Test Bank MCQ 4

Question 1

What is the most advantageous market?

Answer 1

the most advantageous market is the market that maximizes the price received for the asset.

Question 2

What is a principal market?

Answer 2

The greatest volume and level of activity occurs in the principal market.

Question 3

(AICPA.920529FAR-P1-FA)

Dixon Co. incurred costs of $3,300 when it issued, on August 31, 20X5, five-year debenture bonds dated April 1, 20X5. Dixon uses the straight-line method to amortize bond issue costs. By what amount is 20X5 interest expense increased by the amortization of bond issue costs?
$220
$240
$495
$3,300

Answer 3

Answer: $240

There are four years and seven months in the bond term (5 years less the 5 months from April 1 to August 31) or a total of 55 months. Thus, the 20X5 amortization of bond issue costs, is $240 [(4/55)$3,300]. The bonds were outstanding four months in 20X5.

Question 4

(MISCE-0007)

The France Company owns a foreign subsidiary with 2,400,000 local currency units (LCU) of property, plant, and equipment before accumulated depreciation at December 31, year 3. Of this amount, 1,500,000 LCU were acquired in year 1 when the rate of exchange was 1.5 LCU to $1, and 900,000 LCU were acquired in year 2 when the rate of exchange was 1.6 LCU to $1. The rate of exchange in effect at December 31, year 3, was 1.9 LCU to $1. The weighted average of exchange rates which were in effect during year 3 was 1.8 LCU to $1. Assuming that the property, plant, and equipment are depreciated using the straight-line method over a 10-year period with no salvage value, how much depreciation expense relating to the foreign subsidiary’s property, plant, and equipment should be charged in France’s income statement for year 3? Assume the US dollar is the functional currency.

$126,316
$133,333
$150,000
$156,250

Answer 4

This answer is correct. ASC Topic 830 requires remeasurement when the US dollar is the functional currency. Remeasurement means that all assets and liabilities on the balance sheet and revenues and expenses on the income statement are translated at the rates in effect when the transactions originally occurred (e.g., depreciation is translated at the exchange rate in effect at the original transaction date) (i.e., the historical rate). Since the useful life of the fixed assets is 10 years with no salvage value, depreciation will be 150,000 LCU for the equipment acquired in year 1 and 90,000 LCU for the equipment acquired in year 2. These are converted to dollars at their respective historical rates of 1.5 and 1.6 LCU.

$1,500,000 × 10% ÷ 1.5 = $100,000
$ 900,000 × 10% ÷ 1.6 = 56,250
$156,250

Question 5

(TREPD-0031)
Comprehensive income can be displayed in the financial statements in
I. A separate statement that begins with other comprehensive income.
II. A separate statement that begins with net income.
III. A continuation of net income presented at the bottom of the income statement.
IV. Part of the statement of changes in stockholders’ equity

I and II
I and III
II and III
III and IV

Answer 5

Answer: II and III

This answer is correct. Comprehensive income can be displayed in the financial statements either as a separate statement that begins with net income or as a continuation of net income presented at the bottom of the income statement. Comprehensive income can no longer be displayed as part of the statement of changes in stockholders’ equity.

Question 6

(FA-0059)
A schedule of machinery owned by Lester Manufacturing Company is presented below.

                                         Estimated 
                   Total cost      salvage value	Estimated
                                                                    life in years   Machine A	$550,000	$ 50,000   	20 Machine B	$200,000	20,000   	15 Machine C	$ 40,000	—    	                5

Lester computes depreciation on the straight-line method. Based upon the information presented, the composite life of these assets (in years) should be

13.3
16
18
19.8

Answer 6

Answer: 16

The solutions approach is to determine the annual SL depreciation and divide the annual depreciation into the total amount to be depreciated. The annual depreciation is $45,000, which when divided into the total depreciation base of $720,000, indicates a composite life of 16 years.

Machine A $500,000 depr. base/20 yrs = $25,000 depr.
Machine B 180,000 depr. base/15 yrs = 12,000 depr.
Machine C 40,000 depr. base/ 5 yrs. = 8,000 depr.
$720,000 total depr. Base = $45,000 total depr.
$720,000/$45,000 = 16 years

Assets can be grouped for composite depreciation purposes. Under this method, major repair/replacement expenditures are charged to an accumulated depreciation account. Related gains (losses) on disposal of individual assets are usually not recognized. The difference between the proceeds received and the asset’s cost is debited to accumulated depreciation.

Question 7

(aicpa.aq.invent.ifrs.001_17)

As of December 31, Year 2, a company has an inventory item that was originally purchased for $80 in Year 1. The inventory item was written down to its net realizable value of $60 as of December 31, Year 1. As of December 31, Year 2, the inventory item had a net realizable value of $75 and a replacement cost of $65. Normal profit margins for this company are 20%. Under IFRS, what is the carrying amount of the inventory item as of December 31, Year 2?
$60
$65
$75
$80

Answer 7

Answer: $75

Under IFRS, the inventory would be carried at the lower of cost or NRV. The NRV at the end of Year 2 is $75.

Question 8

(DIHA-0031)
According to ASC Topic 815, hybrid instruments must be accounted for

By bifurcating the instrument and valuing the components separately.
At fair value if an election is made not to bifurcate the hybrid instrument.
At net realizable value of the instrument.
At the present value of the cash flows of the instrument.

Answer 8

Answer: At fair value if an election is made not to bifurcate the hybrid instrument.

A company may elect not to bifurcate the instrument and account for the hybrid instrument in its entirety at fair value.

Question 9

(AICPA.090444FAR-SIM)

On October 1, 2008, Potato Company acquired 100% of the voting stock of Spud Company in a legal acquisition. Potato chose to account for its investment in Spud on its books using the cost method. Spud had the following incomes and dividends for the periods shown:

10/1 − 12/31/08 1/1 − 12/31/09
Net Income $3,000 $15,000
Dividends Declared/Paid 1,000 3,000
In its December 31, 2009, consolidating process, which one of the following is the amount of the reciprocity entry Potato will make on the consolidating worksheet?

$2,000
$3,000
$14,000
$18,000

Answer 9

Answer: $2,000

The purpose of the reciprocity is to bring the investment account (on the worksheet) in balance with the subsidiary’s retained earnings as of the beginning of the period being consolidated. Therefore, only the undistributed income of the subsidiary since the business combination up to the beginning of the period being consolidated (January 1, 2009) will be the reciprocity entry at the end of 2009. The undistributed income from October 1 to December 31, 2008 (the beginning of 2009) is net income (+$3,000) less dividends declared and paid (-$1,000), or $2,000.

Question 10

How are donated assets accounted for?

Answer 10

p312 (Valuation of PPE)

Assets received in donation are recorded at their fair value. A revenue or gain is also recorded.

Question 11

(GOV-0037)

On December 31, year 1, Madrid Township paid a contractor $2,000,000 for the total cost of a new firehouse built in year 1 on Township-owned land. Financing was by means of a $1,500,000 general obligation bond issue sold at face value on December 31, year 1, with the remaining $500,000 transferred from the general fund. What should be reported on Madrid’s year 1 financial statements for the Capital Project Fund?

Revenues, $1,500,000; Expenditures, $1,500,000.
Revenues, $1,500,000; Other financing sources, $500,000; Expenditures, $2,000,000.
Revenues, $2,000,000; Expenditures, $2,000,000.
Other financing sources, $2,000,000; Expenditures, $2,000,000.

Answer 11

ANSWER: Other financing sources, $2,000,000; Expenditures, $2,000,000.

This answer is correct because per Section 1800 of the GASB Codification, neither proceeds from a general obligation bond nor transfers from the general fund are revenues. Rather they are recognized as “other financing sources” when they become measurable and available as net current assets. Section 1600 states that expenditures of Governmental Funds are generally recognized in the accounting period in which the fund liability is incurred, which is the current year in this question.

Question 12

Regarding the operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement, does the emerging issues task force approve a discussion memorandum before it is disseminated to the public?

Answer 12

ANSWER: No.

The EITF is not directly involved with the promulgation of accounting standards. Rather, The EITF was established by the FASB to develop consensus positions about how to account for new financial transactions and events.

When the EITF cannot reach consensus on an issue, the FASB may add the issue to its agenda.

Question 13

Regarding the operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement, is an exposure draft modified per public opinion before issuing the discussion memorandum?

Answer 13

ANSWER: No.

The due diligence aspect of standard setting requires the FASB to solicit and consider views from all interested parties.

However, a discussion memorandum, if issued, precedes an exposure draft, which is the proposed accounting standard.

Question 14

Regarding the operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement, is a new statement issued only after a majority vote by the members of the FASB?

Answer 14

ANSWER: Yes

At least four of the seven members of the FASB must vote in favor of a proposed Statement of Financial Accounting Standards.

Question 15

Regarding the operating procedure for issuing a new Financial Accounting Standards Board (FASB) statement, can a new FASB statement be rescinded by a majority vote of the AICPA membership?

Answer 15

ANSWER: No

The AICPA is an entity separate from the FASB and is not involved with the process of adopting new accounting standards.

Question 16

(AICPA.900554FAR-P1-FA)

For the year ending December 31, 2005, Beal Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available:

Allowance for uncollectible accounts, 1/1/05 $42,000

Provision for uncollectible accounts during 2005 (2% on credit sales of $2,000,000) 40,000

Uncollectible accounts written off, 11/30/05 46,000

Estimated uncollectible accounts per aging, 12/31/05 52,000

After year-end adjustment, the uncollectible accounts expense for 2005 should be

$46,000
$48,000
$52,000
$56,000

Answer 16

ANSWER: $56,000

The balance in the allowance for uncollectible accounts before the 2005 adjustment is: $42,000 beginning balance − $46,000 write-offs = -$4,000 (debit balance). The desired ending balance under aging is $52,000.

Therefore, the required increase to the account is $56,000, and this amount is uncollectible accounts expense. The aging method first determines the required ending balance in the allowance account based on the age of receivables, and THEN adjusts the allowance account to that balance.

The $40,000 provision is based on credit sales, and is thus to be ignored in the question.

Question 17

(CACL-0097)

Fulton Cereal Company inaugurated a new sales promotional program. For every 10 cereal box tops returned to the company, customers receive an attractive prize. Fulton estimates that only 30% of the cereal box tops reaching the consumer market will be redeemed. Additional information is as follows:

Units Amounts

Sales of cereal boxes 2,000,000 $1,400,000
Purchase of prizes 36,000 $18,000
Prizes distributed to customers 28,000

At the end of its year, Fulton recognized a liability equal to the estimated cost of potential prizes outstanding. What is the amount of this estimated liability?
$ 4,000
$16,000
$18,000
$42,000

Answer 17

ANSWER: $16,000

The estimated liability at the end of the year is the value of the prizes expected to be distributed less the value of the prizes actually distributed. Only 600,000 box tops (2,000,000 box tops × 30%) are expected to be redeemed. Because 10 box tops must be redeemed for 1 prize, 60,000 prizes (600,000 box tops/10) are expected to be distributed. Only 28,000 prizes have been distributed. Thus, 32,000 more prizes are expected to be distributed. Each prize cost $.50 ($18,000/36,000 prizes). Therefore, Fulton has an estimated liability of $16,000 (32,000 prizes × $.50)

Question 18

(SCF-0017) (modified)

How should deferred income tax expense resulting from temporary differences related to depreciation of plant assets be presented in a statement of cash flows (using indirect approach for operating activities)?

Answer 18

ANSWER: Addition to net income.

When using the indirect approach to determine cash flows from operating activities, noncash deductions from net income should be added back to determine cash flows from operating activities. Since the deferred income tax expense did not use cash but was subtracted in determining net income, it is proper to add it back to net income in cash flows from operating activities.

Question 19

(AICPA.920553FAR-P1-FA)

Nu Corp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machine’s original cost was $140,000. The note’s face amount was $110,000. On the date of the agreement,

the note’s carrying amount was $105,000, and its present value was $96,000.
The machine’s carrying amount was $109,000, and its fair value was $96,000.
What amount of net gain (or losses) should Nu recognize?

($4,000)
$0
($13,000)
$9,000

Answer 19

ANSWER: ($4,000)

The net loss listed is the difference between the carrying amount of the liability and the carrying amount of the machine. Nu has a gain of $9,000 on the note settlement, which is the difference between the liability carrying value ($105,000) and the fair value of the consideration given to extinguish the debt ($96,000). Nu also has a disposal loss on the machine. An ordinary loss of $13,000 is recognized and equals the difference between the machine’s carrying value ($109,000) and its fair value ($96,000).

Question 20

(PVE-0052)

Connor Corporation signed a lease on January 1, year 1, to rent equipment for 10 years. The lease was appropriately treated as a capital lease. On January 1, year 4 Connor renegotiated the lease terms. The new lease agreement does not contain a bargain purchase option, nor transfer of title. The new lease terms are for a shorter length of time, which is not greater than 75% of the economic useful life of the asset. The present value of the minimum lease payments under the new agreement is less than 90% of the fair market value of the leased asset. How should Connor account for the change in the lease agreement?

Reduce the leased asset account by the gross value in the reduction of payments.

Remove the leased asset from the books and treat the lease as an operating lease.

Make no change until the end of the lease term at which time a gain or loss will be recognized for the reduction in payments.

Treat the new lease as a sales-leaseback.

Answer 20

ANSWER: Treat the new lease as a sales-leaseback.

ASC Topic 840 requires that capital leases that are modified so that the resulting lease agreement is classified as an operating lease be accounted for under sale-leaseback provisions.