Accrued interest payable at 10% on $75,000 for 3 months (3/12) = $1,875. There will be no interest payable on $200,000 as it is a non-interest bearing note. Total Interest Payable: $3,000 + $,1875 = $4,875.

Answer 823

Explanation: Interest expense for the current year $ 85,000 Cash paid for interest in the current year (68,000) Increase in accrued interest payable in the year $ 17,000 Accrued interest payable, 12/31 of prior year 15,000 Accrued interest payable, 12/31 of current year $ 32,000

Answer 824

Explanation: The amount of interest to be capitalized is determined by applying an interest rate to the average amount of accumulated expenditures for the asset during the period. The interest rate to be used is the rate on new borrowings which are specifically associated with the acquisition of the new asset, or a weighted average of the interest rates on all debt outstanding during the period. The amount of interest thus determined is not reduced or in any way offset by interest income earned during the construction period. Average expenditure during year ($6,000,000 / 2) $3,000,000 Interest (capitalization) rate × 0.15 Capitalized interest $ 450,000

Answer 825

Explanation: On September 1, Day would have collected two months of real estate taxes from the seller and credited the amount to Real Estate Taxes Payable. At the ends of September and October, Day would have recorded one month of real estate taxes each month by a credit to Real Estate Taxes Payable. When the payment was made for six months of real estate taxes, on November 1, the $12,000 payment would be for the four months prior to that date that would have already been accrued and for the two months that follow the payment date. Therefore, $8,000 (i.e., $12,000 x 4/6) of the payment should be recorded as a decrease in Real Estate Taxes Payable and $4,000 (i.e., $12,000 x 2/6) of the payment should be recorded as an increase in Prepaid Real Estate Taxes.

Answer 826

Explanation: Of the $250,000 of gift certificates sold in the current year, only $225,000 [i.e., $250,000 × (100% - 10%)] are expected to be redeemed. Since $175,000 of the gift certificates sold in the current year were redeemed in the current year, $50,000 should be reported as unearned revenue at 12/31 of the current year. (At 12/31 of the current year there is no liability for unredeemed gift certificates sold in the prior year because the certificates expire one year after their issuance.).

Answer 827

Explanation: A warranty or guarantee is a promise made by the seller to the buyer to make good certain deficiencies in the product during a specified period of time after the sale. Obligations related to product warranties and product defects are an example of loss contingencies. An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: 1) information available prior to the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and 2) the amount of the loss can be reasonably estimated. It is probable that repairs are required and the 2% of net sales is a reasonable estimate so there is a charge to income through warranty expense. Proper accrual of the warranty expense for year 2 would be 2% of the net sales from year 2 (0.02 × $300,000 = $6,000).

Answer 828

Explanation: Ross should report as accrued salary and vacation pay the sum of the payroll for the week ended 1/1, year 3 that pertains to year 2 and the entire amount of the vacation pay earned in year 2 but not taken by 12/31, year 2. Accrued salary, 12/31 year 2 ($80,000 × 4/5*) $64,000 Accrued vacation time earned in year 2 25,000 Accrued salary and vacation time, 12/31 year 2 $89,000*Four days of the 5-day workweek ended 1/1 year 3 pertain to year 2.

Answer 829

Explanation: The correct answer is (D) If the note is a non-interest bearing or the interest rate is below market, the value of the note should be determined by imputing the market rate of interest and determining the value of the note by using the Effective Interest method. The note payable has no stated interest rate, and the services provided have a fair value less than the face amount of the note payable. Therefore, the note payable should be presented, in the statement of financial position, at the face amount minus a discount calculated at the imputed rate. Expenses for Services XXX Discount XXX Notes Payable XXX Next, the difference between what is recorded, and the face value is considered a discount. And the applicable interest rate is called the imputed rate. This is the rate at which the present value of the face amount of the note will be equal to the amount at which it is originally recorded. As a result, the note payable is recorded at its face amount minus a discount calculated at the imputed interest rate.

Answer 830

Explanation: When declared, cash and property dividends represent legal obligations due within one year and are reported as current liabilities. Stock dividends and undeclared dividends on cumulative preferred stock are not reported as liabilities. The dividends for the year have not yet been declared, and are not reported as liabilities. Cumulative preferred stock dividends in arrears must be disclosed in the notes to the statements, and are not reported as liabilities. The only amount that should be reported as a current liability is the bonus.

Answer 831

Explanation: In order to increase sales and promote certain products, companies may offer premiums to those customers who return box tops, coupons, labels, wrappers, etc., as proof of purchase. The cost of these premiums represents an expense that should be matched against revenue from the sales benefited. At the end of the accounting period, an expense account should be debited and a liability account credited for the cost of outstanding premiums expected to be redeemed in subsequent periods. There were 50,000 box tops expected to be redeemed (100,000 sold x 50% probable redemption). As 40,000 box tops were redeemed during the year, an estimated 10,000 box tops will be redeemed in the future. The premium required two box tops and $1 per redemption. An estimated 10,000 box tops equates to an estimated 5,000 unbreakable glasses (10,000 / 2). The glasses cost $2 each, or $10,000 total ($2 x 5,000). The company also estimated receiving $5,000 ($1 x 5,000) in the redemption. The estimated liability at the end of the current year related to the premium is $5,000 ($10,000 glasses cost - $5,000 received with box tops).

Answer 832

Explanation: An employer must accrue a liability for employees' rights to receive vacation pay benefits if the four conditions are met. Three of these conditions are met in the question data. These are: (1) the obligation is attributable to employees' services already rendered, (2) payment of the compensation is probable, and (3) the amount can be reasonably estimated (i.e., the employees have earned vacation pay of $100,000 that they will receive in the next year). The fourth condition necessary for accrual is that the employees' rights to receive the vacation pay benefits accumulate or vest.

Answer 833

Explanation: The correct answer is (B). A liability for warranty costs is recognized when the related revenue is recognized (i.e., on the day the product is sold). Even if the warranty covers a period longer than the period in which the product is sold, the entire liability for the expected warranty costs must be recognized on the day the product is sold. Beginning of Year 1: Warranty liability recognized = $100,000 (1,000 units × $100 estimated warranty cost per unit) Warranty Expense $100,000 Estimated warranty liability $100,000 End of year 1: Actual payments for warranty costs reduce the amount of warranty liability recognized. Estimated warranty liability $12,000 Cash $12,000 Warranty liability = $88,000 ($100,000 - $12,000 actual warranty costs incurred during the first year). The balance in the estimated liability under the warranties account at the end of the first calendar year will be $88,000.

Answer 834

Explanation: The requirement is the amount to be reported for unearned service contract revenues at December 31, Year 1. This is simply the sum of the outstanding service contracts at December 31, year 1, that expire during years 2, 3, and 4 ($150,000 + $225,000 + $100,000 = $475,000). The balance of the service contract expense account ($180,000) does not affect the amount reported as unearned service contract revenues.

Answer 835

Explanation: Liabilities include social security taxes and federal taxes withheld in addition to the employer portion of social security accrued. Federal income taxes withheld and the employee's share of social security should not be classified as payroll expenses by the employer. Liability Expense FIT Withheld $1,200 FICA Employee Portion ($10,000 @ 7%) 700 FICA Employer Portion ($10,000 @ 7%) 700 $700 Totals $2,600 $700

Answer 836

Explanation: The escrow liability on Hemple’s books is as follows: Escrow liability beginning of year $ 500,000 Escrow receipts during the year 1,200,000 Real estate taxes paid during the year (1,450,000) Interest earned during the year 40,000 Maintenance fee ($40,000 * 10%) (4,000) Escrow liability end of year $ 286,000

Answer 837

Explanation: After the conversion, the accounts payable balance will be reported net of purchase discounts. The gross balance of the accounts payable of $30,000 is reduced by the $200 of discounts still available in the accounts payable balance to arrive at the net amount of $29,800.

Answer 838

Explanation: The cost of goods should be included in accounts payable when legal title passes from the seller to the purchaser. Kew should include the $40,000 cost of the goods lost in transit in accounts payable at 12/31 of the prior year. The goods were shipped F.O.B. shipping point, and the title of these goods passed to Kew, and the related liability was incurred, when the vendor delivered the goods to the common carrier on 12/22 of the prior year. Since the vendor authorized Kew to return goods for full credit before year-end, and Kew shipped the goods before year-end, the prior year 12/31 accounts payable balance should be reduced by $70,000, the cost of the goods returned. The $50,000 cost of the goods that were shipped from a vendor F.O.B. destination on 12/20 of the prior year should not be included in accounts payable at 12/31 of the prior year. Title of these goods did not pass to Kew, and the related liability was not incurred, until Kew received the goods on 1/6 of the current year. Therefore, accounts payable should be reported at $2,170,000 ($2,200,000 + $40,000 - $70,000).

Answer 839

Explanation: A warranty or guarantee is a promise made by the seller to the buyer to make good certain deficiencies in the product during a specified period of time after the sale.

Answer 840

Explanation: The amount of consideration is due on January 31, Y1 which is when the entity recognizes a receivable and a liability because it has an unconditional right to consideration as this is a non-cancellable contract. Option (A) is incorrect because on the date of entering into the contract a liability is not recorded, liability is recorded only when the consideration is due and a receivable is recorded on January 31, Y1. Option (C) is incorrect because the entity does not have to wait till the actual receipt of the consideration. As this is a non-cancellable contract a receivable and a liability can be recorded at the date the consideration is due. Option (D) is incorrect because the entity transfers the product on this date as the liability would be cancelled and revenue would be recognized on satisfaction of the performance obligation

Answer 841

Explanation: On September 1, Dyur Co. would have credited two months of taxes from the seller to Property Taxes Payable. At the end of September and the end of October, Dyur would have recorded one month of property taxes each month by a credit to Property Taxes Payable. When the payment was made for six months of taxes on November 1, the payment would be for the four months prior to that date that have already been accrued and for the two months that follow the payment date which should be recorded as Prepaid Property Taxes. Therefore, two-thirds of the payment should be allocated to a decrease in property taxes payable and one-third of the payment should be recorded as an increase in prepaid property taxes.

Answer 842

Explanation: A 12% annual interest rate would equate to 1% interest each month. Of the first $11,122 monthly payment, $5000 ($500,000 note balance × 1%) would be interest expense and the remaining $6,122 would reduce the note balance down to $493,878. The second $11,122 monthly payment would consist of $4,939 (rounded) in interest expense ($493,878 note balance × 1%) and the remaining $6,183 which would reduce the note balance down to $487,695.

Answer 843

Explanation: 2% of $10,000 x 5 employees = $1,000. Acme has chosen to reimburse the state for actual claims instead of using the 3% of eligible gross wages rate. The liability is computed using eligible gross wages, not total wages, for each employee. The actual unemployment claim is accrued, not the state rate times actual wages.

Answer 844

Explanation: On December 31, year 3, House announced the winner of the contest and signed a note payable to the winner. First installment of note payable, due 1/2, year 4 $ 50,000 Cost of annuity purchased on 12/31, year 3 to provide prize moneys remaining after first installment 418,250 Contest prize expense for year 3 $468,250

Answer 845

Explanation: The correct answer is (D). When Sales /Purchases are made on F.O.B. (free on board) destination terms, the title/ownership of the goods passes from the seller to the buyer when the goods reach the destination. When the goods are in transit the title remains with the seller. The copier machine even though shipped on July 1, year 2, reaches Archer only on July 15, year 2. The legal title is transferred to Archer on July 15. Liability is recognized once the legal title is transferred, on July 15, year 2.

Answer 846

Explanation: Advanced payments received from customers are liabilities until the transaction is completed (or canceled). Black’s balance is computed as follows: $118,000 + 184,000 - 164,000 - 50,000 = $88,000.

Answer 847

Explanation: The amount of the bonus is determined by solving the proper equation that describes the terms of the bonus agreement. Using B to represent the bonus, B equals 25% of the total of income before taxes less $100,000 less B. The answer is computed as follows: ``` B = 0.25 × ($160,000 - $100,000 - B); setup B = 0.25 × ($60,000 - B); reduced $ figure B = $15,000 - .25B; simplified right-side 1.25B = $15,000; added .25B to both sides B = $12,000; divided both sides by 1.25 ```

Answer 848

Explanation: Short-term obligations repaid after the balance sheet date and subsequently refinanced before the issuance of the balance sheet must be classified as current liabilities as of the balance sheet date, because current assets were used for the repayment.

Answer 849

Explanation: Ivy Co. should report sales taxes based on February and March sales as sales taxes payable in its March 31 balance sheet. The taxes based on January sales were paid in February because they exceeded $500 ($10,600 sales / 1.06 = sales of $10,000; $10,600 - $10,000 = $600 in sales taxes). This is the $600 debit in February. (a) Total credits to sales revenue account (b) Sales without sales taxes (a/1.06) (a-b) Sales taxes February $7,420 $7,000 $420 March $8,480 $8,000 $480 Total sales taxes payable, March 31 $900

Answer 850

Explanation: Convertible debt securities are those debt securities which are convertible into common stock of the issuer or an affiliated company at a specified price at the option of the holder and which are sold at a price or have a value at issuance not significantly in excess of the face amount. The terms of such securities generally include (1) an interest rate which is lower than the issuer could establish for nonconvertible debt, (2) an initial conversion price which is greater than the market value of the common stock at time of issuance, and (3) a conversion price which does not decrease except pursuant to antidilution provisions. No proceeds from the debt issue are to be assigned to the conversion feature (even though the convertible bonds may sell for substantially more than similar nonconvertible bonds). The reason for no allocation to equity is that the debt cannot be separated from the conversion feature, as would be the case with detachable stock warrants. The holder of the debt need not be repaid with shares of the issuer’s stock and the transaction should not be recorded as the issuance of stock. Option (A) is incorrect because the issuer may repay in cash or convert to shares at the option of the bondholder. Option (C) is incorrect because the transaction is recorded as debt not as issuance of stock. Option (D) is incorrect because bondholder is unlikely to convert the bonds in to stock when the stock price is below the market value of the bond.

Answer 851

``` Explanation: Prepaid expenses (change) 5,000 Operating expenses (given) 100,000 Accrued liabilities (change) 12,000 Cash (plug) 93,000 ```

Answer 852

Explanation: Escrow liability, 1/1 $ 700,000 Add: Escrow payments received during year 1,580,000 Add: Interest on escrow funds during year 50,000 Less: 10% service fee ($50,000 × 10%) (5,000) Less: Real estate taxes paid (1,720,000) Escrow liability, 12/31 $ 605,000

Answer 853

Explanation: The correct answer is (A). Beginning Sales Tax Payable = $4,500. Sales Tax Expense = $800,000 x 5% = $40,000. Sales Tax Paid = $39,500. Sales Tax Payable = Beginning Sales Tax Payable + Sales Tax Expense - Sales Tax Paid = $40,000 + $4,500 - $39,500 = $5,000. With $39,500 in sales taxes paid during the current year, of which $4,500 was for prior year taxes, Casual Wear Co. will have $5,000 in sales tax payable be recorded in Casual Wear's current-year financial statements.

Answer 854

Explanation: In calculating the sales tax payable, October rentals are not included because the tax was paid at the end of November. In calculating the occupancy tax payable, October room nights are included because the tax is not paid until 15 days after the end of the quarter. ``` November $110,000 December 150,000 $260,000 Rate of tax × 15% $39,000 October 1,100 November 1,200 December 1,800 4,100 Rate of tax × $2 $8,200 ```

Answer 855

Explanation: Cost of toys to Mill Co., each $ 0.80 Less: Cash to be received with redemption (.50) Net cost to Mill Co. for each toy $ 0.30 Total packages of candy sold in December $110,000 Times: Anticipated redemption rate × 60% Total coupons anticipated to be redeemed 66,000 Divided by: Number of coupons required for each toy / 5 Anticipated number of toys needed 13,200 Times: Net cost to Mill Co. for each toy (above) × 0.30 Total estimated coupons liability, 12/31 $ 3,960

Answer 856

Explanation: The correct answer is (B). The $200,000 bonus will be considered deferred compensation because it is contingent upon successful completion of two years of employment from Jan 1 Year 1 to Dec 31 Year 2. As the bonus will not be paid unless the CEO continues his employment for two years, the cost of the benefits should be associated with the service period required, which is years 1 and 2. Year 1 expense = $100,000 Year 2 expense = $100,000 $100,000 of expense will be recorded each in years 1 and 2 and accrued as a liability. When the actual payment occurs in years 3 and 4, there is no effect on the income statement. Therefore, Year 2 will show an expense of $100,000 for the service period, and Year 3 will show $0 because it is not a service period. (A) is incorrect because year 2 should be allocated with bonus expense of $100,000 and not in year 3. (C) is incorrect because year 3 bonus expense should be nil. (D) is incorrect because $200,000 is entirely expensed in year 2, instead of allocating between year 1 and year 2.

Answer 857

Explanation: The correct answer is (A). Bonus = 10% of Corporation's Income - $200,000 - Bonus Bonus = 0.10 ($640,000 - $200,000 - Bonus) Bonus = 0.10 ($440,000 – Bonus) Bonus = $44,000 – 0.10 Bonus 1.10 Bonus = $44,000 Bonus = $44,000/1.10 Bonus = $40,000

Answer 858

``` xplanation: C = 0.10 ($75,000 - C) C = $7,500 - 0.10C 1.10 C = $7,500 C = $6,818 ```

Answer 859

Explanation: The coupon liability at 12/31 is not reduced by the 50,000 coupons on hand because the coupons had not been processed for payment at 12/31. Coupons expected to be redeemed 120,000 Times: Payment for redeemed coupon ($0.45 + $0.05) x $0.50 Estimated total coupon liability $60,000 Less: Payments to retailers as of 12/31 25,000 Remaining coupon liability, 12/31 $35,000

Answer 860

Explanation: | ($80,000 × .07) + ($20,000 × .03) = ($5,600 + $600) = $6,200.

Answer 861

Explanation: As Oak believes 1% of sales to be the best estimate of warranty costs, warranty expense should be accrued accordingly. ($5,000,000 × 1% = $50,000). The technological advance applied only to current year sales; thus, in this case, the estimates of warranty costs reported in the previous two years are not changed.

Answer 862

Explanation: The correct answer is (B). Prepaid rent by tenants (paid 8 months in advance) should be recorded by a landlord as a current liability. This is essentially unearned rent. Unearned rent is a liability to the landlord, not an asset. The landlord would debit cash and credit unearned revenue for all 8 months of rent. Since the rent is for eight months (less than one year), the liability would be classified as a current liability.

Answer 863

Explanation: The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. Short-term obligations are those scheduled to mature within one year or operating cycle, whichever is longer, and generally are classified as current liabilities. However, if they are to be refinanced on a long-term basis they will be appropriately classified as long-term liabilities. Exclusion from current liabilities requires two conditions be met; 1) the enterprise must intend to refinance the obligation on a long-term basis, and 2) the enterprise must have the ability to consummate the financing. A refinancing that occurs after the balance sheet date but before the issuance of the balance sheet is evidence of intent and ability. The $1,000,000 bank loan would not be reported as part of current liabilities because it was refinanced on a long-term basis. The accounts payable-trade, short-term borrowings, and current portion of mortgage payable would be reported as current liabilities ($750,000 + $100,000 + $400,000 = $1,250,000).

Answer 864

Explanation: In the absence of a direct association with specific revenue, expenses are recognized and recorded by attempting to allocate the expenses in a systematic and rational manner over certain periods. The $300,000 total compensation expense for years 6, 7, and 8 would be would be allocated over the period it took for the contract to be consummated, 5 years. The compensation expense associated with the contract would be $60,000 in each of years 1 through 5.

Answer 865

Explanation: The correct answer is (B). It is given that the company pays $10,000 for 10 workdays. The salary paid for each workday = 10,000/10 = $1,000. This is also substantiated by the fact that the salaries expense account stood at $14,000 on June 18. Given that June 18 was a Friday and that employees do not work on Saturdays and Sundays, there were only 14 workdays in June till the 18th day of the month. From June 18 to June 30 (Wednesday), there were only 8 workdays. The salaries expense accrues to $8,000. Therefore, the salaries expense account should reflect a total balance of expenses paid plus the expenses accrued i.e. $14,000 + $8,000 = $22,000.

Answer 866

Explanation: Salespersons receive sales commissions only to the extent that their sales commissions earned exceed their fixed salaries for that month. Salesperson Sales commissions Fixed salary Accrued commissions A $ 8,000 ($200,000 × 4%) $10,000 $ 0 B 24,000 ($400,000 × 6%) 14,000 10,000 C 36,000 ($600,000 × 6%) 18,000 18,000 $28,000

Answer 867

Explanation: Accounts payable is a liability account incurred in obtaining goods and services from vendors in the entity’s ordinary course of business. Accounts payable should reflect the cost of those goods or services that have been appropriately included in inventory (or other asset account) or have been expensed. The $50,000 debit for goods to be manufactured should not have been posted to the accounts payable account. The $50,000 payment would be classified as a prepaid asset and not as a reduction of any liability because the goods haven’t been received yet. Adding the $50,000 to the $850,000 brings the accounts payable account to $900,000 on December 31. The $45,000 does not go into accounts payable until January 2 of the next year because the goods were shipped f.o.b. destination. Under an f.o.b. destination contract, the goods and related liability are not recorded until the goods are received.

Answer 868

Explanation: The term "current liabilities" is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities.

Answer 869

Explanation: Estimated warranty liability at 12/31, year 2, should be recorded as the excess of the estimated warranty costs for year 1 and year 2 sales over the actual warranty expenditures to date. Sales (years 1 and 2) $400,000 Estimated warranty cost percentage (2% + 4%) × 6% Estimated warranty cost for year 1 and year 2 sales $ 24,000 Warranty expenditures to date (9,750) Estimated warranty liability, 12/31, year 2 $ 14,250

Answer 870

Explanation: March 1, prior year to Feb.28, currnet year ($10,000 @ 12% X 12/12) $1,200 March 1 to Dec.31, current year [12%($10,000 + $1,200) X 10/12] 1,120 Total Accrued Interest, December 31 $2,320

Answer 871

Explanation: Advanced payments received from customers and others are liabilities until the transaction is completed. The travel and lodging services that were used by KLU is a liability because use of the services indicated a payment in advance for the advertising time to be provided at a later date. Use of the services is an expense.

Answer 872

Explanation: The correct answer is (C). The $264,200 payment includes both principal and interest. The amount of interest is $1,000,000 (amount of note) × 0.09 (the 9% interest) ÷ 4 (payments are quarterly) = $22,500. Subtracting $22,500 from $264,200 leaves $241,700 as principal. Subtracting the $241,700 of principle from the $1,000,000 note balance results in $758,300 should be reported as note payable on the December 31 balance sheet.

Answer 873

Explanation: The correct answer is (C) In case of a firm purchase commitment, when it is probable that a loss will occur due to the contract price being more than the market price, such loss is recognized at the time of decline in prices itself. Paxton Co. has entered into a firm purchase commitment since it is a contract for future purchase of inventory. The market price has fallen down by $2 million than the contract price. A liability of $2 million is supposed to be recorded. In a legal non-cancelable agreement for future purchase of Inventory, if Contract price > Market price and it is expected that loss will occur on the purchase, recognize the loss of ($3,000,000 - $5,000,000) $2,000,000 (Market Price - Contracted Price), at the time of decline in prices. The journal entry would be: Dr: Est. loss on purchase commitment $2,000,000 Cr: Accrued loss on purchase commitment $2,000,000

Answer 874

Explanation: | Accrued expenses are expenses incurred, but not yet paid in cash.

Answer 875

Explanation: The term current liabilities is used primarily to designate obligations whose liquidation is reasonably expected to require the use of existing resources classified as current assets, or the creation of other current liabilities. Long-term liabilities are all obligations not expected to be liquidated by the use of existing current assets or by the creation of current liabilities. Short-term obligations are those scheduled to mature within one year or operating cycle, whichever is longer, and generally are classified as current liabilities. However, if they are to be refinanced on a long-term basis they will be appropriately classified as long-term liabilities. Income taxes payable within the next period, or operating cycle, are classified as current liabilities. A deferred tax liability is over a longer period of time and not considered a current liability. The only amount that would be reported is the $16,000 due within 12 months from the mortgage note payable.

Answer 876

Explanation: Goods held on consignment remain the property of the consignor. The consignee does not incur a liability for consigned goods until the goods are sold to a third party. ``` Consignment sales (500 x $100) $50,000 Less Alt's commission on consignment sales ($50,000 x 10%) 5,000 Payable for consigned goods, 12/31 $45,000 ```