Selected Transactions

Question 1

The amounts related to Product A to be reported on Stacy’s March 31 balance sheet, June 30 balance sheet, and September 30 balance sheet, respectively, should be presented as a:

Answer 1

Contract Asset with conditional rights; Contract Asset with conditional rights; Accounts Receivable.

Stacy reports a Contract Asset on March 31 because it delivered Product A, but payment is conditional upon delivery of 125 units of Product B. Stacy continues to report a Contract Asset related to Product A on the June 30 balance sheet because 125 units of Product B have not yet been delivered. Stacy reports Accounts Receivable on the September 30 balance sheet because it satisfied the performance obligation related to the delivery of Product B that entitles Stacy to payment for Product A.

Question 2

Kinnamont Company manufactures farming equipment that includes navigational systems as part of the standard equipment package and offers optional training on any navigational systems for an additional fee. Smith Company enters into a contract with Kinnamont that includes a combine, a navigational system, and training. Identify the performance obligations to which Smith should allocate the transaction price:

Answer 2

The combine including the navigational system and the training as two separate performance obligations.

Because the navigational system comes standard on the combine, the navigational system is not distinct from the combine and would not have a stand-alone price.

Question 3

What method does a company use to determine the transaction price for a contract that includes variable consideration when the company has numerous other contracts with similar characteristics and there are more than two possible results?

Answer 3

Expected value method

Question 4

Foghorn Company entered into a sales transaction in which it agreed to receive common stock from Leghorn Corporation as payment for services provided to Leghorn Corporation. The journal entry to record the receipt of payment for the sales transaction will include a

Answer 4

Debit to Leghorn Investment.

Question 5

Allocating a transaction price to multiple performance obligations includes which of the following steps:

Answer 5

Identify distinct goods and/or services as separate performance obligations.

Question 6

For a good or service to be considered distinct and identified as a separate performance obligation, it must be

Answer 6

Able to be used by the customer on its own or with resources readily available to the customer and able to be separately identified from other promises in the contract.

Question 7

For a contract that contains multiple performance obligations, revenue is allocated to each performance obligation by

Answer 7

Calculating the proportion of the total stand-alone price represented by each performance obligation and multiplying the proportion by the total transaction price to allocate the transaction price to the separate performance obligations.

Question 8

A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month?

Answer 8

$190,000

Question 9

Sara consigns goods to Lee Company who charges a 10% commission on consignment sales. Lee sells $750 worth of goods on Sara’s behalf. Assuming no other costs of selling, what amount of Accounts Receivable should Sara record from Lee Company for the consignment sales?

Answer 9

$675, Sara will recognize the $75 (10% of $750) commission expense and record the account receivable net of the commission expense amount.

Question 10

Sally collects a nonrefundable up-front fee of $192 when a new customer signs up for a 24-month contract for services. A monthly fee of $32 is also assessed for each customer. How much revenue does Sally record on the date the contract is signed?

Answer 10

$0, Sally does not recognize revenue until services have been provided. The nonrefundable up-front fee of $192 is recognized over the life of the contract, in this case, over 24 months.

Question 11

A new separate contract is created when:
The additional products included in the contract modification are distinct from the products in the original contract.
The blended price of the original and additional products is appropriately reflected in the recognition of revenue after the modification.
The consideration for the additional products reflects an appropriate standalone selling price.

Answer 11

I and III

Question 12

A company incurred costs to fulfill a contract that has a four-year life. The costs are a direct result of the contract and would not have been incurred had the contract not existed. How should the costs to fulfill the contract be accounted for?

Answer 12

Recorded as an asset and amortized over four years

Question 13

Choose the correct statement regarding accounting methods for revenue recognition on long-term contracts, for international and US accounting standards.

Answer 13

International standards require the cost recovery method when the percentage of completion method is not appropriate.

Question 14

Multiple components comprise Net Periodic Pension Cost. The component reported as part of compensation expense and included in the subtotal for income from operations is

Answer 14

Service cost

Question 15

A defined benefit plan’s projected benefit obligation totaled $20mn at the end of the current year. Plan assets at market value totaled $23mn. Choose the correct statement concerning balance sheet reporting for this plan.

Answer 15

$3mn pension asset.

Question 16

A company has a defined benefit pension plan for its employees. On December 31, year one, the accumulated benefit obligation is $45,900, the projected benefit obligation is $68,100, and the fair value of the plan assets is $62,000. What amount, if any, related to the defined benefit plan should be recognized in the balance sheet at December 31, year one?

Answer 16

A liability of $6,100.

Question 17

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

Answer 17

FV, Fair value is the current amount available for payment of pension benefits.

Question 18

The funded status of a defined benefit pension plan for a company should be reported in

Answer 18

The statement of financial position.

Funded status is the difference between projected benefit obligation and plan assets at fair value. Neither of these amounts is reported in the balance sheet (they appear in the notes only), but their difference is reported in the balance sheet as the reported pension liability for defined benefit plans.

Question 19

Barrett Co. maintains a defined benefit pension plan for its employees. At each balance sheet date, Barrett should report pension liability equal to the

Answer 19

Unfunded projected benefit obligation

Question 20

At year end, a company has a defined benefit pension plan with a projected benefit obligation of $350,000; a net gain of $140,000 that was not previously recognized in net periodic pension cost; and prior service cost of $210,000 that was not previously recognized in net periodic pension cost. What amount should be reported in accumulated other comprehensive income related to the company’s defined benefit pension plan at year end?

Answer 20

A debit balance of $70,000.

Question 21

On July 31, Year 5, Tern Co. amended its single employee defined benefit pension plan by granting increased benefits for services provided prior to Year 5. This prior service cost will be reflected in the financial statement(s) for

Answer 21

Year 5, and following years only.

Question 22

Choose the correct statement regarding the treatment of prior service cost (PSC) for defined benefit plans under international accounting.

Answer 22

The entire PSC amount, at present value, is recognized immediately in pension expense.

Question 23

A firm is applying international accounting standards to its defined-benefit pension plan and has pension gains and losses. As a result,

Answer 23

The firm’s earnings will not be affected.

Pension gains and losses are recognized immediately and in full in accumulated other comprehensive income.

Question 24

A firm is applying international accounting standards to its defined-benefit pension plan. At the end of the current year, the actuary informs the firm that the plan has experienced an actuarial gain of $2mn. The average remaining service period of plan participants is ten years. Therefore,

Answer 24

Other comprehensive income is immediately increased.

Question 25

n employer’s obligation for post-retirement healthcare benefits that are expected to be fully provided to or for an employee must be fully accrued by the date the

Answer 25

Employee is fully eligible for benefits.

Post-retirement healthcare benefits often are provided in terms of percentage of total coverage. For example, an employee may have to work 20 years to attain 50% healthcare coverage during retirement, and 30 years to attain 100% coverage.

If the employee is expected to work 25 years, then the 50% coverage is the level built into the expense and liability computations, and the accrual period is the first 20 years of service. After serving 20 years, the employee earns no more benefit.

Question 26

Which of the following costs is unique to post-retirement healthcare benefits?

Answer 26

Per capita claims.

Question 27

An overfunded single-employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a

Answer 27

Noncurrent asset

Question 28

Under the fair-value method of accounting for stock option plans, total compensation recognized

Answer 28

Is based on the value of the option at the grant date, adjusted for forfeitures.

Question 29

A stock option plan with a positive fair value at grant date caused compensation expense of $50,000 per year to be recorded over the five-year service period. During the exercise period (two years), the stock price never exceeded the option price. Therefore, none of the options was exercised.

Choose the correct statement about the accounting for these options.

Answer 29

The contributed capital increase from recording compensation expense is left intact.

Expiration of stock options does not cause reversal of compensation expense because, at the grant date, the firm did provide value to the employee, given that the option had a fair value at that time.

Question 30

On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?

Answer 30

Date of Grant

Question 31

Select the correct statement about executive compensation plans involving stock.

Answer 31

The total amount of compensation expense for a restricted stock award plan is determined at the grant date.

Question 32

As a result of the stock appreciation rights, Morey should recognize compensation expense for 2005 of

Answer 32

The 2005 compensation expense for these stock-appreciation rights equals: (number of shares) × (ending market price − grant-date market price) = 20,000($45 − $30) = $300,000.

The rights are immediately vested, because they can be exercised immediately. Therefore, the entire $300,000 amount is recognized as expense in 2005. Changes in market price in future years, before the rights are exercised, are recognized on a current and prospective basis (change in estimate).

Question 33

Which of the following disclosures is not required of companies with a defined benefit pension plan?

Answer 33

The estimates of future contributions.

Question 34

The recognition of the amortization of $50 of net gain causes what effect on

Answer 34

(1) pension expense- decrease

2) pension liability- no effect (recognized when change occurred, amortization recognizes expense

Question 35

Which of the following statements is a primary objective of accounting for income taxes?

Answer 35

To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences.

Question 36

According to FASB Statement No. 109, Accounting for Income Taxes, justification for the method of determining periodic deferred tax expense is based on the concept of

Answer 36

Recognition of assets and liabilities.

Question 37

Rein Inc. reported deferred tax assets and deferred tax liabilities at the end of 20X3 and at the end of 20X4.

According to FASB Statements No. 109 Accounting for Income Taxes, for the year ended 20X4, Rein should report deferred income tax expense or benefit equal to the

Answer 37

Sum of the net changes in deferred tax assets and deferred tax liabilities.

The net amount of deferred tax expense or benefit is that amount that is not recognized in current period income.

Question 38

When accounting for income taxes, a temporary difference occurs in which of the following scenarios?

Answer 38

An item is included in the calculation of net income in one year and in taxable income in a different year.

Question 39

There are no other temporary differences. In its December 31, 20X5 balance sheet, what amount should Tow report as a deferred income tax liability?

Answer 39

The future temporary differences for depreciation are multiplied by the enacted tax rates in effect in the reversing period.

The $39,000 ending deferred tax liability for 20X5 is the sum of the tax effects of these differences: [$50,000(.35) + $40,000(.35) + $20,000(.25) + $10,000(.25)] = $39,000. The future enacted rates are used because those are the rates in effect when the differences reverse.

Question 40

The Year 2 financial statements would include the tax benefit from the loss brought forward in

Answer 40

Income from continuing operations.

Question 41

Which of the following should be disclosed in a company’s financial statements related to deferred taxes?

I. The types and amounts of existing temporary differences.

II. The types and amounts of existing permanent differences.

III. The nature and amount of each type of operating loss and tax credit carry-forward.

Answer 41

I and III

Question 42

How should a company report its decision to change from a cash-basis to an accrual-basis of accounting?

Answer 42

As a Prior period adjustment (net of tax), by adjusting the beginning balance of retained earnings.

The accrual basis of accounting is required by GAAP. A change from an inappropriate method to the correct method is treated as an error correction. The procedure requires retrospective application, resulting in an after-tax cumulative adjustment to prior years’ earnings (called a Prior period adjustment) to the beginning balance in retained earnings.

Question 43

The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported

Answer 43

When an accounting principle change cannot be distinguished from an estimate change, it is accounted for as an estimate change. Changes in accounting estimate are accounted for currently and prospectively and are reported in income from continuing operations.

Question 44

During 2005, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses the units-of-production-depletion method.

Which of the following statements correctly describes the appropriate accounting for this change?

Answer 44

The change in estimate is applied as of the beginning of 2005 for current and future periods.

Question 45

Which of the following statements is correct as it relates to changes in accounting estimates?

Answer 45

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.

Question 46

How should the effect of a change in accounting estimate be accounted for?

Answer 46

In the period of change and future periods if the change affects both.

Question 47

Cuthbert Industrials, Inc. prepares three-year comparative financial statements. In year 3, Cuthbert discovered an error in the previously issued financial statements for year 1. The error affects the financial statements that were issued in years 1 and 2. How should the company report the error?

Answer 47

The financial statements for years 1 and 2 should be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.

Question 48

In which of the following legal forms of business combination are the assets and liabilities of an acquired entity or entities recorded on the books of the acquiring entity?

Answer 48

Merger-Yes
Consolidation-Yes
Acquisition-NO

Question 49

In which of the following legal forms of business combination are two or more entities combined into one new entity?

Answer 49

Consolidation

Question 50

Which one of the following would be subject to the acquisition accounting requirements of ASC 805, Business Combinations?

Answer 50

Acquisition of a manufacturing entity by a holding company

Question 51

The requirements of ASC 805, Business Combinations, apply to all of the following business combinations except for which one?

Answer 51

Combination between not-for-profit organizations

Question 52

At the closing date of a business combination, goodwill was recognized. During the subsequent measurement period, additional identifiable assets were properly recognized as part of the business combination. If no other changes occurred during the measurement period, which one of the following would be the effect, if any, of the additional assets recognized on the amount of goodwill recognized in the combination?

Answer 52

A decrease in the amount of goodwill recognized

Question 53

Which of the following statements concerning the acquisition date of a business combination is/are correct?

I. The acquisition date may be before the closing date.

II. The acquisition date may be on the closing date.

III. The acquisition date may be after the closing date.

Answer 53

All 3

Question 54

When using the acquisition method of accounting for a business combination, which of the following statements concerning the measurement period is/are correct?

I. It provides time for the acquiring entity to identify assets acquired and liabilities assumed that existed as of the acquisition date.

II. It provides time for the acquiring entity to determine the fair value of assets acquired and liabilities assumed that existed as of the acquisition date.

III. It should not exceed one year from the acquisition date.

Answer 54

All 3

Question 55

Which of the following statements concerning the nature of an acquired business in a business combination is/are correct?

I. A business may be a group of assets.

II. A business may be a group of net assets.

III. A business may be a separate legal entity.

Answer 55

All 3

Question 56

Which one of the following is not a characteristic associated with the concept of a “business” for the purposes of ASC 805, Business Combinations?

Answer 56

For the purposes of ASC 805, a business does not have to be in the form of a separate legal entity. Specifically, a business is an integrated set of activities and assets that is capable of being conducted and managed through the use of inputs and processes for the purpose of providing economic benefits to owners, members, or participants.

Question 57

Which of the following are requirements of using the acquisition method of accounting for a business combination?

I. Determining the acquiring entity.

II. Determining the acquisition date of the business combination.

III. Determining the cost of the acquisition.

Answer 57

All 3

Question 58

Which one of the following correctly describes the maximum length of the measurement period for a business combination?

Answer 58

One year from the acquisition date of the combination

Question 59

When a new entity is formed to effect a business combination, which of the following statements, if any, is/are correct?

I. A legal consolidation has occurred.

II. The new entity is always the acquirer in the business combination.

Answer 59

I only

Question 60

The acquisition date of a business combination is generally which one of the following?

Answer 60

Closing date

Question 61

A company acquires another company for $3,000,000 in cash, $10,000,000 in stock, and the following contingent consideration:

$1,000,000 after Year 1, $1,000,000 after Year 2, and $500,000 after year 3, if earnings of the subsidiary exceed $10,000,000 in each of the three years.
The fair value of the contingent -based consideration portion is $2,100,000. What is the total consideration transferred for this business combination?

Answer 61

All consideration, including contingent consideration, must be measured at acquisition date fair value. The total consideration transferred is:
Cash	$ 3,000,000
Stock	10,000,000
Contingent consideration	2,100,000
Total	$15,100,000

Question 62

An obligation of an acquirer to pay contingent consideration to the former owners of an acquired entity in a business combination can be recognized as which of the following?

Answer 62

Liability or equity

An obligation to pay contingent consideration in a business combination may be recognized by the acquirer as either a liability or as an equity item, depending on the nature of the obligation under the provisions of ASC 480, Distinguishing Liabilities from Equity.

Question 63

Changes in the fair value of contingent consideration transferred in a business combination resulting from occurrences after the acquisition date should be recognized as a gain or loss in the current income when the contingent consideration is classified as

Answer 63

Changes in the fair value of contingent consideration resulting from occurrences that occur after the acquisition date are recognized as gains or losses when the contingent consideration is classified as an asset or a liability. Contingent considerations classified as equity are not remeasured, and no gain or loss is recognized.

Question 64

Which of the following statements concerning the acquisition of a business is/are correct?

I. Most consideration transferred to effect a business combination should be measured at fair value.

II. Contingent consideration should be included in the cost of an acquired business at fair value existing on the acquisition date.

III. The cost of carrying out a business combination should be included in the cost of an acquired business.

Answer 64

I and II only

Question 65

The terms of a business combination can provide that former shareholders of the acquired firm may receive additional compensation based on post-combination earnings or post-combination market share price. Would additional compensation based on such earnings or market price be considered an additional cost of the business combination?

Answer 65

NO

Additional compensation to former shareholders of an acquired entity based on either post-combination earnings or post-combination share price would not be recognized as changes in the cost of the business combination.

Question 66

Which one of the following, incurred by an acquiring entity in carrying out a business combination, would not be included in the cost of an acquired entity?

Answer 66

Cost of legal fees to carry out the combination

Question 67

A business combination is accounted for using the acquisition method. Which of the following should be deducted in determining the combined corporation’s net income for the current period?

Answer 67

Acquisition-related costs incurred to carry out a business combination, including both direct costs of acquisition (e.g., finders’ fees; legal, accounting, and consulting fees; etc.) and general expenses related to an acquisition (e.g., cost of acquisition department), are expensed when incurred and enter into the determination of income for the period.

Question 68

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be

Answer 68

Expensed in the current period

Question 69

On December 31, Year 1, Andover Co. acquired Barrelman, Inc. Before the acquisition, a product lawsuit seeking $10 million in damages was filed against Barrelman. As of the acquisition date, Andover believed that it was probable that a liability existed and that the fair value of the liability was $5 million. What amount should Andover record as a liability as of December 31, Year 1?

Answer 69

$5million

A noncontractual liability that is more likely than not (greater than 50%) to meet the definition of a liability, should be recorded at acquisition date fair value. This lawsuit is probable to occur and should be recorded as part of the business combination at $5 million.

Question 70

Which of the following kinds of intangible assets on the books of an acquired entity immediately before a business combination would be recognized by the acquiring entity?

Answer 70

Future benefits that derive from legal rights

Future benefits that can be separately sold

Question 71

Which one of the following items acquired in a business combination is least likely to require that the acquirer reconsider the acquiree’s classification?

Answer 71

A lease classified as a sales-type capital lease by the acquiree

In a business combination, an acquirer that obtains a lease contract should continue to classify the contract as established at the inception of the contract.

Question 72

Which of the following contingencies that exist on the acquisition date should be recognized by the acquirer in a business combination?

I. A contractual contingency to provide warranty services to prior customers of the acquiree.

II. An outstanding lawsuit against the acquiree for which an expert legal authority believes there is a 20% probability that the suit will be successful.

Answer 72

I only

Contractual contingencies (contingencies related to existing contracts) are recognized by the acquirer and measured at fair value. Noncontractual contingencies (contingencies that do not result from an existing contract), including lawsuits, are recognized only if it is more likely than not that the contingency will give rise to a liability (or an asset)

Question 73

Zooco, Inc. acquired 40% of the voting stock of Stubco, Inc. on September 1, 2008, and accounted for the investment using the equity method of accounting. On May 1, 2009, Zooco acquired an additional 20% of Stubco’s voting stock to achieve a business combination. Which one of the following is the value Zooco should use to measure its original 40% investment in Stubco when recording the combination?

Answer 73

Fair value, May 1, 2009 (on date of acquisition)

Question 74

In which of the following circumstances will goodwill be recognized in a business combination?

Answer 74

The fair value of the investment by the acquiring entity and any noncontrolling interest in the acquired entity is greater than the fair value of the acquired entity’s net assets.

Question 75

In which of the following circumstances of a business combination, if any, could the recognition of a gain occur at the time of the combination?

Answer 75

Investment Value < Fair Value of Net Assets

A gain can occur in a business combination only when the investment value in the acquired entity is less than the fair value of the entity’s net assets, and not when the investment value is greater than the fair value of those net assets.

Question 76

Which one of the following items that was acquired in a business combination is most likely to be accounted for using post-combination accounting requirements specific for the item?

Answer 76

Contingency-based assets

Question 77

How should the acquirer recognize a bargain purchase in a business acquisition?

Answer 77

As a gain in earnings at the acquisition date

Question 78

When goodwill is recognized in a business combination, which of the following types of information about that goodwill must be disclosed?

I. A quantitative description of the factors that make up the goodwill.

II. The amount of goodwill that is expected to be deductible for tax purposes.

III. The amount of goodwill allocated to each reportable segment.

Answer 78

All 3

Question 79

When a bargain purchase occurs in a business combination, which of the following types of information must be disclosed in the period of the combination?

I. The amount of gain recognized.

II. The income statement line item that includes the gain.

III. A description of the basis for the bargain purchase amount.

Answer 79

All 3

Question 80

If provisional amounts are reported for items recognized in a business combination, which of the following kinds of information must be disclosed?

I. The reasons why the accounting is incomplete.

II. The amount of adjustment(s) made to the provisional amounts during the period.

III. The date at which each provisional amount is expected to be resolved.

Answer 80

I and II

Question 81

An entity must disclose information about a business combination it carries out if the acquisition date occurs:

Answer 81

During the Reporting Period

After the Reporting Period but Before Statements are Released

Question 82

Which of the following general types of information about a business combination must be disclosed?

I. The primary reason for a business combination.

II. How the acquirer gained control of the business.

III. The acquisition-date fair value of consideration transferred and each major class of asset acquired and liability assumed.

Answer 82

All 3

Question 83

When a firm elects not to bifurcate a hybrid financial instrument, how should changes in fair value be recognized?

Answer 83

On a prospective basis in the current year earnings and future year’s earnings.

Question 84

Which of the following rates may be used to translate the cash flow statement?

Answer 84

Historic rate

Weighted average rate

Question 85

LaValley Corp. issues monthly financial statements to its creditors. LaValley should perform assessments of hedge effectiveness on a(n)

Answer 85

Monthly

The effectiveness of the hedging relationship must be assessed when financial statements are prepared and at least every 3 months.

Question 86

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

Answer 86

Net income will increase by $5,800.

A stock option is a financial instrument that is recorded at its fair value and is remeasured to fair value at the end of each reporting period with the gains and losses reported in income of the period. On December 1, when Bann acquired the option, its fair value was $600. At the end of the reporting period on December 31, the fair value of the stock had increased by $3 per share ($43 − 40) and the fair value of the time value component of the option decreased to $400. Therefore, the fair value of the option at December 31 was ($3 × 2,000 shares + $400) = $6,400. The change in the fair value of the option was $6,400 − $600, resulting in a $5,800 increase in fair value. Net income is increased by the change in the fair value of the option in the amount of $5,800.

Question 87

Which of the following qualifies as a hybrid instrument that would require bifurcation under ASC Topic 815, Derivatives and Hedging?

Answer 87

I. A bond payable with an interest rate based on the S & P 500 Index.
II. An equity instrument with a call option, allowing the issuing company to buy back the stock.

Both items qualify as hybrid instruments that would require bifurcation under ASC Topic 815. The process of bifurcation separates an embedded derivative instrument from the basic or “host” contract.