Test Bank MCQ 6 Flashcards
Miro Co. began business on January, 2, year 2. Miro used the double-declining balance method of depreciation for financial statement purposes for its building, and the straight-line method for income taxes. On January 16, year 4, Miro elected to switch to the straight-line method for both financial statement and tax purposes. The building cost $240,000 in year 2, which has an estimated useful life of 16 years and no salvage value. Data related to the building is as follows:
Double-declining
balance depreciation Straight-line depreciation
Year 2 $30,000 $15,000
Year 3 26,250 15,000
Miro’s tax rate is 40%. Which of the following statements is correct?
There should be no reduction in Miro’s deferred tax liabilities or deferred tax assets in year 4.
Miro’s deferred tax liability should be reduced by $1,875 in year 4.
Miro’s deferred tax asset should be reduced by $10,500 in year 4.
Miro’s deferred tax asset should be decreased by $750 in year 4.
ANSWER: Miro’s deferred tax asset should be decreased by $750 in year 4.
First calculate depreciation expense in year 4. Historical cost of $240,000 less accumulated depreciation of $56,250 = $183,750 book value. $183,750 book value divided by 14 years remaining life = $13,125. Next, calculate the amount in the deferred tax asset account.
Year DDB depreciation Tax S/L Book/tax difference Tax rate Deferred tax account Classification
Year 2 $30,000 $15,000 $15,000 40% $6,000 Deferred tax asset
Year 3 $26,250 $15,000 $11,250 40% $4,500 Deferred tax asset
Year 4 $13,125 $15,000 $1,875 40% $750 Reduction of DTA
The total in the deferred tax asset account of 12/31/Y3 is $10,500. In year 4, when tax depreciation is greater than depreciation expense on the financial statements, the timing difference will “turn around.” Therefore, in year 4, the deferred tax asset account will be reduced by $750.
(AICPA.090673.FAR.III.A-SIM)
Which of the following statements, if any, concerning the accounting for business combinations is/are correct?
I. All business combinations in the U.S. are subject to the acquisition accounting requirements of ASC 805, Business Combinations.
II. The acquisition accounting requirements of ASC 805, Business Combinations, are identical to those of IFRS #3, Business Combinations.
Neither I nor II.
I only.
II only.
Both I and II.
ANSWER: Neither I nor II.
Neither statement is correct. Not all business combinations in the U.S. are subject to the acquisition accounting requirements of ASC 805 (Statement I). That pronouncement specifically excludes certain combinations, including the formation of a joint venture, the acquisition of assets that do not constitute a business, a combination between entities under common control, a combination between not-for-profit organizations, and the acquisition of a for-profit entity by a not-for-profit organization. In addition, the requirements of ASC 805 are not identical to those of IFRS #3 (Statement II). Differences exist between the two pronouncements in the areas of scope; the definition of control; how fair value, contingencies, employee benefit obligations, noncontrolling interest, and goodwill are measured; and disclosure requirements.
(INVY-0062)
Selected information from the accounting records of Dalton Manufacturing Company is as follows:
Net sales for year 2 $1,800,000
Cost of goods sold for year 2 1,200,000
Inventories at December 31, year 1 336,000
Inventories at December 31, year 2 288,000
Assuming there are 300 working days per year, what is the number of days’ sales in average inventories for year 2?
78
72
52
48
ANSWER: 78
The number of days’ sales in average inventories is calculated using the formula
Average inventory at cost / Average sales per day at cost
Average inventory at cost would be $312,000 [($336,000 + $288,000) ÷ 2]. The average sales per day at cost is $4,000 ($1,200,000 cost of goods sold ÷ 300 days). Therefore, the number of days’ sales in average inventories is 78 days ($312,000 ÷ $4,000).
(AICPA.100902FAR-OFS-SIM)
IFRS for SMEs, which of the following methods, if any, can be used by an investor to account for an investment in another entity (an associate) over which the investor has significant influence?
Cost Method, Equity Method
Yes,Yes
Yes,No
No,Yes
No,No
ANSWER: Yes,Yes
Under IFRS for SMEs, either the cost method or equity method may be used by an investor to account for an investment in another entity (called an “associate” in IFRS for SMEs) over which the investor has significant influence. Under U.S. GAAP, only the equity method may be used.
(AICPA.130717FAR)
Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?
A proposed statement of position.
A proposed accounting standards update.
A proposed accounting research bulletin.
A proposed staff accounting bulletin.
ANSWER:
A proposed accounting standards update.
Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).
(NFP-0037)
Simmons Hospital, a nonprofit hospital affiliated with a religious group, received the following cash contributions from donors during the year ended December 31, Year 1:
- For capital acquisitions $500,000
- For permanent endowments 250,000
The cash received for capital acquisitions was used to acquire assets in Year 2, while the cash received for the permanent endowment was used to acquire investments during Year 1. What effect did these cash contributions have on the amounts reported for cash flows from investing activities and cash flows from financing activities on the statement of cash flows for the year ended December 31, Year 1?
Cash flows from investing activities, Cash flows from financing activities
Decrease $250,000 Increase $500,000 Decrease $750,000 Increase $750,000 Decrease $250,000 Increase $250,000 Decrease $250,000 Increase $500,000
ANSWER: Decrease $750,000, Increase $750,000
Cash contributions that are donor-restricted for long-term purposes are reported as financing activities on the statement of cash flows. Applying this to Simmons Hospital, the hospital should report the sum of the cash received for the capital acquisition and for the permanent endowment as an increase of $750,000 in cash flows from financing activities on the statement of cash flows. According to the AICPA Audit and Accounting Guide, Health Care Organizations, cash received that is restricted as to withdrawal or use for other than current operations or is designated for expenditure in the acquisition or construction of noncurrent assets is excluded from cash and cash equivalents disclosed in current assets. This means that cash received for long-term financing is not part of the change in cash and cash equivalents that is explained on the statement of cash flows. For the statement of cash flows to reconcile to the change in cash and cash equivalents reported in current assets, cash flows reported in the investing activities section has to equal the amount reported in the financing section. The amount reported in investing activities has to be opposite in sign to the cash flows reported in the financing activities section. For Simmons Hospital, this translates to reporting a decrease of $750,000 in the investing activities section. Note that this amount is reported whether the $750,000 of cash received was actually spent or not during Year 1. If the cash was not spent, as was the case with the $500,000 received for capital acquisitions, the investing activities section would report the decrease using a caption such as “purchase of assets restricted to investment in property and equipment.”
(AICPA.910514FAR-P2-FA)
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
$5,000
$12,000
$15,000
$17,000
ANSWER: $15,000
Bankruptcy law specifies that secured creditors are to be satisfied before any assets are paid to unsecured creditors. Hale is a secured creditor for the $5,000 liquidation value. A liquidation value is paid at the liquidation of the firm and thus acts as a secured debt. The remaining claim of $25,000 ($30,000 − $5,000) is unsecured and at the 40% rate yields an additional claim of $10,000, for a total amount to be realized of $15,000.
(AICPA.090679.FAR.III.A-SIM)
Company Z is formed to consolidate three preexisting entities: Companies W, X, and Y. Company Z pays cash to acquire the net assets of Company W and issues debt to acquire the net assets of Company X. Company Z acquires all of the stock of Company Y in the market for cash. Which one of the companies is most likely the acquirer in the business combination?
Company W
Company X
Company Y
Company Z
ANSWER: Company Z
Because Company Z only paid cash and issued debt to effect the combination (no new equity was issued to effect the combination), Company Z is most likely the acquirer.
(PVA-0012)
On October 1, year 1, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, year 1. Fleur’s year 1 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, year 2. As a result of Fleur’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly?
12/31/Y1 retained earnings,
12/31/Y1 interest payable
Yes,Yes
No,No
Yes,No
No,Yes
ANSWER: No,Yes
The requirement is to determine whether Fleur’s retained earnings and interest payable were reported correctly in the year 1 financial statements. Since cost of goods sold was understated in year 1, not enough cost was deducted from sales, resulting in an overstatement of income and retained earnings. However, the interest expense for 3 months would also be misstated because it was calculated as 16% of the face value of the note rather than as 11% of the present value of the note. On February 1 when the note is paid these two effects will have offset each other. However, on December 31, year 1, retained earnings would be misstated. Interest payable was properly accrued at the 16% stated (cash) rate for the 3 months from the date the note was issued until year-end, resulting in the correct reporting of interest payable.
(INVY-0001)
From a theoretical viewpoint, which of the following costs would be considered inventoriable?
Freight-In, Warehousing
No,No
No,Yes
Yes,No
Yes,Yes
ANSWER: Yes, Yes
This answer is correct because all costs incurred to acquire goods or to prepare them for sale are inventoriable. Freight-in is a cost incurred to acquire goods, and warehousing is a cost incurred to store goods awaiting sale. Therefore, both freight-in and warehousing are inventoriable costs.
(AICPA.090224FAR-SIM)
What general kind of hedge, if any, is the hedge of a recognized asset or liability?
I. Fair value.
II. Cash flow.
I only.
II only.
Either I or II.
Neither I nor II.
ANSWER: Either I or II.
The hedge of a recognized asset or liability may be either a fair value hedge or a cash flow hedge, depending on management’s designation. However, the hedge of a recognized asset or liability denominated in a foreign currency generally will be a cash flow hedge.
(IVES-0058)
On January 1, Year 1, Justo purchases 30,000 shares of the 100,000 outstanding shares of stock in Bonita Corp. for $5 per share. During the year, Bonita Corporation has $20,000 of net income and pays $4,000 in dividends. On December 31, Year 1, the value of a share of Bonita Corporation stock is $6 per share. Assuming Justo elects the fair value option to account for its investment in Bonita, what is the amount recorded as Investment in Bonita on the December 31, Year 1, balance sheet?
$150,000
$156,000
$154,800
$180,000
ANSWER: $180,000
This choice is correct because Justo elects the fair value option for reporting this security. The security will be valued at $180,000 in the Year 1 balance sheet, and the resulting $30,000 unrealized gain will be reported in earnings for the period.
(AICPA.061258FAR-P1-FA)
Under the fair-value method of accounting for stock option plans, total compensation recognized
Is based on the value of the option at the grant date, adjusted for forfeitures.
Equals the net increase in OE after all relevant journal entries are recorded.
Is the difference between market price and option price at the grant date.
Is unaffected by the option price.
ANSWER: Is based on the value of the option at the grant date, adjusted for forfeitures.
The fair value of the option sets the compensation expense to be recognized for each option expected to be vested. Applying the forfeiture rate ensures that only options expected to be vested will be entered into the calculation.
(AICPA.040213FAR-SIM)
Which of the following sets of financial statements generally cannot be prepared directly from the adjusted trial balance?
Income Statement, Balance Sheet, Statement of Cash Flows
Income Statement, Statement of Cash Flows
Statement of Cash Flows
Balance Sheet and Statement of Cash Flows
ANSWER: Statement of Cash Flows
This statement generally requires a significant amount of analysis to uncover the cash flows reported within. The adjusted trial balance presents ending account balances. The Statement of Cash Flows reports changes in cash by category. Cash flows are changes in cash and are categorized by type and reported in three categories: operating, investing, and financing.
The Balance Sheet can be prepared from the adjusted trial balance, provided that the amount of income is placed into retained earnings. However, the Statement of Cash Flows does not present account balances. Rather, cash flows are reported.
The Income Statement can generally be prepared from the adjusted trial balance because all revenues, expenses, and gains and losses are included in the trial balance.
(AICPA.090675.FAR.III.A-SIM)
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.
I only
I and III only.
III only.
I, II, and III.
ANSWER: I, II, and III.
All three statements are correct. A business may be a group of assets (that constitute a business), a group of net assets (that constitute a business), or a separate legal entity (that is a business).
