SIM Flashcards
FAR1B011nsim
JRM co. is in the process of closing its books for the year ended December 31, year 2.
The following business events are not properly reflected in JRM’s December 31, year 2, unadjusted trial balance:
The controller determined that half of the recorded rent expense of $10,000 is attributable to year 3.
JRM depreciates its property, plant, and equipment using the straight-line method over 10 years. The property, plant, and equipment had an original cost of $20,000 and a salvage value of $5,000.
JRM uses the percentage-of-sales method to determine the addition to bad debt expense. Uncollectible accounts receivable for year 2 was estimated to be 0.25%.
On December 31, year 2, a customer declared bankruptcy and its accounts receivable of $855 is uncollectible.
Life insurance premiums for the period ended December 31, year 2, of $650 for key members of management are included in prepaid expenses.
Interest of $300 was earned and outstanding on notes receivable during year 2. The note receivable is due at the end of year 5.
Income taxes for year 2 are estimated to be $3,000.
Sales made during year 2 totaled $300,000.
Based on the business events above, calculate the net adjusted balance for the prepaid expenses account. The trial balance shows a debit balance of $1,000 for the prepaid expenses account.
Prepaid expenses are assets. The trial balance shows a debit balance of $1000 in prepaid expenses account.
The controller determined that half of the recorded rent expense of $10,000 is attributable to year 3. Hence 50% of $10,000 = $5,000 of rent expenses have been paid in advance for the next year and is an asset. This should be added to the prepaid expenses. An adjustment debit of $5,000 is made to the prepaid expense account.
Life insurance premiums for the period ended December 31, year 2, of $650 for key members of management are included in prepaid expense. Since the period is ended, the expenses should be recognized and prepaid expense should be amortized. Hence an adjustment credit of $650 is made to the prepaid expenses account.
The adjusted trial balance will show a debit balance of $5,350 [$1000+$5000-$650] on the prepaid expenses account.
FAR2H008nsim
On January 1, year 1, Stopaz Co. Issued 9% five-year bonds with a face value of $100,000. The bonds pay interest semiannually on June 30 and December 31 of each year. The bonds were issued when the market interest rate was 8% and the bond proceeds were $104,100.
Stopaz uses the effective interest method for amortizing bond premiums/discounts and maintains separate general ledger accounts for each.
Calculate the Premium amortized for the six months ended June 30, year 1.
The coupon rate on the bonds was 9% when the market rate is 8%. Investors are willing to pay a premium for bonds that yield higher than the market. Also, The total proceeds of the bond are $104,100 which is greater than the face value of the bond $100,000. Hence these help us conclude that the bonds were issued at a premium of $4,100 ($104,100 – $100,000)
The premium on issue of bonds has to be separately recognized and should be amortized over the life of the bond. Interest is calculated as 100,000 x 9% = $9,000 for 1 full year. Since the interests are paid semi-annually, we should calculate the interest only for 6 months. Therefore, $9,000 x 6/12 = $4,500.
The yield to maturity expected by the investors is 8% per annum. Hence to calculate the interest on a semi-annual basis on these bonds, we take the carrying amount of the bonds ($104,100) and multiply it by half the annual yield to maturity (8%/2=4%) to get $4,164 in interest expense.The actual cash interest expense remains $4,500. The premium is amortized as a reduction in interest expense. Thus, interest expense is recorded as $4,164 for the first period, while $336 is recorded as premium amortization.
To calculate interest expense for the next semiannual payment, we subtract the amount of amortization from the bond’s carrying value and multiply the new carrying value by half the yield to maturity.
FAR3B005nsim
Peterson Co. owns 100% of the outstanding common stock of Silver Corp. On January 1, year 2, Peterson sold equipment to Silver for $120,000, which was originally purchased on January 1, year 1 for $100,000. Peterson was depreciating the equipment over 5 years using straight-line depreciation. There was no salvage value. Silver decides to depreciate the equipment over four years, also using straight-line depreciation with no salvage value. Assume all other appropriate year-end and income tax journal entries have been made.
Calculate the amount of accumulated depreciation to be considered in the eliminating journal entries required for consolidation purposes for the year ended December 31, year 2.
Elimination entries are made for removing the effects of intercompany transactions.
There are, basically, three types of intercompany eliminations as follows:
- Intercompany debt: Eliminates any loans made from one entity to another within the group, since these only result in offsetting notes payable and receivable, as well as offsetting interest expense and interest income. These issues most commonly arise when funds are being moved between entities by a centralized treasury department.
- Intercompany revenue and expenses: Eliminates the sale of goods or services from one entity to another within the group. This means that the related revenues, cost of goods sold, and profits are all eliminated. The reason for these eliminations is that a company cannot recognize revenue from sales to itself; all sales must be to external entities. These issues most commonly arise when a company is vertically integrated.
- Intercompany stock ownership: Eliminates the ownership interest of the parent company in its subsidiaries
The original cost of equipment for Peterson = $100,000. Accumulated depreciation as of January 1, year 2 = $20,000 [($100,000/5)x1]. Hence the value of the equipment in the books of Peterson as on January 1, Year 2 = Cost – accumulated depreciation = $100,000 – $20,000 = $80,000
Cost of the equipment in the books of Silver on purchase of the asset = $120,000. Silver has decided to depreciate the equipment over four years, also using straight-line depreciation with no salvage value.
Depreciation expenses accounted in the books of Silver for Year 2 = $120,000/4 = $30,000.
Value of the asset for consolidation purposes = $80,000 to be depreciated over 4 years. Hence depreciation required for year 2 = $80,000/4 = $20,000.
The total balance in accumulated depreciation account is required to be $40,000 [$20,000 opening balance + $20,000 provided for current year]. The balance of accumulated depreciation in books of Silver as on December 31, year 2 is $30,000. Hence additional accumulated depreciation of $10,000 should be provided for the purpose of Consolidation.
FAR3B007nsim
Peterson Co. owns 100% of the outstanding common stock of Silver Corp. Assume all other appropriate year-end and income tax journal entries have been made.
Throughout year 3, Peterson sold merchandise costing $30,000 to Silver at a price of $60,000. Silver sold 50% of the inventory by December 31, year 3. Silver remitted payment to Peterson before year-end.
Calculate the value of inventory to be considered for eliminating entries for consolidation purposes.
In this business combination, we are trying to eliminate any transactions between the parent and the subsidiary so that we only have transactions with 3rd parties left after the consolidating entries.
Cost of goods sold to Silver during year 3 = $30,000
Sale price of goods sold to Silver during year 3 = $60,000
Profit on sale of goods accounted in the books of Peterson for the sales made to Silver = $30,000
Gross profit ratio = 50% [$30,000/$60,000]
To record the sale, Peterson would record the following entries:
Debit: Intercompany AR $60,000
Credit: Intercompany sales $60,000
Debit: Intercompany COGS $30,000
Credit: Inventory $30,000
This set of entries records the sale and the receivable at the sales amount of $60,000 and reduces the inventory at the cost amount of $30,000.
The key thing to remember at this point is that Silver’s cost is the same as Peterson’s sales price. Silver will book the following entry to record the inventory purchase:
Debit: Inventory $60,000
Credit: Intercompany AP $60,000
Recording of this sale transaction led Peterson have $30,000 of intercompany profit in them. Eliminating the effect of this sale is important because including it misstates the results to users of the financial statements.
We also need to eliminate some or all of the cost of sales. In this case, 50% of the inventory is remaining in Silver’s inventory at the end of the year. Silver sold 50% of the inventory to 3rd parties. This means Silver would record cost of goods sold of $30,000 ($60,000 cost on Silver’s books multiplied by 50% of inventory sold).
Sales to these 3rd parties is recorded in the books of Silver with the following entry:
Debit: COGS $30,000
Credit: Inventory $30,000
Consolidating the books, the total cost of goods sold accounted for with this sale transaction is $60,000 ($30,000 original cost to Peterson plus the $30,000 recorded by Silver). This means that Cost of goods sold is overstated and needs to be corrected.
Original cost of goods was $30,000 and 50% of inventory is sold to outside customers, our cost of sales = $15,000 [$30,000×50%]. Comparing the actual cost of inventory sold ($15,000) with that recorded in the books ($60,000), The cost of goods sold is overstated by $45,000 which needs to be rectified through the elimination entry.
The appropriate amount in ending inventory can be calculated as follows. The original cost of inventory was $30,000 and 50% remains in Silver’s ending inventory. This means we should end the year with $15,000 in ending inventory. But, ending inventory recorded in Silver’s books is $30,000 ($60,000 cost to Silver minus $30,000 reduced from inventory for sales). To get the $30,000 down to the appropriate amount of $15,000, inventory account is adjusted with a credit of $15,000.
FAR2C009n
Hank Inc. purchased two used mineral-polishing machines for a lump sum of $90,000. Hank also paid another $10,000 to restore the machines to working condition. An appraisal once the machines were working returned the following values:
Machine A: $80,000
Machine B: $120,000
How should Hank allocate the costs to the two machines?
The total cost to acquire and prepare the machines for use was $100,000. Then use the proportionate values of the machines to allocate the cost: Machine A is worth $80,000 of $200,000 total value, which is 40%. That means machine B is 60%. Machine A = 40% of $100,000 or $40,000, and Machine B = $60,000.
FAR2A005nsim
Rick had a cash balance of $500. A reconciliation of the bank statement and Rick’s books reveals the following:
Bank service charge: $20
Checks outstanding: $100
Deposits in transit: $200
Checked cleared by the bank for $50 but recorded by Rick as $500
After the reconciliation, what is Rick’s adjusted book balance?
Rick’s book balance would already contain the checks outstanding and the deposits in transit. So the reconciling items are the bank service charge and the incorrect check amount.
Rick’s adjusted book balance would be: $500 + $450 – $20 = $930
FAR2E015nsim
Adell Corp. is a manufacturer of paper products with a December 31 year end.
For the transaction below, provide the correct classification, value as on December 31, year 1 and how should it be reported in the company’s balance sheet.
On October 31, year 1, the company purchased 1,000 shares of ABC common stock at $50 per share. Adell does not have significant influence over the ABC. The fair value of the securities at December 31, year 1 was $75 per share. Management will hold these securities until such time as proceeds from the sale are needed for operations, which is not expected to be in the near future.
FAR4A004nsim
Corona City levied $1,000,000 of property taxes. Based on prior year collection rates, the city estimated that $100,000 of the property taxes would be uncollectible.
Based on this information, how would the city account for the estimated $100,000 of uncollectible taxes?
The levy was for $1,000,000, so Corona City would debit “property tax receivable” for $1,000,000. The credit would be to revenue for $900,000, and a credit to “allowance for uncollectible taxes” for $100,000. Bad debt expense is an accrual accounting item.
As a sidenote: when property taxes are levied, the actual funds from the taxes aren’t “available” right then, but the government can accrue the likely collectible amount as revenue if the amounts are legally due by the end of the period (or within 60 days of the end of the current period – the 60 day rule).
FAR4A003nsim
Corona City levied $1,000,000 of property taxes. Based on prior year collection rates, the city estimated that $100,000 of the property taxes would be uncollectible.
Based on this information, what account and for what amount would the city debit for the property tax levy?
The levy was for $1,000,000, so Corona City would debit “property tax receivable” for $1,000,000. The credit would be to revenue for $900,000, and a credit to “allowance for uncollectible taxes” for $100,000.
As a sidenote: when property taxes are levied, the actual funds from the taxes aren’t “available” right then, but the government can accrue the likely collectible amount as revenue if the amounts are legally due by the end of the period (or within 60 days of the end of the current period – the 60 day rule).
If a company has an obligation in a foreign currency and both the domestic and foreign currencies strengthen, the transaction gain or loss will be:
The impact on the transaction depends on which currency strengthens more. If the domestic currency strengthens more, there will be a gain; if the foreign currency strengthens more, there will be a loss.
FAR4A002aicpa
Roy City received a gift, the principal of which is to be invested in perpetuity with the income to be used to support the local library. In which fund should this gift be recorded?
the point of the investment’s income is to benefit the government. That’s the definition of a permanent fund.
In contrast, any government “trust” funds refer to funds being commingled from other funds or external entities for investment purposes.
Special revenue funds are funds where money is committed and set aside for a specific government purpose. It is usually funded by money transferred from the general fund.
FAR3A002nsim
B Co. is preparing it’s December 31, year 3, financial statements.
All adjustment amounts are material and the company justified all of the changes. No prior adjustments have been recorded.
B Co. determined that it recorded duplicate sales invoices in year 1 for $100,000 and for $135,000 in year 2. B Co.’s effective tax rate for years 1 through 3 was 30%
Calculate the accounts receivable to be credited in Year 3 with respect to the sales related to the year 1 and year 2.
FASB’s Statement of Financial Accounting Standards No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.
According to this standard, the correction of an error in previously issued financial statements is not an accounting change. Error in previously issued financial statements is defined as—an error in recognition, measurement, presentation, or disclosure in financial statements resulting from mathematical mistakes, mistakes in the application of GAAP, or oversight or misuse of facts that existed at the time the financial statements were prepared. A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error.
Duplicating recording of sales invoices is an example of mathematical mistake and oversight of facts that existed at the time the financial statements were prepared. Thus it should be treated as a correction of an error in previously issued financial statements.
The sales invoice recorded twice will still reflect in the books as Accounts receivable. [Even if the customer has paid for original invoice, the duplicate invoice would remain open. If the customer has not yet paid, both invoices would remain open and show in accounts receivable, of which payment can be collected against only one open invoice]. Thus Accounts receivable should be reduced by the value of the duplicate invoices.
Since the changes/ rectification of error relate to the prior period financial statement the effect of reduction in revenue should be accounted in the retained earnings. Since the tax rate is given, the change in tax liability is also calculated.
The accounting entry for rectification of error is made as :
Debit: Retained earnings $164,500
Debit : Income taxes payable/receivable $70,500
Credit : Accounts receivable $235,000
