Test Bank MCQ 3 Flashcards
AICPA.083754FAR-SIM
On January 1 of the current year, a firm’s defined benefit pension plan is amended to increase the benefits for service already provided by employees through that date. The resulting immediate increase in projected benefit obligation (PBO) is $500 at January 1. The average remaining service period of employees covered by the amendment is ten years. Service cost for the year is $1,500. Actual and expected return on plan assets is $178. The discount rate is 10%. PBO at January 1, including the effect of the prior service grant, is $2,800. The funding contribution for the current year is $1,800. Compute pension expense for the current year.
$1,372
$1,652
$1,602
$2,102
Answer: $1,652
Pension expense= $1,500 service cost+$280 interest cost (=$2,800x.10) - $178 expected return. $50 amortization of PSC (=$500/10)=$1,652. When PSC is initially recorded, another comprehensive income account is debited for $500. The amortization of $50 credits that account and debits pension expense for $50.
AICPA.911140FAR-TH-FA
Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price, but less than their book value. Grid uses the cost method of accounting for treasury stock.
What is the impact of this acquisition on total stockholders’ equity and the book value per common share?
Total stockholders’ equity, Book value per share
Increase,Increase
Increase,Decrease
Decrease,Increase
Decrease,Decrease
Answer: Decrease,Increase
The purchase of treasury stock at any price decreases total owners’ equity under the cost method because treasury stock is a contra OE account. When the purchase price per share is less than book value per share, then the denominator decreases by a greater percentage than does the numerator, and book value per share increases.
For example, assume for simplicity that there is only common stock outstanding. Total owners’ equity and number of shares before the treasury stock purchase is $40,000 and 4,000, respectively. Book value per share then is $10. The firm purchases 200 shares of treasury stock for $8 (less than book value). The new book value per share is:
($40,000 − $1,600)/(3,800) = $10.11. Book value per share has increased.
When does title pass for FOB shipping point?
FOB shipping point means that the title passed to the buyer at the selling company’s warehouse.
AICPA.941113FAR-FA (modified)
Goods in the shipping area were excluded from inventory although shipment was not made until January 4, 2006. The goods, billed to the customer FOB shipping point on December 30, 2005, had a cost of $120,000. Are the goods included in inventory?
Answer: Yes
The $120,000 also is included because the goods have not been shipped. The FOB designation is irrelevant because the goods have not yet reached a common carrier.
(AICPA.920532FAR-TH-FA)
Rig Co. sold its factory at a gain and simultaneously leased it back for 10 years. The factory’s remaining economic life is 20 years. The lease was reported as an operating lease.
At the time of sale, Rig should report the gain as
Part of income from continuing operations.
An asset valuation allowance.
A separate component of stockholders’ equity.
A deferred credit.
Answer: A deferred credit.
The gain or loss on a sale-leaseback is deferred and amortized over the term of the lease for both operating and capital leases. There is no information about present value of lease payments or fair value of the asset.
Because this is an operating lease, the deferred gain is treated as a deferred credit. If it were a capital lease, it would be treated as an asset valuation allowance.
What are the differences between IFRS and US GAAP for the recognition and measurement of contingencies and provisions?
The main difference is in terminology. The term contingent liability under U.S. GAAP refers to both recognized and unrecognized uncertain obligations. Under IFRS a recognized contingent obligation is referred to as a provision and an unrecognized contingent obligation is referred to as a contingent liability.
What are some of the terminology differences between IFRS and US GAAP for contingencies?
One terminology difference is probable versus more likely than not. In U.S. GAAP the term probable is interpreted to mean “likely to occur.“ This distinction is usually a legal opinion made by attorneys.
What are the percentage thresholds for IFRS and US GAAP regarding contingencies and provisions?
In IFRS, more likely than not is interpreted to mean more than 50%. U.S. GAAP is a higher threshold for accrual because likely to occur would mean more than 70% or so probability of occurrence—where more likely than not is a threshold of more than 50% likelihood of occurrence.
For IFRS, when is a contingent liability disclosed?
If the outflow of benefits is not more likely than not but reasonably possible, then the entity discloses the possible obligation and refers to it as a contingent liability.
If the outflow of benefits is more likely than not but not estimable, then the entity discloses the possible obligation and refers to it as a contingent liability.
If the outflow of benefits is only remotely possible, there is no recognition or disclosure.
(AICPA.930520FAR-P1-FA)
The following items were included in Opal Co.’s inventory account on December 31, 2004:
Merchandise out on consignment, at sales price, including 40% markup on selling price $40,000
Goods purchased, in transit, shipped FOB shipping point 36,000
Goods held on consignment by Opal 27,000
By what amount should Opal’s inventory account at December 31, 2004 be reduced?
$103,000
$67,000
$51,000
$43,000
The merchandise out on consignment is included in inventory at selling price. But inventory must be measured at cost. $40,000 = cost + .40($40,000). Thus, cost = $24,000. Therefore, inventory should be reduced by the $16,000 of markup on the merchandise out on consignment.
The goods held on consignment should be removed from the inventory because these goods do not belong to Opal.
Hence, the total reduction from inventory is $43,000 ($16,000 + $27,000). The goods in transit are properly included in inventory because they were shipped FOB shipping point, which means the goods belong to Opal when the goods reach the common carrier at the shipping point.
Is the actual return less expected return for pensions subject to delayed recognition?
Answer: Yes.
The difference between actual and expected return is part of the net gain or loss for the period. That amount is not subject to amortization until the following period. Amortization is the gradual process by which the net gain or loss enters pension expense – delayed recognition.
Is the increase in life expectancy subject to delayed recognition for pensions?
Answer: Yes
An increase in life expectancy causes an immediate increase in PBO, because future benefits have increased. A PBO loss has occurred. That amount is part of the net gain or loss subject to amortization (for component 5) in the following period. The gradual process of amortizing the loss into pension expense is delayed recognition.
Are PSC’s subject to delayed recognition for pensions?
Answer: Yes
PSC (prior service cost) is recognized immediately in pension liability and other comprehensive income, but is gradually amortized into pension expense through delayed recognition.
Are PBO’s subject to delayed recognition for pensions?
Answer: No
Changes to PBO are recognized immediately. SC and interest cost are recognized as increases in pension expense and pension liability in the pension-expense entry. PSC, and PBO gains and losses are recognized immediately in the pension liability and other comprehensive income. PBO, however, is not recorded directly in one account; rather, it is reported in the notes to the financial statements.
(TREPD-0082)
The fair value option election applies to all of the following items except for
Pensions.
Long-term notes payable.
Warranties that can be settled by paying a third party.
Held-to-maturity investments.
Answer: Pensions
ASC Topic 825 provides that the fair value option does not apply to pensions.
The fair value election applies for financial liabilities, which includes long-term notes payable, warranties that can be settled by paying a third party and held-to-maturity investments.
