Test Bank MCQ 7 Flashcards
NFP-0024
Which of the following statements is(are) correct about charity care provided by a nonprofit, nongovernmental hospital?
I. Charity care represents healthcare services that are provided but are never expected to result in cash flows.
II. Bad debts expense should include a provision for charity care.
I only.
II only.
I and II.
Neither I nor II.
ANSWER: I only.
According to the AICPA Audit and Accounting Guide Health Care Organizations, charity care represents healthcare services that are provided but are never expected to result in cash flows. As a result, charity care does not qualify for recognition as receivables or revenue in the financial statements. Since charity care does not result in the recognition of receivables, there is no need to estimate uncollectible accounts. Accordingly, bad debts expense does not include an amount related to charity care.
NFP-0035
Carlson Hospital, a nonprofit hospital affiliated with Carlson College, had the following cash receipts for the year ended December 31, Year 1:
- Collections of health care receivables $850,000
- Contribution from donor to establish a term endowment 150,000
- Tuition from nursing school 50,000
- Dividends received from investments in permanent endowment 75,000
The dividends received are restricted by the donor for hospital building improvements. No improvements were made during Year 1. On the hospital’s statement of cash flows for the year ended December 31, Year 1, what amount of these cash receipts would be included in the amount reported for net cash provided (used) by operating activities?
$ 975,000
$ 900,000
$1,050,000
$ 850,000
ANSWER: $ 900,000
The cash flows from revenues, gains, and other support, which are reported on the hospital’s statement of operations, would be included in the net cash provided (used) by operating activities on the statement of cash flows. Both are included in the amount reported for revenue, gains, and other support on the hospital’s statement of operations. Accordingly, cash received from patient service revenue and from tuition revenue are both included in the amount reported for cash flows from operating activities. The cash received for the term endowment as well as the cash received from dividends would not be included in the amount reported for net cash provided (used) by operating activities. Both of these cash receipts would be reported as increases in cash flows provided by financing activities. Cash contributions that are donor-restricted for long-term purposes are reported as financing activities on the statement of cash flows.
The contributions from donor are reported in the investing activities section. The dividends received should be reported in the investing activities section. (BOTH OF THESE CONTRADICT THE ABOVE PARAGRAPH STATING TERM ENDOWMENTS AND DIVIDENDS ARE PART OF CFO-cash flows provided by financing activities?)
AICPA.090322FAR-SIM
Assume Instco acquires an option to buy (a call option) 100 shares of Opco for $50 per share when the market price of Opco is $45 per share and that Instco paid a premium of $1.00 per share to acquire the options. Which one of the following is the underlying related to Instco’s options?
100 shares.
$1.00 per option.
$45.00 per option.
$50.00 per option.
ANSWER: $50.00 per option.
Stock options are derivatives; they derive their value from the value of the stock to which the option applies. The UNDERLYING of a derivative is a specified price, rate, or other monetary variable, in this case the (strike) price of each option, $50.00.
The shares are the NOTIONAL AMOUNT, in total 100 shares.
AICPA.083724FAR-SIM
A plant asset under construction by a firm for its own use was completed at the end of the current year. The following costs were incurred:
Materials $60,000
Labor 30,000
Incremental overhead 10,000
Capitalized interest 20,000
The asset has a service life of 10 years, estimated residual value of $10,000, and will be depreciated under the double declining balance method. At completion, the asset was worth $105,000 at fair value. What amount of depreciation will be recognized on the asset in total over its service life?
$105,000
$120,000
$95,000
$90,000
ANSWER: $95,000
The sum of the four listed costs is $120,000, which exceeds fair value of $105,000. Therefore, the asset is capitalized at $105,000, the lesser of the two amounts. Subtracting the $10,000 residual value yields $95,000 depreciable cost-the total depreciation over the life of the asset.
AICPA.130501FAR
Which of the following methods may a mutual fund investor use to measure and report an equity method investment under IFRS?
Fair Value method
Equity method
Yes,Yes
Yes,No
No,Yes
No,No
ANSWER: Yes, Yes
Under IFRS, only certain investors can elect to measure the equity investee using the fair value option. Mutual fund investors are allowed to utilize the fair value option.
CACL-0020
Wren Company had the following account balances at December 31, Year 1:
Accounts receivable $ 900,000
Allowance for doubtful accounts before any provision for Year 1 doubtful accounts expense) 16,000
Credit sales for Year 1 1,750,000
Wren is considering the following method of estimating doubtful accounts expense for year 1:
* Based on credit sales at 2%
* Based on accounts receivable at 5%
What amount should Wren charge to doubtful accounts expense under each method?
ANSWER: Percentage of credit sales, Percentage of accounts receivable: $35,000, $29,000
When doubtful accounts expense is estimated based on sales, any balance in the allowance account is ignored when computing the expense. The formula to determine the expense is
(Net sales) × (Bad debt rate) = Expense
$1,750,00 × 2% = $35,000%
When doubtful accounts expense is estimated based on accounts receivable, the balance in the allowance account must be considered. This is correct because the formula is used to compute the desired ending balance in the allowance account, not the doubtful accounts expense.
(Accts. Receivable) × (Bad debt rate) = Allowance
$900,000
× 5% = $45,000
Since the allowance account already has a credit balance of $16,000, doubtful accounts expense of $29,000 must be recorded to bring the allowance up to $45,000 ($45,000 − $16,000 = $29,000).
AICPA.101079FAR
Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if:
The useful life of the intangible asset can be reliably determined.
An active market exists for the intangible asset.
The cost of the intangible asset can be measured reliably.
The intangible asset is a monetary asset.
ANSWER: An active market exists for the intangible asset.
An active market will provide a relevant and reliable reference to the assets value. Therefore, just like with PPE, revaluation to fair value is permitted. IAS 38 defines an active market as one that the items traded in the market are homogeneous, there are willing buyers and sellers, and prices are available to the public.
IVES-0062
Under IFRS, financial instruments should be classified as
Tradable, Fair value through profit or loss
Yes,Yes
Yes,No
No,No
No,Yes
ANSWER: No,Yes
IFRS classifies instruments as fair value through profit or loss (FVTPL). Held for trading is a category of FVTPL, but tradable is not.
AICPA.110575FAR
Chape Co. had the following information related to common and preferred shares during the year:
Common shares outstanding, 1/1 700,000
Common shares repurchased, 3/31 20,000
Conversion of preferred shares, 6/30 40,000
Common shares repurchased, 12/1 36,000
Chape reported net income of $2,000,000 at December 31. What amount of shares should Chape use as the denominator in the computation of basic earnings per share?
684,000
700,000
702,000
740,000
ANSWER: 702,000
The preferred stock was actually converted in to common stock.
Diluted EPS is for potentially convertible shares. Therefore, we use the preferred stock converted into common stock in the weighted avg. calculation.
Weighted average shares outstanding are weighted by the number of months the shares were outstanding during the year. The easiest way to do this is to take each change in common stock and multiply by the number of months remaining - add the shares that increased shares outstanding and subtract shares that reduced shares outstanding. Shares Months Wtd avg 700,000 12/12 700,000 - 20,000 9/12 - 15,000 \+40,000 6/12 +20,000 -36,000 1/12 - 3,000 702,000
assess.AICPA.FAR.fv.frame.intro-0021
Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?
$76
$80
$81
$82
ANSWER: $81
When there are multiple markets for an asset, the fair value of an asset is determined based on prices in the principal or most advantageous market. The second market is more advantageous because it has the higher selling price ($80 is greater than $76). In addition, fair value excludes transaction cost; therefore, the valuation of the asset would be $81 ($80 + $1).
AICPA.090420FAR-SIM
In determining the fair value of an asset in the most advantageous market, the market-based exit price should be adjusted for
Transaction Cost
Transportation Cost
ANSWER: No,Yes
In determining the fair value of an asset in the most advantageous market, the market-based exit price would not be adjusted for transaction cost associated with executing the (hypothetical) transaction, but would be adjusted for transportation cost to get the asset to the principal or most advantageous market.
AICPA.090428FAR-SIM
Marco has an investment that is traded in two different markets, Front market and Side market. Marco has equal access to each market. In order to determine the fair value of its investment, Marco has obtained the following per share information for the securities as of the close of business December 31, the end of its fiscal year:
Front Market Side Market
Selling Price $52/sh $50/sh
Transaction Cost $ 6/sh $ 1/sh
If Front market is the principal market for the security for Marco, using the market approach, which one of the following would be the per share amount used for measuring the investment at fair value?
$52/sh
$50/sh
$49/sh
$46/sh
ANSWER: $52/sh
Since Front market is the principal market, fair value would be based on the price at which Marco could sell the investment in that market, or $52/sh. The market selling price would not be adjusted for the related direct transaction cost.
TB.AICPA.FAR.prop.funds-0002
During the current year, Vann County’s motor pool internal service fund sold two vehicles for $5,000. The vehicles had a cost of $6,000 and a carrying value of $4,000. How should Vann County’s motor pool internal service fund report this transaction in its fund financial statements?
Revenue of $5,000
Other financing source of $5,000
Special item of $1,000
Gain of $1,000
ANSWER: Gain of $1,000
Internal service funds use the accrual basis of accounting, and therefore a gain of $1,000 will be reported: $5,000 proceeds less $4,000 carrying value.
Note that if the sale had occurred in one of the governmental funds that use the modified accrual basis of accounting, such as the general fund, revenue of $5,000 would have been reported in its fund level statements.
Even if the transaction had occurred in a governmental fund, such as the general fund, the $5,000 proceeds would not have been classified as other financing source, which is used for interfund transfers and bond proceeds.
“Special items” are reserved for significant transactions that are unusual in nature or infrequent in occurrence. Clearly, this sale is not significant, nor is it unusual.
GOV-0045
Encumbrances would not appear in which fund?
Capital Projects.
Special Revenue.
General.
Enterprise.
ANSWER: Enterprise.
per GASB Codification Section 1700, fixed dollar budgets normally are not adopted for proprietary funds. Thus, the Enterprise Fund would not integrate a budget, and encumbrances would not be appropriate in the Enterprise Fund accounting system.
Encumbrances would appear in the Capital Projects Fund, Special Revenue Fund and General Fund.
Encumbrances is a budgetary account integrated in the formal accounting system of governmental fund types. When goods or services are ordered, Encumbrances is debited and Fund Balance—Reserved for Encumbrances is credited.
GOV-0076
Which of the following would be reported as program revenues on a local government’s government-wide statement of activities?
Charges for services.
Taxes levied for a specific function.
Proceeds from the sale of a capital asset used for a specific function.
Interest revenues.
ANSWER: Charges for services.
Program revenues include (1) charges for services, (2) operating grants and contributions, and (3) capital grants and contributions.
