Z Flashcards
1
Q
Which of the following statements is correct concerning start-up costs?
Costs of start-up activities, including organization costs, should be expensed as incurred.
Costs of start-up activities, including organization costs, should be capitalized and expensed only if an impairment exists.
Costs of start-up activities, including organization costs, should be capitalized and amortized on a straight-line basis over the lesser of the estimated economic life of the company or 60 months.
Costs of start-up activities should be capitalized and amortized on a straight-line basis over the lesser of the estimated economic life of the company or 60 months, while organization costs should be expensed as incurred.
A
Costs of start-up activities, including organization costs, should be expensed as incurred.
An asset can be recorded only when the business is certain that it will derive a benefit from the expenditure. Certain expenditures for research and development, advertising, training, start-up and pre-operating activities, relocation or rearrangement, and goodwill are examples of the kinds of items for which assessments of future economic benefits may be especially uncertain. Consequently, expenditures for start-up costs should be expensed as incurred.
2
Q
Cor-Eng Partnership was formed on January 2, 20X1. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, 20X1, while Eng contributed $20,000 in cash. Drawings by the partners during 20X1 totaled $3,000 by Cor and $9,000 by Eng. Cor-Eng’s net income was $25,000.
Eng’s initial capital balance in Cor-Eng is:
$20,000.
$25,000.
$40,000.
$60,000.
A
$60,000.
Recall that “each partner has an equal initial capital balance…” Thus, since Cor contributed assets valued at $60,000, Eng’s total contribution must also equal $60,000—goodwill valued at $40,000 in addition to the $20,000 cash. From the partnership perspective, the goodwill may be recorded since it was purchased in the admission of Eng.
Journal entry to form partnership:
Dr. Cr. Cash 20,000 Other Assets (at fair value) 60,000 Goodwill 40,000 Cor (Capital) 60,000 Eng (Capital) 60,000
3
Q
Savor Co. had $100,000 in cash-basis pretax income for 20X2. At December 31, 20X2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 20X1, balances. Compared to the accrual basis method of accounting, Savor’s cash pretax income is:
higher by $4,000.
lower by $4,000.
higher by $16,000.
lower by $16,000.
A
lower by $16,000.
An increase in accounts receivable means that sales revenue has been included in net income but not yet received.
A decrease in accounts payable means that cash has been paid for expenses but these cash payments have been deducted in arriving at net income.
Net income $116,000
Increase in accounts receivable (10,000)
Decrease in accounts payable (6,000)
Cash-basis/taxable income $100,000
4
Q
A balance arising from the translation or remeasurement of a subsidiary’s foreign currency financial statements is reported in the consolidated income statement when the subsidiary’s functional currency is:
neither the foreign currency nor the U.S. dollar.
the U.S. dollar.
the foreign currency.
both the foreign currency and the U.S. dollar.
A
the U.S. dollar.
The objective of translation or remeasurement is to report the subsidiary’s income statement results in the U.S. parent’s currency—which is the U.S. dollar.
5
Q
Clear Co.’s trial balance has the following selected accounts:
Cash (includes $10,000 in bond-sinking
fund for long-term bond payable) $50,000
Accounts receivable 20,000
Allowance for doubtful accounts 5,000
Deposits received from customers 3,000
Merchandise inventory 7,000
Unearned rent 1,000
Prepaid expenses 2,000
What amount should Clear report as total current assets in its balance sheet?
$64,000
$67,000
$72,000
$74,000
A
$64,000
A current asset is any asset expected to be sold, consumed, or exhausted through normal operations within one fiscal year or one operating cycle (whichever is greater). Current assets typically include cash and cash equivalents, receivables, inventory, and prepaid expenses. The allowance for doubtful accounts is a contra-current asset. Deposits received from customers and unearned rent are both liabilities; Clear should report the remaining $64,000 as total current assets.
Cash (net of $10,000 in bond-sinking
fund classified as Other Asset) $40,000
Accounts receivable 20,000
Allowance for doubtful accounts (5,000)
Merchandise inventory 7,000
Prepaid expenses 2,000
TOTAL $64,000
6
Q
A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, by a material amount. Which of the following accounting treatments is most appropriate?
Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss
Describe the nature of the contract and the estimated amount of the loss in a note to the financial statements, but do not recognize a loss in the income statement
Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation account
Neither describe the purchase obligation nor recognize a loss on the income statement or balance sheet
A
Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss
Expenses are generally recognized when an enterprise’s economic benefits are consumed in revenue-earning activities or otherwise. Expenses or losses are recognized if it becomes evident that previously recognized future economic benefits of assets have been reduced or eliminated, or that liabilities have been incurred or increased, without associated economic benefits.
In this case, a loss is recognized because it has become evident that previously recognized future economic benefits of assets have been reduced without any associated economic benefits.
7
Q
Hoyt Corp.’s current balance sheet reports the following stockholders’ equity:
5% cumulative preferred stock, par value $100 per share;
2,500 shares issued and outstanding $250,000
Common stock, par value $3.50 per share;
100,000 shares issued and outstanding 350,000
Additional paid-in capital in excess of par value
of common stock 125,000
Retained earnings 300,000
Dividends in arrears on the preferred stock amount to $25,000. If Hoyt were to be liquidated, the preferred stockholders would receive par value plus a premium of $50,000. The book value per share of common stock is:
$7.75.
$7.50.
$7.25.
$7.00.
A
$7.00.
The book value of common stock is $7.00/share, calculated as follows:
Book value/sh = Total Equity - Liquidation value to preferred
No. shares common stock outstanding
= $1,025,000(a) - $325,000(b)
100,000 shares
= $700,000
100,000 shares
= $7.00/share a Total SHE = $250,000 + $350,000 + $125,000 + $300,000 = $1,025,000
b Preferred value = Par + Premiums + Dividends in arrears = $250,000 + $50,000 + $25,000 = $325,000
8
Q
Which of the following statements related to initial direct costs (IDC) is correct?
IDC include items such as commissions and payments made to current tenants to obtain the lease.
IDC include all internal costs associated with obtaining the lease.
IDC are included by the lessor in the measurement of an ROU asset.
IDC are expensed as incurred.
A
IDC include items such as commissions and payments made to current tenants to obtain the lease.
IDC are capitalized (not expensed) and include only those costs that entity would not have incurred if the lease had not been entered into (i.e., must be incremental costs, not internal, such as commissions and payments made to current tenants to obtain the lease). The lessee (not the lessor) includes IDC in the measurement of a right-of-use (ROU) asset.
9
Q
On January 1, year 1, Boston Group issued $100,000 par value, 5% five-year bonds when the market rate of interest was 8%. Interest is payable annually on December 31. The following present value information is available:
5% 8% Present value of $1 (n = 5) 0.78353 0.68058 Present value of an ordinary annuity (n = 5) 4.32948 3.99271 What amount is the value of net bonds payable at the end of year 1?
$88,022
$90,064
$100,000
$110,638
A
$90,064
When bonds are sold with a face interest rate (i.e., 5%) less than the market rate (i.e., 8%), they will be sold at a discount, which is calculated as follows:
Discounted principal $100,000 × 0.68058 = $ 68,058
Discounted interest payments $100,000 × 5% = $5,000 × 3.99271 = 19,964
Selling price (carrying amount) 88,022
Face amount (100,000)
Discount on Bonds Payable $ 11,978
=========
Interest Amortized
Date Cash Expense Discount Carrying Value Jan. 1, year 1 $88,022 Dec. 31, year 1 $5,000 $7,042 $2,042 $90,064
$100,000 × 5% $88,022 × 8% ($7,042 – $5,000) ($88,022 + $2,042)
10
Q
Birk Co. purchased 30% of Sled Co.’s outstanding common stock on December 31, 20X1, for $200,000. On that date, Sled’s stockholders’ equity was $500,000, and the fair value of its identifiable net assets was $600,000. On December 31, 20X1, what amount of goodwill should Birk attribute to this acquisition?
$0
$20,000
$30,000
$50,000
A
$20,000
When a company is bought, in whole or in part, the purchase price may exceed the fair values of all the company’s net assets. The amount of this excess is goodwill from the purchase.
Purchase cost of stock $200,000
Less 30% of identifiable assets (30% of $600,000) 180,000
Excess of purchase price over fair value
of assets (Goodwill) $ 20,000
11
Q
On January 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit operations for the remainder of the calendar year. What amount of these expenses should Tree include in its third-quarter interim financial statements for the three months ended September 30?
$0
$15,000
$75,000
$95,000
A
$95,000
Under FASB ASC 270-10-45-4, interim financial reports should be based on the principles, practices, and policies used in the preparation of the last annual report.
Property taxes ($60,000 x 3/12) $15,000 Major repairs ($240,000 x 3/9) 80,000 Total $95,000
12
Q
Ott Company acquired rights to a patent from Grey under a licensing agreement that required an advance royalty payment when the agreement was signed. Ott remits royalties earned and due, under the agreement, on October 31 each year. Additionally, on the same date, Ott pays, in advance, estimated royalties for the next year. Ott adjusts prepaid royalties at year-end. Information for the current year ended December 31 is as follows:
Date Amount
01/01 Prepaid royalties $ 65,000
10/31 Royalty payment (charged to royalty expense) 110,000
12/31 Year-end credit adjustment to royalty expense 25,000
In its December 31 balance sheet, Ott should report prepaid royalties of:
$25,000.
$40,000.
$85,000.
$90,000.
A
$90,000.
Here one needs to convert from the cash method to the accrual method as to the deferred amount of royalty expenses. The royalty payment was charged to (added to) royalty expense, but there was also a year-end credit adjustment downwards to royalty expense. The only reasonable debit to the year-end credit to royalty expense would be to debit (add to) prepaid royalties, as this could only be deferred (not properly accrued this year) royalty expenses.
So far, prepaid royalties have had a debit balance of $65,000, and if one adds an additional debit to prepaid royalties of $25,000, there will be an ending balance of prepaid royalties of $90,000.
13
Q
The expenditure element “salaries and wages” is an example of which type of classification?
Object
Program
Function
Activity
A
Object
In governmental accounting, expenditures should be recorded in a multiple classification scheme—typically by (1) fund, (2) function or program, (3) organizational unit (e.g., department), (4) activity, (5) character, and (6) object (“object of expenditure”). Object refers to “the type[s] of items purchased or services obtained” (GASB 1800.137) which expenditures are for—that is, “what” is acquired. Governments pay salaries and wages in order to acquire “personal services.”
14
Q
Glade Co. leases computer equipment to customers under sales-type leases. The equipment has no residual value at the end of the lease and the leases do not contain purchase options. Glade wishes to earn 8% interest on a 5-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?
$51,600
$75,000
$129,360
$139,450
A
$51,600
The amount of interest revenue that Glade will earn over the life of the lease is $51,600:
Annual lease payment = Fair value of equipment / Present value factor
= $323,400 / 4.312
= $75,000
Total lease amount collected = Annual lease payment x 5 years
= $75,000 x 5
= $375,000
Interest revenue = Lease amount collected - Fair value of equipment
earned = $375,000 - $323,400
= $51,600
15
Q
Juniper Corporation, which began operations on January 1, 20X8, appropriately uses the installment method of accounting. The following information pertains to Juniper’s operations for the year 20X8:
Installment sales $600,000
Cost of installment sales 400,000
Selling & administrative expenses 50,000
Collections on installment sales 180,000
In its December 31, 20X8, balance sheet, what amount of deferred gross profit should Juniper report related to the installment sales?
$200,000
$140,000
$60,000
$10,000
A
$140,000
Gross profit is calculated as net sales revenues less cost of goods sold. The amount of deferred gross profit to be reported is equal to total gross profit less the gross profit realized through cash collections.
Total gross profit for the installment sale is computed as follows: $600,000 – $400,000 = $200,000. Selling and administrative expenses are period costs and are not considered when assessing the gross profit reported by Juniper.
The amount of gross profit realized is based on the gross profit percentage and the total cash collections. The gross profit percentage on the installment sales is computed as follows: ($600,000 – $400,000) ÷ $600,000 = 33%.
Cash collections of $180,000 are multiplied by the gross profit percentage to arrive at the total gross profit realized of $60,000 ($180,000 × .33). Total gross profit of $200,000 less realized gross profit of $60,000 equals $140,000 of deferred gross profit to be reported at the end of the year.
16
Q
Walt Co. adopted the dollar-value LIFO inventory method as of January 1, 20X1, when its inventory was valued at $500,000. Walt’s entire inventory constitutes a single pool. Using a relevant price index of 1.10, Walt determined that its December 31, 20X1, inventory was $577,500 at current-year cost, and $525,000 at base-year cost. What was Walt’s dollar-value LIFO inventory on December 31, 20X1?
$525,000
$527,500
$552,500
$577,500
A
$527,500
When applying dollar-value LIFO (last in, first out), one must first compute the ending inventory total using base-year prices, to tell how much the total inventory (at base-year prices) has increased or decreased. If this is an increase, then add the increase amount (multiplied by the year’s price level) to the beginning inventory total.
$ 525,000 December 31, 20X1, inventory at base-year cost
- $500,000 January 1, 20X1, inventory at base-year cost
$25,000 20X1 layer at base-year cost
x 1.10 20X1 index
$27,500 20X1 layer at December 31, 20X1, cost
==========
Dollar-value LIFO inventory on December 31, 20X1
Base-year layer $500,000
20X1 layer at 20X1 cost 27,500
Total $527,500
17
Q
What is the purpose of SFAC 4 as stated in that concepts statement?
To provide the methods for preparing financial statements for nonbusiness entities
To provide a basis for establishing detailed accounting and reporting standards for nonbusiness entities
To provide detailed accounting and reporting standards for nonbusiness entities
All of the answer choices are correct.
A
To provide a basis for establishing detailed accounting and reporting standards for nonbusiness entities
SFAC 4, Objectives of Financial Reporting by Nonbusiness Organizations, represents the most recent expression of the overall purposes and related objectives of financial reporting by nonbusiness organizations.
The purposes and related accounting and reporting objectives set forth in SFAC 4 are concepts—not standards—and are designed to provide a basis for establishing detailed accounting and reporting standards.
18
Q
On January 2 of the current year, LTTI Co. entered into a three-year, noncancelable contract to buy up to 1,000,000 units of a product each year at $.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year-end, LTTI had only purchased 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year?
$0
$8,000
$12,000
$52,000
A
$52,000
LTTI had a purchase commitment for 600,000 units (200,000 × 3) and purchased 80,000 units. By canceling sales of the product, LTTI has a loss of $52,000 (520,000 units × .10).
19
Q
Dean Company uses the retail inventory method to estimate its inventory for interim statement purposes. Data relating to the computation of the inventory at July 31 are as follows:
Cost Retail Inventory, 2/1 $ 180,000 $ 250,000 Purchases 1,020,000 1,575,000 Markups, net 175,000 Sales 1,705,000 Estimated normal shoplifting losses 20,000 Markdowns net 125,000 Under the approximate lower of average cost or market retail method, Dean’s estimated inventory at July 31 is:
$90,000.
$96,000.
$102,000.
$150,000.
A
$90,000.
First, add the beginning inventory and purchases in the cost column:
$180,000 + $1,020,000 = $1,200,000
When seeking the lower of cost or market method for the retail method, add, in the retail column, first only the beginning inventory, the purchases, and the net markups:
$250,000 + $1,575,000 + $175,000 = $2,000,000
Divide these subtotals, to get the cost-to-retail ratio:
$1,200,000 ÷ $2,000,000 = 0.6
Next, from the subtotal in the retail column, subtract the sales, normal losses, and markdowns, leaving an ending inventory, at retail, of $150,000:
$2,000,000 – $1,705,000 – $20,000 – $125,000 = $150,000
The final step to get the ending inventory at lower of average cost or market is to take the ending inventory at retail of $150,000 and multiply it by the cost to retail ratio of 0.6:
$150,000 × 0.6 = $90,000
Note: Inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs.
20
Q
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?
As a component of income from continuing operations
By restating the financial statements of all prior periods presented
As a correction of an error
By footnote disclosure only
A
As a component of income from continuing operations
FASB ASC 250-10-45-18 requires that whenever a change in accounting principle is inseparable from a change in an accounting estimate, the change should be considered as a change in estimate. Changes in estimates are handled prospectively. That is, previously reported information in previous financial statements is not adjusted, nor is a cumulative effect of the change reported. Prospective treatment only requires utilization of the change(s) in the current period as it effects the current period’s income. It is part of income from continuing operations because no special disclosure is required on the face of the income statement under the prospective approach.
21
Q
When a lessee has an operating lease and the payments required in the lease occur at the beginning of the lease period:
the balance in the right-of-use asset account will be equal to the balance in the lease liability account at the beginning of the second year of the lease.
the balance in the right-of-use asset account will be less than the balance in the lease liability account at the beginning of the second year of the lease.
the balance in the right-of-use asset will be more than the balance in the lease liability account at the beginning of the second year of the lease.
the balance in the right-of-use asset account can be either less than or greater than the balance in the lease liability account at the beginning of the second year of the lease, depending on how the lessee accounts for the lease.
A
the balance in the right-of-use asset will be more than the balance in the lease liability account at the beginning of the second year of the lease.
When recording expense for an operating lease, the lessee records a single amount of expense that is made up of two parts: the interest on the lease obligation and the amortization of the right-of-use asset. In computing the components of lease expense at the end of the first year, interest expense is computed and amortization expense is the difference between the lease payment and the interest expense. This means that the amortization expense will be less than the lease payment.
Since the amount of amortization expense is less than the payment, the carrying value of the right-of-use asset will be greater than the lease liability because, at the beginning of the second year, the lease liability was reduced by the full lease payment when the first lease payment was made.
22
Q
All of the following items are examples of common variable lease provisions, except:
external market rate or index (e.g., LIBOR).
usage of the underlying asset (e.g., miles on a leased car).
estimated life of the underlying asset.
performance of the underlying asset (i.e., percentage of revenue generated from leased asset).
A
estimated life of the underlying asset.
The estimated life of the underlying asset is a fixed amount and would not be an example of a variable provision.
The other answer choices are examples of common lease provisions:
External market rate or index (e.g., LIBOR (London Interbank Offered Rate) or SOFR (Secured Overnight Financing Rate))
Usage of the underlying asset (e.g., miles on a leased car)
Performance of the underlying asset (i.e., percentage of revenue generated from leased asset)
23
Q
When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee on signing an operating lease?
At the expiration of the lease
When received
At the commencement of the lease
Over the life of the lease
A
Over the life of the lease
FASB ASC 842-30-25-11 stipulates that the income shall
be recognized on a straight-line basis unless another systematic and rational basis is more clearly evident.
Since the bonus represents a deviation from a straight-line pattern of lease payments, it should be recognized in income in straight-line fashion over the life of the lease.
24
Q
On January 1, Year 1, a company issued its employees 10,000 shares of restricted stock. On January 1, Year 2, the company issued to its employees an additional 20,000 shares of restricted stock. Additional information about the company’s stock is as follows:
Fair Value of Stock
Date (per share) January 1, Year 1 $20 December 31, Year 1 22 January 1, Year 2 25 December 31, Year 2 30 The shares vest at the end of a 4-year period. There are no forfeitures. What amount should be recorded as compensation expense for the 12-month period ended December 31, Year 2?
$175,000
$205,000
$225,000
$500,000
A
$175,000
The value of the restricted stock is earned equally over the 4-year vesting period, and the compensation expenses must be divided equally into those years. The total expense is the value of the shares multiplied by the amounts: 10,000 × $20 = $200,000, and also 20,000 × $25 for an additional $500,000, for a total of $700,000 compensation expense, earned 1/4th each year: $700,000 × 0.25 = $175,000.
25
On September 1, Year 1, Howe Corp., offered special termination benefits to employees who had reached the early retirement age specified in the company’s pension plan. The termination benefits consisted of lump-sum and periodic future payments. Additionally, the employees accepting the company offer receive the usual early retirement pension benefits. The offer expired on November 30, Year 1. Actual or reasonably estimated amounts at December 31, Year 1, relating to the employees accepting the offer are as follows:
Lump-sum payments totaling $475,000 were made on January 1, Year 2.
Periodic payments of $60,000 annually for three years will begin January 1, Year 3. The present value at December 31, Year 1, of these payments was $155,000.
Reduction of accrued pension costs at December 31, Year 1, for the terminating employees was $45,000.
In its December 31, Year 1, balance sheet, Howe should report a total liability of special termination benefits of:
$655,000.
$630,000.
$475,000.
$585,000.
$630,000
The total liability that needs to be recognized is for the lump sum and the present value of the periodic payments ($475,000 + $155,000 = $630,000). It is not to be offset against the reduction in accrued pension costs.
26
What is the present value of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date and based on current and past compensation levels?
Interest cost
Accumulated benefit obligation
Projected benefit obligation
Service cost
Accumulated benefit obligation
The glossary of FASB ASC 715-30 (Compensation—Retirement Benefits; Defined Benefits Plans—Pension) defines the projected benefit obligation as follows: “The actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date. The projected benefit obligation is measured using assumptions as to future compensation levels if the pension benefit formula is based on those future compensation levels (pay-related, final-pay, final-average-pay, or career-average-pay plans).”
FASB ASC 715-30-20 states, “The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels.”
Accumulated benefit obligation is based upon prior compensation. Project benefit obligation is based on future compensation.
27
In Dart Co.'s Year 2 single-step income statement, as prepared by Dart's controller, the section titled “Revenues” consisted of the following:
Sales $250,000
Purchase discounts 3,000
Recovery of accounts written off 10,000
Total revenues $263,000
In its Year 2 single-step income statement (statement of profit or loss), what amount should Dart report as total revenues?
$253,000
$250,000
$260,000
$263,000
$250,000
The single-step income statement presents all revenue and gains in the upper part of the statement. Purchase discounts are shown as deductions in the expense section. Recovery of accounts written off has no effect on the income statement since cash is increased and allowance for doubtful accounts is decreased.
28
The following information relates to two projects performed by Miley Co. during the year for laboratory research aimed at discovering new knowledge:
Likelihood That Effort
Project Costs Will Result in Future Benefits
I. $100,000 Probable
II. $ 50,000 Reasonably possible
What should Miley report as research and development expenses in its income statement for the year?
$0
$50,000
$100,000
$150,000
$150,000
Research is defined as a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, a new process or technique, or in bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
R&D (research and development) should be expensed if doubt exists as to whether any future benefits will be received, so both projects should be expensed. Miley should report $150,000 ($100,000 + $50,000) as R&D expense in its income statement for the year.
29
On January 1, Year 2, a finance lease agreement was entered into that requires annual lease payments of $42,500 over a 4-year lease term, which equals the remaining useful life of the asset. The first payment is due on January 1 of Year 2 and every December 31 thereafter. The interest rate is 7%. What would be the amount of the lease liability and interest expense, respectively, reported on the December 31 balance sheet and income statement, respectively, at the end of Year 2?
PV Factors:
Annuity Due n=3; i=7 2.80800
Annuity Due n=4; i=7 3.62432
Ordinary Annuity n=3; i=7 2.62432
Ordinary Annuity n=4; i=7 3.38721
Lease Liability = $111,533; Interest Expense = $0
Lease Liability = $76,840; Interest Expense = $7,807
Lease Liability = $122,316; Interest Expense = $10,782
Lease Liability = $66,058; Interest Expense = $7,102
Lease Liability = $76,840; Interest Expense = $7,807
The original liability can be calculated in one of two ways: (1) present value of an annuity due for 4 periods at 7% or (2) present value of an ordinary annuity for 3 periods plus the first payment. The answer is exactly the same.
Present Value, Annuity Due (PVAD): $42,500 at 7% for 4 periods = $42,500 × 3.62432 = $154,033
Present Value, Ordinary Annuity (PVOA): $42,500 at 7% for 4 periods = $42,500 × 2.62432 = $111,533 + $42,500 = $154,033
One payment is made on day one, reducing the lease liability before any interest ($154,033 – $42,500 = $111,533). Interest on the liability for the year would be $7,807 ($111,533 × .07), recorded with another payment made on the last day of the year, so the liability would be $76,840 with rounding ($111,533 – $34,693 ($42,500 – $7,807)).
30
Brill Co. made the following expenditures during 20X1:
Costs to develop computer software
for internal use in Brill's general
management information system $100,000
Costs of market research activities 75,000
What amount of these expenditures should Brill report in its 20X1 income statement as research and development expenses?
$175,000
$100,000
$75,000
$0
$0
Neither of these costs meets the definition of research and development cost:
Development of software for internal use is likely excluded from the applicability of FASB ASC 730-10-15-5.
Marketing research is specifically excluded from the definition of research and development by FASB ASC 730-10-15-4.
Research and development costs are defined as the “planned research…for new knowledge” and “the translation of research findings…into a…design for a new product or process.” (FASB ASC 730-10-20)
31
Main Co. began its manufacturing business last year. Main uses the dollar-value LIFO method to determine the value of its inventory. Main's inventory was valued at $100,000 at the end of last year and, using current costs, $132,000 at the end of the current year. The prices for Main's inventory during the current year were 20% higher than last year's prices. What amount should Main report as inventory on its balance sheet at the end of the current year?
$110,000
$112,000
$122,000
$132,000
$112,000
Dollar-value LIFO uses base-year costing to state inventory at its LIFO cost basis. End-of-the-year inventory must be converted to base-year costs to establish a layer of LIFO inventory and then the appropriate price index is applied.
In this example, ending inventory is only $110,000 ($132,000 ÷ 1.20) at base-year pricing. Inventory is then composed in two layers:
Base-Year Prices Price Index LIFO Cost
Year 1 layer $100,000 100 $100,000
Year 2 layer 10,000 ($110,000 − $100,000) 120 12,000
$110,000 $112,000
At the end of the year Main will report inventory of $112,000.
32
What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization?
Residual interest
Ownership interest
Donor's interest
Equity interest
Residual interest
Net assets of a nongovernment not-for-profit are defined to be the residual interest in the assets of the entity that remains after deducting its liabilities. In a business enterprise, its equity represents the ownership interest, but not for a nongovernmental not-for-profit.
33
Under current generally accepted accounting principles, which approach is used to determine income tax expense?
Net of tax approach
Asset and liability approach
“With and without” approach
Periodic expense approach
Asset and liability approach
The FASB determines income tax expense by requiring an asset and liability approach to the expense. This method recognizes that tax expense is the result of current-year activities and preceding-year activities. This method focuses on the calculation of and change in deferred tax assets and liabilities, current income tax payable, and valuation allowances, and calculates the periodic expense or benefit as the change in the asset or liability from the prior balance sheet date. Note that all deferred tax assets and liabilities are classified as long term on the balance sheet.
34
Abel Company will decommission a nuclear electric utility plant at the end of the plant's useful life. The obligation associated with the retirement should be recorded at fair value in the period in which it is incurred. The journal entry would:
debit Asset and credit Liability.
debit Expense and credit Liability.
debit Asset and credit Contra Asset.
debit Expense and credit Contra Asset.
debit Asset and credit Liability.
FASB ASC 410-20-25-5 provides: "Upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability."
35
In its Year 1 income statement, Tow, Inc., reported proceeds from an officer’s life insurance policy of $90,000 and depreciation of $250,000. Tow was the owner and beneficiary of the life insurance on its officer. Tow deducted depreciation of $370,000 in its Year 1 income tax return when the tax rate was 30%. Data related to the reversal of the excess tax deduction for depreciation follow:
Reversal of Enacted
Year Excess Tax Deduction Tax Rates
2 $50,000 35%
3 40,000 35%
4 20,000 25%
5 10,000 25%
There are no other temporary differences. Tow expects to report profits (rather than losses) for tax purposes for all future years. In its December 31, Year 1, balance sheet, what amount should Tow report as a deferred income tax liability?
$63,000
$66,000
$39,000
$36,000
$39,000
Deferred tax liabilities are measured by the total temporary differences multiplied by the tax rates in effect when the tax differences unwind. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.
The life insurance proceeds will not be taxed ever, but the depreciation is taxed at a different times than when it is reported on the financial records. The tax depreciation is taken first, so later years will have fewer deductions and more taxes due. The amounts due in the future are based on the times of reversal and the rates in effect at the time.
```
For Year 2, $50,000 × 0.35 = $17,500.
For Year 3, $40,000 × 0.35 = $14,000.
For Year 4, $20,000 × 0.25 = $5,000.
For Year 5, $10,000 × 0.25 = $2,500.
Adding these amounts results in the total deferred income tax liability for Year 1:
```
$17,500 + $14,000 + $5,000 + $2,500 = $39,000
36
According to the FASB conceptual framework, what does the concept of faithful representation in financial reporting include?
Effectiveness
Certainty
Precision
Neutrality
Neutrality
"Faithful representation—Financial reports represent economic phenomena in words and numbers. To be useful, financial information not only must represent relevant phenomena, but it also must faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from error. Of course, perfection is seldom, if ever, achievable. The Board's objective is to maximize those qualities to the extent possible." (SFAC 8.3, paragraph QC12)
37
During December 20X1, Nile Co. incurred special insurance costs but did not record these costs until payment was made during 20X2. These insurance costs related to inventory that had been sold by December 31, 20X1. What is the effect of the omission on Nile's accrued liabilities and retained earnings at December 31, 20X1?
No effect on accrued liabilities or retained earnings
No effect on accrued liabilities and overstated retained earnings
Understated accrued liabilities and overstated retained earnings
Understated accrued liabilities and no effect on retained earnings
Understated accrued liabilities and overstated retained earnings
The insurance costs relate to inventory sold in 20X1. Therefore, the unpaid cost should have been in accounts payable at December 31, 20X1, but was not. Likewise, the costs should have been included in cost of goods sold for 20X1 because the inventory was sold in that period. Therefore, expenses were understated, resulting in an overstatement of 20X1 net income and of the December 31, 20X1, retained earnings. The unrecorded accounts payable means that liabilities were understated at December 31, 20X1.
38
Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were used in the computation of cash flows from operating activities:
Beginning inventory $ 200,000
Ending inventory 150,000
Cost of goods sold 1,200,000
Beginning accounts payable 300,000
Ending accounts payable 200,000
What amount should Baler report as cash paid to suppliers for inventory purchases?
$1,200,000
$1,250,000
$1,300,000
$1,350,000
$1,250,000
Baler should report $1,250,000, calculated as follows:
Cost of goods sold $1,200,000
Decrease in inventory:
Beginning inventory $200,000
Ending inventory 150,000 (50,000)
Decrease in accounts payable:
Beginning accounts payable $300,000
Ending accounts payable 200,000 100,000
Cash paid to suppliers $1,250,000
39
A foreign subsidiary of a U.S. parent company should measure its assets, liabilities and operations using the:
subsidiary's local currency.
subsidiary's functional currency.
U.S. dollar.
best available spot rate.
subsidiary's functional currency.
The FASB requires that an asset, liability, revenue, expense, gain, or loss arising from a transaction should be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect on the transaction date. Functional currency is determined by the primary economic environment in which the entity operates and is often determined by the parent company.
40
For the week ended February 14, 20X3, Valentino & Sons paid recorded total salaries and wages expense of $50,000. The federal income taxes withheld from the employee paychecks were $8,300. FICA taxes withheld from the employee paychecks were $3,500. Employees had voluntary deductions of $1,200 withheld as well. Combined federal and state unemployment taxes are charged at a rate of 4% on qualifying salaries and wages and, of the $50,000 total salaries and wages expense, $21,000 qualified for unemployment taxes. All salaries and wages paid were subject to FICA tax rates of 7% each for employer and employee. For the week ended February 14, 20X3, how much cash will be paid to Valentino & Sons employees?
$38,200
$37,000
$33,500
$32,600
$37,000
The total to be received by the employees in their paychecks on February 14, 20X3, is computed as follows. (Note: Unemployment is paid by the employer only; it is not withheld from salaries and wages.)
Total salaries and wages $50,000
Federal income taxes withheld (8,300)
FICA taxes withheld (3,500)
Voluntary deductions (1,200)
Total $37,000
41
The following data pertain to Thorne Corp. for the current calendar year:
Net income $240,000
Dividends paid on common stock $120,000
Common stock outstanding
(unchanged during year) 300,000 shares
The market price per share of Thorne’s common stock at December 31 was $12. The price-earnings ratio at December 31 was:
9. 6 to 1.
10. 0 to 1.
15. 0 to 1.
30. 0 to 1.
15.0 to 1.
The price-to-earnings ratio is the relationship between the stock price per share to the earnings per share. The stock price per share is given as $12, but the earnings per share will have to be computed.
Earnings per share is net income divided by common shares outstanding:
$240,000 ÷ $300,000 = 0.8
Thus, the price-to-earnings ratio is $12 ÷ 0.8, or 15 to 1.
42
Mill Co.'s trial balance included the following account balances on December 31, 20X1:
Accounts payable $15,000
Bonds payable (due 20X2) 25,000
Discount on bonds payable (due 20X2) (3,000)
Dividends payable 01/31/X2 8,000
Notes payable (due 20X3) 20,000
What amount should be included in the current liability section of Mill's December 31, 20X1, balance sheet?
$45,000
$51,000
$65,000
$78,000
$45,000
Current liabilities are “obligations whose liquidation is reasonably expected to require the use of existing resources properly classified as current assets, or the creation of other current liabilities”.
Mill Co. should report the following current liabilities on December 31, 20X1:
Accounts payable $15,000
Bonds payable (due 20X2) $25,000
Less: Unamortized discount (3,000) 22,000
Dividends payable 8,000
Total current liabilities $45,000
=======
Notes payable due 20X3 (which is more than one year away) are classified as noncurrent.
43
Willem Co. reported the following liabilities at December 31, Year 1:
Accounts payable trade $ 750,000
Short-term borrowings 400,000
Mortgage payable, current portion $100,000 3,500,000
Other bank loan, matures June 30, Year 2 1,000,000
The $1,000,000 bank loan was refinanced with a 20-year loan on January 15, Year 2, with the first principal payment due January 15, Year 3. Willem's audited financial statements were issued February 28, Year 2. What amount should Willem report as current liabilities at December 31, Year 1?
$850,000
$1,150,000
$1,250,000
$2,250,000
$1,250,000
The amount to be presented as current liabilities consists of the following:
Accounts payable trade $ 750,000
Short-term borrowings 400,000
Mortgage payable, current portion 100,000
Total $1,250,000
The refinanced loan is not included in current liabilities. FASB ASC 470-10-45-13 and 45-14, “Short-Term Obligations Expected to Be Refinanced,” addresses this refinanced loan:
"Short-term obligations arising from transactions in the normal course of business that are due in customary terms shall be classified as current liabilities. A short-term obligation shall be excluded from current liabilities only if the conditions in the following paragraph are met. Funds obtained on a long-term basis before the balance sheet date would be excluded from current assets if the obligation to be liquidated is excluded from current liabilities.
"A short-term obligation shall be excluded from current liabilities if the entity intends to refinance the obligation on a long-term basis (see [FASB ASC] 470-10-45-12B) and the intent to refinance the short-term obligation on a long-term basis is supported by an ability to consummate the refinancing demonstrated in either of the following ways:
"Post-balance-sheet-date issuance of a long-term obligation or equity securities. After the date of an entity's balance sheet but before that balance sheet is issued or is available to be issued (as discussed in [FASB ASC] 855-10-25), a long-term obligation or equity securities have been issued for the purpose of refinancing the short-term obligation on a long-term basis. If equity securities have been issued, the short-term obligation, although excluded from current liabilities, shall not be included in owners' equity.
"Financing agreement. Before the balance sheet is issued or is available to be issued (as discussed in [FASB ASC] 855-10-25), the entity has entered into a financing agreement that clearly permits the entity to refinance the short-term obligation on a long-term basis on terms that are readily determinable, and all of the following conditions are met:
"The agreement does not expire within one year (or operating cycle) from the date of the entity's balance sheet and during that period the agreement is not cancelable by the lender or the prospective lender or investor (and obligations incurred under the agreement are not callable during that period) except for violation of a provision with which compliance is objectively determinable or measurable. For purposes of this Subtopic, violation of a provision means failure to meet a condition set forth in the agreement or breach or violation of a provision such as a restrictive covenant, representation, or warranty, whether or not a grace period is allowed or the lender is required to give notice. Financing agreements cancelable for violation of a provision that can be evaluated differently by the parties to the agreement (such as a material adverse change or failure to maintain satisfactory operations) do not comply with this condition.
"No violation of any provision in the financing agreement exists at the balance sheet date and no available information indicates that a violation has occurred thereafter but before the balance sheet is issued or is available to be issued (as discussed in [FASB ASC] 855-10-25), or, if one exists at the balance sheet date or has occurred thereafter, a waiver has been obtained.
"The lender or the prospective lender or investor with which the entity has entered into the financing agreement is expected to be financially capable of honoring the agreement."
44
Baker Co. uses the calendar year as its accounting year. During 20X1, Congress enacted new tax legislation that changed the tax rate for 20X2 from 30% to 40%. The tax rate for 20X3 and following years remained at 30%. Baker has only one type of temporary difference or carryforward—a taxable temporary difference. Accordingly, Baker had a deferred tax liability at the beginning of 20X1 and will have a deferred tax liability at the end of 20X2. With regard to the change in tax rates, Baker should:
include the effect of the change on the January 1, 20X1, deferred tax liability in income from continuing operations of 20X1.
include the effect of the change on the January 1, 20X1, deferred tax liability in income from continuing operations of 20X2.
include the effect of the change on the January 1, 20X1, deferred tax liability in 20X1 net income as the cumulative effect of a change in accounting principle.
include the effect of the change on the January 1, 20X1, deferred tax liability in 20X2 net income as the cumulative effect of a change in accounting principle.
include the effect of the change on the January 1, 20X1, deferred tax liability in income from continuing operations of 20X1.
The effect of the change on the deferred tax asset or liability at the beginning of the year of change should be included in income from continuing operations for the period that includes the enactment date.
45
Mobe Co. reported the following operating income (loss) for its first three years of operations:
20X0 $ 300,000
20X1 (700,000)
20X2 1,200,000
For each year, there were no deferred income taxes, and Mobe's effective income tax rate was 30%. In its 20X1 income tax return, Mobe elected to carry back the maximum amount of loss possible. In 20X1, Mobe was unsure that it would earn any future taxable income, thus requiring a valuation allowance to write down the deferred tax asset to zero until it is used next year. In its 20X2 income statement, what amount should Mobe report as total income tax expense?
$120,000
$150,000
$240,000
$360,000
$240,000
20X1 loss after carryback to 20X0:
= ($700,000) − $300,000
= ($400,000)
20X2 income after carryforward of remainder of 20X1 loss:
= $1,200,000 − $400,000
= $800,000
20X2 income tax expense:
= ($800,000 x 0.30)
= $240,000
46
Which of the following fund types of a government reports a statement of net position?
Capital project funds
Enterprise funds
Special revenue funds
Permanent funds
Enterprise funds
The statement of net position reports the financial position of proprietary funds. Enterprise funds are a type of proprietary fund. Capital projects funds, special revenue funds, and permanent funds are all types of governmental funds that report financial position on a balance sheet. The net assets of proprietary funds are called net position. The net assets of a governmental fund are represented by Fund Balance.
47
Taft Corp. uses the equity method to account for its 25% investment in Flame, Inc. During 20X1, Taft received dividends of $30,000 from Flame and recorded $180,000 as its equity in the earnings of Flame. Additional information follows:
All the undistributed earnings of Flame will be distributed as dividends in future periods.
The dividends received from Flame are eligible for the 65% dividends-received deduction.
There are no other temporary differences.
Enacted income tax rates are 21% for 20X1 and thereafter.
In its December 31, 20X1, balance sheet, what amount should Taft report for deferred income tax liability?
$19,500
$29,295
$31,500
$11,025
$11,025
The recognized but currently unreceived income will generate a future tax consequence, a future tax liability. However, dividends received by a corporation are eligible for a dividends-received deduction (a permanent difference), and thus only a smaller taxable amount (multiplied by the tax rate) will eventually be paid because the permanent difference lowers taxable income.
Taft's recorded equity in Flame earnings $180,000
Less dividends received in 20X1 30,000
Temporary difference before dividend deduction 150,000
Less dividends-received deduction (65% x $150,000) 97,500
Net amount of temporary difference $ 52,500
Times tax rate x 21%
Deferred income tax liability, noncurrent $ 11,025
48
In its 20X2 financial statements, Cris Co. reported interest expense of $85,000 in its income statement and cash paid for interest of $68,000 in its cash flow statement. There was no prepaid interest or interest capitalization either at the beginning or end of 20X2. Accrued interest on December 31, 20X1, was $15,000. What amount should Cris report as accrued interest payable in its December 31, 20X2, balance sheet?
$2,000
$15,000
$17,000
$32,000
$32,000
The interest payable on January 1 was last year’s expense, but was paid this year. Only $53,000 of this year’s expense was paid this year, leaving $32,000.
Interest expense for 20X2 $85,000
Less: Interest paid in 20X2 - 68,000
Increase in accrued interest $17,000
Add: December 31, 20X1, accrued balance 15,000
Accrued interest on December 31, 20X2 $32,000
49
Cardamom Limited wants to get an idea about the effectiveness of its inventory management processes. The following data have been compiled to provide a benchmark for future comparisons.
Net cash sales $ 51,000
Cost of goods sold 272,000
Inventory at beginning of year 37,000
Purchases 263,000
Accounts receivable at beginning of year 47,000
Accounts receivable at end of year 52,000
What was the number of days’ sales in average inventory turnover for the current year?
49. 7 days
45. 0 days
37. 6 days
43. 6 days
43.6 days
The number of days’ sales in average inventory can be computed in at least two ways. The first way is to first compute inventory turnover and then divide that value into the number of days in the year. Inventory turnover is computed by dividing average inventory into cost of goods sold.
Cost of goods sold is $272,000. Beginning inventory is $37,000. Ending inventory is the beginning inventory plus purchases, less cost of goods sold, and thus ending inventory is $28,000, computed as follows:
$37,000 (Beginning inventory) + $263,000 (Purchases) – $272,000 (Cost of goods sold) = $28,000
The average of the beginning and ending inventory is $32,500, computed as follows:
$37,000 (Beginning inventory) + $28,000 (Ending inventory) = $65,000
$65,000 ÷ 2 =$32,500; the inventory turnover is $272,000 ÷ $32,500, or 8.4 times.
Finally, 365 days ÷ 8.4 = 43.5 days. It can also be computed as (Average Inventory ÷ Cost of Goods Sold) × Days per year: ($32,500 ÷ $272,000) × 365 = 43.6 days.
50
In Year 1, Lobo Corp. reported for financial statement purposes the following revenue and expenses that were not included in taxable income:
Premiums on officers' life insurance under which the
corporation is the beneficiary $ 5,000
Interest revenue on qualified state or municipal bonds 10,000
Depreciation deducted for income tax purposes in excess on
depreciation reported for financial statement purposes 10,000
Estimated future warranty costs to be paid in Year 2 and Year 3 60,000
Lobo’s enacted tax rate for the current and future years is 30%. Lobo expects to operate profitably in the future. There were no temporary differences in prior years. The deferred tax benefit is:
$19,500.
$22,500.
$18,000.
$21,000.
$18,000
Deferred tax benefits only come about from temporary differences, like depreciation and warranty costs. All deferred tax assets and liabilities are classified as noncurrent, and apply to both financial accounting and to tax accounting, but are taken at different times for each. The other items are only taken into account in financial accounting, and are not income or expense items for taxes.
When depreciation for tax purposes is in excess of depreciation for financial accounting, then it will not give rise to a benefit, but instead to a liability. This leaves only the warranty costs, which do give rise to a deferred tax benefit, since the warranty costs will defer to future years' additional tax deductions.
The way to measure the deferred tax benefit is by multiplying the estimated warranty costs by the future tax rate of 30%:
$60,000 × 0.30 = $18,000
51
At the beginning of the year, the carrying value of an asset was $830,000 with 12 years of remaining life. The fair value of the liability for the asset retirement obligation was $86,000. At year-end, the carrying value of the asset was $760,000. The credit-adjusted, risk-free interest rate was 7%. The risk-free interest rate was 3%. What was the amount of accretion expense for the year related to the asset retirement obligation?
$83,420
$70,000
$6,020
$2,580
$6,020
An asset retirement obligation (ARO) refers to an obligation associated with the retirement of a tangible, long-lived asset, such as a nuclear power plant. After the initial measurement, an entity should recognize period-to-period changes in the liability for an ARO resulting from (a) the passage of time and (b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Changes in the value of a liability for an ARO must be measured by applying an interest method of allocation using a credit-adjusted, risk-free interest rate.
Accretion expense would be:
$86,000 × 0.07 = $6,020
Note: Accounting for ARO liability is similar to the treatment of bonds payable. The liability is initially recorded at its present value and is amortized. Amortization is recorded with a debit to accretion expense and a credit to ARO liability.
52
For the year ended December 31, 20X1, Tyre Co. reported pretax financial statement income of $750,000. Its taxable income was $650,000. The difference is due to accelerated depreciation for income tax purposes. Tyre's effective income tax rate is 30%, and Tyre made estimated tax payments during 20X1 of $90,000. What amount should Tyre report as current income tax expense for 20X1?
$105,000
$135,000
$195,000
$225,000
$195,000
Tyre's current income tax expense is simply taxable income multiplied by the effective income tax rate. (Note: Tyre also has a noncurrent deferred income tax liability in the amount of $30,000 ($100,000 timing difference multiplied by the 30% tax rate).)
Current income tax expense = Taxable income x Tax rate
= $650,000 x 0.30
= $195,000
53
Senlo Co. uses a 1-year operating cycle and recognizes profits for financial statement and tax purposes during its two years of operation. Depreciation for tax purposes exceeded depreciation for financial statement purposes each year. These temporary differences are expected to reverse in Years 3, 4, and 5. At the end of Year 2, the deferred tax liability shown as a noncurrent liability is based on the:
enacted tax rate for Year 3.
tax rates for Years 1 and 2.
enacted tax rates for Years 3, 4, and 5.
enacted tax rates for Years 4 and 5.
enacted tax rates for Years 3, 4, and 5.
Deferred tax liabilities are measured by the total temporary differences multiplied by the tax rates in effect when the tax differences unwind. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.
54
A deferred tax asset of $100,000 was recognized in the Year 1 financial statements by the Chaise Company when a loss from discontinued segments was carried forward for tax purposes. A valuation allowance of $100,000 was also recognized in the Year 1 statements because it was considered more likely than not that the deferred tax asset would not be realized. Chaise had no temporary differences. The tax benefit of the loss carried forward reduced current taxes payable on Year 3 continuing operations. The Year 3 income statement would include the tax benefit from the loss brought forward in:
cumulative effect of accounting changes.
extraordinary gains.
income from continuing operations.
gain or loss from discontinued segments.
income from continuing operations.
When a loss is recognized for financial accounting, it usually generates an income tax benefit at the same time, as long as it is true that prior income and income taxes paid could be refunded or if it is expected that there will be future income to deduct the loss against. If there was no income to deduct the loss against, then the tax benefit was valued at zero for the year (using the valuation allowance specified).
When later income is earned and the tax benefit can be used, then the tax benefit is recognized in the later year when the income is earned, and is caused by the later income. (The income tax benefit is thus allocated to the later year when the income arises to allow the deduction, and is allocated to the income from continuing operations from the later year.) Note that the concept of “extraordinary” items has been eliminated from GAAP; the presentation for items that are unusual in nature or occur infrequently will be expanded to include items that are both unusual in nature and infrequently occurring.
55
Venus Corp.'s worksheet for calculating deferred income taxes for 20X1 follows:
20X1 20X2 20X3
Pretax income $1,400 0 0
Temporary differences:
Depreciation (800) (1,200) $2,000
Warranty costs 400 (100) (300)
Taxable income $1,000 (1,300) 1,700
Loss carryback (1,000) 1,000
Loss carryforward 300 (300)
$ 0 $ 0 $1,400
======= ======= =======
Enacted rate 30% 30% 25%
Deferred tax liability
(asset):
Noncurrent $ 50
=======
Venus had no prior deferred tax balances. In its 20X1 income statement, what amount should Venus report as current income tax expense?
$420
$350
$0
$300
$300
Current income tax expense = 30% × $1,000 = $300, and is defined in FASB ASC 740-10-20 as "the amount of income taxes paid or payable (or refundable) for a year is determined by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues for that year."
56
Which of the following funds of a governmental unit uses the same basis of accounting as the special revenue fund?
Internal trust funds
Enterprise funds
Permanent funds
Pension trust funds
Permanent funds
Special revenue funds are classified as governmental funds. The other governmental funds are the general fund, capital projects funds, debt service funds and permanent funds. Governmental funds use the modified accrual basis of accounting. Enterprise funds are a type of proprietary fund and investment and pension trust funds are types of fiduciary funds. They use the accrual basis of accounting.
57
Perez, Inc., owns 80% of Senior, Inc. During 20X1, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in 20X1. For 20X1 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted?
Sales and cost of goods sold should be reduced by the intercompany sales.
Net income should be reduced by 80% of the gross profit on intercompany sales.
Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
No adjustment is necessary.
Sales and cost of goods sold should be reduced by the intercompany sales.
FASB ASC 810-10-45-1 states: “In the preparation of consolidated financial statements, intra-entity balances and transactions should be eliminated. This includes…sales and purchases....Any intra-entity profit…shall be eliminated.”
The income statement adjustment process is greatly simplified because the goods sold to Senior were all subsequently sold to “outside” customers. This means that inventory will not require adjustment. The only adjustment needed is reduction of sales and cost of goods by the total dollar amount of the intercompany sales. Failure to do this would overstate those two items on the consolidated income statement.
58
A capital projects fund for a new city courthouse recorded a receivable of $300,000 for a state grant for which all eligibility requirements have been met and a $450,000 transfer from the general fund. What amount should be reported as revenue by the capital projects fund?
$0
$300,000
$450,000
$750,000
$300,000
Transfers are other financing sources and are never recognized as revenues. If the receivable is associated with an unrestricted grant or with a restricted grant for which all eligibility requirements have been met, the state grant should be reported as revenues.
59
In governmental accounting, a fund is:
an independent, self-balancing set of accounts.
used to assist in ensuring fiscal compliance.
I only
II only
Both I and II
Neither I nor II
Both I and II
GASB 1300 defines a fund “as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations…” (Emphasis added)
60
Which of the following should a company classify as a research and development expense?
Periodic design changes to existing products
Routine design of tools, jigs, molds, and dies
Redesign of a product prerelease
Legal work on patent applications
Redesign of a product prerelease
Research is a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, developing a new process or technique, or bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. A useful way to analyze activities to determine if their costs are research and development (R&D) costs is to establish if they relate to activities identified with the period prior to the beginning of commercial production. Only the redesign of a product prerelease qualifies as an R&D expense.
61
Wind Co. incurred organization costs of $6,000 at the beginning of its first year of operations. How should Wind treat the organization costs in its financial statements in accordance with GAAP?
Never amortized
Amortized over 60 months
Expensed immediately
Amortized over 40 years
Expensed immediately
Organization costs are start-up costs and are required to be expensed when incurred.
62
A company is completing its annual impairment analysis of the goodwill included in one of its cash generating units (CGUs). The recoverable amount of the CGU is $32,000. The company noted the following related to the CGU:
Other
Goodwill Patents Assets Total
Historical cost $15,000 $10,000 $35,000 $60,000
Depreciation and amortization 0 3,333 11,667 15,000
Carrying amount, December 31 $15,000 $ 6,667 $23,333 $45,000
Under IFRS, which of the following adjustments should be recognized in the company's consolidated financial statements?
Decrease goodwill by $13,000
Decrease goodwill by $15,000
Decrease goodwill by $3,250, patents by $2,167, and other assets by $7,583
Decrease goodwill by $4,333, patents by $1,926, and other assets by $6,741
Decrease goodwill by $13,000
Under IFRS, impairment is measured at the level of the cash generating unit.
Total carrying amount $45,000
Recoverable amount 32,000
Impairment $13,000
63
On January 2, 20X1, Pare Co. purchased 75% of Kidd Co.'s outstanding common stock. Selected balance sheet data at December 31, 20X1, is as follows:
PARE KIDD
Total assets $420,000 $180,000
======== ========
Liabilities $120,000 $ 60,000
Common stock 100,000 50,000
Retained earnings 200,000 70,000
$420,000 $180,000
======== ========
During 20X1, Pare and Kidd paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions.
The combination is accounted for as an acquisition. In its December 31, 20X1, consolidated balance sheet, what amount should Pare report as common stock?
$50,000
$100,000
$137,500
$150,000
$100,000
In a consolidated balance sheet, only the common stock of the parent entity is labeled “common stock.” Pare would report its own common stock ($100,000) on the December 31, 20X1, consolidated balance sheet.
Note: The 25% non-majority-owned common stock of Kidd Co. would be reported as part of “noncontrolling (minority) interest.”
64
FASB Topic 842 lease accounting guidance defines a short-term lease as a lease that, at the commencement date, has a lease term under the contract of:
24 months or less.
36 months or less.
12 months or less.
48 months or less.
12 months or less.
The FASB defines a short-term lease as a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. (FASB ASC Glossary)
65
On June 1, Greendale Corp. issued $700,000, five-year bonds at 8%, with interest payable annually on May 31. The bonds sold for $728,700 when the market rate of interest was 7%. Greendale uses the effective interest method for amortizing premiums on bonds payable. What is the balance of the premiums on bonds payable account immediately following the first interest payment?
$23,709
$34,440
$33,691
$22,960
$23,709
The balance of the premium on bonds payable account immediately following the first interest payment is $23,709 ($28,700 − $4,991). Cash paid is the face interest rate of 8% times the face amount of the bond of $700,000, or $56,000. Interest expense is the market interest rate of 7% times the market value of the bond of $728,700, or $51,009. The difference of $4,991 ($56,000 − $51,009) is premium amortization. The journal entries for bond issuance and for the first interest payment are as follows:
Cash 728,700
Premium on bonds payable 28,700
Bonds payable 700,000
Interest expense (7% × $728,700) 51,009
Premium on bonds payable ($56,000 - $51,009) 4,991
Cash (8% × $700,000) 56,000
Premium on bonds payable $28,700
Less premium amortization (4,991)
Unamortized bond premium $23,709
66
Wall Co. sells a product under a 2-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall's first two years in business, it made the following sales and incurred the following warranty repair costs:
Year 1
Total sales $250,000
Total repair costs incurred 4,500
Year 2
Total sales $300,000
Total repair costs incurred 5,000
What amount should Wall report as warranty expense for Year 2?
$6,000
$5,000
$5,900
$1,000
$6,000
In order to properly match warranty expense with the revenue generating the expenses, 2% of Year 2's sales (0.02 × $300,000 = $6,000) should be expensed.
67
According to the FASB's conceptual framework, the objectives of financial reporting for business enterprises are based on:
the needs of the users of the information.
reporting on management's stewardship.
the need for conservatism.
generally accepted accounting principles.
the needs of the users of the information.
SFAC 8, chapter 1 (“The Objective of General Purpose Financial Reporting”), paragraph OB2, states: "The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. These decisions involve buying, selling or holding equity and debt instruments and providing or settling loans and other forms of credit." (Emphasis added)
Thus, the objective of financial reporting is based on user needs.
68
Fountain Co. is constructing an office building for its own use. Fountain started the two-year construction project on April 1, year 1, at which point the interest capitalization period began. Fountain made the following payments in year 1 related to the construction of the building:
April 1 Payment to architect for building plans $ 30,000
July 1 Progress payment to contractor 60,000
October 1 Progress payment to contractor 150,000
For the purpose of capitalizing interest, what are Fountain's weighted-average accumulated expenditures for the year ended December 31, year 1?
$90,000
$240,000
$105,000
$80,000
$90,000
If specified conditions are met, interest is capitalized for assets that are constructed or otherwise produced for an enterprise’s own use. The amount of interest to be capitalized is determined by applying the appropriate capitalization rate to the average amount of the average accumulated expenditures (AAE) for the asset during that period, which weights expenditures for the percentage of the year the enterprise utilized the payments for the assets' construction. The accumulated expenditures are computed as follows:
Date of Months
Expenditure Amount Outstanding AAE
04/01 $ 30,000 9/12 $ 22,500
07/01 60,000 6/12 30,000
10/01 150,000 3/12 37,500
Total AAEs $ 90,000
69
It is inappropriate to record depreciation expenses in:
an enterprise fund.
an internal service fund.
a private-purpose trust fund.
a capital projects fund.
a capital projects fund.
Depreciation expense is not recorded in any governmental fund since governmental funds account for neither depreciable assets nor expenses (the measurement focus of governmental funds is on expenditures, not expenses). Capital assets and related depreciation expenses are accounted for in proprietary funds and fiduciary funds. The only governmental fund type listed in the responses to this question is the capital projects fund, so this is the appropriate response.
70
During January of the previous year, Doe Corp. agreed to sell the assets and product line of its Hart division. The sale on January 15 of the current year resulted in a gain on disposal of $900,000. Not considering any impairment losses, Hart’s operating losses were $600,000 for the previous year and $50,000 for the current-year period January 1 through January 15. Disregarding income taxes, what amount of net gain (loss) should be reported in Doe’s comparative current and previous years' income statements?
Current year, $900,000; Previous year, $(650,000)
Current year, $0; Previous year, $250,000
Current year, $850,000; Previous year, $(600,000)
Current year, $250,000; Previous year, $0
Current year, $850,000; Previous year, $(600,000)
The sale of a division would be a discontinued operation since its disposition represents a strategic shift. The discontinued operation would be recorded in the year the sale occurred.
Previous Current
Net loss from continuing operations $(600,000) $(50,000)
Gain on sale of discontinued operations 900,000
Net income $(600,000) $850,000
71
A company should report investment in debt securities that it has classified as trading at:
lower of cost or market, with holding gains and losses included in earnings.
lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses.
fair value, with holding gains included in earnings only to the extent of previously recognized holding losses.
fair value, with holding gains and losses included in earnings.
fair value, with holding gains and losses included in earnings.
Investment in debt securities are carried at fair value with holding gains and losses included in earnings.
72
During 20X1, Sloan, Inc., began a project to construct new corporate headquarters. Sloan purchased land with an existing building for $750,000. The land was valued at $700,000 and the building at $50,000. Sloan planned to demolish the building and construct a new office building on the site. What is the appropriate accounting treatment for interest of $186,000 on construction financing paid during construction?
None of the answer choices are correct.
Classify as building and depreciate
Expense
Classify as land and do not depreciate
Classify as building and depreciate
FASB ASC 360-10-30-1 provides: "If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset."
The $186,000 should be classified as building cost and would be depreciated.
73
Toft Co. had 120,000 shares of common stock outstanding at January 1. On April 1, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible preferred stock on which a dividend of $5 per share was declared during the year. Net income for the year was $480,000. What should Toft report as earnings per share for the year?
$2.69
$2.87
$3.00
$3.20
$2.87
Toft. Co has a simple capital structure. Basic earnings per share (EPS) is the earnings per share available to common shareholders. It does not consider possible conversions to common stock that did not occur during the period. It can be calculated as follows:
EPS = (Net income – Preferred dividends) / Weighted-average common shares outstanding
During the year Toft. Co had EPS of $2.87 (rounded) based on net income of $480,000, preferred dividends of $50,000 ($5 × 10,000 shares), and 150,000* weighted-average common shares.
EPS = ($480,000 – $50,000) / $150,000
EPS = $2.87
* 150,000 shares = (120,000 shares × 12/12 months) + (40,000 shares × 9/12 months)
74
Pine Limited owns a 15% royalty interest in a natural gas well. Pine receives royalty payments on January 31 for the gas sold between the previous June 1 and November 30, and on July 31 for oil sold between the previous December 1 and May 31. Production reports show the following oil sales:
May 1, 20X7–October 31, 20X7 $650,000
November 1, 20X7–December 31, 20X7 124,000
November 1, 20X7–April 30, 20X8 730,000
May 1, 20X8–October 31, 20X8 718,000
November 1, 20X8–December 31, 20X8 137,000
What amount should Pine report as royalty revenue for 20X8?
$198,600
$217,200
$219,150
$237,750
$219,150
In this question, one needs to convert from cash receipts to accrual earnings. Compute the amount of earnings properly allocable to 20X8, and then compute the percentage.
Revenue for January 1–April 30:
$730,000 − $124,000 $ 606,000
Revenue for May 1–October 31 718,000
Revenue for November 1–December 31 137,000
Total 20X8 revenue $1,461,000
Times 15% × 0.15
Pine's 20X8 royalty revenue $ 219,150
75
A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements?
Current assets were understated and gross profit was overstated.
Current assets and gross profit were both overstated.
Current assets and gross profit were both understated.
Current assets were overstated and gross profit was understated.
Current assets and gross profit were both overstated.
The overstatement of ending inventory (a current asset) results in an understatement of cost of goods sold.
The understatement of cost of goods sold results in an overstatement of gross profit.
76
Cross Corp. has outstanding 2,000 shares of 11% preferred stock, $50 par. On August 8, 20X1, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross' additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:
Preferred stock: $25,000; Additional paid-in capital: $7,500; Retained earnings: $(10,000)
Preferred stock: $25,000; Additional paid-in capital: $0; Retained earnings: $(2,500)
Preferred stock: $25,000; Additional paid-in capital: $(2,500); Retained earnings: $0
Preferred stock: $22,500; Additional paid-in capital: $0; Retained earnings: $0
Preferred stock: $25,000; Additional paid-in capital: $(2,500); Retained earnings: $0
The entry to record the redemption and retirement of the preferred stock:
Dr. Cr.
11% Preferred stock (.25 x 2,000 x $50) 25,000
Additional paid-in capital from
preferred stock ($25,000 - $22,500) 2,500
Cash 22,500
Note: Retained earnings would be debited if the balance in additional paid-in capital from preferred stock was less than the amount by which the cash paid to redeem the stock exceeded the par value.
77
Generally, which inventory costing method approximates most closely the current cost for each of the following?
Cost of goods sold: LIFO; Ending inventory: FIFO
Cost of goods sold: LIFO; Ending inventory: LIFO
Cost of goods sold: FIFO; Ending inventory: FIFO
Cost of goods sold: FIFO; Ending inventory: LIFO
Cost of goods sold: LIFO; Ending inventory: FIFO
Because LIFO (last in, first out) counts the most recent purchases as sold items, its cost of goods sold will be closest to current costs. Since FIFO (first in, first out) counts the most recent purchases as still in inventory, the ending inventory under FIFO will be closest to current costs.
78
Both quantitative and qualitative disclosures are required for both the lessor and lessee. Which of the following is an incorrect matching of the information and the type of disclosure?
Quantitative: a maturity analysis of lease liabilities for each of the first five years after the balance sheet date
Quantitative: information about risks associated with residual values
Qualitative: a general description of the leasing arrangement
Qualitative: a reconciliation of opening and closing right-of-use (ROU) asset balances
Qualitative: a reconciliation of opening and closing right-of-use (ROU) asset balances
Lease disclosure requirements are quite extensive for both the lessor and lessee. The guiding objective is that lessees and lessors provide disclosures that enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Information disclosed is both qualitative and quantitative. Qualitative information describes the quality of something, while quantitative describes the quantity (i.e., amount) of something.
A reconciliation is quantitative in nature, not qualitative.
79
Which of the following terms best describes the standalone selling price?
The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer
The price at which an entity would sell a promised good or service to a customer
The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, adjusted for the effects of the time value of money
The amount of noncash consideration, measured at fair value
The price at which an entity would sell a promised good or service to a customer
Standalone selling price is the price at which an entity would sell a promised good or service to a customer.
Transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price might be adjusted for the effects of the time value of money, not the standalone selling price. The amount of noncash consideration, measured at fair value, is an example of a transaction price.
80
Rice Co. was incorporated on January 1, 20X1, with $500,000 from the issuance of stock and borrowed funds of $75,000. During the first year of operations, net income was $25,000. On December 15, 20X1, Rice paid a $2,000 cash dividend. No additional activities affected owner's equity in 20X1. On December 31, 20X1, Rice's liabilities had increased to $94,000. In Rice's December 31, 20X1, balance sheet (statement of financial position), total assets should be reported at:
$598,000.
$600,000.
$617,000.
$692,000.
$617,000.
Total assets should be reported at $617,000:
Stockholders' equity (January 1, 20X1) $500,000
Add net income 25,000
Deduct dividends (2,000)
Stockholders' equity (December 31, 20X1) $523,000
========
Total assets = Total liabilities + Stockholders' equity
= $94,000 + $523,000
= $617,000
81
A voluntary health and welfare entity received a $700,000 permanent endowment during the year. The donor stipulated that the income and investment appreciation be used to maintain its senior center. The endowment fund reported a net investment appreciation of $80,000 and investment income of $50,000. The organization spent $60,000 to maintain its senior center during the year. What amount of change in net assets with donor restrictions should the organization report as a result of these transactions?
$70,000
$770,000
$50,000
$130,000
$770,000
The change in net assets with donor restrictions includes the original donation of $700,000, any increases from investment income ($50,000) and net investment appreciation ($80,000) that the donor restricted to use for the senior center, and any decreases from the amount of resources spent for the restricted purpose ($60,000). These net assets released from restrictions reduce net assets with donor restrictions and increase net assets without donor restrictions by $60,000. Therefore, the change in net assets with donor restrictions is $700,000 + $80,000 + $50,000 − $60,000, or $770,000.
82
On December 31, 20X3 and 20X4, Oliver Corporation had outstanding 12,000 shares of $50 par value 3% cumulative preferred stock. Oliver also had 45,000 shares of $8 par value common stock outstanding on that same date. On December 31, 20X3, dividends in arrears on the preferred stock were $8,200. Cash dividends declared in 20X4 totaled $41,400. Of the $41,400, what amounts were payable on each class of stock?
Preferred stock: $41,400; Common stock: $0
Preferred stock: $26,200; Common stock: $15,200
Preferred stock: $8,200; Common stock: $33,400
Preferred stock: $18,000; Common stock: $23,400
Preferred stock: $26,200; Common stock: $15,200
Preferred stock dividends for each year must be paid before common stock dividends may be paid. Cumulative preferred stock dividends in arrears must be caught up as well, prior to paying any dividends to common stock for the year.
Dividends in arrears on preferred stock $ 8,200
Preferred stock dividend requirement
for 20X4 (12,000 shares × $50 × 3%) 18,000
Dividends allocable to preferred shares $26,200
Dividends allocable to common shares
($41,400 − $26,200) $15,200
83
At the beginning of year 1, a company amends its defined benefit pension plan for an additional $500,000 in prior service cost. The amendment covers employees with a 10-year average remaining service life. At the end of year 1, what is the net entry to Accumulated Other Comprehensive Income (AOCI), ignoring income tax effects?
A $550,000 credit
A $500,000 debit
A $450,000 credit
A $450,000 debit
A $450,000 debit
When plan amendments are made, additional benefits are sometimes applied retroactively to employees for service rendered in prior years. This increase in the benefits represents a cost to the employer that GAAP requires to be recognized as a component of pension expense over the remaining service years of the affected employees. The unrecognized prior service cost must be recognized as a component of Other Comprehensive Income. The amortization of the unrecognized prior service cost is recognized as an increase in pension expense and as a reduction of the unrecognized amount remaining in Accumulated Other Comprehensive Income.
At the end of year 1, 1/10 or $50,000 amortization would reduce the $500,000 unrecognized prior service cost, so the net entry to AOCI would be a debit of $450,000.
84
Each of the following events is required to be reported to the United States Securities and Exchange Commission on Form 8-K, except:
the creation of an obligation under an off-balance sheet arrangement of a registrant.
the unregistered sale of equity securities.
the quarterly results of operations and financial condition of a registrant.
a change in a registrant's certifying accountant.
the quarterly results of operations and financial condition of a registrant.
Public companies must report certain material corporate events on a more current basis than quarterly (on Form 10-Q) or annually (on Form 10-K). Form 8-K reports current events, allowing investors to obtain information in a timely manner about events material to a company’s performance. Some of the most common events reported on Form 8-K include a change in a registrant’s certifying accountant, notification about entering into material agreements (including merger agreements and sales of securities), and entering into debt or other direct financial obligations. Companies have four business days from the event date to file a Form 8-K.
85
Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?
Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.
Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.
Milton will retain control of the receivables.
Good Neighbor Financing will assume the responsibility of collecting the receivables.
Milton will retain control of the receivables.
Under a pledge, an account receivable is used as collateral for a loan. Milton continues to collect the receivables and applies the collection to the loan balance.
86
A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred:
Dividends paid $300
Proceeds from the issuance of common stock 250
Borrowings under a line of credit 200
Proceeds from the issuance of convertible bonds 100
Proceeds from the sale of a building 150
What is the company's increase in cash flows provided by financing activities for the year?
$250
$50
$350
$150
$250
The company's increase in cash flows is $250, calculated as follows:
Dividends paid $(300)
Proceeds from the issuance of common stock 250
Borrowings under a line of credit 200
Proceeds from the issuance of convertible bonds 100
Net increase from financing activities $250
The proceeds from the sale of a building are included in investing activities.
87
Which of the following statements is a primary objective of accounting for income taxes?
To identify all of the permanent and temporary differences of an enterprise
To compare an enterprise's federal tax liability to its state tax liability
To estimate the effect of the tax consequences of future events
To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences
To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences
Accounting for income taxes under FASB rules is based on the “liability method.” Under the liability method, accounting for income taxes has two primary objectives: to recognize the amount of taxes currently payable or refundable, and to recognize deferred tax liabilities and assets for the future tax consequences of temporary differences.
88
Both Curry City and the State have a general sales tax on all merchandise. Curry City's tax rate is 2% and the State's rate is 4%. Merchants are required by law to remit all sales tax collected each month to the State by the 15th of the following month. By law, the State has 45 days to process the collections and to make disbursements to the various jurisdictions for which it acts as an agent. Sales tax collected by merchants in Curry totals $450,000 in May and $600,000 in June. Both merchants and the State make remittances in accordance with statutes. What amount of sales tax revenue for May and June is included in the June 30 year-end financial statements of the State and Curry?
State: $700,000; Curry: $350,000
State: $1,050,000; Curry: $350,000
State: $1,050,000; Curry: $0
State: $300,000; Curry: $150,000
State: $700,000; Curry: $350,000
Sales taxes are classified as a form of derived tax revenue. According to GASB N50.113, revenues should be recognized when the underlying exchange transaction occurs. (On the modified accrual basis of accounting, revenues should be recognized when the underlying exchange has occurred and the resources are available.)
In this question, the underlying sales transactions took place before June 30. Also, the resources are considered to be available because the resources are received in the current year or soon enough thereafter to be used to pay the current year's bills, i.e., within 60 days of year-end (15 days for remittance to the state plus 45 days for distribution to the city). Thus, the full amount collected, $1,050,000, would be recognized by either the state or the city.
Distribution of the amount:
The total percentage of the tax collected is 6% (4% + 2%).
The amount to Curry City = $1,050,000 × 2/6 = $350,000
The amount to State = $1,050,000 × 4/6 = $700,000
89
A company reports the following information for year 1:
Sale of equipment $20,000
Issuance of the company's bonds 10,000
Dividends paid 5,000
Purchase of stock of another company 2,000
Purchase of U.S. Treasury note 2,000
Income taxes paid 2,000
Interest income received 500
What is the company's net cash flow from financing activities?
($9,000)
$5,000
$5,500
$15,000
$5,000
Partial Statement of Cash Flows:
Cash Flows from Financing Activities:
Issuance of the company’s bonds $10,000
Dividends paid (5,000)
Net Cash Flows from Financing Activities $ 5,000
========
The statement of cash flows is presented in three sections: cash flows from operating activities, from investing activities, and from financing activities. The change in cash resulting from the total of these three sections reconciles the change in cash for the period.
The financing activities section of the statement of cash flows presents positive and negative cash flows for transactions resulting from sources of financing for the company, primarily debt and equity financing. This section includes an increase from the issuance of the company’s bonds and a decrease from dividends paid (as shown in the partial statement of cash flows above).
The operating activities section of the statement of cash flows presents the positive and negative cash flows from the company’s primary operating activities. This section includes income taxes paid and interest income received.
The investing activities section of the statement of cash flows presents positive and negative cash flows for transactions involving assets that are not held for resale (i.e., inventories). The most significant investing activities involve investments in debt and equity securities, plant assets, and intangible assets. This section includes the sale of equipment, the purchase of stock of another company, and the purchase of a U.S. Treasury note.
90
The following information pertains to Spruce City's liability for claims and judgments:
Current liability at January 1, 20X1 $100,000
Claims paid during 20X1 800,000
Current liability at December 31, 20X1 140,000
Noncurrent liability at December 31, 20X1 200,000
What amount should Spruce report for 20X1 claims and judgments expenditures?
$1,040,000
$940,000
$800,000
$840,000
$840,000
Because the question asks for the amount of “expenditures,” it is clear that the question refers to the governmental fund reporting and not the government-wide reporting. The current liability of $100,000 at the start of year 20X1 relates to expenditures of the prior year. The 20X1 payment of $800,000 liquidated that liability of $100,000 remaining from the prior year and recognized $700,000 of 20X1 expenditures. At the end of 20X1, another $140,000 of 20X1 claims and judgments expenditures were waiting to be liquidated with current resources. Thus, the 20X1 claims and judgments expenditures were $840,000.
91
Yellow Co. received a large worker's compensation claim of $90,000 in the third quarter for an injury occurring in the third quarter. How should Yellow account for the transaction in its interim financial report?
Recognize $22,500 ratably over the four quarters of the year
Recognize $90,000 in the third quarter
Recognize $30,000 for each of the first three quarters
Disclose the $90,000 in the third quarter and recognize it at year-end
Recognize $90,000 in the third quarter
In general, interim financial reports should be based on the principles, practices, and policies used in the preparation of the last annual report. Deferrals, accruals, and estimations at the end of each interim period are determined on the same basis as the same judgments would be made for an annual period; hence Yellow would recognize the entire $90,000 in the third quarter.
92
Louisiana Designer Yarn, Inc., applies IFRS and does substantial research and development work in designing new processes to produce its products. One yarn-producing machine design, which is in an advanced stage of development, and which the company thinks its present prototype model should be both technologically feasible and affordable to produce, is still going to be developed, internally, for 18 months prior to being finished. Can the corporation recognize and capitalize any of the costs of developing the new machine design?
No, because all research and development costs are expensed as incurred
Yes, as long as the design is likely to be feasible and marketable or profitable to use internally for future production
Yes, but only if the machine is to be used by the corporation itself for internal operations and production
No, because the machine design is an internally developed intangible asset, with no purchase transaction
Yes, as long as the design is likely to be feasible and marketable or profitable to use internally for future production
93
Which of the following accounting pronouncements is the most authoritative?
FASB Statement of Financial Accounting Concepts (SFAC)
FASB Technical Bulletins
FASB Accounting Standards Codification
AICPA Statement of Position
FASB Accounting Standards Codification
Under FASB ASC 105-10, effective for financial statements issued for interim and annual periods ending after September 15, 2009, the Accounting Standards Codification (ASC) is the single source of authoritative GAAP recognized by the Financial Accounting Standards Board (FASB) to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority.
94
In Year 1, Gamma, a not-for-profit organization, deposited at a bank $1,000,000 given by a donor to purchase endowment securities. The securities were purchased January 2, Year 2. At December 31, Year 1, the bank recorded $2,000 interest on the deposit. In accordance with the bequest, this $2,000 was used to finance ongoing program expenses in March of Year 2. At December 31, Year 1, what amount of the bank balance should be included as current assets in Gamma’s statement of financial position?
$0
$2,000
$1,000,000
$1,002,000
$2,000
In this situation, the income from the endowment is available to fund current program expenses (those incurred within the year). Since the principal of the endowment is designated for security investments (which are not current assets), only the income related to the investment is current, since it is intended to be expended within the coming year.
95
A lessee-guaranteed residual value at the beginning of a finance lease should be:
excluded from lease payments by both the lessee and lessor.
included by the lessor as part of lease payments at future value.
included by the lessee as part of lease payments at present value.
included by the lessor as part of lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.
included by the lessee as part of lease payments at present value.
The guaranteed residual value is a promise made by the lessee to return a certain value to the lessor which the lessor desires to recover its investment in the asset. When calculating the lease payments, the lessor includes the guaranteed residual value in the lease liability computation. However, if the residual value of the asset at the end of the lease term is expected to be greater than the guarantee, the lessee can ignore the guaranteed residual value. If the amount owed under a guaranteed residual value changes, the lessee must remeasure payments.
96
Foster Company reported a retained earnings balance of $402,000 on December 31, 20X4. In May 20X5, Foster discovered that merchandise costing $95,000 had been erroneously included in inventory in its 20X4 financial statements. Foster has a 25% tax rate. What amount should Foster report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 20X5?
$330,750
$402,000
$425,750
$473,750
$330,750
Foster should report $330,750 as adjusted beginning retained earnings:
Reported retained earnings (12/31/X4) $402,000
Correction of error:
DECREASE in income ($95,000)*
Less income taxes (25%) 23,750
Prior-period adjustment (71,250)
Adjusted beginning retained earnings $330,750
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* Inventory was overstated in 20X4, meaning inventory was reported as ending inventory when it should have been included in cost of goods sold, leading to a lower net income in 20X4. Therefore, 20X4 was overstated, causing beginning retained earnings to also be overstated.
97
On January 2, 20X1, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 non-interest-bearing note due January 2, 20X4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type on January 2, 20X1, was 10%. The present value of 1 at 10% for three periods is 0.75.
In Emme's 20X1 income statement, what amount should be reported as interest income?
$9,000
$45,000
$50,000
$60,000
$45,000
Interest is revenue charged in relation to money lent. One must recognize it based on the amount lent and the agreed-upon rate.
Present value of note = .75 × $600,000 = $450,000
Interest income for 20X1 = 0.10 × $450,000 = $45,000
98
A deferred tax liability may result from which of the following items?
Life insurance proceeds received on the death of key employees
Interest on municipal bonds
Penalties paid for legal violations
Depreciation of tangible assets
Depreciation of tangible assets
The most common source of a deferred tax liability is the use of accelerated depreciation for tax purposes only (not for financial accounting). More tax expenses are taken immediately than for financial accounting, thus leaving fewer tax deductions for future use (and higher taxes to pay later on, thus a deferred tax liability). The other answer choices are permanent differences. All deferred tax assets and liabilities are classified as noncurrent on the balance sheet.
99
On December 31, 20X1, Bit Co. had capitalized costs for a new computer software product with an economic life of 5 years. Sales for 20X2 were 30% of expected total sales of the software. On December 31, 20X2, the software had a net realizable value equal to 90% of the capitalized cost. What percentage of the original capitalized cost should be reported as the net amount on Bit's December 31, 20X2, balance sheet?
80%
72%
90%
70%
70%
FASB ASC 985-20-35-1 provides: "The annual amortization shall be the greater of the amount computed using (a) The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) The straight-line method over the remaining estimated economic life of the product including the period being reported on."
Ratio of current to total revenues (given) = 30%
Straight-line rate = 1/5 = 20%
The greater of these, 30%, would be used in computing 20X2 amortization, leaving a net amount of 70% (100% − 30%) to be shown on Bit's December 31, 20X2, balance sheet.
100
Spiro Corp. uses the sum-of-the-years'-digits method to depreciate equipment purchased in January 20X1 for $20,000. The estimated salvage value of the equipment is $2,000 and the estimated useful life is four years. What should Spiro report as the asset's carrying amount as of December 31, 20X3?
$1,800
$2,000
$3,800
$4,500
$3,800
The sum-of-the-years'-digits depreciation method entails using a fraction with a numerator equal to the remaining useful life of the asset at the beginning of the year and a denominator equal to the sum of the years' digits. To calculate annual depreciation expense, this fraction is applied each year to the depreciable basis of the asset, which is the historical cost less any salvage value. For an asset with a 4-year estimated useful life, the denominator is 4 + 3 + 2 +1 = 10. The depreciable basis in Spiro's equipment is $20,000 less an estimated salvage value of $2,000 = $18,000. Depreciation expense for 20X1 through 20X3 is calculated as follows: 4/10 × $18,000 = $7,200; 3/10 × $18,000 = $5,400; 2/10 × $18,000 = 3,600. At December 31, 20X3, accumulated depreciation is $16,200 and the cost is $20,000, resulting in a net book value of the equipment of $3,800.
101
Which of the following is included on a statement of changes in equity?
Events changing stockholders' equity accounts are listed chronologically to the left.
The impact of the transactions on the number of shares of stock, if any, is presented in the descriptions to the left.
All of the items listed are included on a statement of changes in equity.
Column headings identify individual stockholders' equity accounts.
All of the items listed are included on a statement of changes in equity.
A. statement of changes in stockholders' equity includes the following:
Column headings that identify individual stockholders' equity accounts
Events changing stockholders' equity accounts
The body of the statement presented in terms of the dollar impact of various transactions and events
The impact of the transactions on the number of shares of stock, if any
Ending balances that tie to the items presented in the stockholders' equity section of the balance sheet on the same dates
102
Which of the following would be added back to net income when reporting operating activities' cash flows by the indirect method?
Excess of treasury stock acquisition cost over sales proceeds (cost method)
Bond discount amortization
Both excess of treasury stock acquisition cost over sales proceeds (cost method) and bond discount amortization
Neither excess of treasury stock acquisition cost over sales proceeds (cost method) nor bond discount amortization
Bond discount amortization
FASB ASC 230-10-55-1 describes the indirect method briefly as follows: "Given sufficiently detailed information, major classes of operating cash receipts and payments may be determined indirectly by adjusting revenue and expense amounts for the change during the period in related asset and liability accounts."
Thus, bond discount amortization would be deducted from interest expense to compute the amount of cash paid for bond interest. The net effect would be to add this amortization amount to net income (as a noncash expense).
The excess of treasury stock acquisition cost over sales proceeds is not an income item; rather, the excess is an equity item debited to contributed capital from treasury stock transactions.
103
A nongovernmental not-for-profit college has a portfolio of bond investments that had an original cost of $2,000,000. The college's board of trustees voted to hold the principal of this fund intact in perpetuity and designated the earnings to reimburse faculty for travel to academic conferences. During the year, interest of $50,000 was earned in cash. The fair value of the bonds was $1,980,000. What amount should the college report as net assets with donor restrictions at year-end?
$2,000,000
$0
$1,980,000
$2,030,000
$0
Only the donor can restrict assets; the board of trustees does not hold that power. Therefore, the amount of net assets with donor restrictions at year-end is $0.
104
The City of Cobb has two trust funds for the benefit of the city's library, trust fund A and trust fund B. Only the earnings from trust fund A can be expended and both the principal and interest from trust fund B can be expended. How should the City of Cobb report each trust fund?
Trust fund A: Permanent
Trust fund B: Permanent
Trust fund A: Permanent
Trust fund B: Special revenue
Trust fund A: Special revenue
Trust fund B: Permanent
Trust fund A: Special revenue
Trust fund B: Special revenue
Trust fund A: Permanent
Trust fund B: Special revenue
Trust fund A should be classified as a permanent fund because the principal amount of the fund is restricted in use and only the earnings can be expended.
Trust fund B is classified as a special revenue fund because the fund’s principal and earnings are both restricted to use for the city’s library only. Trust fund B would be a permanent fund if, like trust fund A, the principal was prohibited from use.
105
The modified accrual basis of accounting should be used for which of the following funds?
Enterprise fund
Pension trust fund
Proprietary fund
Capital projects fund
Capital projects fund
In governmental accounting, the measurement focus and basis of accounting used depend on the nature of the fund. The flow of current financial resources measurement focus and the modified accrual basis are used in the governmental funds where revenues and expenditures are recorded, such as the General, Special Revenue, Capital Projects, Debt Service, and Permanent Funds.
106
A company has the following items on its year-end trial balance:
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Net sales $500,000
Common stock 100,000
Insurance expense 75,000
Wages 50,000
Cost of goods sold 100,000
Cash 40,000
Accounts payable 25,000
Interest payable 20,000
What is the company's gross profit?
```
$400,000
$230,000
$500,000
$275,000
$400,000
As presented on a multiple-step income statement, gross profit (or gross margin) is net sales less cost of goods sold. In this problem, gross profit is:
Net sales $500,000
Cost of goods sold (100,000)
Gross profit $400,000
107
The following information was taken from the current year financial statements of Planet Corp.:
Accounts receivable, January 1 $ 21,600
Accounts receivable, December 31 30,400
Sales on account and cash sales 438,000
Uncollectible accounts 1,000
No accounts receivable were written off or recovered during the year. If the direct method is used in the current-year statement of cash flows, Planet should report cash collected from customers as:
$446,800.
$428,200.
$429,200.
$447,800.
$429,200.
The cash collected is $429,200, calculated as follows:
Sales $438,000
Increase in accounts receivable
($30,400 – $21,600) 8,800
Cash collected from customers $429,200
108
The following information pertains to Grove City's interfund receivables and payables at December 31, 20X1:
Due to special revenue fund from
general fund $10,000
Due to private trust fund from
special revenue fund 4,000
In Grove's special revenue fund balance sheet at December 31, 20X1, how should these interfund amounts be reported?
As a liability of $6,000
As an asset of $10,000 and a liability of $4,000
As an asset of $6,000
As an asset of $4,000 and a liability of $10,000
As an asset of $10,000 and a liability of $4,000
Grove City's special revenue fund would have an asset equal to the amount “due to special revenue fund from the general fund.” The amount “due to private trust fund from special revenue fund” is a liability of the special revenue fund. It is not acceptable to “net” these two accounts.
109
Wilson Corp. experienced a $50,000 decline in the market value of its inventory in the first quarter of its fiscal year. Wilson had expected this decline to reverse in the third quarter, and in fact, the third quarter recovery exceeded the previous decline by $10,000. Wilson's inventory did not experience any other declines in market value during the fiscal year. What amounts of loss and/or gain should Wilson report in its interim financial statements for the first and third quarters?
First quarter: $50,000 loss; Third quarter: $60,000 gain
First quarter: $0; Third quarter: $10,000 gain
First quarter: $50,000 loss; Third quarter: $50,000 gain
First quarter: $0; Third quarter: $0
First quarter: $0; Third quarter: $0
FASB ASC 270-10-45-1 states that companies should view interim periods as an integral part of the annual reporting period. Therefore, declines in inventory that are temporary need not be reported in interim periods.
Note that Wilson expected the first-quarter decline to reverse later in the same year. However, if it expected the loss to be of an other-than-temporary nature, Wilson should have recognized the loss in the first quarter.
110
In February, Colt Corp. sold merchandise to Sink Co. for $10,000. Colt is using the cost recovery method to account for this sale, which had cost of goods sold of $2,500. Colt received the following payments from Sink during the year:
```
Date Amount
June $1,000
August 1,500
October 200
December 700
$3,400
What amounts of gross profit should Colt recognize in its June 30 and December 31 income statements?
```
June 30: $0; December 31: $0
June 30: $0; December 31: $900
June 30: $1,000; December 31: $2,400
June 30: $1,000; December 31: $3,400
June 30: $0; December 31: $900
Under U.S. GAAP, profit is deemed to be realized at the point of sale unless the collection of the sales price is not reasonably assured. The cost recovery method (CRM) is only allowed in limited situations (e.g., where receivables are collectible over an extended period of time and, because of the terms of the transaction or other uncertainties, there is no reasonable basis for estimating the degree of collectibility). Under the CRM, the early payments are considered entirely a recovery of cost, and not until the cost is completely recovered is any gross profit recognized.
Accordingly, Colt should classify the first two payments as recovery of cost ($2,500) and the second two payments ($900) as gross profit on the December 31 income statement.
111
Permanent differences between taxable income and pre-tax accounting income affect:
intraperiod income tax allocation.
interperiod income tax allocation.
both interperiod and intraperiod income tax allocation.
neither interperiod nor intraperiod income tax allocation.
neither interperiod nor intraperiod income tax allocation.
FASB ASC 740-10-10-1 notes: “Certain revenues are exempt from taxation and certain expenses are not deductible.”
The items referred to in this passage are commonly called permanent differences. A permanent difference affects only the current reconciliation of book income to taxable income, and the permanent difference has no effect on the computation of deferred taxes. Permanent differences do not affect either interperiod or intraperiod income tax allocation.
112
Encumbrances would not appear in which fund?
Enterprise
Capital projects
General
Special revenue
Enterprise
Encumbrances are used for budgetary control purposes in governmental funds. Of the four funds listed in this question, all but the enterprise funds are governmental funds. The GASB Codification emphasizes that encumbrances should be used especially in the general and special revenue funds, and may be used in the capital projects fund depending on the complexity of the projects being administered.
113
On March 21, Year 2, a company with a calendar year-end issued its Year 1 financial statements. On February 28, Year 2, the company's only manufacturing plant was severely damaged by a storm and had to be shut down. Total property losses were $10 million and determined to be material. The amount of business disruption losses is unknown. How should the impact of the storm be reflected in the company's Year 1 financial statements?
Accrue and disclose the property loss and additional business disruption losses in the financial statements
Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements
Accrue and disclose the property loss with no accrual or disclosure of the business disruption loss
Provide no information related to the storm losses in the financial statements until losses and expenses become fully known
Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements
An entity must not recognize events that arose after the balance sheet date but before the financial statements are issued. One of the events specifically mentioned in FASB ASC 855-10-55-2 is the loss of plant as a result of fire or other natural disaster. However, this event must be disclosed in the notes to the financial statements.
FASB ASC 855-10-55-2 states: "The following are examples of nonrecognized subsequent events addressed in [FASB ASC] 855-10-25-3:
"Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
"A business combination that occurs after the balance sheet date but before financial statements are issued or are available to be issued ([FASB ASC] 805 requires specific disclosures in such cases.)
"Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued
"Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued
"Losses on receivables resulting from conditions (such as a customer's major casualty) arising after the balance sheet date but before financial statements are issued or are available to be issued
"Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
"Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees after the balance sheet date but before financial statements are issued or are available to be issued."
(Emphasis added)
114
Which of the following statements regarding the cash basis of accounting is true?
The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method.
Cash basis financial statements are sometimes provided for investors or creditors.
Net operating cash flow is the difference between cash receipts and cash disbursements.
All of the answer choices are true.
All of the answer choices are true.
The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method. However, cash basis financial statements are sometimes provided for investors or creditors. Cash basis accounting results in a measure similar to net income called net operating cash flow. Net operating cash flow is the difference between cash receipts and cash disbursements.
The cash basis is an acceptable method for the preparation of tax returns.
115
Aln Co. incurred the following expenses during the current period:
Routine ongoing efforts to improve an existing product $ 50,000
Troubleshooting in connection with breakdowns during
commercial production 75,000
Routine testing of products during commercial production
for quality-control purposes 100,000
What is the total amount of research and development expense incurred by Aln during the current period?
$0
$75,000
$125,000
$175,000
$0
U.S. GAAP defines research and development costs as costs that will be useful in developing a new product or service and the translation of research into a plan or design for a new product. The costs relate to activities identified with the period prior to the beginning of commercial production and are expensed as incurred because their ability to provide future benefits is still uncertain.
Ongoing efforts to improve an existing product already in production, troubleshooting during commercial production, and routine testing during commercial production are all activities that have occurred after the production phase has begun and therefore would not quality as research and development expenses. The company would report $0 in research and development as none of its activities relate to the preproduction period.
116
A company reports the following information as of December 31:
Sales revenue $800,000
Cost of goods sold 600,000
Operating expenses 90,000
Unrealized holding gain on available-
for-sale debt securities, net of tax 30,000
What amount should the company report as comprehensive income as of December 31?
$30,000
$110,000
$140,000
$200,000
$140,000
Other comprehensive income is computed as follows:
```
Sales revenue $800,000
Cost of goods sold 600,000
Gross profit $200,000
Operating expenses 90,000
Net income $110,000
Unrealized holding gain 30,000
Comprehensive income $140,000
```
117
Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12, 20X1. Cobb received a stock dividend of 2,000 shares on March 31, 20X1, when the carrying amount per share on Roe's books was $35 and the market value per share was $40. Roe paid a cash dividend of $1.50 per share on September 15, 20X1. In Cobb's income statement for the year ending October 31, 20X1, what amount should Cobb report as dividend income?
$88,000
$15,000
$18,000
$98,000
$18,000
A stock dividend does not represent income to the investor. The only effect of a stock dividend is a change in the number of shares held and the carrying value per share; the total carrying value remains unchanged. Thus, only the cash dividend results in dividend income (based on 12,000 shares, the number after the stock dividend):
Dividend income for the year ending October 31, 20X1
= 12,000 shares x $1.50
= $18,000
Note: Cobb's 2% ownership interest requires accounting using the cost method. Under the cost method, dividends are recognized as income when received.
118
Isle Co. owned a copy machine that cost $5,000 and had accumulated depreciation of $2,000. Isle exchanged the copy machine for a computer that cost $4,000. Isle's future cash flows are not expected to change significantly as a result of the exchange. What amount of gain or loss should Isle report and at what amount should it record the asset?
No gain or loss in the income statement; $4,000 asset in the balance sheet
$1,000 gain in the income statement; $4,000 asset in the balance sheet
$1,000 gain in the income statement; $3,000 asset in the balance sheet
No gain or loss in the income statement; $3,000 asset in the balance sheet
No gain or loss in the income statement; $3,000 asset in the balance sheet
Normally, in a nonmonetary exchange, the asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident. However, there are three exceptions in which the exchange is recorded at the carryover amount, not fair value. One of those exceptions is for exchange transactions that lack commercial substance, as does the exchange above. Isle should record the new copy machine at the carryover amount of $3,000 and not any gain or loss.
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119
Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than generally accepted accounting principles (also known as a special purpose framework)?
I. Basis of accounting used by an entity to file its income tax return
II. Cash receipts and disbursements basis of accounting
Neither I nor II
I only
Both I and II
II only
Both I and II
AU-C 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, identifies five comprehensive bases of accounting other than generally accepted accounting principles (AU-C 800.07):
```
Cash basis
Tax (income) basis
Regulatory basis
Contractual basis
Other basis
Note: Both the income tax (tax (income) basis) and cash (cash basis) bases are on this list.
```
120
A company completes construction of a $400 million offshore oil platform and places it into service on January 1. State law requires that the platform be dismantled and removed at the end of its useful life, which is estimated to be 10 years. The company estimates that the cost of dismantling the platform will be $20 million. The discounted value of the liability is $9 million using the company's credit-adjusted, risk-free rate. The company has already capitalized the $400 million construction cost of the platform. What amounts should the company record as liability and expense when the asset is placed into service?
Liability, $0; Expense, $0
Liability, $20,000,000; Expense, $20,000,000
Liability, $9,000,000; Expense, $0
Liability, $9,000,000; Expense, $9,000,000
Liability, $9,000,000; Expense, $0
An asset retirement obligation (ARO) refers to an obligation associated with the retirement of a tangible, long-lived asset, such as an offshore oil platform. When an ARO is recognized, an entity should capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the ARO. Subsequently, the entity should amortize the asset retirement cost to expense using a systematic and rational method over its useful life.
The ARO liability is the discounted present value of the liability, or $9,000,000. Accretion expense is recorded at the end of the accounting period, not when the asset is place into service.
121
Which of the following transactions qualifies as a discontinued operation?
Disposal of part of a line of business that represents 20% of the entity's total revenue
Planned and approved sale of a segment
Phasing out of a production line representing 25% of the entity's total revenue
All of the answer choices are discontinued operations.
All of the answer choices are discontinued operations.
Discontinued operations result from a disposal that represents a strategic shift. Examples included in FASB ASC 205-20-55-83 to 55-101 include:
a sale of a product line that represents 15% of the entity’s total revenues;
a sale of a geographical area that represents 20% of the entity’s total assets;
a sale of the entity’s stores in one of its two types of store formats that have provided 15% of current-period net income and have, in the past, represented 30% to 40% of the entity’s net income;
the sale of an equity method investment representing 20% of the entity’s total assets; or
the sale of 80% of a product line representing 40% of total revenue, but only if the entity retains 20% of its ownership interest.
All of the disposals described in the answer choices are discontinued operations.
122
A company began developing computer software to be sold as a separate product on January 1, year 1. During the planning, coding, and testing phases, the company incurred $1,300,000 of costs. On June 30, year 1, the product was determined to be technologically feasible. The company began producing product masters of the software and incurred an additional $750,000 of costs from July 1, year 1, through September 30, year 1. After the software was available for release on October 1, year 1, the company incurred an additional $275,000 of costs relating to maintenance and customer support. What amount of software-related costs should be capitalized?
$275,000
$750,000
$1,300,000
$2,050,000
$750,000
Costs for computer software to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model. After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Maintenance and customer support costs are not production costs, and are expensed.
The company should capitalize $750,000 (for producing product masters of the software) in software-related costs.
123
Swift Co. has identified three operating segments that may require separate disclosure in Swift's general purpose financial statements for the year ended December 31, year 2. Information for year 2 follows:
Segment (in Thousands)
A B C Total
Reported revenue $ 42 $121 $14 $ 177
Reported profit(loss) 12 65 (3) 74
Assets 470 800 80 1,350
Which of Swift's segments are required to be separately disclosed in its December 31, year 2, financial statements?
A, B, and C
A and C only
A and B only
B and C only
And B only
Once an enterprise identifies its operating segments, it must report information separately for each operating segment that meets any of the following three tests:
Revenue test: If its revenue is 10% or more of the combined revenue of all operating segments
Profitability test: If the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute terms, of:
the combined reporting profit of all operating segments that did not report a loss or
the combined reported loss of all operating segments that did report a loss
Asset test: If its assets are 10% or more of the combined assets of all operating segments
Following these rules, segments must be reported if:
Revenue > = $17.7 ($177 × 10%)
Segments meeting requirement: A and B
Profit or loss > = $7.7 ($77 combined profit × 10%) > ($3 combined losses × 10%)
Segments meeting requirement: A and B
Assets > = $135 ($1,350 × 10%)
Segments meeting requirement: A and B
An operating segment must only meet one test to require separate reporting. Under the revenue test, the profitability test, or the asset test, A and B would have to report separately. C is not required to report under any of the three tests.
124
As of December 1, Year 2, a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 3-year balloon note. The company has no other liabilities. How should the company's debt be presented in its classified balance sheet (statement of financial position) on December 31, Year 2, if no debt repayments were made in December?
Current liabilities of $1,000,000; long-term liabilities of $1,050,000
Current liabilities of $500,000; long-term liabilities of $1,550,000
Current liabilities of $400,000; long-term liabilities of $900,000
Current liabilities of $500,000; long-term liabilities of $800,000
Current liabilities of $400,000; long-term liabilities of $900,000
A current liability is expected to require the use of current assets or the creation of other current liabilities. Long-term liabilities (or obligations) are those liabilities scheduled to mature beyond one year. The current and long-term liabilities in this problem are as follows:
Current Long-Term
Line of credit $250,000
Secured note 150,000 $600,000
Balloon note 300,000
Total $400,000 $900,000
125
The University of Tulsa, a private institution, is required to report under the standards of which of the following bodies?
Primarily FASB
Primarily GASB
Primarily APB
None of the above
Primarily FASB
Since the University of Tulsa is a private university, it is not required to report under the standards of GASB. GASB standards only apply to entities belonging to a governmental entity.
When the Financial Accounting Foundation (FAF) established the GASB in a brother-sister relationship with the FASB, the FAF established the following jurisdiction policy:
The GASB is to establish accounting and reporting standards for activities and transactions of state and local governmental entities—which include states, counties, cities, and towns; independent school districts; state and local government educational institutions (colleges and universities); hospitals and other health care organizations; and charitable and other not-for-profit organizations that are government organizations.
The FASB is to establish accounting and reporting standards for activities and transactions of all other entities.
The GASB and the FASB agreed that the term “state and local governmental entities” should be defined as follows:
Governmental organizations are:
public corporations and bodies corporate and political and
other organizations that have one or more of the following characteristics:
popular election of officers or appointment (or approval) of a controlling majority of the members of the organization's governing body by officials of one or more state or local governments,
the potential for unilateral dissolution by a government with the net assets reverting to a government,
the power to enact and enforce a tax levy, or
the ability to issue directly (rather than through a state or municipal authority) debt that pays interest exempt from federal taxation
Entities meeting either part a. or part b. of this definition are under the GASB's jurisdiction; those not meeting this definition are under the FASB's jurisdiction.
126
On January 1, year 3, a company changed its inventory costing method from LIFO to FIFO. The company's year 3 financial statements contain comparative information for year 2. How should the company present the year 1 effect of the change in accounting principle in its year 3 comparative financial statements?
As an adjustment to the beginning year 2 inventory balance with an offsetting adjustment to beginning year 2 retained earnings
As part of income from continuing operations in the year 2 income statement
As an extraordinary item in the year 2 income statement
As a note disclosure only
As an adjustment to the beginning year 2 inventory balance with an offsetting adjustment to beginning year 2 retained earnings
Changing from LIFO (last in, first out) to FIFO (first in, first out) is considered a change in accounting principle. The FASB requires that in the absence of a specific statement by the FASB to the contrary, accounting changes should be accounted for using the retrospective approach. Under this approach, all prior years’ financial statements presented should be restated and the cumulative effect of the change should be reported in the retained earnings statement (or in the statement of changes in stockholders’ equity) as an adjustment of the beginning-of-period balance of retained earnings of the earliest year presented, which would be year 2 for this question.
127
On February 3, Rafia Corporation, a U.S. company, sold and delivered merchandise on a 30-day account to Sanchez & Company, a Mexican corporation, for 1,900,000 pesos. On March 3, Sanchez paid Rafia in full. Relevant currency exchange rates were as follows:
February 3 March 3
Spot rate $ .056 $ .050
30-day forward rate .052 .049
What amount should Rafia record to accounts receivable when it receives payment from Sanchez on March 3 as an account receivable for its sale to Sanchez?
$106,400
$95,000
$93,100
$11,400
$106,400
The receivable should initially be recorded at the spot rate on the date of the transaction (1,900,000 pesos × $0.056 = $106,400). When Rafia receives payment on March 3, the 1,900,000 pesos will equal $95,000 (1,900,000 × $0.05) in U.S. dollars, not the $106,400 U.S. dollars for which the accounts receivable was originally recorded.
The journal entry on March 3 is:
Cash 95,000
Foreign currency transaction loss 11,400
Accounts receivable 106,400
128
A firm's ending inventory balance was overstated by $1,000. Which of the following statements is correct according to a periodic inventory system?
The gross margin was understated by $1,000.
The retained earnings were overstated by $1,000.
The cost of goods available for sale was overstated by $1,000.
The cost of goods sold was overstated by $1,000.
The retained earnings were overstated by $1,000.
To solve this question, try using the inventory formula:
Cost of goods sold (COGS) = Beginning inventory (BI) + Purchases (P) – Ending inventory (EI)
If EI is overstated, then COGS is understated. This results in overstating net income (NI). Since NI closes into retained earnings (RE) at year-end, RE would also be overstated (by $1,000). Cost of goods available for sale (CGAS) is BI + P and would not be affected by the amount in EI.
129
In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary's functional currency is the currency:
of the country in which the subsidiary is located.
of the environment in which the subsidiary primarily generates and expends cash.
of the country in which the parent is located.
in which the subsidiary maintains its accounting records.
of the environment in which the subsidiary primarily generates and expends cash.
FASB ASC 830-10-45-2 states that the functional currency is the currency of the primary economic environment in which the entity operates or the currency in which most of the subsidiary's transactions are denominated.
130
On January 1, 20X1, Crater, Inc., purchased equipment having an estimated salvage value equal to 20% of its original cost at the end of a 10-year life. The equipment was sold December 31, 20X5, for 50% of its original cost. If the equipment's disposition resulted in a reported loss, which of the following depreciation methods did Crater use?
Double-declining balance
Sum-of-the-years'-digits
Straight-line
Composite
Straight-line
Use of an accelerated depreciation method (e.g., double-declining balance or sum-of-the-years'-digits) would most likely produce a gain rather than a loss because of the rapid reduction in carrying value. With this in mind, it would be a good idea to try the straight-line method first.
Assume that the equipment cost $10,000. Then, the salvage value would equal $2,000 (20% × $10,000). Crater held the equipment for 5 years (January 1, 20X1, through December 31, 20X5). Proceeds would equal $5,000 (50% × $10,000).
Straight-line depreciation for 5 years = 5 x ($10,000 - $2,000) / 10 = $4,000
Carrying value after 5 years = $10,000 - $4,000 = $6,000
Loss from disposal = Proceeds - Carrying value
= $5,000 - $6,000 = ($1,000)
The straight-line depreciation method must have been used by Carter.
131
Glinko Corporation has convertible bonds as part of its capital structure. The bonds were issued at par and have a face value of $300,000. The interest rate on the bonds is 5%. If Glinko has an income tax rate of 35%, what is the amount that will be added to the numerator in the computation of diluted earnings per share?
$5,250
$15,000
$105,000
$9,750
$9,750
The amount to be added back is the after-tax amount of the interest expense on the bonds that Glinko will have added back to net income if the bonds were converted. The annual interest expense on the bonds is $15,000 ($300,000 × .05). The annual interest expense is multiplied by the tax rate and then that amount is subtracted from the annual interest expense to arrive at after-tax interest expense ($15,000 × 0.35 = $5,250; $15,000 – $5,250 = $9,750).
The amount can be more efficiently computed in the following manner: $15,000 × (1 – 0.35) = $9,750.
132
Dean Company uses the retail inventory method to estimate its inventory for interim statement purposes. Data relating to the computation of the inventory at July 31 are as follows:
Cost Retail
Inventory, 2/1 $ 180,000 $ 250,000
Purchases 1,020,000 1,575,000
Markups, net 175,000
Sales 1,705,000
Estimated normal shoplifting losses 20,000
Markdowns net 125,000
Under the approximate lower of average cost or market retail method, Dean’s estimated inventory at July 31 is:
$90,000.
$96,000.
$102,000.
$150,000.
$90,000.
First, add the beginning inventory and purchases in the cost column:
$180,000 + $1,020,000 = $1,200,000
When seeking the lower of cost or market method for the retail method, add, in the retail column, first only the beginning inventory, the purchases, and the net markups:
$250,000 + $1,575,000 + $175,000 = $2,000,000
Divide these subtotals, to get the cost-to-retail ratio:
$1,200,000 ÷ $2,000,000 = 0.6
Next, from the subtotal in the retail column, subtract the sales, normal losses, and markdowns, leaving an ending inventory, at retail, of $150,000:
$2,000,000 – $1,705,000 – $20,000 – $125,000 = $150,000
The final step to get the ending inventory at lower of average cost or market is to take the ending inventory at retail of $150,000 and multiply it by the cost to retail ratio of 0.6:
$150,000 × 0.6 = $90,000
Note: Inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs.
133
A 15-year bond was issued in Year 1 at a discount. During Year 11, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the Year 11 bond transactions was to increase long-term liabilities by the excess of the 10-year bond’s face amount over the 15-year bond’s:
face amount less the deferred loss on bond retirement.
carrying amount.
face amount.
carrying amount less the deferred loss on bond retirement.
carrying amount.
In order to solve this problem, give the 15-year bonds a face amount, say $100,000. If the bond was issued at a discount, then it was issued and was carried as a debt at a value below $100,000, say $90,000 (if the remaining unamortized discount was $10,000). If the 10-year bond was issued at its face amount, then it would be carried as a debt at its face amount.
If the 10-year bond was issued during Year 11, then the 15-year bond was still a long-term debt, and the new 10-year bond would also be a long-term debt. If the 10-year bond was issued at face and the proceeds paid off the face amount of the 15-year bond, then the 10-year bond would have needed to be at least the face amount of the 15-year bond (they would have the same face amount).
Thus, the new debt would be carried at $100,000, the old debt would be carried at below $100,000 (less the remaining unamortized discount), and the total long-term liabilities would be increased by the discount left, the amount the new 10-year debt carrying value is higher than the carrying value of the 15-year debt.
134
A company obtained a $300,000 loan with a 10% interest rate on January 1, Year 1, to finance the construction of an office building for its own use. Building construction began on January 1, Year 1, and the project was not completed as of December 31, Year 1. The following payments were made in Year 1 related to the construction project:
January 1 Purchased land for $120,000
September 1 Progress payment to contractor for $150,000
What amount of interest should be capitalized for the year ended December 31, Year 1?
$17,000
$13,500
$30,000
$15,000
$17,000
The capitalized interest is based on the payments made for the land and progress payments to the contractor based on the amount of the year that these payments were outstanding. The land payment of $120,000 was outstanding the entire year for an expenditure amount of $120,000 × 12/12, or $120,000. The progress payment to the contractor was for $150,000 and was made in September, for only the last four months of the year, thus an expenditure of $150,000 × 4/12, or $50,000.
The total weighted-average expenditures was thus $120,000 and $50,000, for a total of $170,000. A larger ($300,000) specifically construction-related debt was outstanding all year, so there is enough principal to capitalize the interest at the 10% rate of the loan.
The capitalized interest is thus $170,000 × 0.10, or $17,000.
135
A publicly traded corporation reported a $10,000 deduction in its current-year tax return for an item it expects to be disallowed. The tax rate is 40%. How should the corporation report this tax position in the financial statements?
As a $4,000 deferred tax asset and a $4,000 income tax benefit
As a $10,000 deferred tax asset
As a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit
As a temporary difference disclosed in the notes to the financial statements that is not recognized
As a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit
If the company expects the item to be disallowed, it believes it does not meet the “more likely than not” threshold for recognizing a potential tax benefit. Following accounting conservatism, the company must treat the deduction as if it was disallowed from the start by recognizing tax expense and the associated liability.
The company would have $4,000 ($10,000 × 40%) more in tax expense and liability because it expects the deduction to be disallowed.
136
Options to purchase common stock are excluded from the computation of diluted EPS if:
their exercise price is greater than the average market price.
their exercise price is less than the average market price.
they are employee compensation and the employee may not be able to sell the stock until some future date.
they are issued as part of employee compensation arrangements.
their exercise price is greater than the average market price.
Options have a diluting effect when the average market price of the common stock exceeds the exercise price of the options. (Note that options would not be exercised by holders if the option price exceeds the market price.) FASB ASC 260-10-45-28A states that stock-based awards are included in diluted EPS even if the employee may not be able to sell them until some future date.
137
For the fall semester of 20X2, a state-operated college sent tuition notices to enrolled students that totaled $6,720,000 for tuition and fees. Selected students were granted tuition waivers of $420,000 and fee waivers of $52,400. The net amount of tuition and fees realized was $6,184,200, because estimated uncollectible tuition and fees amounted to $63,400.
What amount should the college report for the period as operating revenues from tuition and fees?
$6,300,000
$6,247,600
$6,184,200
$6,720,000
$6,184,200
Tuition and fee revenues should be reported net of tuition discounts and allowances with the discount or allowance amount parenthetically disclosed on the face of the statement. Tuition waivers are a kind of discount that lowers net tuition received from specific students. Uncollectible accounts are recognized with the use of an allowance for government college and university accounting.
Operating revenue from tuition and fees is $6,184,200 ($6,720,000 – $420,000 – $52,400 – $63,400).
138
On December 30, 20X1, Rafferty Corp. leased equipment under a finance lease. Annual lease payments of $20,000 are due December 31 for 10 years. The equipment's useful life is 10 years, and the interest rate implicit in the lease is 10%. The finance lease obligation was recorded on December 30, 20X1, at $135,000, and the first lease payment was made on that date. What amount should Rafferty include in current liabilities for this lease in its December 31, 20X1, balance sheet?
$8,500
$6,500
$20,000
$11,500
$8,500
Initial lease obligation on December 31, 20X1 $135,000
Less payment made on December 31, 20X1 - 20,000
Lease obligation during 20X2 $115,000
========
Portion of December 31, 20X2, payment that is interest =
rate x obligation x time = 10% x $115,000 x 1 = $11,500
Portion of December 31, 20X2, payment that is related
to lease obligation = payment - interest portion =
$20,000 - $11,500 = $8,500
This amount is a current liability since it is payable within the current period. The remaining lease obligation is noncurrent.
139
Motocrossers Inc. is a nongovernmental not-for-profit entity that maintains a motocross facility. Motocrossers received an unrestricted pledge of $90,000 from one of the riders who trained on the track early in his career. Of the promised amount, $60,000 was designated by the donor for use during the current year, and $30,000 was designated for next year. Twelve percent (12%) of the contributions receivable are expected to be uncollectible. What amount should Motocrossers report as restricted support (contributions) in the statement of activities for the current year?
$86,400
$90,000
$26,400
$30,000
$26,400
Of the $90,000 of contributions, $60,000 designated for use during the current year would have been collected in full by the date of the financial statements issued as of the end of the year. This $60,000 would be reported in the statement of activities as unrestricted support. Of the remaining $30,000, 12% or $3,600 is estimated to be uncollectible. Therefore, the $26,400 anticipated to be collected in the subsequent year is reported in the statement of activities as restricted support (due to the time restriction).
140
A company issued a purchase order on December 15, year 1, for a piece of capital equipment that costs $100,000. The capital equipment was shipped from the vendor on December 31, year 1, and received by the company on January 5, year 2. The equipment was installed and placed in service on February 1, year 2. On what date should the depreciation expense begin?
December 31, year 1
February 1, year 2
December 15, year 1
January 5, year 2
February 1, year 2
Depreciation is the process of allocating the cost of plant and equipment to the accounting periods in which the operational benefits are received (also referred to as the estimated useful life). Therefore, depreciation should begin on the date the asset was placed into service, or February 1, year 2.
141
The basis for defining the governmental financial reporting entity is:
legal autonomy.
financial autonomy.
administrative autonomy.
public accountability.
public accountability.
According to GASB 2100.109, “The concept underlying the definition of the financial reporting entity is that elected officials are accountable [sic] to their constituents for their actions.”
142
On December 31, Year 6, Bradley Corp. sold a piece of land with a carrying cost of $1 million to Kravis Inc. for $2 million and simultaneously leased it back for 10 years with annual payments of $120,000 payable at the end of each year using a 5% discount rate. The lease is appropriately recorded as a sale and leaseback transaction by both Bradley and Kravis. The market rates for the lease of the land are $90,000, payable annually at the end of each year. What amount would Bradley recognize as a financial liability at the commencement of the lease? (PV for n=10, i=5% is 7.72173.)
$0
$768,348
$694,956
$231,652
$231,652
After the commencement date, both Bradley and Kravis account for the lease by treating $90,000 of the annual $120,000 payment as lease payments. The remaining $30,000 of annual payments are discounted over 10 periods at 5% and are accounted for as payments made to settle the financial liability of $231,652 recognized by Bradley and payments received to settle the financial asset of $231,652 recognized by Kravis ($30,000 × 7.72173).
143
Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of 5 years, but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year?
$40,000
$0
$15,000
$120,000
$0
The trademark is considered to have an indefinite useful life and should not be amortized until its useful life is determined to be no longer indefinite. Any intangible asset with no clear legal or economic limits on its use can thereby be considered to have an indefinite (unlimited) useful life. It is not amortized, but is instead tested annually for possible impairment (as is goodwill).
144
Babcock Company owes $50,000 to Mendenhall Corporation. Babcock also has an account receivable from Mendenhall of $45,000. Babcock wants to offset these items and report a net payable of $5,000 in their balance sheet. Which of the following is not required for Babcock to report these items in this manner?
Babcock has the right to set off the amount owed with the amount owed by the other party.
Babcock must have a signed agreement from Mendenhall to report the items in an offsetting manner.
Babcock’s right to offset the items is enforceable by law.
The amounts owed by Babcock and Mendenhall to each other are clearly determinable.
Babcock must have a signed agreement from Mendenhall to report the items in an offsetting manner.
Generally, the offsetting of assets and liabilities in the balance sheet is improper unless a right of setoff exists. The four criteria to establish a right of setoff that permits a firm to report items in an offsetting manner are:
1. each of the two parties owes the other determinable amounts,
2. the reporting party has the right to set off the amount owed with the amount owed by the other party,
3. the reporting entity intends to set off, and
4. the right of setoff is enforceable by law.
A signed agreement is the only answer choice that is not one of the four criteria.
145
The three internal service funds of a town were presented in a single column in the basic financial statements. The town's internal service funds supplied goods and services to the various governmental functions of the town. Combining the internal service funds in this way simplified:
the preparation of the notes to the financial statements.
the conversion of the fund-based information to the government-wide financial statement format.
the presentation of the budgetary schedules.
the preparation and presentation of the combining fund statements.
the conversion of the fund-based information to the government-wide financial statement format.
Although classified as proprietary funds, the internal service funds of this town would be reported in the governmental activities column in the government-wide financial statements. Presenting them in a single column facilitates the preparation of the government-wide statements as the internal service fund operations of the town would be considered governmental activities and the enterprise operations would be considered business-like activities. Internal service funds are exempted from the major funds reporting requirements. All enterprise funds could be shown in a single column in the basic financial statements if none would need to be shown separately as a major fund. This aggregation does not change the notes disclosures required. Budgetary accounting, required for governmental funds, is not required for internal service funds.
146
Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14, 20X1. Plack received a stock dividend of 2,000 shares on April 30, 20X1, when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15, 20X1. In its 20X1 income statement, what amount should Plack report as dividend income?
$94,000
$24,000
$20,000
$90,000
$24,000
Receipt of a stock dividend does not result in income to the recipient and no journal entry is made by Plack Co. As a result of the stock dividend, Plack now owns 12,000 shares of stock and receipt of a $2 per share cash dividend yields income of $24,000.
147
On October 15, 20X7, Felis Limited, a U.S. corporation, sold merchandise to a Belgian firm for 130,000 euros. Terms of the sale require payment in euros on February 16, 20X8. On October 15, 20X7, the spot exchange rate was $1.17 per euro. At December 31, 20X7, Felis' year-end, the spot rate was $1.15, but the rate increased to $1.21 by February 16, 20X8, when payment was received. How much should Felis report as foreign exchange gain or loss in its 20X8 income statement?
$7,800 gain
$7,800 loss
$2,600 gain
$2,600 loss
$7,800 gain
Gains and losses arising from foreign currency transactions (transactions denominated in a currency other than the functional currency) arise when monetary assets and liabilities (such as the account receivable in this question) are denominated in a currency other than the functional currency and the exchange rate between the currencies changes.
These changes increase or decrease expected functional currency cash flows and shall be included in determining net income for the period in which the exchange rate changes (i.e., the receivable is revalued at the spot rate at year-end and again when the payment is received).
Thus, Felis would revalue the receivable at $1.15/euro and report a $2,600 (€130,000 × ($1.17 – $1.15)) foreign transaction loss at December 31, 20X7. Then, in its 20X8 income statement, Felis again revalues the receivable (from $1.15 to $1.21) and reports a $7,800 gain (€130,000 × ($1.21 – $1.15)).
148
Correy Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years’ data) pertain to Correy’s operating segments for the current year ended December 31:
Operating Identifiable
Segment Total Revenues Operating Profit Assets at 12/31
A $10,000,000 $1,750,000 $20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,250,000 675,000 7,000,000
F 1,500,000 225,000 3,000,000
$32,750,000 $5,800,000 $67,500,000
=========== ========== ===========
In its segment information for the current year, how many reportable segments does Correy have?
Three
Four
Five
Six
Five
To be a reportable segment, the segment must report revenue, profit, or assets of 10% of the total entity. Segment F does not have 10% of any of these attributes, so it is not report
149
Which of the following is a characteristic of a finance lease?
The lease term is substantially less than the estimated economic life of the leased property.
The lease contains a purchase option that is reasonably certain to be exercised.
The present value of the lease payments at the beginning of the lease term is 75% or more of the fair value of the property at the commencement of the lease.
The future obligation does not appear in the balance sheet of the lessee.
The lease contains a purchase option that is reasonably certain to be exercised.
FASB ASC 842-10-25-2 establishes the criteria for classifying leases as finance leases. The first set of criteria result in a finance lease for a lessee or sales-type lease for the lessor if the lease meets any of the following criteria at commencement:
Title (ownership) transfers to the lessee by the end of the lease term.
The lease contains a purchase option that the lessee is reasonably certain to exercise.
The lease term is for the major part of the remaining economic life of the underlying asset. This criterion shall not be used if the lease commencement date is near the end of the asset’s economic life.
The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. “Substantially all” is considered 90% or more of the present value.
The underlying asset is specialized and is not expected to have an alternative use to the lessor at the end of the lease term.
150
According to the FASB conceptual framework, which of the following correctly pairs a primary qualitative characteristic of accounting information with one of its components?
Relevance and predictive value
Relevance and verifiability
Faithful representation and predictive value
Faithful representation and feedback value
Relevance and predictive value
Relevance and faithful representation are the primary qualitative characteristics of accounting information. The components of relevance are predictive value, confirmatory value, and materiality. The characteristics of faithful representation are completeness, neutrality, and being free from error.
151
Albany Co. has net income of $39,000, $17,000 of prior service costs related to amendments implemented in their pension plan, a gain of $8,100 on the effective portion of a cash flow hedge, and an impairment loss of $6,000 on an intangible asset. What amount is Albany’s comprehensive income?
$47,100
$13,900
$30,100
$22,000
$30,100
Comprehensive income includes net income and other comprehensive income (OCI). OCI includes pension-related items like the implementation of prior service costs and gains and losses on the effective portion of cash flow hedges as well as unrealized holding gains or losses on available-for-sale debt securities. The impairment loss ($6,000) is already included in net income.
Net income $39,000
Prior service costs related to a pension plan (17,000)
Gain on effective portion of cash flow hedge 8,100
$30,100
152
In 20X1, Wildlife Rescue, a not-for-profit entity that works with injured wild animals, received donations of $5,200 for supplies. In 20X2, $600 was spent for this purpose and another $2,100 was spent and all supplies used by the end of 20X3. What should Wildlife Rescue report in the statement of financial position for 20X3 regarding the donation?
Net assets without donor restrictions $0, net assets with donor restrictions $0
Net assets without donor restrictions $600, net assets with donor restrictions $2,100
Net assets without donor restrictions $0, net assets with donor restrictions $2,500
Net assets without donor restrictions $2,700, net assets with donor restrictions $2,500
Net assets without donor restrictions $0, net assets with donor restrictions $2,500
The donation was earmarked for a specific purpose. As of the date of the statement of financial position for 20X3, the unspent donation amounted to $2,500 that would be reflected in net assets with donor restrictions. The 20X3 supplies purchase and use of supplies would be reported in the statement of activities as both an increase at the time of purchase (reclassification from net assets with donor restrictions to net assets without donor restrictions) and a decrease (expense) at the time of use with a zero net effect on net assets without donor restrictions by the end of 20X3.
153
Frame Co. has an 8% note receivable dated June 30, 20X0, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, 20X1, 20X2, and 20X3. In its June 30, 20X2, balance sheet, what amount should Frame report as a current asset for interest on the note receivable?
$0
$4,000
$8,000
$12,000
$8,000
The balance sheet needs to include the amount of unpaid interest accrued on the outstanding principal up until the balance sheet date. After the first installment on the principal was made, there was still $100,000 of the debt outstanding for a full year.
Note receivable balance on June 30, 20X0 $150,000
Principal collected in 20X1 − 50,000
Note receivable balance on July 1, 20X1 $100,000
Times interest rate × .08
Interest receivable June 30, 20X2 $ 8,000
154
Property taxes and fines represent which of the following classes of nonexchange transactions for governmental units?
Derived tax revenues
Imposed nonexchange revenues
Government-mandated nonexchange transactions
Voluntary nonexchange transactions
Imposed nonexchange revenues
GASB N50.104 requires that nonexchange revenues be classified into four different categories: Derived Tax Revenues, Imposed Nonexchange Revenues, Government Mandated Nonexchange Transactions, and Voluntary Nonexchange Transactions. Property taxes and fines are examples of imposed nonexchange revenues insofar as they are assessed by governments on nongovernmental entities, including individuals, and are not assessments on exchange transactions.
155
A company has a single defined benefit pension plan for all employees. At year-end, the company's projected benefit obligation is $1 million and the fair value of plan assets is $3 million, which is comprised of $1.5 million of contributions made by the company and $1.5 million of recognized investment returns. What should the company report related to the defined benefit pension plan in its statement of financial position at the end of the current year?
A noncurrent asset of $1.5 million
A current liability of $2 million
A noncurrent asset of $2 million
Both a current liability of $1 million and a current asset of $3 million
A noncurrent asset of $2 million
For financial reporting purposes, pension plan assets and pension plan liabilities are reported net of each other and classified as noncurrent. In this case, plan assets of $3 million exceed plan obligations of $1 million by $2 million ($3 million − $1 million). Because plan assets exceed liabilities, this would be recognized as an asset to the company under the noncurrent section of the balance sheet.
156
Bayberry Co. has an asset with a cost of $200,000 and accumulated depreciation of $120,000. Driftwood Co. has an asset with a cost of $250,000 and accumulated depreciation of $160,000. Both assets have a fair value of $100,000. Bayberry and Driftwood find it mutually advantageous to exchange assets, and the exchange results in improved future cash flows for both companies. What amount, if any, is Bayberry's gain on the exchange?
$0
$10,000
$20,000
$50,000
$20,000
Provided the exchange has commercial substance, it should be accounted for based on fair value, which is the same basis as that used in monetary transactions. The asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident. The difference between this fair value and the book value of the asset surrendered should be recognized as a gain or loss at the time of the exchange. The exchange has commercial substance as long as it is expected to significantly change the entity’s future cash flows. The journal entry for Bayberry is as follows:
New asset (fair value) 100,000
Accumulated depreciation 120,000
Old asset 200,000
Gain on exchange 20,000
157
Tang City received $250,000 from a donor who stipulated that the resources must be invested and must remain intact, but any income generated may be used for general government services. In which fund should Tang City record the donation?
Permanent
Private-purpose trust
Custodial
Special revenue
Permanent
A permanent fund, a governmental fund–type, is used when resources are restricted such that principal must be maintained indefinitely but earnings may be used to support the reporting government's own programs. This contrasts with the special revenue fund, also a governmental fund-type, which is used when revenue streams are restricted as to use or when the principal may eventually be expended. A private-purpose trust fund, a fiduciary fund, is used to account for principal and disbursal of earnings for beneficiaries other than the reporting government itself.
158
During the current year, the local humane society, a nongovernmental not-for-profit entity, received a $100,000 permanent endowment from Cobb. Cobb stipulated that the income must be used to care for older horses that can no longer race. The endowment reported income of $8,000 in the current year. What amount of unrestricted contribution revenue should the humane society report for the current year?
$100,000
$8,000
$0
$108,000
$0
Endowments that must be maintained in perpetuity (permanent endowment), as well as income from the endowment, are classified as restricted revenues.
159
Penn Corp. paid $300,000 for the outstanding common stock of Star Co. At that time, Star had the following condensed balance sheet:
Carrying Amounts
Current assets $ 40,000
Plant and equipment (net) 380,000
Liabilities 200,000
Stockholders' equity 220,000
The fair value of the plant and equipment was $60,000 more than its recorded carrying amount. The fair values and carrying amounts were equal for all other assets and liabilities. The combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). What amount of goodwill, related to Star's acquisition, should Penn report in its consolidated balance sheet?
$80,000
$20,000
$60,000
$40,000
$20,000
Under FASB ASC 805-30-30-1, the excess of acquisition price over the net value of the identifiable assets acquired is accounted for as goodwill: "Measurement of Goodwill: "The acquirer shall recognize goodwill as of the acquisition date, measured as the excess of (a) over (b):
"The aggregate of the following:
"The consideration transferred measured in accordance with this Section, which generally requires acquisition-date fair value (see paragraph 805-30-30-7)
"The fair value of any noncontrolling interest in the acquiree
"In a business combination achieved in stages, the acquisition-date fair value of the acquirer's previously held equity interest in the acquiree.
"The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this Topic."
Acquisition price $300,000
Less fair value of net assets:
Current assets $ 40,000
Plant and equipment
($380,000 + $60,000) 440,000
Subtotal 480,000
Less liabilities 200,000 280,000
Excess of acquisition price over
fair value of net assets = Goodwill $ 20000
160
Brower Corporation acquired all of the outstanding stock of Jordon Corporation. The purchase price of the acquisition was $1,960,000. The book value of Jordon’s net assets was $2,172,000. Jordon had assets whose fair values were greater than their carrying value by $58,000. How much gain is implied in Brower’s acquisition of Jordon?
$212,000
$200,000
$270,000
$58,000
$270,000
If the values assigned to the identifiable net assets exceed the cost of the acquired company, this would be considered a bargain purchase option and the “excess” must be recognized as a gain in earnings of the acquisition date.
Brower will record a gain of $270,000, computed as follows:
Purchase price less book value of purchased share of net assets: $1,960,000 – $2,172,000 = $(212,000)
Because the book value of the net assets is greater than the purchase price, there is no goodwill implied in the acquisition and thus Brower will recognize a gain. The gain is the difference between the book value of the net assets plus any undervalued assets:
$212,000 + $58,000 = $270,000
161
Which of the following is a similarity between IFRS and U.S. GAAP in accounting for defined benefit pension plans?
Both U.S. GAAP and IFRS use service cost in computing benefit cost (pension expense).
Both IFRS and GAAP immediately recognize in profit and loss (income) past service cost (prior service cost).
Neither IFRS nor U.S. GAAP recognizes interest as part of benefit cost (pension expense).
Neither IFRS nor U.S. GAAP can use the corridor approach.
Both U.S. GAAP and IFRS use service cost in computing benefit cost (pension expense).
Both IFRS and U.S. GAAP include service cost as part of the net periodic pension cost computation (pension expense).
Both IFRS and U.S. GAAP include interest as part of the pension expense determination. U.S. GAAP permits the corridor approach, but since unrecognized gain and losses are never eliminated from other comprehensive income under IFRS, the corridor approach is not needed. While IFRS recognized past (prior) service cost immediately in income, U.S. GAAP still allows prior service cost to be amortized over future periods.
162
Which of the following estimation methods best describes the residual approach?
Uses competitors’ prices for similar goods or services and adjusts those prices to reflect the entity’s costs and margins
Determines a standalone selling price based on vendor-specific objective evidence, third-party evidence, or a best estimate
Forecasts expected costs of satisfying a performance obligation and adds an appropriate margin for those goods or services
Estimates a standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract
Estimates a standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract
The residual approach estimates a standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract.
The adjusted market assessment approach uses competitors’ prices for similar goods or services and adjusts those prices to reflect the entity’s costs and margins. The expected cost plus a margin approach forecasts expected costs of satisfying a performance obligation and adds an appropriate margin for those goods or services. GAAP guidance prior to the issuance of ASU 2016-01 determined the standalone selling price based on vendor-specific objective evidence, third-party evidence, or a best estimate.
163
On September 1, 20X1, Cano & Co., a U.S. corporation, sold merchandise to a foreign firm for 250,000 francs. Terms of the sale require payment in francs on February 1, 20X2. On September 1, 20X1, the spot exchange rate was $.20 per franc. At December 31, 20X1, Cano's year-end, the spot rate was $.19, but the rate increased to $.22 by February 1, 20X2, when payment was received. How much should Cano report as foreign exchange gain or loss in its 20X2 income statement?
$2,500 loss
$0
$5,000 gain
$7,500 gain
$7,500 gain
Gains and losses arising from foreign currency transactions (transactions denominated in a currency other than the functional currency) arise when monetary assets and liabilities (such as the account receivable in this question) are denominated in a currency other than the functional currency and the exchange rate between the currencies changes.
These changes increase or decrease expected functional currency cash flows and shall be included in determining net income for the period in which the exchange rate changes (i.e., the receivable is revaluated at the spot rate at year-end and again when the payment is received).
Thus, Cano would revalue the receivable at $.19/franc and report a $2,500 ($250,000 × ($.19 − $.20)) foreign transaction loss at December 31, 20X1. Then, in its 20X2 income statement, Cano again revalues the receivable (from $.19 to $.22) and reports a $7,500 gain ($250,000 × ($.22 − $.19)).
164
On January 2, Basketville City purchased equipment with a useful life of three years to be used by its water and sewer enterprise fund. Which of the following is the correct treatment for the asset?
Capitalize; depreciation is not permitted.
Record the purchase of the equipment as an expenditure.
Capitalize; depreciation is optional.
Capitalize; depreciation is required.
Capitalize; depreciation is required.
Proprietary funds (including enterprise funds and internal service funds) are reported using the economic resources measurement focus and the accrual basis of accounting. Essentially, this means they are reported using a revenue and expense model. In this model, equipment is recorded and reported as capital assets (the term used for fixed assets in government reporting). Because expenses are reported, depreciation expense must be calculated and reported.
165
How should a company report its decision to change from a cash basis of accounting to accrual basis of accounting?
As a correction of an error (net of tax), by adjusting the beginning balance of retained earnings
As a component of other comprehensive income
Prospectively, with no amounts restated and no cumulative adjustment
As a change in accounting principle, requiring the cumulative effect of the change (net of tax) to be reported in the income statement
As a correction of an error (net of tax), by adjusting the beginning balance of retained earnings
A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error. The cash basis is not generally accepted. Consequently, the change to accrual basis is a correction of an error. A correction of an error in prior years' financial statements is reported in the year of correction by restating all prior years affected by the error. The cumulative effect of the error on periods prior to those presented must be reflected in the carrying amounts of the assets and liabilities as of the beginning of the earliest year presented.
166
Which of the following defines equity as it relates to a business entity?
Net revenues
Total revenues less total expenses
Total assets and liabilities
Total assets less total liabilities
Total assets less total liabilities
Total assets less total liabilities defines equity. Equity (or net assets) is the residual interest in the assets of a business entity that remains after deducting its liabilities; equity represents the ownership interest. Revenues are inflows of the assets or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the enterprise’s ongoing major or central operations. Expenses are outflows or other uses of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the enterprise’s ongoing major or central operations. Revenues less expenses is net income (loss) and will increase (decrease) equity, but these accounts do not define equity.
167
How would a municipality that uses modified accrual and encumbrance accounting record the transaction of approved purchase orders issued for supplies?
Debit appropriations control
Credit encumbrances control
Debit encumbrances control
Debit expenditures control
Debit encumbrances control
Encumbrance entries are recorded in budgetary accounts to prevent overspending of appropriations and to assure compliance with budget authorizations. Encumbrances are recorded when purchase orders are approved for goods or services based on their estimated costs as follows:
Encumbrances--Control DR
Fund Balance--Reserve for Encumbrances CR
When the purchase order is filled, the encumbrance entry is reversed and an expenditure for the actual liability incurred is recorded. An alternative to the “Fund Balance—Reserve for Encumbrances” account is to simply use “Reserve for Encumbrances.”
168
Malay Corporation is a 100%-owned subsidiary of a U.S. parent company. Malay is located in Singapore and reports its financial statements in local currency, the Singapore dollar. The following exchange rates were available at the time the U.S. parent company was preparing consolidated financial statements:
```
Current rate $0.79
Historical rate (acquisition) 0.90
Weighted-average rate 0.85
Beginning of current year 0.88
Malay reported revenue of 4,570,000 Singapore dollars for the current period. When converting Malay’s revenue account to U.S. dollars at year-end, how much should be reported in U.S. dollars?
```
$4,021,600
$3,610,300
$4,113,000
$3,884,500
$3,884,500
Under FASB ASC 830-30-45-3, all elements of financial statements should be translated by using a current exchange rate. For revenues and expenses, an appropriately weighted-average exchange rate for the period may be used to translate those amounts. In this case, the weighted-average exchange rate of 0.85 times the revenue in Singapore dollars equals the revenue in U.S. dollars (0.85 × 4,570,000 Singapore dollars = $3,884,500).
169
During the current year, Fuqua Steel Co. had the following unusual financial events occur:
Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly.
A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location.
A segment of Fuqua's operations, steel transportation, was sold at a net loss of $350,000. This was Fuqua’s first divestiture of one of its operating segments.
Before income taxes, what amount of gain (loss) should be reported separately as a component of income from continuing operations?
$(255,000)
$(350,000)
$5,000
$260,000
$5,000
The sale of a segment would be a discontinued operation since its disposition represents a strategic shift. The remaining two items would be reported as a net $5,000 gain component of income from continuing operations.
170
Town, Inc., is preparing its financial statements for the year ending December 31, 20X1. On December 1, 20X1, Town was awarded damages of $75,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received in January 20X2, prior to the issuance of the financial statements. What is the reporting requirement?
Both accrual and disclosure
Disclosure only
Neither accrual nor disclosure
Accrual only
Both accrual and disclosure
Town, Inc., has a legally enforceable right to the settlement from the lawsuit on December 1, 20X1, so it would be reported in 20X1. The circumstances of the accrual of the gain should be disclosed in the interest of full disclosure.
171
On December 31, 20X1, Byte Co. had capitalized software costs of $600,000 with an economic life of four years. Sales for 20X2 were 10% of expected total sales of the software. At December 31, 20X2, the software had a net realizable value of $480,000. In its December 31, 20X2, balance sheet, what amount should Byte report as net capitalized cost of computer software?
$450,000
$480,000
$540,000
$432,000
$450,000
When software costs are capitalized, yearly amortization of these costs is based on the greater of the ratio of current sales to expected total sales or the straight-line method over the useful life of the asset (four years).
Sales ratio: 10% (0.10) × $600,000 = $60,000
Straight-line: 25% (0.25) × $600,000 = $150,000
Since straight-line amortization is larger and is used, the remaining capitalized cost is $600,000 less $150,000, or $450,000. Since the net realizable value, $480,000, is greater than the $450,000, there is no need for an additional write-off.
FASB ASC 350-40-35-4 states: "Amortization: The costs of computer software developed or obtained for internal use shall be amortized on a straight-line basis unless another systematic and rational basis is more representative of the software's use."
FASB ASC 985-20-35-4 states: "Net Realizable Value of Capitalized Software Costs: At each balance sheet date, the unamortized capitalized costs of a computer software product shall be compared to the net realizable value of that product. The amount by which the unamortized capitalized costs of a computer software product exceed the net realizable value of that asset shall be written off."
172
During the current year, a voluntary health and welfare entity receives $300,000 in unconditional promises to give expected to be collected in less than one year. Of this amount, $100,000 has been designated by donors for use next year to support operations. If 15% of the unrestricted promises are expected to be uncollectible, what amount of unrestricted support should the entity recognize in its current-year financial statements?
$270,000
$300,000
$200,000
$170,000
$170,000
The contributions that donors intend to be used to finance the next year's operations are restricted support. Promises that donors intend to be used to finance current-year operations are reported as unrestricted support after deducting the uncollectible portion of the receivables.
$300,000 - $100,000 = $200,000
$200,000 × 0.15 = $30,000
$200,000 - $30,000 = $170,000
173
A company has an equity investment with a historical cost of $500,000 that is traded in an active market. At December 31, year 1, the quoted price for an identical investment was $400,000 and the quoted price for a similar investment was $430,000. Using the company's internal present value of cash flows model, the company arrived at a value of $410,000. What amount is the value of the investment on December 31, year 1?
$500,000
$400,000
$410,000
$430,000
$400,000
A fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into levels. A Level 1 input consists of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date, and a Level 2 input is an input other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 1 valuations are of higher order and represent the most appropriate measurement if a Level 1 price is available. Level 2 prices are used if a Level 1 input is not available.
The equity investment should be valued at the Level 1 value of $400,000.
174
A donor provided a $10 million gift for a specific program to a nongovernmental, not-for-profit organization. The organization cannot spend the $10 million, but it may use the income on the gift for the donor-specified program. In the organization's statement of activities, the gift should be reported as part of the change in:
restricted—nonspendable.
net assets with donor restrictions.
net assets without donor restrictions.
temporarily restricted net assets.
net assets with donor restrictions.
Only restrictions imposed by donors or grantors are considered restrictions in accounting for not-for-profit organizations. Some restrictions can be satisfied by the passage of time or by using the resources for a certain purpose (e.g., to finance expenses of a specific program or to construct a building). Other restrictions cannot be fulfilled by either the passage of time or actions of the organization. In either case, these are considered net assets with donor restrictions.
Revenues are classified in the same categories that net assets are classified into: those that contribute to net assets with donor restrictions, and those that contribute to net assets without donor restrictions. Expenses are always reported as changes in net assets without donor restrictions.
The donation is this question is an example of a restriction because the donor requires that the $10 million principal be maintained intact in perpetuity (i.e., cannot be spent). Therefore, the revenue related to these net assets would be reported as part of the change in net assets with donor restrictions.
175
The Seasoned Village, a voluntary health and welfare entity devoted to supporting the elderly, received a $2,500,000 permanent endowment during the year. The donation carried the stipulation that the income and investment appreciation is to be used to maintain its senior center. The endowment fund reported a net investment appreciation of $182,000 and investment income of $100,000. The organization spent $147,000 to maintain its senior center during the year. What amount of change in net assets with donor restrictions should the organization report as a result of these transactions?
$100,000
$135,000
$282,000
$2,635,000
$2,635,000
The change in net assets with donor restrictions includes the original donation of $2,500,000, any increases from investment income ($100,000) and net investment appreciation ($182,000) that the donor restricted to use for the senior center, and any decreases from the amount of resources spent for the restricted purpose ($147,000).
These net assets released from restrictions reduce net assets with donor restrictions and increase net assets without donor restrictions by $147,000. Therefore, the change in net assets with donor restrictions is $2,500,000 + $182,000 + $100,000 − $147,000, or $2,635,000.
176
The following information pertains to each unit of merchandise purchased for resale by Vend Co.:
March 1 December 31
Purchase price $ 8 --
Selling price 12 $ 15
Price-level index 110 121
Replacement cost -- 10
Under current value accounting, what is the amount of Vend’s holding gain on each unit of this merchandise?
$0
$2.00
$0.80
$1.20
$1.20
The gain is the difference between the current replacement cost ($10) and price-level adjustment historical cost of $8.80 ($8 × ($121 ÷ $110)).
Holding gain = $10 − $8.80 = $1.20
177
Barr Co. has total debt of $420,000 and stockholders' equity of $700,000. Barr is seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in common stock, and is negotiating with a bank to borrow additional funds. The bank is requiring a debt-to-equity ratio of .75. What is the maximum additional amount Barr will be able to borrow?
$525,000
$225,000
$750,000
$330,000
$330,000
To compute the largest addition to debt without violating the terms, determine the new total for equity, whereupon up to 75% of that equity total is the upper debt limit.
Debt-to-equity ratio = Total debt / Total stockholders' equity
0.75 = Total debt / ($700,000 + $300,000)
0.75($1,000,000) = Total debt
$750,000 = Total debt
Additional debt = Total debt - Present debt
= $750,000 - $420,000
= $330,000
178
Which of the following is a required part of a local government's management's discussion and analysis (MD&A) as part of its financial statements?
The MD&A should be presented with other required supplementary information.
The MD&A should compare current-year results to the prior year with emphasis on the current year.
The MD&A should include an analysis for each fund.
The MD&A should present condensed financial information from the fund financial statements.
The MD&A should compare current-year results to the prior year with emphasis on the current year.
Management’s discussion and analysis (MD&A) is presented prior to the basic financial statements as an analytical overview. The MD&A focuses on the primary government and distinguishes information pertaining to the primary government from that of its discretely presented component units; it presents both a short-term and a long-term analysis of the local government’s activities and status; and it discusses the current-year results compared with the prior-year results, discussing both positive and negative aspects of the comparisons.
The MD&A is not presented with other RSI (required supplementary information), it does not need to include an analysis of each fund, and it does not present condensed fund information.
179
Which of the following represents a difference in lessor accounting for sales-type versus direct financing leases?
Sales-type leases derecognize the leased asset; direct financing leases do not derecognize the leased asset.
Direct financing leases derecognize the leased asset; sales-type leases do not derecognize the leased asset.
Selling profit or loss is recognized immediately in a sales-type lease while it is deferred in a direct financing lease.
In both types, profit or loss on sale is deferred. In a sales-type lease it is recognized over the term of the lease; in a direct financing lease it is recognized at the end of the lease.
Selling profit or loss is recognized immediately in a sales-type lease while it is deferred in a direct financing lease.
Both sales-type leases and direct financing leases require the lessor at commencement to derecognize the leased asset and recognize the net investment in the lease. Sales-type leases recognize a selling profit at commencement whereas selling profits are deferred in direct financing leases.
180
On January 1, 20X2, to better reflect the variable use of its only machine, Holly, Inc., elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, 20X0, was $50,000, and its estimated life was 10 years. Holly estimates that the machine's remaining total life is 50,000 machine hours as of January 1, 20X2.
Machine hours usage was 8,500 during 20X1 and 3,500 during 20X0.
Holly's income tax rate is 30%. Holly should report the accounting change in its 20X2 financial statements as:
an adjustment to beginning retained earnings of $1,400.
a cumulative effect of a change in accounting principle of $1,400 in its income statement.
prospectively.
an adjustment to beginning retained earnings of $2,000.
prospectively.
FASB ASC 250-10-45-5 requires that changes in depreciation methods be accounted for prospectively. Accordingly, the carrying amount (book value) of the machine at January 1, 20X2, should be depreciated over the remaining life of the machine. At January 1, 20X2, the carrying amount is $40,000 (i.e., $50,000 acquisition cost less $10,000 accumulated depreciation), which should be depreciated over the remaining 50,000 machine hours at a rate of $.80 per machine hour (i.e., $40,000 ÷ 50,000 hours = $.80). The depreciation amount to be recognized in 20X2 is the number of machine hours used in 20X2 × $.80.
181
Parker Co. amended its pension plan on January 2 of the current year. It also granted $600,000 of unrecognized prior service costs to its employees. The employees are all active and expect to provide 2,000 service years in the future, with 350 service years this year. What is Parker's unrecognized prior service cost amortization for the year?
$0
$2,000
$600,000
$105,000
$105,000
When plan amendments are made, additional benefits are sometimes applied retroactively to employees for service rendered in prior years. This increase in the benefits to be paid to employees represents a cost to the employer. GAAP requires that this cost be recognized as a component of net periodic pension cost over the remaining service years of the affected employees. FASB ASC 715-30-25-4 requires that the unrecognized prior service cost be recognized as a component of other comprehensive income. The amortization of the unrecognized prior service cost is recognized as an increase in net periodic pension cost and as a reduction of the unrecognized amount remaining in accumulated other comprehensive income.
Prior service costs $600,000
Expected service years / 2,000
Cost per service year $ 300
Service years completed this year x 350
Unrecognized prior service cost amortization $105,000
182
Which of the following is a Level 3 input to valuation techniques used to measure the fair value of an asset?
Quoted prices in active markets for identical assets
Quoted prices for similar assets in active markets
Unobservable inputs for the asset
Inputs other than quoted prices that are observable for the asset
Unobservable inputs for the asset
A fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into three broad levels, as follows: (1) Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; (2) Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and (3) Level 3 inputs are unobservable inputs for the asset or liability.
183
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors, and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax). Assume the rate for OASDI is 6.2% with a threshold of $118,000 and the rate for HI is 1.45%. Ginger Corporation has two employees who crossed over the threshold in the most recent pay period. The year-to-date payroll amounts (excluding the current pay period) and amounts for the current pay period are given below:
Employee Salaries To-Date Salary Current Pay Period
Smith $114,300 $10,240
Jones 112,910 9,750
How much FICA tax should Ginger Corporation withhold for these two employees for the current pay period?
$544.98
$834.84
$289.86
$377.88
$834.84
Smith will have the 6.2% tax withheld on $3,700 ($118,000 – $114,300) of her salary and Jones will have the tax withheld on $5,090 ($118,000 – $112,910) of his salary. This amount totals $544.98 (($3,700 + $5,090) × 0.062).
Smith and Jones will pay the 1.45% tax (Medicare) on the full amount of their salaries for the current pay period. This amount totals $289.86 (($10,240 + $9,750) × 0.0145).
The total to be withheld from the salaries of Smith and Jones is $834.84 ($544.98 + $289.86).
184
Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices. Which of the following would alter the timing of Red's cash flows for the $3 million in receivables already recorded on its books?
Change the due date of the invoice
Discount the receivables outstanding
Factor the receivables outstanding
Demand payment from customers before the due date
Factor the receivables outstanding
Factoring arrangements are a means of discounting accounts receivable on a nonrecourse, notification basis. Accounts receivable are sold outright, usually to a transferee (the factor) that assumes the full risk of collection, without recourse to the transferor in the event of a loss. Debtors are directed to send payments to the transferee. Red Co. will have its cash immediately upon the sale, whereas the other methods may accelerate the receipt of cash but will not result in a great deal of cash being received immediately.
185
Nomar Co. shipped inventory on consignment to Seabright Co. that cost $20,000. Seabright paid $500 for advertising that was reimbursable from Nomar. At the end of the year, 70% of the inventory was sold for $30,000. The agreement states that a commission of 20% will be provided to Seabright for all sales. What amount of net inventory on consignment remains on the balance sheet (statement of financial position) for the first year for Nomar?
$20,000
$6,000
$6,500
$0
$6,000
Inventory on consignment is inventory of the consignor, not of the consignee. The 30% of the inventory that was not sold is Nomar's inventory, not Seabright's inventory. Therefore, Nomar's inventory cost is 30% of $20,000, or $6,000.
186
On the first day of each month, Bell Mortgage Co. receives from Kent Corp. an escrow deposit of $2,500 for real estate taxes. Bell records the $2,500 in an escrow account. Kent's 20X2 real estate tax is $28,000, payable in equal installments on the first day of each calendar quarter. On December 31, 20X1, the balance in the escrow account was $3,000. On September 30, 20X2, what amount should Bell show as an escrow liability to Kent?
$1,500
$4,500
$8,500
$11,500
Use a T-account for escrow liability to Kent:
Deposits from Kent Corp. are credits ($2,500 per month).
Payments to the taxing authority ($28,000 ÷ 4 = $7,000 per quarter are debits)
187
In preparing combined financial statements for a governmental entity, interfund receivables and payables should be:
reported as additions to or reductions from the unassigned fund balance.
reported as amounts due to and due from other funds.
eliminated.
reported as reservations of fund balance.
reported as amounts due to and due from other funds.
Interfund loans should be reported as interfund receivables in lender funds and interfund payables in borrower funds, not affect the fund balance or net position of either fund involved, and not be reported as “other financing sources or uses” in the governmental fund financial statements. The transaction should be reported as a transfer from the fund that made the loan to the fund that received the loan.
188
Kew Co.’s accounts payable balance at December 31 of the prior year was $2,200,000 before considering the following data:
>Goods shipped to Kew FOB shipping point on December 22 of the prior year were lost in transit. The invoice cost of $40,000 was not recorded by Kew. On January 7 of the current year, Kew filed a $40,000 claim against the common carrier.
>On December 27 of the prior year, a vendor authorized Kew to return, for full credit, goods shipped and billed at $70,000 on December 3 of the prior year. The returned goods were shipped by Kew on December 28 of the prior year. A $70,000 credit memo was received and recorded by Kew on January 5 of the current year.
>Goods shipped to Kew FOB destination on December 20 of the prior year, were received on January 6 of the current year. The invoice cost was $50,000.
What amount should Kew report as accounts payable in its prior-year December 31 balance sheet?
$2,180,000
$2,280,000
$2,170,000
$2,170,000
The items shipped to the company on December 22 shipping point should be added to inventory, even though the items were lost. The title to the goods transferred at the time the common carrier picked them up and the goods were part of the company inventory upon receipt by the common carrier. (The common carrier owes the company the price of the goods lost in transit, but that is a separate legal matter.)
The items that were returned to the vendor in the prior year (with the vendor’s approval) should be taken out of purchases and removed from the payables for the year.
The goods shipped FOB destination that did not arrive until January were not the company inventory until the title passed in January (upon arrival), so they should not be added to payables.
Thus, the end-of-year payables should be $2,170,000:
$2,200,000 + $40,000 – $70,000 = $2,170,000
189
How should a nongovernmental, not-for-profit entity report donor-restricted cash contributions for long-term purposes in its statement of cash flows?
Investing activity inflow
Operating activity inflow
Financing activity inflow
As a noncash transaction
Financing activity inflow
The cash flow statement for a not-for-profit is similar to a business cash flow statement. In a modification from the business cash flow statement, cash contributions received from donors who have restricted the use to long-term purposes are reported as financing activities. Thus, “operating activity inflow” and “investing activity inflow” use the wrong categories of cash flows. “As a noncash transaction” is incorrect because cash is clearly received in this transaction.
190
Which of the following should a company classify as a research and development expense?
Routine design of tools, jigs, molds, and dies
Periodic design changes to existing products
Legal work on patent applications
Redesign of a product prerelease
Redesign of a product prerelease
Research is a planned search or critical investigation aimed at the discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service, developing a new process or technique, or bringing about a significant improvement to an existing product or process. Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use. A useful way to analyze activities to determine if their costs are research and development (R&D) costs is to establish if they relate to activities identified with the period prior to the beginning of commercial production. Only the redesign of a product prerelease qualifies as an R&D expense.
191
Ute Co. had the following capital structure during 20X1 and 20X2:
Preferred stock, $10 par, 4%
cumulative, 25,000 shares issued
and outstanding $ 250,000
Common stock, $5 par, 200,000
shares issued and outstanding 1,000,000
Ute reported net income of $500,000 for the year ended December 31, 20X2. Ute paid no preferred dividends during 20X1 and paid $16,000 in preferred dividends during 20X2. In its December 31, 20X2, income statement, what amount should Ute report as basic earnings per share?
$2.48
$2.50
$2.45
$2.42
$2.45
Net income reported in 20X2 $500,000
Attributed to preferred stock:
For 20X2 ($25,000 x $10 x .04) (See Note) 10,000
Income attributable to common shares $490,000
Note: The $16,000 dividends paid in 20X2 included only the $10,000 (i.e., 25,000 × $10 × .04) preferred dividend requirement for 20X2. Dividends in arrears should have been included in the previous year's computation of earnings per share.
Earnings per share = $490,000 / 200,000 shares
= $2.45
The current year's dividends accrued, and only the current year's dividends on cumulative preferred stock, whether declared or not, should be deducted from net income in calculating EPS. Dividends in arrears would have been included in the EPS calculation in previous years.
192
After speaking to the company's sales manager, a customer placed a large order. The customer has no immediate need for the products, so the customer asked the company to wait 60 days before delivering the products. In this case, the company should recognize revenue for the sale when the order is:
placed by the customer.
packed and ready for shipment.
delivered to the customer.
verified as in-stock by the company.
delivered to the customer.
Revenue is not recognized until the company satisfies its performance obligation. In this case, the company’s performance obligation is the delivery of the goods to the customer.
When the customer orders the goods, no performance obligation has been satisfied and no revenue is earned. Similarly, verification of the goods being in-stock does not satisfy, nor does packing the goods but not shipping them absent presenting them to the carrier for shipment. Note that revenue recognition would depend on the shipping terms (FOB destination or FOB shipping point).
193
When should a long-lived asset be tested for recoverability?
When the asset's carrying amount is less than its fair value
When the asset's fair value has decreased, and the decrease is judged to be permanent
When events or changes in circumstances indicate that its carrying amount may not be recoverable
When external financial statements are being prepared
When events or changes in circumstances indicate that its carrying amount may not be recoverable
FASB ASC 360-10-35-21 states that an entity must review long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
194
A storm damaged the roof of a nongovernmental, not-for-profit organization's building. A professional roofer repaired the roof at no charge. How should the roof repairs be recognized in the statement of activities?
As an increase in expenses and an increase in contributions from donated services
As an increase in fixed assets and an increase in contributions from donated services
No recognition is required in the financial statements, but a note disclosure is required.
As an increase in the building account and an increase in net assets without donor restrictions
As an increase in expenses and an increase in contributions from donated services
For nonprofits, contribution revenues should be reported for donated services at their fair value, with a matching amount of expense recognized in the appropriate category, under two circumstances:
1. The services create or enhance nonfinancial assets; or
2. All three of the following conditions are met:
a. Specialized skills are required to perform the services;
b. The individuals donating the services possess those skills; and
c. The organization would have to buy the services if they were not donated.
3. Essentially this is a wash entry, but the activity can be tracked through the recording process.
195
How can forfeited nonvested accounts of an employee benefit plan be used?
For expenses
Forfeited nonvested accounts could be used for any of the other answer choices, in accordance with plan documents.
To reduce future employer contributions
To be reallocated to participant's accounts
Forfeited nonvested accounts could be used for any of the other answer choices, in accordance with plan documents.
Required disclosure includes, among other items, the amount and disposition of forfeited nonvested accounts—specifically, identification of those amounts that are used to reduce future employer contributions, expenses, or reallocated to participant's accounts, in accordance with plan documents.
196
Wright Co. is a small, privately held entity established at the beginning of year 1. Wright decided to prepare cash-basis financial statements. At the end of year 1, the company recorded receivables of $2,000,000 and accrued expenses of $900,000, which were included in the total expenses incurred for the year of $2,200,000, with $1,300,000 paid during the year. Cash sales of $1,200,000 were fully recognized for the year. What is the company's cash-basis income/loss from operations at the end of year 1?
A loss of $100,000
A loss of $1,000,000
A loss of $1,900,000
Income of $1,000,000
A loss of $100,000
The cash basis of accounting merely compares cash receipts to cash disbursements. Wright Co received $1,200,000 in cash sales and paid $1,300,000 in cash expenses for a net loss from operations under the cash basis of $100,000 ($1.2 million − $1.3 million).
The accruals and receivable balances would be needed under accrual accounting, not cash-basis accounting.
197
Oak Co., a newly formed corporation, incurred the following expenditures related to land and building:
County assessment for sewer lines $ 2,500
Title search fees 625
Cash paid for land with a building to be demolished 135,000
Excavation for construction of basement 21,000
Removal of old building $21,000 less salvage of $5,000 16,000
At what amount should Oak record the land?
$153,500
$154,125
$138,125
$175,625
$154,125
The cost of plant assets includes all expenditures necessary to acquire the asset and prepare it for its intended use. The cost of land includes the purchase price, costs incidental to acquisition (such as legal fees, commissions, and title insurance), and the costs of preparing the land for use (such as the costs of surveying, grading, filling, draining, and clearing). The cost of tearing down an existing building is included in the cost of the land.
All of the costs presented other than the excavation should be included in the cost of the land. The excavation for the basement will be included in the cost of the building.
198
The lease term:
excludes any rent-free periods.
begins at the commencement date.
is never modified once determined at commencement of the lease.
includes all optional renewal periods.
begins at the commencement date.
The lease term includes any rent-free periods, begins at commencement, can change or be revised under certain lease modifications, and only includes optional renewal periods if there is “reasonable certainty” that the lessee has a significant economic incentive to exercise the option.
199
According to the principles concerning the use of fund accounting, a governmental entity should have only one:
general fund.
capital projects fund.
internal service fund.
pension trust fund.
general fund.
According to the principles concerning the use of fund accounting specified by GASB 1300.116, “a government shall report only one general fund.”
Although “the general rule is to establish the minimum number of funds consistent with legal specifications, operational requirements, and the principles of fund accounting,” a governmental entity could have a need for more than one pension trust fund, internal service fund, or capital projects fund.
200
The following information pertains to Grove City's interfund receivables and payables at December 31, 20X1:
Due to special revenue fund from
general fund $10,000
Due to private trust fund from
special revenue fund 4,000
In Grove's special revenue fund balance sheet at December 31, 20X1, how should these interfund amounts be reported?
As an asset of $6,000
As an asset of $10,000 and a liability of $4,000
As an asset of $4,000 and a liability of $10,000
As a liability of $6,000
As an asset of $10,000 and a liability of $4,000
Grove City's special revenue fund would have an asset equal to the amount “due to special revenue fund from the general fund.” The amount “due to private trust fund from special revenue fund” is a liability of the special revenue fund. It is not acceptable to “net” these two accounts.
201
Lime Co.'s payroll for the month ending January 31, 20X1, is summarized as follows:
Total wages $10,000
Federal income tax withheld 1,200
All wages paid were subject to the Federal Insurance Contributions Act (FICA). FICA tax rates were 7.65% each for employee and employer. Lime remits payroll taxes on the 15th of the following month. In its financial statements for the month ending January 31, 20X1, what amounts should Lime report as total payroll tax liability and as payroll tax expense?
Liability: $1,200; Expense: $1,530
Liability: $1,965; Expense: $1,530
Liability: $1,965; Expense: $765
Liability: $2,730; Expense: $765
Liability: $2,730; Expense: $765
Payroll tax liability:
Federal income tax withheld $1,200
Employee FICA (7.65% x $10,000) 765
Employer FICA (7.65% x $10,000) 765
Total $2,730
Payroll tax expense:
Employer FICA (7.65% × $10,000) = $765
202
Which of the following statements regarding the modified cash basis of accounting is true?
Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.
The modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.
Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP and the modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.
None of the answer choices are correct.
Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP and the modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.
The modified cash basis is a hybrid method which combines features of both the cash basis and the accrual basis. Modifications to the cash basis accounting include such items as the capitalization of assets and the accrual of income taxes. If these modifications are made, the resulting balance sheet would include long-term assets, accumulated depreciation, and a liability for income taxes. The income statement would report depreciation expense and income tax expense. Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.
The modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.
203
General purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users?
Regulatory and taxing authorities
Investors and creditors and their advisors
The board of directors of the corporation
The management of the corporation
Investors and creditors and their advisors
General purpose financial statements are designed to provide information to the primary users since information cannot be provided directly to these users. The primary users are existing and potential investors, lenders, and other creditors. These users make decisions about buying, selling, or holding equity and debt instruments or providing credit by evaluating the expected returns from their investment. These parties need information about the prospects of future net cash inflows to the entity. They also need information about the entity’s resources, claims against those resources, and how efficiently the entity’s management and governing board have used the entity’s resources.
Regulatory and taxing authorities, the board of directors, and management of the corporation are also users of general purpose financial statements; however, they are not the primary users.
204
Financial statement line item explanations which may require additional information for full disclosure purposes include all of the following except:
degree of credit or nonperformance risk.
potential effect related to inability to perform or pay.
line item relation to other line items.
nature of primary activities.
nature of primary activities.
Many financial statement line item explanations, such as local denomination demand deposits, do not require further explanatory information. However, other line items require varying degrees of disclosure. A summary of potential additional disclosures is as follows:
For assets: the nature, quality, and location; future cash flows; relation to other line items; and significant contractual, statutory, regulatory, or judicial restrictions.
For assets and liabilities resulting from financial instruments or other contracts: contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows.
Other disclosures could include equity instrument terms or conditions, potential effects of changing accounting methods, breakdown of aggregated line items, alternative measurements, and the line item’s relation to other line items.
205
A company performing its long-lived asset impairment testing is reviewing the fair value of equipment. Each of the following valuation techniques may be appropriate for measuring the fair value of the equipment, except the:
market approach.
income approach.
cost approach.
net realizable value approach.
net realizable value approach.
The net realizable value approach is not an acceptable fair valuation method. The determination of fair value may require the use of one or more valuation techniques. The valuation technique used should be consistent with the market approach, income approach, and/or cost approach, as appropriate.
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach converts future amounts (e.g., cash flows) to a single present amount (discounted) using methods such as present value techniques and option-pricing models. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost).
206
A lessee-guaranteed residual value at the beginning of a finance lease should be:
excluded from lease payments by both the lessee and lessor.
included by the lessor as part of lease payments at future value.
included by the lessee as part of lease payments at present value.
included by the lessor as part of lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.
included by the lessee as part of lease payments at present value.
The guaranteed residual value is a promise made by the lessee to return a certain value to the lessor which the lessor desires to recover its investment in the asset. When calculating the lease payments, the lessor includes the guaranteed residual value in the lease liability computation. However, if the residual value of the asset at the end of the lease term is expected to be greater than the guarantee, the lessee can ignore the guaranteed residual value. If the amount owed under a guaranteed residual value changes, the lessee must remeasure payments.
207
Which characteristic of information in the statistical tables included in a comprehensive annual financial report differentiates it from information contained in the financial statements?
Both data covering financial trends and fiscal years
Data covering financial trends
Fiscal years
Neither data covering financial trends nor fiscal years
Both data covering financial trends and fiscal years
A comprehensive annual financial report (CAFR) includes an introductory section, financial section, and statistical section. The financial section includes the financial statements, auditor’s report, and required supplementary information for the financial statements prepared for the required fiscal years. The statistical section includes financial, economic, and demographic information and their associated trends over the fiscal years presented in the financial statements and data not confined to the fiscal-year approach required of the financial statements.
208
Which of the following statements is not correct?
Performance obligations identified in a contract with a customer are limited to the goods or services explicitly stated in that contract.
Promises implied by an entity’s customary business practices can create a valid expectation by the customer that the entity will transfer goods or services to the customer.
Transaction price does not include estimates of consideration from the future exercise of options for additional goods or services.
When determining the transaction price, an entity should consider the effects of variable consideration.
Performance obligations identified in a contract with a customer are limited to the goods or services explicitly stated in that contract.
Performance obligations are not limited to the goods or services explicitly stated in a contract. A performance obligation as a promise in a contract with a customer to transfer to the customer either a good or service that is distinct or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. That promise can be explicit, implicit, or based upon customary business practices. Implicit promises can create a valid expectation by the customer that the entity will transfer goods or services to the customer (e.g., free maintenance services). A portion of the transaction price must be allocated to any implied promise identified as a performance obligation.
209
Which of the following would be reported as a decrease in the statement of changes in net assets available for benefits of an employee benefits plan?
Contributions from participants, including those transmitted by the sponsor
Benefits paid to participants
Contributions from other identified sources (for example, state subsidies or federal grants)
Contributions from employers, segregated between cash and noncash contributions
Benefits paid to participants
The statement of changes in net assets available for benefits of an employee benefit plan must include the following:
>The change in fair value (or estimated fair value) of each significant type of investment, including participant-directed and self-directed investments held in brokerage accounts. Gains and losses from investments sold need not be segregated from unrealized gains and losses relating to investments held at year-end. Realized gains and losses on investments that were both bought and sold during the period should be included. This information may be presented in the accompanying footnotes.
>Investment income, exclusive of changes in fair value described above
>Contributions from employers, segregated between cash and noncash contributions (a noncash contribution shall be recorded at fair value; the nature of noncash contributions shall be described either parenthetically or in a note) (This would be an increase.)
>Contributions from participants, including those transmitted by the sponsor (This would be an increase.)
Contributions from other identified sources (for example, state subsidies or federal grants) (This would be an increase.)
>Benefits paid to participants (This would be a decrease.)
>Payments to insurance entities to purchase contracts that are excluded from plan assets
>Administrative expenses
210
The senior accountant for Carlton Co., a public company with a complex capital structure, has just finished preparing Carlton's income statement for the current fiscal year. While reviewing the income statement, Carlton's finance director noticed that the earnings per share data has been omitted. What changes will have to be made to Carlton's income statement as a result of the omission of the earnings per share data?
No changes will have to be made to Carlton's income statement. The income statement is complete without the earnings per share data.
Carlton's income statement will have to be revised to include the earnings per share data.
Carlton's income statement will only have to be revised to include the earnings per share data if Carlton's market capitalization is greater than $5,000,000.
Carlton's income statement will only have to be revised to include the earnings per share data if Carlton's net income for the past two years was greater than $5,000,000.
Carlton's income statement will have to be revised to include the earnings per share data.
FASB ASC 260 requires that earnings per share be presented on the face of the income statement of publicly held enterprises.
211
The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob's liability to Mene:
Carrying amount of liability liquidated $150,000
Carrying amount of real estate
transferred 100,000
Fair value of real estate transferred 90,000
What amount should Knob report as a pretax gain (loss) on restructuring of payables?
$(10,000)
$0
$50,000
$60,000
60,000
In the case of a transfer of assets to satisfy a debt in a troubled debt restructuring, the debtor shall recognize a gain/loss on the transfer of assets (equal to the difference between the fair value and carrying value of the liability liquidated).
Carrying amount of liability settled $150,000
Less fair value of real estate transferred 90,000
Pretax gain on restructuring of payables $ 60,000
212
Hill Company's reconciliation between financial statement and taxable income for 20X7 follows:
Pre-tax financial income $312,000
Permanent difference 37,000
Temporary difference- depreciation (75,000)
Taxable income $274,000
Additional Information:
AT
12/31/X6 12/31/X7
Cumulative temporary differences
(future taxable amounts) $14,000 $89,000
The enacted tax rate was 30% for 20X6, 34% for 20X7, and 38% for years thereafter.
In its December 31, 20X7, income statement, what amount should Hill report as the current portion of income tax expense?
$62,900
$80,580
$88,400
$93,160
$93,160
The current portion of the income tax expense is the year’s taxable income multiplied by the tax rate; the remaining part of the income tax expense is the deferred or noncurrent part ($274,000 × 34% = $93,160).
213
Spruce Corporation shipped inventory on consignment to Aspen Inc. that originally cost $175,000. The freight costs (that were paid by Spruce) amounted to $1,400. Aspen paid $3,600 for advertising that was reimbursable from Spruce. At the end of the year, 80% of the inventory was sold for $196,000. The agreement stated that a commission of 15% will be provided to Aspen for all sales. Ignoring income taxes, what amount should Spruce report as net income for the year?
$26,600
$25,200
$23,000
$21,880
$21,880
Net income is computed as follows for Spruce Corporation.:
Sales $196,000
Cost of sales (($175,000 +
$1,400) × 80%)* (141,120)
Commissions ($196,000 × 15%) (29,400)
Advertising expense (3,600)
Net income $ 21,880
214
Which of the following assets or transactions is an element of comprehensive income?
Investments by owners
Sales revenue
Distributions to owners
Deferred revenue
Sales revenue
The statement of comprehensive income includes all revenues and expenses contained in the income statement/statement of profit and loss. Consequently, it would include sales revenue but would not include investments or distributions by owners or deferred revenue.
215
On August 1, 20X7, Remy signed a two-year contract to provide house painting services on an as-needed basis to Cox Homebuilding Inc., with the contract to start immediately. Cox agreed to pay Remy $2,400 for the two-year period. Payment is not scheduled to occur until completion of the contract, in 20X9. Remy should recognize revenue in 20X7 in the amount of:
$1,200.
$500.
$2,400.
$0.
$500.
Revenue for long-term contracts is recognized over time when any one of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; the entity’s performance creates or enhances an asset, such as work-in-process (WIP), that the customer controls as the asset is created or enhanced; or the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. This arrangement qualifies for revenue recognition over time because the customer consumes the benefit of the seller's service as the seller provides it. Therefore, Remy would recognize revenue of $500 ($2,400 × 5/24 of the contract duration) in 20X7.
216
A voluntary health and welfare entity received a $700,000 permanent endowment during the year. The donor stipulated that the income and investment appreciation be used to maintain its senior center. The endowment fund reported a net investment appreciation of $80,000 and investment income of $50,000. The organization spent $60,000 to maintain its senior center during the year. What amount of change in net assets with donor restrictions should the organization report as a result of these transactions?
$50,000
$70,000
$130,000
$770,000
$770,000
The change in net assets with donor restrictions includes the original donation of $700,000, any increases from investment income ($50,000) and net investment appreciation ($80,000) that the donor restricted to use for the senior center, and any decreases from the amount of resources spent for the restricted purpose ($60,000). These net assets released from restrictions reduce net assets with donor restrictions and increase net assets without donor restrictions by $60,000. Therefore, the change in net assets with donor restrictions is $700,000 + $80,000 + $50,000 − $60,000, or $770,000.
217
On July 1, 20X1, Casa Development Co. purchased a tract of land for $1,200,000. Casa incurred additional costs of $300,000 during the remainder of 20X1 in preparing the land for sale. The tract was subdivided into residential lots as follows:
```
Lot Number Sales Price
Class of Lots Per Lot
A 100 $24,000
B 100 16,000
C 200 10,000
Using the relative sales value method, what amount of costs should be allocated to the Class A lots?
```
$300,000
$375,000
$600,000
$720,000
n a basket purchase, one price is paid for many separable assets. The price is allocated among these assets in accordance with their relative fair values.
Cost to be allocated = Land costs + Additional costs
= $1,200,000 + $300,000 = $1,500,000
Lot Number of x Sales price = Sales value
Class Lots per lot of lot class
A 100 x $24,000 = $2,400,000
B 100 x $16,000 = $1,600,000
C 200 x $10,000 = $2,000,000
Total sales values $6,000,000
==========
Relative sales Sales value of Total
value of Class = Class A lots / Sales Value
A lots
= $2,400,000 / $6,000,000 = 0.40
Cost allocated Total Relative sales values
to Class A lots = Cost x ratio for Class A lots
= $1,500,000 x 0.40
= $600,000
218
Beck Co.’s inventory of trees is as follows:
Beginning inventory 10 trees at $ 50
March 4 purchased 6 trees at 55
March 12 sold 8 trees at 100
March 20 purchased 9 trees at 60
March 27 sold 7 trees at 105
March 30 purchased 4 trees at 65
What was Beck’s cost of goods sold using the last-in, first-out (LIFO) perpetual method?
$910
$850
$808
$775
$850
The cost of goods sold is $850, determined as follows:
SOLD - This one
6 @ 55 - 3/12
2 @ 50 - 3/12
7 @ 60 - 3/27
PURCHASED
6 @ 55 - 3/4
9 @ 60 - 3/20
4 @ 65 - 3/30
```
BALANCE
10 @ 50 - Beginning
10 @ 50 - 3/4
6 @ 55 - 3/4
8 @ 50 - 3/12
8 @ 50 - 3/20
9 @ 60 - 3/20
8 @ 50 - 3/27
2 @ 60 - 3/27
8 @ 50 - 3/30
2 @ 60 - 3/30
4 @ 65 - 3/30
```
219
From the perspective of the lessor, which of the following statements is incorrect regarding nonoperating leases?
The lessor could account for the lease as a sales-type lease, with or without a selling profit.
For all sales-type leases, the lessor recognizes interest revenue over the lease term.
The lessor is required to derecognize the underlying asset at lease commencement.
For sales-type leases with selling profit, the lessor recognizes the profit ratably over the term of the lease.
For sales-type leases with selling profit, the lessor recognizes the profit ratably over the term of the lease.
For sales-type leases with selling profit, the lessor derecognizes the asset and records sales revenue, cost of goods sold, and a lease receivable (i.e., net investment in lease) at the beginning of the lease. Selling profit is therefore also recognized at the beginning of the lease, not ratably over the term of the lease.
220
Lease payments can fluctuate during the lease term, often based on the occurrence of a specified event. Which of the following is not an example of such an event?
Contingencies related to revenues
Contingencies related to asset usage
Contingencies related to an external market rate
Contingencies related to technological advances
Contingencies related to technological advances
Technological advances are generally not considered events which could trigger a change in lease payments. The remaining answer choices (contingencies related to revenues, asset usage, and external market rates) are examples that could trigger a change in a year’s particular payment but not a change in the original measurement of the liability or receivable since these would be considered variable payments.
221
On July 1, Patios R Us entered into a two-month contract to build a patio for Paula. Patios R Us is guaranteed to receive a base fee of $4,000 for their services, and a bonus depending on when the project is completed. Paula would pay an additional 20% of the base fee if the project finished two weeks early and 10% if the project finished a week early. The probability of finishing two weeks early is 40%, one week early is 30%, and on time 30%. What is the expected transaction price with variable consideration estimated as the expected value?
$4,360
$4,000
$4,440
$5,200
$4,440
The amount of consideration in a contract may vary due to discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items, or if an entity’s entitlement to the consideration is contingent on the occurrence (or nonoccurrence) of a future event. One method for estimating the amount of variable consideration is the expected value method: the sum of probability-weighted amounts in a range of possible consideration amounts. This method is appropriate when an entity has a large number of contracts with similar characteristics. The expected value of the transaction price is $4,400, computed as follows:
$4,000 + (20% × $4,000 × 40%) + (10% × $4,000 × 30%) + (0% × $4,000 × 30%)= $4,000 + $320 + $120 + $0 = $4,440
222
Which of the following statements meet the measurement and recognition criteria for landfill closure and post-closure costs?
Landfills should only be accounted for in the general fund.
Total landfill liabilities should be recognized in the general long-term debt account group.
Expense recognition should begin when waste is accepted and should continue through the post-closure period.
Equipment and facilities included in estimated total current cost of closure and post-closure care should not be reported as capital assets.
Equipment and facilities included in estimated total current cost of closure and post-closure care should not be reported as capital assets.
Equipment and facilities included in the estimated total current cost of closure and post-closure care should not be reported as capital assets. Equipment, facilities, services, and final cover, included in the estimated total current cost, should be reported as a reduction of the accrued liability for landfill closure and post-closure care, when they are acquired
223
Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan's adoption. The employees, A, B, C, and D, are expected to retire from the company as follows:
“A” will retire after three years.
“B” and “C” will retire after five years.
“D” will retire after seven years.
What is the amount of prior service cost amortization in the first year?
$0
$5,000
$20,000
$25,000
$20,000
4 years in Year 1
20 years total ( 3 + 5 + 5 + 7)
=4/20 = .25*100,000
224
During Year 2, a former employee of Dane Co. began a suit against Dane for wrongful termination in November of Year 1. After considering all of the facts, Dane's legal counsel believes that the former employee will prevail and will probably receive damages of between $1,000,000 and $1,500,000, with $1,300,000 being the most likely amount. Dane's financial statements for the year ended December 31, Year 2, will not be issued until February of Year 3. In its December 31, Year 2, balance sheet, what amount should Dane report as a liability with respect to the suit?
$0
$1,000,000
$1,300,000
$1,500,000
$1,300,000
A loss contingency must be accrued if it is probable that the loss will occur and the amount can be reasonably estimated.
If a range of loss can be estimated, the best estimate within the range is accrued. Since legal counsel believes that $1,300,000 is the most likely amount to be collected, Dane should report this amount as a liability.
225
A nongovernmental not-for-profit entity's statement of activities is similar to which of the following for-profit financial statements?
Balance sheet
Statement of cash flows
Statement of retained earnings
Income statement
Income statement
In discussing the financial statements for not-for-profit entities (NFPs), the FASB Codification states a “statement of activities for NFPs is the financial statement that an NFP issues instead of a business entity's income statement.”
226
Brite Corp. had the following liabilities on December 31, 20X1:
Accounts payable $ 55,000
Unsecured notes, 8% (due 7-1-X2) 400,000
Accrued expenses 35,000
Contingent liability 450,000
Deferred income tax liability 25,000
Senior bonds, 7% (due 3-31-X2) 1,000,000
The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against Brite. Brite's legal counsel expects the suit to be settled in 20X3, and has estimated that Brite will be liable for damages in the range of $450,000 to $750,000. The deferred income tax liability is not related to an asset for financial reporting and is expected to reverse in 20X3. What amount should Brite report in its December 31, 20X1, balance sheet for current liabilities?
$515,000
$940,000
$1,490,000
$1,515,000
$1,490,000
The contingent liability will not be settled until 20X3; therefore, the liability is noncurrent. All deferred income tax liabilities are classified as noncurrent. Brite Corp.'s current liabilities on December 31, 20X1, would include:
Accounts payable 55,000
Unsecured notes, 8% (due 7-1-X2) 400,000
Accrued expenses 35,000
Senior bonds, 7% (due 3-31-X2) 1,000,000
Total $1,490,000
227
A company is completing its annual impairment analysis of the goodwill included in one of its cash generating units (CGUs). The recoverable amount of the CGU is $32,000. The company noted the following related to the CGU:
Other
Goodwill Patents Assets Total Historical cost $15,000 $10,000 $35,000
Depreciation and amortization 0 3,333 11,667 Carrying amount, Dec 31 $15,000 $ 6,667 $23,333
*Hint: Add up all totals*
Under IFRS, which of the following adjustments should be recognized in the company's consolidated financial statements?
Decrease goodwill by $13,000
Decrease goodwill by $15,000
Decrease goodwill by $3,250, patents by $2,167, and other assets by $7,583
Decrease goodwill by $4,333, patents by $1,926, and other assets by $6,741
Decrease goodwill by $13,000
Under IFRS, impairment is measured at the level of the cash generating unit.
Total carrying amount $45,000
Recoverable amount 32,000
Impairment $13,000
228
On January 1, Fonk City approved the following general fund resources for the new fiscal period:
Property taxes $5,000,000
Licenses and permits 400,000
Intergovernmental revenues 150,000
Transfers in from other funds 350,000
What amount should Fonk record as estimated revenues for the new fiscal year?
$5,400,000
$5,550,000
$5,750,000
$5,900,000
$5,550,000
Governments usually prepare their budgets showing estimated revenues and estimated expenditures or appropriations on a basis consistent with financial reporting. This budget includes revenues, increases in the general fund resources not matched by decreases in another fund resources, and also expected interfund transfers. Interfund transfers are recognized in the records as “other financing sources” and result from a movement of resources from one fund to another. Property taxes, licenses and permits, and intergovernmental revenues will all be represented in the budget as “estimated revenues.” The expected transfers in will be represented by “estimated other financing sources” in the budget.
229
Leer Corp.’s pretax income in the current year was $100,000. The temporary differences between amounts reported in the financial statements and the tax return are as follows:
Depreciation in the financial statements was $8,000 more than tax depreciation.
The equity method of accounting resulted in financial statement income of $35,000. A $25,000 dividend was received during the year, which is eligible for the 65% dividends-received deduction.
Leer’s effective income tax rate was 20%. In its current-year income statement, Leer should report a current provision for income taxes of:
$23,350.
$16,350.
$21,900.
$17,850.
$16,350.
The current provision for income taxes is simply the taxable income for the year multiplied by the tax rate for the year. Thus, we need to find the taxable income for the year.
Start with the pretax income of $100,000, and add $8,000 to it because tax depreciation expense was less than book depreciation. The $35,000 equity method income for financial accounting needs to be subtracted since it is not the taxed amount:
$100,000 + $8,000 – $35,000 = $73,000
The dividends that are taxable are subject to a dividends-received deduction of 65%. Thus, only add in $8,750 of the dividends ($25,000 × 0.35 (1 − .65)), because the dividends, though taxable in part, are not financial accounting income when applying the equity method:
$73,000 + $8,750 = $81,750
Thus, taxable income is $81,750 ($100,000 + $8,000 – $35,000 + $8,750) and the current income tax due is $16,350:
$81,750 × 0.20 = $16,350
230
On January 2, 20X2, Lake Mining Co.'s board of directors declared a cash dividend of $400,000 to stockholders of record on January 18, 20X2, payable on February 10, 20X2. The dividend is permissible under law in Lake's state of incorporation. Selected data from Lake's December 31, 20X1, balance sheet are as follows:
Accumulated depletion $100,000
Capital stock 500,000
Additional paid-in capital 150,000
Retained earnings 300,000
The $400,000 dividend includes a liquidating dividend of:
$0.
$100,000.
$150,000.
$300,000.
$100,000.
The liquidating dividend is that portion of the cash dividend that exceeds the balance in retained earnings because other equity accounts must be debited. Thus, for Lake:
Total amount of January 2, 20X2, cash dividend
$400,000
Less: Retained earnings balance 300,000
Liquidating dividend $100,000
Liquidating dividends are a return of the investment rather than a return on the investment.
231
On September 1, 20X1, Canary Co. sold used equipment for a cash amount equaling its carrying amount for both book and tax purposes. On September 15, 20X1, Canary replaced the equipment by paying cash and signing a note payable for new equipment. The cash paid for the new equipment exceeded the cash received for the old equipment. How should these equipment transactions be reported in Canary's 20X1 statement of cash flows?
Cash outflow equal to the cash paid less the cash received
Cash outflow equal to the cash paid and note payable less the cash received
Cash inflow equal to the cash received and a cash outflow equal to the cash paid and note payable
Cash inflow equal to the cash received and a cash outflow equal to the cash paid
Cash inflow equal to the cash received and a cash outflow equal to the cash paid
Included in cash inflows from investing activities per FASB ASC 230-10-45-12 are “receipts from sales of property, plant, and equipment and other productive assets.”
This pronouncement also includes, under the category of cash outflows from investing activities, “payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment and other productive assets.” (FASB ASC 230-10-45-13)
Canary Co. should treat the cash payments related to the equipment separately as both a cash inflow and cash outflow in the statement of cash flows.
232
At the beginning of the year, the carrying value of an asset was $830,000 with 12 years of remaining life. The fair value of the liability for the asset retirement obligation was $86,000. At year-end, the carrying value of the asset was $760,000. The credit-adjusted, risk-free interest rate was 7%. The risk-free interest rate was 3%. What was the amount of accretion expense for the year related to the asset retirement obligation?
$83,420
$70,000
$6,020
$2,580
$6,020
An asset retirement obligation (ARO) refers to an obligation associated with the retirement of a tangible, long-lived asset, such as a nuclear power plant. After the initial measurement, an entity should recognize period-to-period changes in the liability for an ARO resulting from (a) the passage of time and (b) revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Changes in the value of a liability for an ARO must be measured by applying an interest method of allocation using a credit-adjusted, risk-free interest rate.
Accretion expense would be:
$86,000 × 0.07 = $6,020
Note: Accounting for ARO liability is similar to the treatment of bonds payable. The liability is initially recorded at its present value and is amortized. Amortization is recorded with a debit to accretion expense and a credit to ARO liability.
233
During periods of rising prices, when the FIFO inventory method is used, a perpetual inventory system results in an ending inventory cost that is:
the same as in a periodic inventory system.
higher than in a periodic inventory system.
lower than in a periodic inventory system.
higher or lower than in a periodic inventory system, depending on whether physical quantities have increased or decreased.
the same as in a periodic inventory system.
The FIFO perpetual inventory method will produce the same ending inventory as the FIFO periodic method. This is due to the fact that the “first-in” units are removed first under both methods. The only difference is that the units sold are removed immediately under the perpetual approach but only at the end of the period under the periodic approach. The flow and amounts are the same. This is not true for any other inventory method (other than specific identification).
234
Loft reviewed its inventory values for proper pricing at year-end under the LIFO method. The following summarizes two inventory items examined for the lower of cost or market:
Inventory Item #1 Inventory Item #2
Original cost $210,000 $400,000
Replacement cost 150,000 370,000
Net realizable value 240,000 410,000
Net realizable value
less profit margin 208,000 405,000
What amount should Loft include in inventory at year-end, if it uses the total of the inventory to apply the lower of cost or market?
$520,000
$610,000
$613,000
$650,000
$610,000
Inventory measured using any method other than LIFO or the retail inventory method (e.g., FIFO or average cost) is measured at the lower of cost and net realizable value (NRV), which is defined to be the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. If the NRV of inventory is lower than its cost, the difference is recognized as a loss in earnings in the period in which it occurs.
Inventory measured using LIFO or the retail inventory method must be valued at lower of cost or market when the utility of the inventory is no longer as great as cost. Market is replacement cost unless:
replacement cost is more than net realizable value, in which case market will be net realizable value (the ceiling) or
replacement cost is less than net realizable value reduced by a normal profit margin, in which case market is net realizable value minus a normal profit margin (the floor).
Total original cost $210,000 + $400,000 = $610,000
Total replacement cost $150,000 + $370,000 = $520,000
Total net realizable value $240,000 + $410,000 = $650,000
Total net realizable value
less profit margin $208,000 + $405,000 = $613,000
Since replacement cost is less than realizable value less profit margin, market is the floor of $613,000. The lower of cost or market is then the cost of $610,000.
235
Wood City, which is legally obligated to maintain a debt service fund, issued the following general obligation bonds on July 1, 20X1:
```
Term of bonds 10 years
Face amount $1,000,000
Issue price 101
Stated interest rate 6%
Interest is payable January 1 and July 1. What amount of bond premium should be amortized in Wood's debt service fund for the year ended December 31, 20X1?
```
$1,000
$500
$250
$0
$0
A debt service fund is a governmental fund used to account for the accumulation of resources for the payment of general long-term debt principal and interest. As a governmental fund, the modified accrual basis of accounting is used. (Amortization is an allocation system used in the accrual basis of accounting to determine interest expense. Amortization does not change the financial resources of a governmental-type fund or the amount paid out or “expended” for interest, and is thus not recorded in governmental-type funds.) The amount of premium amortized is $0.
236
As of December 1, Year 2, a company obtained a $1,000,000 line of credit maturing in one year on which it has drawn $250,000, a $750,000 secured note due in five annual installments, and a $300,000 3-year balloon note. The company has no other liabilities. How should the company's debt be presented in its classified balance sheet (statement of financial position) on December 31, Year 2, if no debt repayments were made in December?
Current liabilities of $1,000,000; long-term liabilities of $1,050,000
Current liabilities of $500,000; long-term liabilities of $1,550,000
Current liabilities of $400,000; long-term liabilities of $900,000
Current liabilities of $500,000; long-term liabilities of $800,000
Current liabilities of $400,000; long-term liabilities of $900,000
A current liability is expected to require the use of current assets or the creation of other current liabilities. Long-term liabilities (or obligations) are those liabilities scheduled to mature beyond one year. The current and long-term liabilities in this problem are as follows:
```
Current Long-Term
Line of credit $250,000
Secured note 150,000 $600,000
Balloon note 300,000
Total $400,000 $900,000
```
237
A capital projects fund for a new city courthouse recorded a receivable of $300,000 for a state grant for which all eligibility requirements have been met and a $450,000 transfer from the general fund. What amount should be reported as revenue by the capital projects fund?
$0
$300,000
$450,000
$750,000
$300,000
Transfers are other financing sources and are never recognized as revenues. If the receivable is associated with an unrestricted grant or with a restricted grant for which all eligibility requirements have been met, the state grant should be reported as revenues.
238
An entity authorized 2,000,000 shares of common stock. At January 1, Year 9, the entity had 842,000 shares of common stock issued and 746,000 shares of common stock outstanding. The entity had the following transactions in Year 9:
April 19 Issued 75,000 shares of common stock
July 21 Resold 18,000 shares of treasury stock
November 7 Completed a 1-for-2 reverse common stock split
What is the total number of shares of common stock that the entity has outstanding at the end of Year 9?
839,000
764,000
419,500
410,500
419,500
At the beginning of the year, the number of shares outstanding was 746,000 (given):
75,000 new shares were issued, giving a new total of 821,000 outstanding
18,000 treasury shares were reissued; adding them to the 821,000 gives a new total of 839,000.
A 1-for-2 reverse stock split reduces the shares outstanding at that point by half, for a new total of 419,500 (839,000 ÷ 2).
239
Permanent differences between taxable income and pre-tax accounting income affect:
interperiod income tax allocation.
intraperiod income tax allocation.
both interperiod and intraperiod income tax allocation.
neither interperiod nor intraperiod income tax allocation.
neither interperiod nor intraperiod income tax allocation.
FASB ASC 740-10-10-1 notes: “Certain revenues are exempt from taxation and certain expenses are not deductible.”
The items referred to in this passage are commonly called permanent differences. A permanent difference affects only the current reconciliation of book income to taxable income, and the permanent difference has no effect on the computation of deferred taxes. Permanent differences do not affect either interperiod or intraperiod income tax allocation
240
Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance?
It defers any gains and losses.
It defers losses to the extent of any gains.
It recognizes gains and losses immediately.
It defers gains and recognizes losses immediately.
It recognizes gains and losses immediately.
Generally, a nonmonetary exchange should be based on the fair values of the assets exchanged—resulting in the immediate recognition of a gain or loss.
Exceptions to this treatment include the following:
Fair value is not determinable
Exchange transaction to facilitate sales to customers
Exchange transaction that lacks commercial substance
Under these exceptions, no gains or losses are recognized.
241
The County of Kipling collects taxes for the City of Grant and two school districts located within the county in addition to its own property taxes. The county has no control over the use of the assets in the fund, and the fund meets the criteria established in GASB Statement 84 to qualify as a fiduciary fund. What type of fiduciary fund would be used to record this activity?
Exchange fund
Investment trust fund
Custodial fund
General fund
Custodial fund
A custodial fund is a type of fiduciary fund that is used to report fiduciary activities that are not required to be reported in pension/OPEB trust funds, investment trust funds, or private-purpose trust funds. For custodial funds, the government is collecting and remitting property taxes, but has no discretion over the use of the funds.
The general fund records the taxes receivable and tax revenue for the county. Each of the other governments—city and school districts—would record their own tax revenue and receivable in a general or special revenue fund. Both the general fund and the special revenue fund are governmental funds. With the adoption of GASB Statement 84, the term “agency fund” is no longer used. Since the cash in the fund is remitted to the respective governments and not held for investment, it is not an investment trust fund.
242
Which of the following statements related to sale/leaseback transactions is incorrect?
If the transaction is not at fair value, the entity should adjust the selling price of the asset.
Sale/leaseback transactions generally involve fixed assets such as real estate.
Sale/leaseback transactions occur when a transferor sells an asset to a transferee and then the transferee leases that same asset back.
Sale/leaseback transactions may provide financing, accounting, or tax benefits.
Sale/leaseback transactions occur when a transferor sells an asset to a transferee and then the transferee leases that same asset back.
Sale/leaseback transactions occur when an entity (transferor) sells an asset to another entity (transferee) and then the transferor leases that same asset back from the transferee.
The other answer choices are correct statements:
>If the sale/leaseback transaction is not at fair value, the entity should adjust the selling price of the asset.
>Sale/leaseback transactions generally involve fixed assets such as real estate.
>Sale/leaseback transactions may provide financing, accounting, or tax benefits.
243
How should a nongovernmental not-for-profit entity report depreciation expense in its statement of activities?
It should not be included.
It should be included as a decrease in net assets without donor restrictions.
It should be included as an increase in net assets with donor restrictions.
It should be reclassified from net assets without donor restrictions to net assets with donor restrictions, depending on donor-imposed restrictions on the assets.
It should be included as a decrease in net assets without donor restrictions.
All expenses reported on the statement of activities by a not-for-profit are reported as decreases in net assets without donor restrictions. Although not requiring a cash payment, depreciation is an expense.
244
When valuing ending inventory on a balance sheet and cost of goods sold on an income statement, U.S. GAAP allows for the use of the LIFO, FIFO, and the average cost flow assumptions. IFRS allows the use of which of the following?
LIFO
FIFO
Average cost flow
I and II only
I, II, and III
II and III only
I and III only
II and III only
U.S. GAAP allows the use of specific identification and any of the three cost flow assumptions mentioned, but IFRS specifically disallows the use of LIFO (last in, first out) (IAS 2.IN13).
245
Andro Co. has a $10 million note payable that is due three months after year-end. The note payable was refinanced when long-term bonds were issued one month after year-end for $11 million. The December 31 financial statements were issued two months after year-end. How should Andro classify and disclose the note?
Classification of liability: Current
Note disclosure required: No
Classification of liability: Current
Note disclosure required: Yes
Classification of liability: Noncurrent
Note disclosure required: No
Classification of liability: Noncurrent
Note disclosure required: Yes
Classification of liability: Noncurrent
Note disclosure required: Yes
To classify a liability as long term, the enterprise must have the intent and ability to refinance the obligation. Refinancing a short-term obligation on a long-term basis means renewing, extending, or replacing it with short-term obligations for an uninterrupted period extending beyond one year from the date of an enterprise’s balance sheet. The ability to consummate the refinancing may be demonstrated by actual issuance of a long-term obligation after the balance sheet date, but before the balance sheet is issued. The amount of the short-term obligation to be excluded from current liabilities is the amount of the obligation that is able to be refinanced on a long-term basis. The refinanced note must be disclosed.
246
State and local governments have various sources of revenue. When revenues are received from charges to users for services provided, these revenues are classified as:
program revenues.
general revenues.
general revenues and program revenues.
specific revenues.
program revenues.
Program revenues are derived directly from the program itself or from parties outside the reporting government's taxpayers or citizenry, as a whole; they reduce the net cost of the function to be financed from the government's general revenues. Revenues derived from those who purchase, use, or directly benefit from the goods or services of a program, even those beyond the reporting government's boundaries, are always considered program revenues.
247
o determine the accounting treatment for a transaction, a governmental entity must first refer to:
GASB Technical Bulletins.
GASB Statements.
AICPA Practice Bulletins.
Implementation Guides published by the GASB staff.
GASB Statements.
GASB Statements are in category A of the governmental GAAP hierarchy.
248
A customer is considering buying a television set with a retail price of $2,000. The customer asks the store manager if the store will consider paying the sales tax so that the total cash payment is $2,000. The sales tax is 8%. The store manager agrees to accept $2,000 cash. What should the accountant credit in this transaction?
Sales $2,000; Sales tax payable $0
Sales $1,840; Sales tax payable $160
Sales $2,000; Sales tax payable $148
Sales $1,852; Sales tax payable $148
Sales $1,852; Sales tax payable $148
This question is testing critical thinking skills. The quickest way to solve this problem is to understand that sales revenue must be less than $2,000 for the customer to pay a total of $2,000, as sales taxes are applied to the new sales price, regardless of price. From there, the easiest approach is to quickly apply 8% to both remaining sales prices ($1,840 and $1,852) to determine which leads to a total transaction cost of $2,000.
The only possible answer is sales of $1,852 and sales tax payable of $148 ($1,852 × 8%). Sales of $1,840 is incorrect because $160 is not 8% of $1,840.
249
A company should report investment in debt securities that it has classified as trading at:
lower of cost or market, with holding gains and losses included in earnings.
lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses.
fair value, with holding gains included in earnings only to the extent of previously recognized holding losses.
fair value, with holding gains and losses included in earnings.
fair value, with holding gains and losses included in earnings.
Investment in debt securities are carried at fair value with holding gains and losses included in earnings.
250
As an inducement to enter a lease, Graf Co. a lessor, granted Zep, Inc., a lessee, 12 months of free rent under a 5-year operating lease. The lease was effective on January 1, 20X1, and provides for monthly rental payments to begin January 1, 20X2. Zep made the first rental payment on December 30, 20X1. In its 20X1 income statement, Graf should report rental revenue in an amount equal to:
zero.
cash received during 20X1.
one-fourth of the total cash to be received over the life of the lease.
one-fifth of the total cash to be received over the life of the lease.
one-fifth of the total cash to be received over the life of the lease.
The timing of the cash payments is not relevant in the situation described. What is important is that Graf will collect four years of payments for a 5-year lease.
Each year Graf should recognize 1/5th (1/life of lease) of the total lease payment as rental revenue for that year.
251
Which of the following types of information would be included in total net assets in the statement of financial position for a nongovernmental not-for-profit organization?
Total current net assets and liabilities
Total current assets and long-term assets
Net assets with donor restrictions and net assets without donor restrictions
Assets with donor restrictions, assets without donor restrictions, and net liabilities
Net assets with donor restrictions and net assets without donor restrictions
The total net assets in the statement of financial position is the total equity of a not-for-profit entity. The equity is reported in two categories, net assets with donor restrictions and net assets without donor restrictions, depending on whether there are donor-imposed constraints on asset use. Within these categories or in the notes, additional detail can be included about donors' wishes for their contributed assets.
252
Godart Co. issued $4,500,000 notes payable as a scrip dividend that matured in five years. At maturity, each shareholder of Godart’s three million shares will receive payment of the note principal plus interest. The annual interest rate was 10%. What amount should be paid to the stockholders at the end of the fifth year?
$450,000
$2,250,000
$4,500,000
$6,750,000
$6,750,000
The note does not compound the interest due; the payment here is a simple interest computation. The total interest is the principal multiplied by the rate, multiplied by the total time outstanding:
$4,500,000 × 0.10 × 5 years = $2,250,000
Add this to the principal of $4,500,000 to get the total payment of principal and interest:
$4,500,000 + $2,250,000 = $6,750,000
253
SFAC 4 suggests what performance indicators for nonbusiness organizations?
Net income
Information about the nature and relationship between inflows and outflows of resources
Information about service efforts and accomplishments
Information about both the nature and relationship between inflows and outflows and service efforts and accomplishments
Information about both the nature and relationship between inflows and outflows and service efforts and accomplishments
SFAC 4, Objectives of Financial Reporting by Nonbusiness Organizations, notes that the performance of nonbusiness organizations is usually not subject to direct competition in markets as is that of business enterprises. Thus, other controls have been introduced to ensure efficient and effective operation (i.e., funds, budgets, donor restrictions).
SFAC 4 observes that nonbusiness organizations generally have no single indicator of performance such as profit or net income, and suggests two performance indicators for nonbusiness organizations:
1. Information about the nature and relationship between inflows and outflows of resources
2. Information about service efforts and accomplishments
254
After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For Year 1, income for Cone's branch was $160,000 before income taxes and Cone's bonus. Cone's bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone's bonus for Year 1?
$12,000
$15,000
$25,000
$32,000
$12,000
Cone's bonus for Year 1 is $12,000:
Bonus = 0.25 x ($160,000 - $100,000 - Bonus)
Bonus = 0.25 x ($60,000 - Bonus)
Bonus = $15,000 - (.25 x Bonus)
Bonus + (0.25 x Bonus) = $15,000
1.25 (125%) x Bonus = $15,000
Bonus = $15,000 / 1.25
Bonus = $12,000
255
Frame Co. has an 8% note receivable dated June 30, 20X0, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, 20X1, 20X2, and 20X3. In its June 30, 20X2, balance sheet, what amount should Frame report as a current asset for interest on the note receivable?
$0
$4,000
$8,000
$12,000
$8,000
The balance sheet needs to include the amount of unpaid interest accrued on the outstanding principal up until the balance sheet date. After the first installment on the principal was made, there was still $100,000 of the debt outstanding for a full year.
Note receivable balance on June 30, 20X0 $150,000
Principal collected in 20X1 − 50,000
Note receivable balance on July 1, 20X1 $100,000
Times interest rate × .08
Interest receivable June 30, 20X2 $ 8,000
256
At December 31 of the current year, Taos Co. estimates that its employees have earned vacation pay of $100,000. Employees will receive their vacation pay next year. Should Taos accrue a liability at December 31 if the rights to this compensation accumulated over time or if the rights are vested?
Accumulated, yes; Vested, no
Accumulated, no; Vested, no
Accumulated, yes; Vested, yes
Accumulated, no; Vested, yes
Accumulated, yes; Vested, yes
Rights to paid absences, such as vacation pay, should be accrued as an expense when earned, as long as the rights are vested, or at least accumulate (carry over to the next period).
257
During the current year, Wythe County levied $2,000,000 property taxes, 1% of which is expected to be uncollectible. During the year, the county collected $1,800,000 and wrote off $15,000 as uncollectible. What amount should Wythe County report as property tax revenue in its government-wide statement of activities for the current year?
$1,800,000
$1,980,000
$1,985,000
$2,000,000
$1,980,000
The government-wide statement of activities is prepared using full accrual accounting and the economic resources measurement focus, which requires revenues to be recognized when due to the government regardless of the date of receipt. The estimated collectible revenue in this case is 99% of the property tax levy, or $1,980,000. That $15,000 of the expected uncollectible $20,000 (1% of the levy) is written off does not change the revenue recognition. Property taxes are considered an “imposed nonexchange revenue.”
258
For a right-of-use asset under a lease that contains a purchase option whereby it is reasonably certain the option will be exercised, the amortization period used by the lessee is:
the term of the lease or the estimated useful life of the asset, whichever is greater.
the estimated useful life of the asset at the commencement of the lease.
the term of the lease.
the term of the lease or the estimated useful life of the asset, whichever is shorter.
the estimated useful life of the asset at the commencement of the lease.
The inclusion of a purchase option which is reasonably certain to be exercised makes this a finance lease for the lessee. As such, the lessee will retain ownership and possession of the asset after the end of the lease term. Accordingly, the amortization period is the estimated useful life of the asset as of the beginning of the lease.
259
Parent Co. owns 90% of the 10,000 outstanding shares of Subsidiary Co.'s common stock on December 31, year 1. On that date, the stockholders' equity of Subsidiary was $150,000, consisting of $100,000 of no-par common stock and $50,000 of retained earnings. On January 2, year 2, Subsidiary issued 2,000 previously unissued shares for $24,000 to various outside investors. As a consequence of this transaction, Parent's ownership share was reduced to 75%. Which of the following correctly reports this transaction?
Parent's investment in Subsidiary is reduced by $4,500.
Parent's investment in Subsidiary is increased by $3,000.
The consolidated income statement reports a loss of $7,500.
The consolidated income statement reports a gain of $4,000.
Parent's investment in Subsidiary is reduced by $4,500.
If a parent company owns less than 100% of the voting stock of a subsidiary, there is a noncontrolling (minority) interest in the net assets of the subsidiary as well as a controlling interest. The noncontrolling (minority) interest represents a subset of total stockholders’ equity, as demonstrated for a consolidated balance sheet:
Stockholders’ equity: 12.31.Yr 1 1.2.Yr 2
Controlling interest $135,000 $130,500
Noncontrolling interest 15,000 43,500
Total stockholders’ equity $150,000 $174,000
On January 2, year 2, total stockholder equity increased to $174,000 ($150,000 + $24,000). Parent Co. now owns 75%, or $130,500 ($174,000 × 75%), so the investment in Subsidiary is decreased by $4,500 ($135,000 – $130,500).
260
On October 15, 20X7, Felis Limited, a U.S. corporation, sold merchandise to a Belgian firm for 130,000 euros. Terms of the sale require payment in euros on February 16, 20X8. On October 15, 20X7, the spot exchange rate was $1.17 per euro. At December 31, 20X7, Felis' year-end, the spot rate was $1.15, but the rate increased to $1.21 by February 16, 20X8, when payment was received. How much should Felis report as foreign exchange gain or loss in its 20X8 income statement?
$7,800 gain
$7,800 loss
$2,600 gain
$2,600 loss
$7,800 gain
Gains and losses arising from foreign currency transactions (transactions denominated in a currency other than the functional currency) arise when monetary assets and liabilities (such as the account receivable in this question) are denominated in a currency other than the functional currency and the exchange rate between the currencies changes.
These changes increase or decrease expected functional currency cash flows and shall be included in determining net income for the period in which the exchange rate changes (i.e., the receivable is revalued at the spot rate at year-end and again when the payment is received).
Thus, Felis would revalue the receivable at $1.15/euro and report a $2,600 (€130,000 × ($1.17 – $1.15)) foreign transaction loss at December 31, 20X7. Then, in its 20X8 income statement, Felis again revalues the receivable (from $1.15 to $1.21) and reports a $7,800 gain (€130,000 × ($1.21 – $1.15)).
261
The following trial balance of Mint Corp. on December 31, 20X1, has been adjusted, except for income tax expense.
TRIAL BALANCE
December 31, 20X1
Cash - D $ 600,000
Accounts receivable (net) - D 3,500,000
Cost in excess of billings
on long-term contracts - D 1,600,000
Billings in excess of costs
on long-term contracts -C $ 700,000
Prepaid taxes - D 450,000
Property, plant, and equipment (net) - D 1,480,000
Note payable (noncurrent) -C 1,620,000
Common stock -C 750,000
Additional paid-in capital -C 2,000,000
Retained earnings (unappropriated) -C 900,000
Retained earnings (restricted for
note payable) -C 160,000
Earnings from long-term contracts -C 6,680,000
Costs and expenses - D 5,180,000
$12,810,000 $12,810,000
=========== ===========
Other financial data for the year ending December 31, 20X1:
Mint uses the same method to account for long-term construction contracts for financial statement and income purposes. All receivables on these contracts are considered to be collectible within 12 months.
During 20X1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense. There were no temporary or permanent differences. Mint's tax rate is 30%.
In Mint's December 31, 20X1, balance sheet, what amount should be reported as total retained earnings?
$1,950,000
$2,110,000
$2,400,000
$2,560,000
$2,110,000
900,000 900,000
160,000 1,060,000
```
6,680,000
(5,180,000)
1,500,000
*.3
(450,000) 1,050,000
```
262
When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using historical exchange rates?
Debt securities classified as available-for-sale
Long-term notes payable
Equipment used in operations, carried at cost
Accounts receivable
Equipment used in operations, carried at cost
FASB ASC 830-10-45-18 provides guidance for the remeasurement (i.e., translation) of the books of record into the functional currency. Specifically, a listing of accounts to be remeasured using historical exchange rates is provided and tangible, fixed assets carried at cost appear in that listing. In general, monetary items are remeasured using current rates and nonmonetary items are remeasured using historical rates. For example, plant assets and the related depreciation expense would be translated at historical rates.
Note: Remeasurement using historical rates is the exception to the general guidance of using the current exchange rate for all assets and liabilities. Only those items on this listing are remeasured using historical rates.
263
On January 5, 20X9, Mandu Inc. signs a 10-year equipment lease; the equipment has an economic life of 12 years. Lease payments are $9,000 per year, discounted at 5% to a present value of $69,500. The fair value of the leased asset at commencement is $75,000. From the lessee’s perspective this lease should be classified as a(n):
operating lease.
finance lease.
sales-type lease.
installment lease.
finance lease.
The lessee determines that the lease is a finance lease because (1) the lease term is for a significant portion of the asset’s life (83.3%) and (2) the present value of the lease payments represent a significant portion of the asset’s fair value (92.7%).
264
On March 31, 20X1, the Winn company traded in an old machine that had a carrying amount of $16,800, and a fair value of $14,500. Winn paid a cash difference of $6,000 for a new machine having a total cash price of $20,500. The exchange should include recording:
no gain or loss.
$3,700.
$2,300 loss on exchange.
$2,300 impairment loss.
$2,300 impairment loss.
According to FASB ASC 360-10-40-4, an impairment loss is recognized on an exchange of similar productive assets if the carrying amount of the asset exceeds its fair value on the date of exchange. For Winn, an impairment loss of $2,300 ($16,800 carrying amount less $14,500 fair value) should be recognized.
FASB ASC 845-10-30-1 specifies that if fair value is determinable nonmonetary exchanges be recorded based on fair value unless the exchange transaction lacks commercial substance. In that case, the entire amount of any implied gain or loss should be recognized at the time of exchange. However, in Winn's case, the $2,300 impairment loss should be recognized before the nonmonetary exchange is recorded. Thus, the $2,300 loss is an impairment loss rather than a loss on exchange.
265
A not-for-profit entity receives $150 from a donor. The donor receives two tickets to a theater show and an acknowledgment in the theater program. The tickets have a fair market value of $100. What amount is recorded as contribution revenue?
$0
$50
$100
$150
$50
The amount of contribution revenue recognized in an exchange transaction is reduced by the fair market value of the consideration given by the organization to the donor. The $150 received is reduced by the $100 fair market value of the theater tickets for total contribution revenue of $50.
266
Bailey Co. changed the accounting for insurance expense from the cash basis to the accrual basis in the current year. In January of the prior year, Bailey recorded insurance expense of $240,000 for the cash purchase of a 4-year insurance policy. How should Bailey report the insurance transaction in the current year's financial statements?
As a $180,000 debit to prepaid insurance
As a $60,000 debit to insurance expense
As a $60,000 debit to insurance expense, a $120,000 debit to prepaid asset, and $180,000 credit to retained earnings
As a $180,000 debit to insurance expense, a $120,000 credit to prepaid asset, and $60,000 credit to retained earnings
As a $60,000 debit to insurance expense, a $120,000 debit to prepaid asset, and $180,000 credit to retained earnings
Under the cash basis of accounting, Bailey would have recorded the full $240,000 cash payment as insurance expense, which would have been closed to retained earnings at the end of Year 1. Under accrual accounting, Bailey would have recognized the full $240,000 payment as a prepaid asset, reclassifying $60,000 to insurance expense at the end of each year ($240,000 ÷ 4 years).
To make this adjustment at the end of Year 2, Bailey would recognize Year 2 insurance expense ($60,000), record the two years remaining on the prepaid asset ($120,000), and adjust retained earnings, ignoring income taxes, for the over-recognized expense in Year 1 ($180,000).
267
Income tax-basis financial statements differ from those prepared under GAAP in that income tax-basis financial statements:
do not include nontaxable revenues and nondeductible expenses in determining income.
include detailed information about current and deferred income tax liabilities.
contain no disclosures about finance and operating lease transactions.
recognize certain revenues and expenses in different reporting periods.
recognize certain revenues and expenses in different reporting periods.
Both income tax-basis and GAAP-basis financial statements recognize all the financial activities of a company's business. However, it is the timing of this recognition that differs between the two methods. For income tax-basis financial statements, taxable revenues and tax-deductible expenses are recognized in the financial statements in the same period they are reported in the tax return. For financial statements prepared in accordance with GAAP, all revenues and expenses are recognized using the accrual method of accounting.
268
Which of the following accounting changes should be given retrospective treatment when preparing the financial statements?
A change in the depreciation method used for a tangible asset
A change in the method used to account for long-term contracts
A change in the useful life of a property, plant, and equipment asset
A change in the percentage used to estimate the amount of uncollectible accounts
A change in the method used to account for long-term contracts
A change in accounting principle is given retrospective treatment when reported in the financial statements. This means that all periods presented need to reflect the new accounting principle. A change in accounting estimate is given prospective treatment, meaning that all changes are reported in current and future periods, but no prior periods are restated.
Of the four answer choices, only the change in the method used to account for long-term contracts qualifies as a change in accounting principle. Thus, it is the only one of the four that will be treated retrospectively. While a change in depreciation methods is a change in accounting principle, it is treated as a change in accounting estimate.
269
Which of the following assets of a nongovernmental not-for-profit charitable organization must be depreciated?
A freezer costing $150,000 for storing food for the soup kitchen
Building costs of $500,000 for construction in progress for senior citizen housing
Land valued at $1,000,000 being used as the site of the new senior citizen home
A bulk purchase of $20,000 of linens for its nursing home
A freezer costing $150,000 for storing food for the soup kitchen
The freezer is a long-lived, tangible asset currently being used in operations. It also has a limited life. Assets not being used in operations and land are not depreciated. The linens are not material enough in amount and, if used daily, may not have a useful life in excess of a year or slightly more.
FASB ASC 958-360-35-1 provides that a not-for-profit entity “shall recognize the cost of using up the future economic benefits or service potentials of its long-lived tangible assets—depreciation.”
270
On March 1, 20X1, Ila Co. made a significant decision to not exercise the purchase option at the end of the lease term. requiring modification of the terms of a 4-year lease of equipment. Ila had leased the equipment on January 1, 20X1, and properly recorded it as a finance lease due to the option purchase. Under the modified provisions, the lease would have been classified as:
a sales-type lease.
a finance lease.
an operating lease.
a leverage lease.
an operating lease.
FASB ASC 842-10-25-9 requires that a modified lease not accounted for as a separate contract to be reassessed as of the modification date and be accounted for in accordance to FASB ASC 842-10-25-10 through 25-14. The lease modification changed the lease classification from a finance lease to an operating lease effective March 1, 20X1.
271
A company obtained a $300,000 loan with a 10% interest rate on January 1, Year 1, to finance the construction of an office building for its own use. Building construction began on January 1, Year 1, and the project was not completed as of December 31, Year 1. The following payments were made in Year 1 related to the construction project:
January 1 Purchased land for $120,000
September 1 Progress payment to contractor for $150,000
What amount of interest should be capitalized for the year ended December 31, Year 1?
$30,000
$15,000
$17,000
$13,500
$17,000
The capitalized interest is based on the payments made for the land and progress payments to the contractor based on the amount of the year that these payments were outstanding. The land payment of $120,000 was outstanding the entire year for an expenditure amount of $120,000 × 12/12, or $120,000. The progress payment to the contractor was for $150,000 and was made in September, for only the last four months of the year, thus an expenditure of $150,000 × 4/12, or $50,000.
The total weighted-average expenditures was thus $120,000 and $50,000, for a total of $170,000. A larger ($300,000) specifically construction-related debt was outstanding all year, so there is enough principal to capitalize the interest at the 10% rate of the loan.
The capitalized interest is thus $170,000 × 0.10, or $17,000.
272
On January 2, 20X3, Fir Corporation sold real estate with a carrying amount of $630,000 in exchange for a $900,000 noninterest-bearing note due January 2, 20X9. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type on January 2, 20X3, was 6%. The present value of $1 at 6% for six periods is 0.70.
In Fir's 20X3 and 20X4 income statement, what amount should be reported as interest income?
20X3, $42,472; 20X4, $45,020
20X3, $0; 20X4, $37,800
20X3, $37,800; 20X4, $40,068
20X3, $40,068; 20X4, $42,472
20X3, $37,800; 20X4, $40,068
Notes receivable represent a right to receive a fixed amount of money at a future date. Noninterest-bearing notes typically include a portion of interest in the face amount ($900,000) of the note even though actual interest payments will not be made.
On issuance, the note would be recorded at its present value of $630,000 ($900,000 × 0.70). The difference between the face value and the present value would represent a discount on the note receivable (a contra asset). At the end of 20X3, interest would be recorded on the book value of the note receivable ($900,000 − $270,000 discount = book value $630,000; $630,000 × .06 = $37,800).
In 20X4, the book value of the note is now $667,800 ($630,000 + $37,800) so interest revenue would be $40,068 ($667,800 × .06).
273
On January 2, the City of Walton issued $500,000, 10-year, 7% general obligation bonds. Interest is payable annually, beginning January 2 of the following year. What amount of bond interest is Walton required to report in the statement of revenue, expenditures, and changes in fund balance of its governmental funds at the close of this fiscal year, September 30?
$0
$17,500
$26,250
$35,000
$0
Principal and interest on general long-term liabilities of state and local governments must be reported in the period in which they become legally due and payable. An exception is permitted, but not required, if the due date is in the first 30 days of the next fiscal year (not the case here) and dedicated resources have been set aside in a debt service fund by the end of the year (not indicated here). In any event, even if the two conditions are met, the question asked for the required amount to report for bond interest. Because no bond interest becomes legally due and payable (matures) during the year, $0 of bond interest is required to be reported.
274
Troy Corporation, a U.S. company, purchased merchandise for 25,000 Australian dollars from a vendor in Melbourne on December 1, 20X4. Payment in Australian dollars was due on January 31, 20X5. The exchange rates to purchase one Australian dollar were as follows:
```
12/1/X4 12/31/X4
Spot-rate $0.74 $0.78
30-day rate 0.75 0.79
60-day rate 0.77 0.80
In its December 31, 20X4, income statement, what amount should Troy report as the effect of this foreign exchange transaction?
```
$250 loss
$1,000 loss
$1,000 gain
$250 gain
$1,000 loss
FASB ASC 830-20 (Foreign Currency Transactions) provides that a gain or loss on a forward contract is computed by multiplying the foreign currency amount of the forward contract by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the forward contract.
Troy's reported foreign exchange loss:
= 25,000 Australian dollars × ($0.74 – $0.78) per Australian dollar
= $1,000 loss
275
Kent, Inc.'s, reconciliation between financial statement and taxable income for 20X2 follows:
Pre-tax financial income $150,000
Permanent difference (12,000)
138,000
Temporary difference-
depreciation (9,000)
Taxable income $129,000
=========
ADDITIONAL INFORMATION:
AT
12/31/X1 12/31/X2
Cumulative temporary differences
(future taxable amounts) $11,000 $20,000
The enacted tax rate was 34% for 20X1, and 40% for 20X2 and years thereafter.
In its December 31, 20X2, balance sheet, what amount should Kent report as the current portion of income tax payable?
$55,860
$55,200
$51,600
$60,000
$51,600
The current income tax payable is the year’s taxable income multiplied by the tax rate.
Current income Taxable Current
tax payable = income × tax rate
= $129,000 × 40%
= $51,600
276
Which of the following represents a difference in lessor accounting for sales-type versus direct financing leases?
Direct financing leases derecognize the leased asset; sales-type leases do not derecognize the leased asset.
Sales-type leases derecognize the leased asset; direct financing leases do not derecognize the leased asset.
In both types, profit or loss on sale is deferred. In a sales-type lease it is recognized over the term of the lease; in a direct financing lease it is recognized at the end of the lease.
Selling profit or loss is recognized immediately in a sales-type lease while it is deferred in a direct financing lease.
Selling profit or loss is recognized immediately in a sales-type lease while it is deferred in a direct financing lease.
Both sales-type leases and direct financing leases require the lessor at commencement to derecognize the leased asset and recognize the net investment in the lease. Sales-type leases recognize a selling profit at commencement whereas selling profits are deferred in direct financing leases.
277
According to the FASB conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called:
feedback value.
predictive value.
representational faithfulness.
reliability.
predictive value.
Statement of Financial Accounting Concepts 8.3, paragraph QC8, Qualitative Characteristics of Useful Accounting Information, defines predictive value as follows: “Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcomes. Financial information need not be a prediction or forecast to have predictive value.”
278
For interim financial reporting, a company's income tax provision for the second quarter of 20X1 should be determined using the:
effective tax rate expected to be applicable for the full year of 20X1 as estimated at the end of the first quarter of 20X1.
effective tax rate expected to be applicable for the full year of 20X1 as estimated at the end of the second quarter of 20X1.
effective tax rate expected to be applicable for the second quarter of 20X1.
statutory tax rate for 20X1.
effective tax rate expected to be applicable for the full year of 20X1 as estimated at the end of the second quarter of 20X1.
For interim financial reporting:
<>at the end of each interim period an estimate should be made of the expected tax rate applicable to the full fiscal year and
<>this rate should be used to develop the income tax provision for the affected interim period.
Specifically, the income tax provision for the second quarter of 20X1 would be calculated using the full-year estimated tax rate for 20X1 estimated at the end of the second quarter.
279
Star Corp. had the following accounts and balances in its general ledger as of December 31:
```
Petty cash $ 500
XYZ Bank - checking account 20,000
Marketable equity security 10,000
Marketable debt security 7,500
ABC Bank - depository account 5,000
What amount should Star report as cash and cash equivalents in the balance sheet as of December 31?
```
$25,000
$25,500
$35,000
$42,500
$25,500
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are so near maturity that they represent insignificant risk of changes in value due to changes in interest rates. (Generally, only investments with original maturities of three months or less qualify as cash equivalents, such as Treasury bills, commercial paper, money market funds, and federal funds sold.)
Star should report $25,500 ($500 petty cash + $20,000 checking account + $5,000 depository account) in cash and cash equivalents. Marketable securities are current assets or long-term assets depending on the holding intent of the owner, not cash and cash equivalents.
280
In a period of rising general price levels, Pollard Corp. discloses income on a current cost basis. Which of the following contributes to Pollard’s purchasing power loss on net monetary items?
Refundable deposits with suppliers
Equity investment in unconsolidated subsidiaries
Warranty obligations
Wages payable
Refundable deposits with suppliers
Purchasing power gain or loss is computed by restating monetary assets and liabilities in units of constant purchasing power. Rising prices would cause liabilities to be paid with less valuable dollars, so equity investment in unconsolidated subsidiaries, warranty obligations, and wages payable would result in a purchasing power gain. Receipt of less valuable dollars from refundable deposits would result in a purchasing power loss.
281
Hilltop Co.'s monthly bank statement shows a balance of $54,200. Reconciliation of the statement with company books reveals the following information:
Bank service charge: $10
Insufficient funds check: $650
Checks outstanding: $1,500
Deposits in transit: $350
Check deposited by Hilltop and cleared by the bank for $125, but improperly recorded by Hilltop as $152
What is the net cash balance after the reconciliation?
$52,363
$53,023
$53,050
$53,077
$53,050
We have no way of finding the unadjusted ending month balance per books in the cash account, but we can find the corrected ending cash balance from the information given by starting with the ending bank balance.
The ending bank balance is $54,200 and when we add the deposits in transit and subtract outstanding checks from this balance, we should have the corrected ending balance.
Thus, starting with $54,200 and adding the $350 deposit in transit, and then subtracting the $1,500 checks outstanding, we get $53,050.
The other items would be adjustments to unadjusted ending cash balance, which we do not have, the check error being the company's error, not the bank's error.
282
Nect Corporation reported a retained earnings balance of $330,000 at December 31 of the previous year. In August of the current year, Nect determined that insurance premiums of $51,000 for the 2-year period beginning January 1 of the previous year had been paid and fully expensed in that year. Nect has a 40% income tax rate. What amount should Nect report as adjusted beginning retained earnings in its current-year statement of retained earnings?
$330,000
$345,300
$360,600
$319,800
$345,300
Income was understated in the previous year because the full insurance premium was recorded as expense, leading to an understatement in beginning retained earnings the next year. The beginning retained earnings balance should reflect the after-tax effect of only half of the insurance premium because the premium covered two years. Nect should report adjusted beginning retained earnings of $345,300:
Beginning retained earnings as originally reported $330,000
Overstated expense of $51,000/2 – Tax of 40% ($10,200) 15,300
Corrected beginning retained earnings $345,300
283
On January 2, Rafa Co. purchased a franchise with a useful life of 5 years for $60000. An additional franchise fee of 3% of franchise operation revenues must be paid each year to the franchisor. Revenues from franchise operations amounted to $215000 during the year. In its December 31 balance sheet, what amount should Rafa report as an intangible asset-franchise?
$60000
$54450
$12000
$48000
$48000
A franchise is an intangible asset and, if it has a finite useful life, it is amortized over that useful life. Here the carrying amount of the franchise is $60000, and amortizing that cost equally over its useful life of 5 years would make for an amortization expense of $12000 each year. After one year, the franchise will be carried at $48000 ($60000 – $12000).
284
FASB ASC 505-50-15-2 establishes a fair value approach for stock-based employee compensation plans. The fair value methodology is also extended to cover issuance of:
bonds for certain types of assets.
cash dividends to shareholders.
equity instruments for goods and services.
long-term debt for goods and services.
equity instruments for goods and services.
FASB ASC 505-50-15-2 applies to "all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments or by incurring liabilities to a goods or service provider that is not an employee in amounts based, at least in part, on the price of the entity's shares or other equity instruments or that require or may require settlement by issuing the entity's equity shares or other equity instruments."
285
The effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a:
gain.
loss.
either a gain or a loss.
neither a gain nor a loss.
either a gain or a loss.
FASB ASC 225-20-45-16 contains the following requirement: "A material event or transaction that an entity considers to be of an unusual nature or of a type that indicates infrequency of occurrence or both shall be reported as a separate component of income from continuing operations."
This applies to both gains and losses.
286
The following items were included in Opal Co.'s inventory account on December 31, 20X1:
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 on December 31, 20X1, be reduced?
$103,000
$67,000
$51,000
$43,000
$43,000
Goods owned by Opal, which are out on consignment, and goods in transit FOB shipping (title to goods passed to Opal upon shipment) are included in year-end inventory. Goods held by Opal on consignment for another entity are not included.
Opal's inventory should be reduced by:
Markup on merchandise out on consignment:
(40% x $40,000) 16,000
Goods held on consignment by Opal: 27,000
Total reduction $43,000
287
In a not-for-profit entity, which of the following should be included in total expenses?
Grants to other organizations and depreciation
Grants to other organizations
Depreciation
Neither grants to other organizations nor depreciation
Grants to other organizations and depreciation
Per FASB ASC 720-25-25-1, contributions made by a business are considered expenses of the period. Not-for-profit entities recognize expenses the same way as businesses, so the contribution would be considered an expense with the other expenses of the period. FASB ASC 958-720-45-15 lists depreciation as an expense.
288
A statement of financial position for a nongovernmental not-for-profit organization reports amounts for which of the following classes of net assets?
Current
Long-term
Without donor restrictions
Temporarily unrestricted
Without donor restrictions
A nongovernmental statement of financial position shows two classes of net assets: with donor restrictions and without donor restrictions. Current, long-term, and temporarily unrestricted are not classes of net assets.
289
An entity should disaggregate revenue from contracts with customers into the primary categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Which of the following is a category that might not be appropriate?
Type of goods or services (major product lines)
Geography (region or country)
Type and amount of sales commission
Sales channels (directly to consumers and through intermediaries)
Type and amount of sales commission
Type and amount of sales commission is not an acceptable disaggregation category. Revenue from contracts should be disaggregated into primary categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, including the following:
<>Type of goods or services (major product lines)
<>Geography (region or country)
<>Market or type of customer (government and nongovernment customers)
<>Type of contract (fixed-price and time-and-materials contracts)
<>Contract duration (short-term and long-term contracts)
<>Timing of transfer of goods or services (at a point in time and over time)
<>Sales channels (directly to consumers and through intermediaries)
290
Lease M does not contain a purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease P does not transfer ownership of the property to the lessee at the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease M as a finance lease and Lease P as an operating lease
Lease M as an operating lease and Lease P as a finance lease
Both Lease M and Lease P as finance leases
Both Lease M and Lease P as operating leases
Both Lease M and Lease P as finance leases
FASB ASC 842-10-25-2 established five criteria for classifying leases. The first set of criteria result in a finance lease for a lessee or sales-type lease for the lessor if the lease meets any of the following criteria at commencement:
1. Title (ownership) transfers to the lessee by the end of the lease term.
2. The lease contains a purchase option that the lessee is reasonably certain to exercise.
3. The lease term is for the major part of the remaining economic life of the underlying asset. This criterion shall not be used if the lease commencement date is near the end of the asset’s economic life.
4. The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
5. The underlying asset is specialized and is not expected to have an alternative use to the lessor at the end of the lease term.
If one or more of these conditions are present, the lease is a finance lease. The FASB has removed the former bright-line tests but in FASB ASC 842-10-55-2 uses the former rules as benchmarks.
Lease M is a finance lease because the lease term is greater than or equal to 75% of the economic life of the property. Lease P is also a finance lease for the same reason.
291
Miller Co. discovered that in the prior year, it failed to report $40,000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 40%. What was the impact of the error on Miller's financial statements for the prior year?
Understatement of accumulated depreciation of $24,000
Understatement of accumulated depreciation of $40,000
Understatement of depreciation expense of $24,000
Understatement of net income of $24,000
Understatement of accumulated depreciation of $40,000
Failure to report depreciation expense would understate depreciation expense and accumulated depreciation by the amount of the depreciation expense not reported. If no other errors were made, income would be overstated by the net of tax amount ($24,000).
292
Bay Manufacturing Co. purchased a 3-month U.S. Treasury bill. In preparing Bay's statement of cash flows, this purchase would:
have no effect.
be treated as an outflow from financing activities.
be treated as an outflow from investing activities.
be treated as an outflow from operating activities.
have no effect.
FASB ASC 230-10-20 focuses on cash and cash equivalents. The following explanation is offered: "Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an enterprise with banking operations)."
Thus, the purchase of U.S. Treasury bills would have no effect on the statement of cash flows.
293
The Town of Starbuck's general fund received a notice of a federal grant award for an expenditure-driven (reimbursement) grant in the amount of $2,000,000. Included with the notice was an advance of $1,000,000. During the year, the Town incurred $1,400,000 of program expenditures of which $800,000 were considered eligible qualifying expenditures. No additional money had been received from the grantor during the year.
What would be the amount of deferred revenues reported at the end of the year by the general fund?
$0
$200,000
$600,000
$1,200,000
$200,000
Normally, resources provided before that period of qualifying activity should be recognized as deferred revenues. Insofar as the amount of qualifying expenditures was less than the amount of the advance, the deferred revenues would be equal to the difference.
Advance received $1,000,000
Qualifying expenditures 800,000
Deferred revenues $ 200,000
294
Album Co. issued 10-year, $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the effective interest rate for the debenture bonds?
6%
7%
12%
14%
14%
Effective interest = Carrying value of the bonds × Effective interest rate × Time period
In this case:
$13,016 = $185,953 × Unknown effective interest rate × 1/2 year
Effective interest rate = ($13,016 ÷ $185,953) × 2 = 14%
295
On June 30, Union, Inc., purchased goodwill of $125,000 when it acquired the net assets of Apex Corp. During the year, Union incurred additional costs of developing goodwill, by training Apex employees ($50,000) and hiring additional Apex employees ($25,000). Union’s December 31 balance sheet should report goodwill of:
$200,000.
$175,000.
$150,000.
$125,000.
$125,000.
In a company purchase transaction, goodwill can be recognized. It is maintained at its purchase value, unless and until it is found to be impaired. Costs to maintain or develop goodwill are not capitalized, but are expensed.
296
A nongovernmental, not-for-profit organization held the following investments:
```
Investment
Stock A (100 shares)
$50 Cost
$45 Fair Value (Beginning of Year)
$51 Fair Value (End of Year)
Stock B (200 shares)
$40 Cost
$41 Fair Value (Beginning of Year)
$49 Fair Value (End of Year)
```
What amount of stock investments should be reported in the year-end statement of financial position?
$12,700
$13,000
$13,800
$14,900
$14,900
Not-for-profit entities follow FASB accounting guidance, which requires that investments in equity securities with readily determinable market values are reported at fair value. Investment gains and losses are reported as changes in net assets without donor restrictions unless their use is restricted by explicit donor stipulations or by law.
Total fair value at the end of the year is [(100 shares × $51) + (200 shares × $49)] = $14,900.
297
Dayne County's general fund had the following disbursements during the year:
Payment of principal on long-term debt $100,000
Payments to vendors 500,000
Purchase of a computer 300,000
What amount should Dayne County report as expenditures in its governmental funds statement of revenues, expenditures, and changes in fund balances?
$300,000
$500,000
$800,000
$900,000
$900,000
Because the governmental funds have the measurement focus of current financial resources, all three disbursements ($900,000) would be reported as expenditures. Because governmental funds do not account for noncurrent assets or liabilities, the purchase of equipment ($300,000) and the payment of principal on long-term debt ($100,000) are fund expenditures, as well as the payments to vendors ($500,000).
298
What is the purpose of information presented in notes to the financial statements?
To provide disclosures required by generally accepted accounting principles
To correct improper presentation in the financial statements
To provide recognition of amounts not included in the totals of the financial statements
To present management's responses to auditor comments
To provide disclosures required by generally accepted accounting principles
SFAC 5, Recognition and Measurement in Financial Statements of Business Enterprises, addresses the subject of notes to financial statements as follows:
"Although financial statements have essentially the same objectives as financial reporting, some useful information is better provided by financial statements, and some is better provided, or can only be provided, by notes to financial statements or by supplementary information or other means of financial reporting:
"Information disclosed in notes…is essential…and…an integral part of the financial statements prepared in accordance with generally accepted accounting principles."
This clearly indicates that notes to financial statements provide disclosures required by generally accepted accounting principles.
299
Cole Co. began constructing a building for its own use in January 20X1. During 20X1, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was $40,000. What amount of interest cost should Cole capitalize?
$20,000
$40,000
$50,000
$70,000
$40,000
For qualifying assets being constructed for an entity's own use, FASB ASC 835-20-30-2 requires interest cost to be capitalized equal to the less of (a) the avoidable interest (based on the weighted-average amount of accumulated expenditures), or (b) the actual interest cost incurred. Cole's avoidable interest is given to be $40,000. Since the $70,000 actual interest cost incurred ($50,000 + $20,000) is greater than the avoidable interest of $40,000, the amount of interest that Cole can capitalize is $40,000.
300
Which of the following financial instruments is not considered a derivative financial instrument?
Commercial paper
A futures contract for raw cocoa
A forward exchange contract
A fair value hedge
Commercial paper
One of the characteristics of a derivative instrument is that it derives its value or cash flow from some other security or index, called an underlying.
FASB ASC 815-10-20 defines an underlying as follows: “An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself.”
Commercial paper is a debt agreement and does not have this characteristic of derivative financial instruments.
301
Based on the stock transactions below, what is the weighted-average number of shares outstanding as of December 31, year 1, that should be used in the calculation of basic earnings per share in financial statements issued on March 1, year 2?
Date Transactions
January 1, year 1 Beginning balance 100,000
April 1, year 1 Issued 30,000 shares for cash
June 1, year 1 50% stock dividend
February 15, year 2 2-for-1 stock split
March 15, year 2 Issued 40,000 shares for cash
147,500
183,750
295,000
367,500
367,500
Earnings per share (EPS) is a comparison of the earnings applicable to common stock with the number of shares of common stock of that enterprise. Basic EPS is based on the weighted-average number of actual common shares (WACS) outstanding during the period. In computing WACS, retroactive application is given to stock splits and stock dividends. WACS is computed as follows:
```
1/1 100,000 × 1.5 × 12/12 = 150,000
4/1 30,000 × 1.5 × 9/12 = 33,750
183,750
Effect of retroactive split 2
367,500
```
302
Selected information from the separate and consolidated balance sheets and income statements of Pare, Inc., and its subsidiary, Shel Co., as of December 31, 20X1, and for the year then ended is as follows:
Pare Shel Consolidated
Balance sheet
accounts
Accounts
receivable $ 52,000 $ 38,000 $ 78,000
Inventory 60,000 50,000 104,000
Income Statement
accounts
Revenues $400,000 $280,000 $616,000
Cost of goods
sold 300,000 220,000 462,000
Gross profit 100,000 60,000 154,000
Additional information: During 20X1, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales.
What was the amount of intercompany sales from Pare to Shel during 20X1?
$6,000
$12,000
$58,000
$64,000
$64,000
Total separate revenues = $400,000 + $280,000 = $680,000
Less consolidated revenues 616,000
Revenues eliminated in consolidation $ 64,000
Since intercompany sales are eliminated in the consolidation process, the $64,000 eliminated represents intercompany sales from Pare to Shel.
303
Which of the following statements is correct concerning start-up costs?
Costs of start-up activities, including organization costs, should be expensed as incurred.
Costs of start-up activities, including organization costs, should be capitalized and expensed only if an impairment exists.
Costs of start-up activities, including organization costs, should be capitalized and amortized on a straight-line basis over the lesser of the estimated economic life of the company or 60 months.
Costs of start-up activities should be capitalized and amortized on a straight-line basis over the lesser of the estimated economic life of the company or 60 months, while organization costs should be expensed as incurred.
Costs of start-up activities, including organization costs, should be expensed as incurred.
An asset can be recorded only when the business is certain that it will derive a benefit from the expenditure. Certain expenditures for research and development, advertising, training, start-up and pre-operating activities, relocation or rearrangement, and goodwill are examples of the kinds of items for which assessments of future economic benefits may be especially uncertain. Consequently, expenditures for start-up costs should be expensed as incurred.
304
The following selected financial data pertains to Alex Corporation for the current year ended December 31:
Operating income $900,000
Interest expense (100,000)
Income before income tax 800,000
Income tax expense (320,000)
Net income 480,000
Preferred stock dividends (200,000)
Net income available to common stockholders $280,000
=========
The times interest earned ratio is:
2. 8 to 1.
4. 8 to 1.
8. 0 to 1.
9. 0 to 1.
9.0 to 1.
The times interest earned ratio is income before interest expenses and taxes divided by interest expense. In this question, that would be the operating income prior to either of those expenses, or $900,000 divided by the interest expense of $100,000, giving an answer of 9.0 to 1.
305
Noting that interest rates are declining, Blue Township opted to retire an existing, callable general obligation bond and replace it with a new bond issue with lower interest. A $4,000,000, 5% bond originally issued at par value with 15 years remaining was retired for $4,100,000. A new $4,000,000, 2%, 30-year bond was issued. The new bond issue was sold at 104 and printing, legal, and administrative costs for the transactions were paid in an amount of $5,000. On the fund financial statements, this refunding would result in:
$4,100,000 of expenditures and $4,160,000 of revenues to the debt service fund.
$4,100,000 of other financing uses and $4,160,000 of other financing sources to the debt service fund.
$4,100,000 of expenditures, $5,000 of other financing uses, and $4,160,000 of revenues to the debt service fund.
$4,100,000 of other financing uses, $5,000 of expenditures, and $4,160,000 of other financing sources to the debt service fund.
$4,100,000 of other financing uses, $5,000 of expenditures, and $4,160,000 of other financing sources to the debt service fund.
This transaction is recognizable as a “current” refunding in that the proceeds of new debt are used to repay old debt in its entirety. Usually, the debt service fund is used for refunding transactions. The proceeds of the new debt are not considered revenues and payment of the old debt is not considered expenditures. If underwriter fees or attorney costs had been paid out of the proceeds, the smaller net proceeds would have been recognized as other financing sources.
306
The following information pertains to Seda Co.’s pension plan for the current year:
Actuarial estimate of projected benefit obligation at 1/1 $72,000
Assumed discount rate 10%
Service costs for the year $18,000
Pension benefits paid during the year $15,000
If no change in actuarial estimates occurred during the year, Seda’s projected benefit obligation at December 31 of the current year was:
$64,200.
$75,000.
$79,200.
$82,200.
$82,200.
To compute projected benefit obligation at the end of the year, start with the beginning-of-year balance, add service cost, add interest cost, and subtract out benefits paid out during the year.
Interest cost is computed by multiplying the discount rate times the beginning year balance, so interest cost is:
$72,000 × 0.10 = $7,200
Thus, the end-of-year balance is:
$72,000 + $7,200 + $18,000 – $15,000 = $82,200
307
Jillian’s Jewelry sells gift cards redeemable for Jillian’s products either in-store or online. During 20X5, Jillian sold $365000 of gift cards, and $345000 of the gift cards were redeemed for products. As of December 31, 20X5, $6000 of the remaining gift cards had passed the date at which Jillian concludes that the cards will never be redeemed. How much gift card revenue should Jillian recognize in 20X5?
$365000
$351000
$345000
$371000
$351000
Breakage is the value of prepaid stored-value products that is not redeemed by consumers for goods, services, or cash. To prevent liabilities related to breakage from being recognized in perpetuity, Accounting Standards Update (ASU) 2016-04, Liabilities—Extinguishments of Liabilities, was issued, clarifying that prepaid stored-value product liabilities (both physical and digital forms) meet the definition of a financial liability. Under a two-party arrangement, the vendor records deferred revenue until such time as the card is redeemed (i.e., then revenue is recognized). Under a third-party arrangement, the vendor recognizes a financial liability to provide payment to the third-party vendor when the customer redeems the card.
The sale of a gift card created deferred revenue, as it is a prepayment by a customer for goods or services to be delivered at a future date. Revenue is recognized when goods or services are delivered or when the likelihood of redemption is remote. In this case, $345000 was redeemed and another $6000 was viewed as expired, yielding total revenue of $351000.
Breakage estimates must be reassessed each reporting period. Changes in the estimate are accounted for as a change in an accounting estimate. Both the methodology used and any significant judgments made in recognizing breakage for prepaid stored-value products are required to be disclosed.
308
On December 31, 20X1 and 20X2, Carr Corp. had outstanding 4,000 shares of $100 par value 6% cumulative preferred stock and 20,000 shares of $10 par value common stock. On December 31, 20X1, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in 20X2 totaled $44,000. Of the $44,000, what amounts were payable on each class of stock?
Preferred stock: $44,000; Common stock: $0
Preferred stock: $36,000; Common stock: $8,000
Preferred stock: $24,000; Common stock: $20,000
Preferred stock: $32,000; Common stock: $12,000
Preferred stock: $36,000; Common stock: $8,000
Preferred stock dividends for each year must be paid before common stock dividends may be paid. Cumulative preferred stock dividends in arrears must be caught up as well, prior to paying any dividends to common stock for the year.
Dividends in arrears on preferred stock $12,000
Preferred stock dividend requirement
for 20X2 (4,000 shares x $100 x 6%) 24,000
Dividends allocable to preferred shares $36,000
=======
Dividends allocable to common shares
($44,000 - $36,000) $ 8,000
=======
Remember: Dividends in arrears and current dividends on cumulative preferred stock must be paid before any dividend can be paid to common. Since the preferred stock is not participating, the total amount remaining after the current and in arrears amount is paid to preferred goes to common.
309
The FASB believes that, as a general policy, there is a maximum number of reportable segments about which information should be provided. What is the number?
10
20
5
15
10
<>If an operating segment becomes reportable because it meets one or more of the quantitative criteria in the current period but did not meet those criteria previously, prior-period segment information that is presented for comparative purposes should be restated, unless it is not practicable to do so.
<>Information about operating segments that do not meet any of the quantitative criteria, and that are not combined with other operating segments to create reportable segments, are combined and presented in an “all other” category.
<>As a practical limit, more than 10 reportable segments is a recommended level at which management should consider whether its presentation of segment information has become overly detailed.
310
When there is a change in the reporting entity, how should the change be reported in the financial statements?
Prospectively, including note disclosures
Retrospectively, including note disclosures, and application to all prior-period financial statements presented
Currently, including note disclosures
Note disclosures only
Retrospectively, including note disclosures, and application to all prior-period financial statements presented
With a change in reporting entity, all prior years' financial statements must be reported as if the change happened before the financial statements were presented. The cumulative effect of the change is an adjustment to beginning retained earnings for the first year presented. This treatment is the retrospective approach.
311
On January 1, Year 1, a shipping company sells a boat and leases it from the buyer in a sale/leaseback transaction. At the end of the 10-year lease, ownership of the boat reverts to the shipping company. The fair value of the boat, at the time of the transaction, was less than its undepreciated cost. Which of the following outcomes most likely will result from the sale/leaseback transaction?
The boat will not be classified in property, plant, and equipment of the shipping company.
The shipping company will not derecognize the asset in the current year.
The shipping company will recognize the total profit on the sale of the boat in the current year.
The shipping company will not recognize depreciation expense for the boat in the current year.
The shipping company will not derecognize the asset in the current year.
The first step is to determine if this transaction qualifies as a sale. Per FASB ASC 842-40-25-2, a sale has not occurred if the leaseback could be classified as a finance lease or a sales-type lease. Since title will transfer back to the shipping company, this does not qualify for sale/leaseback treatment. The shipping company will not derecognize the asset and will recognize the consideration received as a financial liability.
312
In Year 6, Spirit, Inc., determined that the 12-year estimated useful life of a machine purchased for $48,000 in January of Year 1 should be extended by three years. The machine is being depreciated using the straight-line method and has no salvage value. What amount of depreciation expense should Spirit report in its financial statements for the year ending December 31, Year 6?
$4,200
$3,200
$2,800
$4,800
$2,800
Spirit should report $2,800 depreciation expense for the year ending December 31, Year 6:
Original cost $48,000
Depreciation Years 1-5 ($4,000 × 5 yrs.) 20,000
Book value at beginning of Year 6 $28,000
Year 6 depreciation ($28,000 ÷ 10) $ 2,800
313
On January 2, 20X2, Lake Mining Co.'s board of directors declared a cash dividend of $400,000 to stockholders of record on January 18, 20X2, payable on February 10, 20X2. The dividend is permissible under law in Lake's state of incorporation. Selected data from Lake's December 31, 20X1, balance sheet are as follows:
Accumulated depletion $100,000
Capital stock 500,000
Additional paid-in capital 150,000
Retained earnings 300,000
The $400,000 dividend includes a liquidating dividend of:
$300,000.
$150,000.
$0.
$100,000.
$100,000.
The liquidating dividend is that portion of the cash dividend that exceeds the balance in retained earnings because other equity accounts must be debited. Thus, for Lake:
Total amount of January 2, 20X2, cash dividend $400,000
Less: Retained earnings balance 300,000
Liquidating dividend $100,000
========
Liquidating dividends are a return of the investment rather than a return on the investment.
314
Fontenot Company had an increase in its deferred tax liability account of $182,000 during 20X2. The deferred tax asset account decreased by $104,000 during the same year. Fontenot has a tax rate of 32%. Which of the following should Fontenot report in the income tax expense section of its 20X2 income statement?
Deferred income tax benefit of $91,520
Deferred income tax expense of $91,520
Deferred income tax benefit of $286,000
Deferred income tax expense of $286,000
Deferred income tax expense of $286,000
The amount to be reported in the income tax section of the income statement is the deferred income tax expense based on the changes in the deferred tax accounts. The result is deferred income tax expense of $286,000 ($104,000 + $182,000).
Income tax expense 286,000
Deferred tax liability 182,000
Deferred tax asset 104,000
315
A storm damaged the roof of a nongovernmental, not-for-profit organization's building. A professional roofer repaired the roof at no charge. How should the roof repairs be recognized in the statement of activities?
As an increase in expenses and an increase in contributions from donated services
As an increase in the building account and an increase in net assets without donor restrictions
As an increase in fixed assets and an increase in contributions from donated services
No recognition is required in the financial statements, but a note disclosure is required.
As an increase in expenses and an increase in contributions from donated services
For nonprofits, contribution revenues should be reported for donated services at their fair value, with a matching amount of expense recognized in the appropriate category, under two circumstances:
1. The services create or enhance nonfinancial assets; or
2. All three of the following conditions are met:
a. Specialized skills are required to perform the
services;
b. The individuals donating the services possess
those skills; and
c. The organization would have to buy the services if
they were not donated.
Essentially this is a wash entry, but the activity can be tracked through the recording process.
316
Which of the following accounts should Moon City close at the end of its fiscal year?
Vouchers payable
Expenditures
Fund balance
Fund balance—reserved for encumbrances
Expenditures
Expenditures is a nominal (operating statement) account used in periodically measuring outflows of financial resources, and as such is closed at the end of the fiscal year. Vouchers Payable, Fund Balance, and Fund Balance—Reserved for Encumbrances are all balance sheet (real) accounts. Balance sheet accounts are not closed at fiscal year-end.
317
According to the FASB conceptual framework, which of the following is not an essential characteristic of a gain?
There is an increase in net assets.
They can result from all other transactions and other events and circumstances affecting an entity.
They can result from peripheral or incidental transactions.
They can result from revenues or investment by owners.
They can result from revenues or investment by owners.
SFAC 6, Elements of Financial Statements, defines gains as “increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.”
Because gains are distinct from revenues, transactions that result in revenues are not gains. Investments by owners are contributions, not gains.
318
A donor provided a $10 million gift for a specific program to a nongovernmental, not-for-profit organization. The organization cannot spend the $10 million, but it may use the income on the gift for the donor-specified program. In the organization's statement of activities, the gift should be reported as part of the change in:
temporarily restricted net assets.
net assets with donor restrictions.
restricted—nonspendable.
net assets without donor restrictions.
net assets with donor restrictions.
Only restrictions imposed by donors or grantors are considered restrictions in accounting for not-for-profit organizations. Some restrictions can be satisfied by the passage of time or by using the resources for a certain purpose (e.g., to finance expenses of a specific program or to construct a building). Other restrictions cannot be fulfilled by either the passage of time or actions of the organization. In either case, these are considered net assets with donor restrictions.
Revenues are classified in the same categories that net assets are classified into: those that contribute to net assets with donor restrictions, and those that contribute to net assets without donor restrictions. Expenses are always reported as changes in net assets without donor restrictions.
The donation is this question is an example of a restriction because the donor requires that the $10 million principal be maintained intact in perpetuity (i.e., cannot be spent). Therefore, the revenue related to these net assets would be reported as part of the change in net assets with donor restrictions.
319
Dove Inc. owns 100% of Flom Co. On January 2, 20X3, Dove sold equipment with an original cost of $120,000 and a carrying amount of $84,000 to Flom for $108,000. It is Dove’s policy to use straight-line depreciation with a useful life of 10 years for equipment like that sold to Flom. The equipment had no residual value. Flom is using straight-line depreciation over 6 years with no residual value. In Dove's December 31, 20X3, consolidating worksheet, by what amount should depreciation expense be decreased?
$18,000
$12,000
$0
$6,000
$6,000
When dealing with unrealized gains or losses in a consolidated financial statement setting, the objective is to defer unrealized gains to establish both historical cost balances and recognize appropriate income within the consolidated financial statement. The unrealized gain of the sale of the equipment to Flom is located in the cost of the equipment on Flom’s books. Depreciation expense on a consolidated basis should be the depreciation that would have been expensed on Dove's books if the equipment had not been sold.
Depreciation on Flom's books (unrealized gain)
($108,000 ÷ 6) $18,000
Depreciation on Dove's books (original cost)
($120,000 ÷ 10) 12,000
Difference $ 6,000
320
Opto Co. is a publicly traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers?
The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues
The identity of any external customer providing 10% or more of a particular operating segment's revenue
The identity of any external customer considered to be “major” by management
Information on major customers is not required in segment reporting.
The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues
The FASB requires the following with respect to enterprise-wide disclosures about major customers:
After an enterprise has identified its operating segments (including those that represent an aggregation of two or more separate segments), it must report separately information about each operating segment that meets any one or more of the following tests:
<>Revenue test: If its revenue is 10% or more of the combined revenue of all operating segments (revenue includes both sales to external customers and intersegmental sales or transfers)
<>Profitability test: If the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of:
1. the combined reported profit of all operating segments that did not report a loss or
2. the combined reported loss of all operating segments that did report a loss
Asset test: If its assets are 10% or more of the combined assets of all operating segments
321
Cole Co. began constructing a building for its own use in January 20X1. During 20X1, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was $40,000. What amount of interest cost should Cole capitalize?
$20,000
$40,000
$50,000
$70,000
$40,000
For qualifying assets being constructed for an entity's own use, FASB ASC 835-20-30-2 requires interest cost to be capitalized equal to the less of (a) the avoidable interest (based on the weighted-average amount of accumulated expenditures), or (b) the actual interest cost incurred. Cole's avoidable interest is given to be $40,000. Since the $70,000 actual interest cost incurred ($50,000 + $20,000) is greater than the avoidable interest of $40,000, the amount of interest that Cole can capitalize is $40,000.
322
On January 1, 20X1, Sip Co. signed a 5-year contract enabling it to use a patented manufacturing process beginning in 20X1. A royalty is payable for each product produced, subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually. On the contract date, Sip prepaid a sum equal to two years' minimum annual fees. In 20X1, only minimum fees were incurred. The royalty prepayment should be reported in Sip's December 31, 20X1, financial statements as:
a current asset and an expense.
an expense only.
a noncurrent asset.
a current asset and noncurrent asset.
a current asset and an expense.
The prepayment on January 1, 20X1, represented the minimum annual fees for 20X1 and 20X2. On December 31, 20X1, the 20X1 fee is an expense and the payment for the 20X2 fee is a current asset (prepaid fee).
323
Which of the following is not a type of fiduciary fund?
Custodial fund
Investment trust fund
Permanent fund
Private-purpose trust fund
Permanent fund
Fiduciary funds include pension trust funds, investment trust funds, private-purpose trust funds and custodial funds. Permanent funds are a type of governmental fund.
324
A government's police department reports appropriations of $10,000, encumbrances of $2,000, and expenditures of $5,000. What is the amount of available appropriations for the police department?
$7,000
$3,000
$5,000
$8,000
$3,000
An appropriation is created at the time the budget is recorded, to denote the amount of funds that have been authorized for spending. An encumbrance is established to offset the appropriation when a purchase order is created, showing that a portion of the approved spending has actually been used to purchase the item. Once the goods and invoice are received, the encumbrance is reversed and expenditures are recognized.
For the information in this question, purchase orders of $2,000 are outstanding (i.e., the goods have been ordered but not received or invoiced) and $5,000 of funds have been paid out. From the original $10,000 of approved appropriations, only $3,000 remains ($10,000 − $5,000 − $2,000).
325
A company issues $1,500,000 of par bonds at 98 on January 1, year 1, with a maturity date of December 31, year 30. Bond issue costs are $90,000, and the stated interest rate of the bonds is 6%. Interest is paid semiannually on January 1 and July 1. Ten years after the issue date, the entire issue was called at 102 and canceled. The company uses the straight-line method of amortization for bond discounts and issue costs, and the result of this method is not materially different from the effective interest method. The company should classify what amount as the loss on extinguishment of debt at the time the bonds are called?
$30,000
$90,000
$50,000
$110,000
$110,000
When a bond is retired, the principal, unamortized premium or discount, and any bond issue costs that were incurred and recorded as an asset (i.e., as a deferred charge) must be written off, reducing any gain that may be recognized on the retirement. The journal entry to write off the above bond is as follows:
Bonds Payable (face) 1,500,000
Loss on Bond Extinguishment (plug) 110,000
Bond Discount ($30,000 × 20/30) 20,000
Bond Issue Costs ($90,000 × 20/30) 60,000
Cash ($1,500,000 × 1.02) 1,530,000
326
KLU Broadcast Co. entered into an agreement to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, travel and lodging services of $10,000 were used by KLU. However, the advertising service had not been provided. How should KLU account for travel and lodging in its June 30 financial statements?
Not reported
Revenue and expense is recognized when the agreement is complete.
An expense and liability of $10,000 is recognized.
An asset and revenue for $10,000 is recognized.
An expense and liability of $10,000 is recognized.
KLU has incurred expenses for travel and lodging and has a corresponding liability for unearned revenue. The revenue from providing advertising time is not earned and cannot be recognized as revenue until the advertising time actually has been provided for Hotel Co.
327
On January 2, 20X1, Smith purchased the net assets of Jones's Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy's cash-basis financial statements for the year ending December 31, 20X1, Spiffy reported revenues in excess of expenses of $60,000. Smith's drawings during 20X1 were $20,000. In Spiffy's financial statements, what amount should be reported as Capital-Smith?
$400,000
$410,000
$415,000
$390,000
$390,000
Under the cash method of accounting, revenue is recognized when received in the form of cash, and expenses are recognized when paid in cash. The owner’s capital account maintains a record of the owner’s investment and the earnings for the owner, and is lowered by drawings.
Capital-Smith balance January 2, 20X1 $350,000
Add: Net income 60,000
Subtotal $410,000
Deduct: Withdrawals (20,000)
Capital-Smith balance December 31, 20X1 $390,000
328
In a sale/leaseback transaction, a gain resulting from the sale should be:
I. deferred if the sale is at fair value.
II. recognized immediately if the sale is at fair value.
II only
Neither I nor II
I only
Both I and II
II only
FASB ASC 842-40-30-2 provides that if the lease is not at fair value, the entity should adjust the sale price and record any gain as additional financing. FASB ASC 842-40-55-24 provides an example where the gain is partially recognized and partially deferred as additional financing. Item I (deferred if the sale is at fair value) is incorrect as the deferral would only occur if the sale is not at fair value.
329
A government-wide statement of net position must include which of the following?
A consolidation of all government-wide activities
Prior-year comparative financial data
A distinction between governmental and business-type activities
Primary government fiduciary fund data
A distinction between governmental and business-type activities
The government-wide financial statements report governmental activities, business-type activities, the primary government totals, and discretely presented component units. All data in the government-wide statements are presented on the accrual (revenue and expense) basis and use the economic resources measurement focus. Fiduciary funds and fiduciary component units are not included in these statements. Governmental activities and business-type activities are reported separately.
330
Which of the following statements concerning patents is correct?
Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent's remaining economic life.
Research and development contract services purchased from others and used to develop a patented manufacturing process should be capitalized and amortized over the patent's economic life and not assessed for impairment.
Research and development costs incurred to develop a patented item should be capitalized and amortized on a straight-line basis over 17 years.
Legal fees and other direct costs incurred in registering a patent should be capitalized and amortized on a straight-line basis over a 5-year period.
Legal costs incurred to successfully defend an internally developed patent should be capitalized and amortized over the patent's remaining economic life.
In general, the cost of internally developed patents should be expensed in the period incurred. An exception to this is the treatment of legal costs related to patents as required by FASB ASC 730-10-55-2. In a listing of examples of activities to be excluded from research and development treatment (i.e., expensed when incurred) is "i. Legal work in connection with patent applications or litigation, and the sale or licensing of patents."
This means that legal costs related to the successful defense of internally developed patents should be capitalized and amortized over the patent's remaining economic life.
FASB ASC 350-30-35-14 requires that intangibles subject to amortization also be assessed for impairment.
331
Which of the following accounting changes should be given retrospective treatment when preparing the financial statements?
A change in the amount of expected warranty repairs
A change from the weighted-average method to the FIFO method of inventory costing
A change in the useful life of a finite life intangible asset
A change in the settlement rate used in computing pension expense
A change from the weighted-average method to the FIFO method of inventory costing
A change in accounting principle is given retrospective treatment when reported in the financial statements. This means that all periods presented need to reflect the new accounting principle. A change in accounting estimate is given prospective treatment, meaning that all changes are reported in current and future periods, but no prior periods are restated.
Of the four answer choices, only the change from weighted average to FIFO (first in, first out) for inventory costing qualifies as a change in accounting principle.
332
Comprehensive income includes all of the following, except:
dividends to shareholders.
revenues from external customers.
interest expense to bondholders.
loss from a tornado.
dividends to shareholders.
Comprehensive income is defined in the FASB's conceptual framework as “the change in equity (net assets) of a business enterprise, during a period, from transactions and other events and circumstances from nonowner sources.” Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Dividends are a distribution to owners and would therefore not be included in comprehensive income. The other three answer choices (revenues from external customers, interest expense to bondholders, and loss from a tornado) would be included.
333
How should a nongovernmental, not-for-profit entity report donor-restricted cash contributions for long-term purposes in its statement of cash flows?
Operating activity inflow
Investing activity inflow
Financing activity inflow
As a noncash transaction
Financing activity inflow
The cash flow statement for a not-for-profit is similar to a business cash flow statement. In a modification from the business cash flow statement, cash contributions received from donors who have restricted the use to long-term purposes are reported as financing activities. Thus, “operating activity inflow” and “investing activity inflow” use the wrong categories of cash flows. “As a noncash transaction” is incorrect because cash is clearly received in this transaction.
334
Which of the following types of information would be included in total net assets in the statement of financial position for a nongovernmental not-for-profit organization?
Total current net assets and liabilities
Total current assets and long-term assets
Net assets with donor restrictions and net assets without donor restrictions
Assets with donor restrictions, assets without donor restrictions, and net liabilities
Net assets with donor restrictions and net assets without donor restrictions
The total net assets in the statement of financial position is the total equity of a not-for-profit entity. The equity is reported in two categories, net assets with donor restrictions and net assets without donor restrictions, depending on whether there are donor-imposed constraints on asset use. Within these categories or in the notes, additional detail can be included about donors' wishes for their contributed assets.
335
Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil. On the date of the exchange, cost and market values of the oil were as follows:
Yola Co. Zaro Co.
Cost $100,000 $126,000
Market values 120,000 150,000
In Zaro’s income statement, what amount of gain should be reported from the exchange of the oil?
$0
$4,800
$24,000
$30,000
$4,800
This is a nonmonetary transaction without commercial substance, and thus full gain is not recognized yet, but is instead deferred. Some cash is received, though, so some gain is recognized.
<>$30,000 cash out of a market value of the exchange of $150,000 is 20% of the transaction being in cash, so 20% of the gain is recognized now.
<>Zaro’s gain is $150,000 – $126,000, or $24,000, and 20% of $24,000 is $4,800, the gain recognized now.
336
The Town of Starbuck's general fund received a notice of a federal grant award for an expenditure-driven (reimbursement) grant in the amount of $2,000,000. Included with the notice was an advance of $1,000,000. During the year, the Town incurred $1,400,000 of program expenditures of which $800,000 were considered eligible qualifying expenditures. No additional money had been received from the grantor during the year.
What would be the amount of deferred revenues reported at the end of the year by the general fund?
$0
$200,000
$600,000
$1,200,000
$200,000
Normally, resources provided before that period of qualifying activity should be recognized as deferred revenues. Insofar as the amount of qualifying expenditures was less than the amount of the advance, the deferred revenues would be equal to the difference.
Advance received $1,000,000
Qualifying expenditures 800,000
Deferred revenues $ 200,000
337
A company that is a large accelerated filer must file its Form 10-Q with the U.S. Securities and Exchange Commission within how many days after the end of the period?
30 days
40 days
45 days
60 days
40 days
Form 10-Q is the quarterly report required by the SEC for publicly traded companies. The due date is 40 days after the end of the quarter to which it applies.
338
During 20X1, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows:
FIFO Weighted-Average
January 1, 20X1 $71,000 $77,000
December 31, 20X1 79,000 83,000
Orca's income tax rate is 30%.
Orca should report the cumulative effect of this accounting change as:
a component of income after discontinued operations.
a component of income from continuing operations.
a component of accumulated other comprehensive income.
retrospectively as an adjustment of the beginning-of-period balance of retained earnings of the earliest year presented.
retrospectively as an adjustment of the beginning-of-period balance of retained earnings of the earliest year presented.
FASB ASC 250-10-45-5 mandates that voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented. The only exception is when the FASB issues a new pronouncement and mandates in that pronouncement that a change in accounting principle made to comply with that pronouncement should be made by including the cumulative effect in net income of the year of change.
339
Host Co. has adopted FASB ASC 205-20 (Presentation of Financial Statements—Discontinued Operations). On October 1, 20X1, in a strategic shift, Host Co. approved a plan to dispose of a segment of its business. Host expected that the sale would occur on April 1, 20X2, at an estimated gain of $350,000. The segment had actual and estimated operating losses as follows:
01/01/X1 to 09/30/X1 $(300,000)
10/01/X1 to 12/31/X1 (200,000)
01/01/X2 to 03/31/X2 (400,000)
Assuming that the segment qualified as a component under FASB ASC 205-20-45, in its 20X1 income statement, what should Host report as a loss from operation of a discontinued segment?
$200,000
$250,000
$500,000
$600,000
$500,000
Under FASB ASC 205-20-45-3, the losses from a discontinued segment that qualifies as a component are reported in the period they occur. An anticipated loss on sale should be recognized by writing the component down to FMV. An anticipated gain on sale of the component should not be recognized until the day of the sale.
Loss 01/01/X1 to 09/30/X1 ($200,000)
Loss 10/01/X1 to 12/31/X1 ( 300,000)
Loss ($500,000)
FASB ASC 205-20-45-3 states the following: "In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business entity or statement of activities of a not-for-profit entity (NFP) for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with paragraphs 360-10-35-40 and 360-10-40-5, in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur. The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income. For example, the results of discontinued operations may be reported in the income statement of a business entity as follows:
Income from continuing operations before income taxes $XXXX
Income taxes XXX
Income from continuing operations $XXXX
Discontinued operations (Note X):
Loss from operations of discontinued Component X
(including loss on disposal of $XXX) $XXXX
Income tax benefit XXXX
Loss on discontinued operations XXXX
Net Income $XXXX
=====
"A gain or loss recognized on the disposal shall be disclosed either on the face of the income statement or in the notes to financial statements."
340
Combined statements may be used to present the results of operations of:
commonly controlled companies.
companies under common management.
both commonly controlled companies and companies under common management.
neither commonly controlled companies nor companies under common management.
both commonly controlled companies and companies under common management.
FASB ASC 810-10-20 notes that in consolidation controlling financial interest resides with one of the companies included in the consolidation. In addition, combined financial statements would be useful where one individual owns a controlling financial interest in several entities that are related in their operations. Another use of combined statements is to present the financial position and the results of operations of entities under common management.
Thus, combined statements (not consolidated) may be used to present operating results of companies under common management, as well as commonly controlled companies.
341
Which of the following expenditures qualifies for asset capitalization?
Cost of materials used in prototype testing
Costs of testing a prototype and modifying its design
Salaries of engineering staff developing a new product
Legal costs associated with obtaining a patent on a new product
Legal costs associated with obtaining a patent on a new product
Assets are probable future economic benefits obtained or controlled by a particular enterprise as a result of past transactions or events. (SFAC 6.25)
The incorrect answer choices are research and development costs. Since there is a great deal of uncertainty about the future benefit of these costs, they must be expensed. (FASB ASC 730-10-05-3)
342
A company has multiple defined benefit pension plans. A pension asset reported in the statement of financial position represents the amount by which the:
total fair value of plan assets exceeds the total projected benefit obligation for all overfunded and underfunded plans.
total fair value of all plans exceeds the total accumulated benefit obligation for all overfunded and underfunded plans.
fair value of plan assets exceeds the projected benefit obligation for the company's overfunded plans.
fair value of plan assets exceeds the accumulated benefit obligation for the overfunded plans.
fair value of plan assets exceeds the projected benefit obligation for the company's overfunded plans.
The fair value of plan assets is the amount that a pension plan(s) could reasonably expect to receive for an investment in a current sale between a willing buyer and a willing seller. An entity must recognize on its balance sheet the full overfunded or underfunded status of its defined benefit pension plans. The overfunded or underfunded status is the difference between the fair value of the plan assets and the projected benefit obligation. The right to offset multiple plans does not exist; therefore, a pension asset is the total by which the fair value of plan assets for overfunded plans only exceeds the total projected benefit obligation for just those overfunded plans. Underfunded plans would be shown separately.
343
All of the following items are examples of common variable lease provisions, except:
external market rate or index (e.g., LIBOR).
usage of the underlying asset (e.g., miles on a leased car).
estimated life of the underlying asset.
performance of the underlying asset (i.e., percentage of revenue generated from leased asset).
estimated life of the underlying asset.
The estimated life of the underlying asset is a fixed amount and would not be an example of a variable provision.
The other answer choices are examples of common lease provisions:
<>External market rate or index (e.g., LIBOR (London Interbank Offered Rate) or SOFR (Secured Overnight Financing Rate))
<>Usage of the underlying asset (e.g., miles on a leased car)
<>Performance of the underlying asset (i.e., percentage of revenue generated from leased asset)
344
On March 31, 20X1, the Winn company traded in an old machine that had a carrying amount of $16,800, and a fair value of $14,500. Winn paid a cash difference of $6,000 for a new machine having a total cash price of $20,500. The exchange should include recording:
no gain or loss.
$3,700.
$2,300 loss on exchange.
$2,300 impairment loss.
$2,300 impairment loss.
According to FASB ASC 360-10-40-4, an impairment loss is recognized on an exchange of similar productive assets if the carrying amount of the asset exceeds its fair value on the date of exchange. For Winn, an impairment loss of $2,300 ($16,800 carrying amount less $14,500 fair value) should be recognized.
FASB ASC 845-10-30-1 specifies that if fair value is determinable nonmonetary exchanges be recorded based on fair value unless the exchange transaction lacks commercial substance. In that case, the entire amount of any implied gain or loss should be recognized at the time of exchange. However, in Winn's case, the $2,300 impairment loss should be recognized before the nonmonetary exchange is recorded. Thus, the $2,300 loss is an impairment loss rather than a loss on exchange.
345
U.S. Securities and Exchange Commission (SEC) regulations for the financial statement presentation and disclosure requirements of SEC filings can be found in:
Regulation S-B.
Regulation S-K.
Regulation S-T.
Regulation S-X.
Regulation S-X.
SEC Regulation S-X prescribes the form, content, and presentation of and disclosure requirements for financial statements.
SEC Regulation S-K contains the instructions for filing nonfinancial statement forms required under the Securities Act of 1933, Securities Exchange Act of 1934, and Energy Policy and Conservation Act of 1975. Regulation S-T governs the electronic submission of required forms. Due to the fact that the SEC requires electronic filing now, the instructions set forth in Regulation S-T may supersede those in Regulation S-K. Regulation S-B outlines the disclosure requirements that small business issuers must follow under the Securities Act of 1933 and Securities Exchange Act of 1934.
346
Strut Co. has a payable to its parent, Plane Co. In which of the following balance sheets should this payable be reported separately?
Both Strut's balance sheet and Plane's consolidated balance sheet
Strut's balance sheet
Plane's consolidated balance sheet
Neither Strut's balance sheet nor Plane's consolidated balance sheet
Strut's balance sheet
The payable to Plane Co. from Strut Co. would only appear on Strut Co.’s balance sheet. Payable and receivable amounts that are due to and due from subsidiaries of a consolidated business entity are not reported on the consolidated balance sheet of the consolidated company. The payable would be eliminated during the consolidation process and would not appear on the balance sheet of the consolidated entity or the standalone balance sheet of the parent.
347
A company provides the following information:
Year 1 Year 2 Year 3
Cash receipts from customers:
From Year 1 sales $95,000 $120,000
From Year 2 sales 200,000 $ 75,000
From Year 3 sales 50,000 225,000
What is the accrual-based revenue for Year 2?
$200,000
$275,000
$320,000
$370,000
$275,000
Accrual-based revenue for Year 2 is the row titled, “From Year 2 sales” ($200,000 + $75,000) regardless of when cash is received.
348
A donor gives $10,000 to a nongovernmental, not-for-profit organization with instructions that it must be used to fund the organization’s general operating expenses during the following fiscal year. The donation will increase the organization's:
net assets without donor restrictions.
net assets with donor restrictions.
restricted net assets.
restricted retained earnings.
net assets with donor restrictions.
Only restrictions imposed by donors or grantors are considered restrictions in accounting for not-for-profit organizations. Donor and grantor restrictions may be time restrictions or use restrictions. Restrictions that can be satisfied by the passage of time or by the use of resources for a certain purpose (to finance expenses of a specific program or to construct a building, for example) are considered net assets with donor restrictions. Since the donor’s instructions will be satisfied in the following year, the donation is considered a time-restricted donation. There are no accounts called "restricted net assets" or "restricted retained earnings."
349
What discount rate should public entity lessees use first when determining their discount rate?
Lessees should first use the rate implicit in the lease, if known.
Lessees should use their risk-free borrowing rate.
Lessees should use their incremental borrowing rate.
Lessees should use the rate implicit in the lease first, and then their risk-free rate if the implicit rate is not known.
Lessees should first use the rate implicit in the lease, if known.
Both lessees and lessors discount lease payments at the lease commencement date using the rate implicit in the lease. If the lessee does not know the rate implicit in the lease, it can use its incremental borrowing rate. Only nonpublic entities can use their risk-free interest rate as their incremental borrowing rate.
350
A company reported net income available to common stockholders of $2,000,000 for the year ended December 31, year 2. The company had 1,500,000 shares of common stock outstanding as of January 1, year 2, and issued 500,000 additional shares of common stock on May 1, year 2. What amount is the company's basic earnings per share for the year ended December 31, year 2?
$1.00
$1.09
$1.20
$1.33
$1.09
Earnings per share (EPS) of $1.09 (rounded) is a comparison of the earnings applicable to common stock with the number of shares of common stock of that entity, and is based on a weighted-average shares concept. The computation of the denominator shares takes into consideration the portion of the period that the common shares were outstanding or assumed to be outstanding, as follows:
Total Number
of Shares Months Outstanding Weighted Average
1,500,000 4 months out of 12 500,000
2,000,000 8 months out of 12 1,333,333
1,833,333
EPS = Net income
Weighted-average common shares outstanding
EPS = $2,000,000
1,833,333
EPS = $1.09 (rounded)
351
Which of the following is a criterion for a lease to be classified as a finance lease in the books of a lessee?
The lease contains a purchase option that is reasonably certain to be exercised.
The lease does not transfer ownership of the property to the lessee.
The lease term is less than a major portion of the estimated useful life of the leased property.
The present value of the lease payments is 70% or more of the fair market value of the leased property.
The lease contains a purchase option that is reasonably certain to be exercised.
FASB ASC 842-10-25-2 establishes the criteria for classifying leases as finance leases. The first set of criteria result in a finance lease for a lessee or sales-type lease for the lessor if the lease meets any of the following criteria at commencement:
<>Title (ownership) transfers to the lessee by the end of the lease term.
<>The lease contains a purchase option that the lessee is reasonably certain to exercise.
<>The lease term is for the major part of the remaining economic life of the underlying asset. This criterion shall not be used if the lease commencement date is near the end of the asset’s economic life.
<>The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
<>The underlying asset is specialized and is not expected to have an alternative use to the lessor at the end of the lease term.
352
Which of the following is not one of the criteria for classification as a finance lease?
Transfer of ownership
Purchase option reasonably certain to exercise
No alternative use for the asset
The present value of the lease payments being a major part of the fair value
The present value of the lease payments being a major part of the fair value
The present value of the lease payments being substantially all (not a major part) of the fair value is one of the five finance lease criteria.
The five FASB criteria for a finance lease are (1) transfer of ownership, (2) purchase option reasonably certain to exercise, (3) the lease term is the major part of the economic life of the asset, (4) the present value of the lease payments is substantially all of fair value, and (5) there is no alternative use for the asset.
353
Which of the following is a required financial statement for an investment trust fund?
Statement of revenues, expenditures, and changes in fiduciary net position
Statement of activities
Statement of revenues, expenses, and changes in fiduciary net position
Statement of changes in fiduciary net position
Statement of changes in fiduciary net position
Investment trust funds are one of the fiduciary fund types for state and local governments. Two financial statements are required for fiduciary funds—a statement of fiduciary net position and a statement of changes in fiduciary net position.
354
The following data pertain to Cowl, Inc., for the year ending December 31, 20X1:
Net sales $ 600,000
Net income 150,000
Total assets (January 1, 20X1) 2,000,000
Total assets (December 31, 20X1) 3,000,000
What was Cowl's rate of return on assets for 20X1?
5%
6%
20%
24%
6%
The return on assets ratio relates net income to average total assets.
Rate of return on assets = Net income / Average assets
= $150,000 / .5 ($2,000,000 + $3,000,000)
= $150,000 / .5 ($5,000,000)
= $150,000 / $2,500,000
= .06
= 6%
355
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 type of fund should this gift be recorded?
Permanent fund
Investment trusts fund
Private-purpose trust fund
Special revenue fund
Permanent fund
The GASB Codification directs that resources that must be held as investment principal with earnings restricted to support the reporting government's programs for a specific purpose must be accounted for in a permanent fund. The gift received by Roy City meets this description. Investment trust funds and private-purpose trust funds are both fiduciary funds that should be used to hold resources held in trust for others and not for gifts received by the government itself. A special revenue fund could be used to account for the income from the gift, but not for the investment of the gift itself.
356
Quantitative criteria for identifying reportable segments include all of the following, except:
the segment uses 10% or more of the company's assets.
the segment is responsible for 10% or more of the company's revenues.
the segment is responsible for 10% or more of the company's operating profit or loss.
the segment has 10% or more of the company's long-term debt.
the segment has 10% or more of the company's long-term debt.
An operating segment is a reportable segment if it meets one or more of the following quantitative criteria:
<>Its revenue (both internal and external) is 10% or more of the combined revenue of all operating segments.
<>The amount of its reported profit or loss is 10% or more of the greater of the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss. (In making these determinations, the absolute value of all figures is used.)
<>Its assets make up 10% or more of the combined assets of all operating segments.
357
Chestnut Limited issued bonds with a face value of $280,000. This issuance took place on May 20, Year 1. The bonds are dated March 20, Year 1, and mature on March 20, Year 11. The bonds have a stated interest rate of 6% and were issued at 102 plus accrued interest. Interest is payable semiannually on March 20 and September 20. What amount did Chestnut receive from the bond issuance?
$288,400
$285,600
$282,800
$280,000
$288,400
When bonds are issued between the date they are dated and the first interest payment date, the interest related to the time period between the date the bonds are dated and the issue date is paid by the purchaser of the bonds to the issuer. This is because the issuer will pay a full interest payment on the first interest payment date. By having the purchaser of the bonds pay the accrued interest to the issuer, the amount received by the purchaser on the first interest payment, combined with the amount paid by the purchaser, results in a net payment of the interest accrued from the date the bonds are issued until the first interest payment date.
In this case, Chestnut issued the bonds at a premium and received $288,400:
Sales price = $280,000 × 1.02 = $285,600
Accrued interest = $280,000 × 0.06 × (2/12) = 2,800
Total amount received $288,400
358
At December 31, Year 1, Gasp Co.'s allowance for uncollectible accounts had a credit balance of $30,000. During Year 2, Gasp wrote off uncollectible accounts of $45,000. At December 31, Year 2, an aging of the accounts receivable indicated that $50,000 of the December 31, Year 2, receivables may be uncollectible. What amount of allowance for uncollectible accounts should Gasp report in its December 31, Year 2, balance sheet?
$20,000
$25,000
$35,000
$50,000
$50,000
This is a basic question about the allowance account for uncollectible accounts receivable. At the end of the year, this allowance account has to have, as a credit balance, the amounts included within accounts receivable that are in doubt as to collection. This amount is stated in the problem, as $50,000.
359
At the commencement of a finance lease, a guaranteed residual value that is probable should be:
included as part of lease payments at present value.
included as part of lease payments at future value.
included as part of lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.
excluded from lease payments.
included as part of lease payments at present value.
Per FASB ASC 842-10-30-5, at the commencement date, lease payments include fixed payments, variable lease payments, reasonably certain option exercise prices, payments for penalties, fees paid by the lessee to owners of a special-purpose entity, and amounts probable of being owed under residual value guarantees.
Note: The lessee includes in the payment only the amount of the guaranteed residual value that is probable of being owed. If the expected residual value will be greater than the guaranteed residual value, then the lessee can ignore it.
360
A government entity is required to include a statement of cash flows in which of the following financial statements?
Governmental fund financial statements
Government-wide financial statements
Proprietary fund financial statements
Fiduciary fund financial statements
Proprietary fund financial statements
Proprietary fund financial statements include statement of net position; statement of revenues, expenses, and changes in net position; and statement of cash flows. The statement focuses on major enterprise funds and on the internal service fund type, and the direct method of presenting cash flows from operating activities is required. GASB requires that the statement classify cash flows in four activities categories (operating, noncapital financing, capital and related financing, and investing) and requires that all financing activities be classified as either noncapital or capital and related, depending on whether they are solely for capital asset construction, acquisition, or improvement.
361
Johnson Corp. issued bonds on January 1, 20X1. The 6% bonds have a face value of $80,000, and were issued for $87,186, reflecting a yield rate of 4%. The interest payment dates are June 30 and December 31 and the bonds mature in 5 years. Johnson uses the effective interest method to amortize discounts and premiums on the bonds it issues. How much interest expense will Johnson report in its income statement related to these bonds for the year ended December 31, 20X1?
$1,731
$2,400
$3,475
$1,744
$3,475
Johnson will report $3,475 interest expense in its income statement.
Cash Interest Premium Carrying
Payment Expense Amort. Amount
1/1/X1 $87,186
6/30/X1 $2,400 $1,744 $656 86,530
12/31/X1 2,400 1,731 669 85,861
The cash payment is computed as $80,000 × 0.06 × 6/12 = $2,400. Interest expense is computed as carrying value ($87,186) times the yield rate (4%) times half a year (6/12) = $87,186 × 0.04 × 6/12 = $1,744.
Premium amortization is the difference between the cash payment and the interest expense. The premium amortization is subtracted from the carrying value because the bonds were issued at a premium and will approach face value ($80,000) over time: $87,186 – $656 = $86,530.
Interest expense at 12/31/X1 is equal to $86,530 × 0.04 × 6/12 = $1,731. Premium amortization at December 31, 20X1, is equal to $2,400 – $1,731 = $669. Carrying value at December 31, 20X1, is equal to $86,530 – $669 = $85,861. Total interest expense for 20X1 is $3,475 ($1,744 + $1,731).
362
Which of the following is an acceptable method to report taxable income?
Cash basis
Accrual basis
The hybrid method
All of the answer choices are acceptable methods to report taxable income.
All of the answer choices are acceptable methods to report taxable income.
There are three acceptable methods to report taxable income: cash basis, accrual basis, and the hybrid method.
363
Isle Co. owned a copy machine that cost $5,000 and had accumulated depreciation of $2,000. Isle exchanged the copy machine for a computer that cost $4,000. Isle's future cash flows are not expected to change significantly as a result of the exchange. What amount of gain or loss should Isle report and at what amount should it record the asset?
No gain or loss in the income statement; $3,000 asset in the balance sheet
No gain or loss in the income statement; $4,000 asset in the balance sheet
$1,000 gain in the income statement; $3,000 asset in the balance sheet
$1,000 gain in the income statement; $4,000 asset in the balance sheet
No gain or loss in the income statement; $3,000 asset in the balance sheet
Normally, in a nonmonetary exchange, the asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident. However, there are three exceptions in which the exchange is recorded at the carryover amount, not fair value. One of those exceptions is for exchange transactions that lack commercial substance, as does the exchange above. Isle should record the new copy machine at the carryover amount of $3,000 and not any gain or loss.
364
Daniel Company is embroiled in a lawsuit with an individual investor. If the probability of loss from the lawsuit is remote, a loss contingency should be:
neither accrued as a liability nor disclosed.
accrued as a liability but not disclosed.
disclosed and accrued as a liability.
disclosed but not accrued as a liability.
neither accrued as a liability nor disclosed.
FASB ASC 450-20-25-2 requires that when the probability of a loss is remote, the loss contingency is neither accrued nor disclosed.
When a loss is probable and the amount of such loss can be reasonably estimated, the loss contingency should be accrued. When a loss is reasonably possible, a loss contingency should be disclosed but not accrued.
365
Wren Corp.’s trademark was licensed to Mont Co. for royalties of 15% of sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Wren received the following royalties from Mont:
March 15 September 15
Year 1 $10,000 $15,000
Year 2 12,000 17,000
Mont estimated that sales of the trademarked items would total $60,000 for July through December, Year 2. In Wren’s Year 2 income statement, the royalty revenue should be:
$26,000.
$29,000.
$38,000.
$41,000.
$26,000.
The royalty revenue should be based on the trademark sales during Year 2 (15% of them). The amount received on September 15 of Year 2, $17,000, was for the sales for the first 6 months of Year 2, and the estimated sales for the last 6 months of Year 2 were $60,000 in total. The royalty revenue for Year 2 was the $17,000 plus 15% of the $60,000 for a total of $26,000 ($17,000 + (0.15 × $60,000)).
366
On December 31 of the current year a building owned by Carr, Inc., was destroyed by fire. Carr paid $12,000 for removal and clean-up costs. The building had a book value of $250,000 and a fair value of $280,000 on December 31. What amount should Carr use to determine the gain or loss on this involuntary conversion?
$250,000
$262,000
$280,000
$292,000
$262,000
When an asset is destroyed by an involuntary conversion, gain or loss is generally recognized, based on insurance or other proceeds less the carrying value of the asset. The carrying value of the building was $250,000, and the $12,000 clean-up costs can be added to the overall loss computations, for a cost of $262,000.
367
Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices. Which of the following would alter the timing of Red's cash flows for the $3 million in receivables already recorded on its books?
Change the due date of the invoice
Factor the receivables outstanding
Discount the receivables outstanding
Demand payment from customers before the due date
Factor the receivables outstanding
Factoring arrangements are a means of discounting accounts receivable on a nonrecourse, notification basis. Accounts receivable are sold outright, usually to a transferee (the factor) that assumes the full risk of collection, without recourse to the transferor in the event of a loss. Debtors are directed to send payments to the transferee. Red Co. will have its cash immediately upon the sale, whereas the other methods may accelerate the receipt of cash but will not result in a great deal of cash being received immediately.
error_outline First Time Score
368
On October 15, 20X7, Felis Limited, a U.S. corporation, sold merchandise to a Belgian firm for 130,000 euros. Terms of the sale require payment in euros on February 16, 20X8. On October 15, 20X7, the spot exchange rate was $1.17 per euro. At December 31, 20X7, Felis' year-end, the spot rate was $1.15, but the rate increased to $1.21 by February 16, 20X8, when payment was received. How much should Felis report as foreign exchange gain or loss in its 20X8 income statement?
$7,800 gain
$7,800 loss
$2,600 gain
$2,600 loss
$7,800 gain
Gains and losses arising from foreign currency transactions (transactions denominated in a currency other than the functional currency) arise when monetary assets and liabilities (such as the account receivable in this question) are denominated in a currency other than the functional currency and the exchange rate between the currencies changes.
These changes increase or decrease expected functional currency cash flows and shall be included in determining net income for the period in which the exchange rate changes (i.e., the receivable is revalued at the spot rate at year-end and again when the payment is received).
Thus, Felis would revalue the receivable at $1.15/euro and report a $2,600 (€130,000 × ($1.17 – $1.15)) foreign transaction loss at December 31, 20X7. Then, in its 20X8 income statement, Felis again revalues the receivable (from $1.15 to $1.21) and reports a $7,800 gain (€130,000 × ($1.21 – $1.15)).
369
Gem City's internal service fund received $50,000 cash from the general fund that does not need to be repaid. This should be reported in Gem's internal service fund as a credit to:
revenues.
other financing sources.
accounts payable.
transfers.
transfers.
Inflows of assets from other funds without a requirement for repayment are considered interfund transfers. In proprietary funds (which include internal service funds), transfers should be reported separately after nonoperating revenues and expenses in the statement of revenues, expenses and changes in fund net position. An interfund transfer to/from a governmental fund should be reported as “other financing sources or uses” in the governmental fund.
370
What is the primary objective of financial reporting?
To provide economic information that is comprehensible to all users
To provide management with an accurate evaluation of their financial performance
To provide forecasts for future cash flows and financial performance
To provide information that is useful for economic decision making
To provide information that is useful for economic decision making
SFAC 5 states that one of the characteristics of financial statements is to provide financial information (not managerial or economic) that is useful to decision making. SFAC 5 states that financial statements individually and collectively contribute to meeting the objectives of financial reporting, with each financial statement providing a different kind of information. Financial reporting is based upon past performance, not future performance or future cash flows.
371
A government's assets include inventory of $1,500,000, roads constructed for $31,000,000 with accumulated depreciation of $9,500,000 million, and equipment acquired for $3,420,000 with accumulated depreciation of $1,310,000. Its liabilities include an outstanding balance of $6,300,000 for bonds payable issued to construct the roads and a $1,100,000 short-term loan for inventory purchases. What amount should be reported as the net investment in capital assets in the government-wide statement of net assets position?
$17,310,000
$23,610,000
$31,000,000
$34,420,000
$17,310,000
The government-wide statement of net position is one of two required government-wide statements (the other is the government-wide statement of activities). Remember that governmental activities and business-type activities are reported separately. Governmental activities typically include (1) all governmental fund assets and liabilities, (2) general capital assets (including infrastructure such as streets, roads, and bridges), (3) general long-term liabilities, and (4) the assets and liabilities of internal service activities.
Therefore, net investment in capital assets is $17,310,000 ($31,000,000 − $9,500,000 + $3,420,000 − $1,310,000 − $6,300,000). Short-term assets of $1,500,000 and short-term liabilities of $1,100,000 are not included.
372
Large City does not use the modified approach to account for roads. At the beginning of the current year, the city spent $800,000 on new roads. The roads have a 20-year useful life. What amount should Large City report as an expense related to the new roads in the statement of activities for the current year?
$0
$20,000
$40,000
$800,000
$40,000
Except for qualifying infrastructure capital assets, governments are required to depreciate all capital assets with limited lives. Because Large City is not electing the modified approach, standard straight-line depreciation is to be utilized over each year of the asset’s life, for an annual expense of $40,000 ($800,000 ÷ 20 years).
373
Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $0.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?
$50
$100
$200
$900
$100
The intrinsic method is the excess of the market price over the exercise price.
```
Market price (100 x $10) $1,000
Exercise price (100 x $9) 900
Intrinsic value $ 100
```
374
At December 30 of the current year, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of 0.5:1. On December 31, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?
Current ratio increased and quick ratio decreased
Current ratio increased and quick ratio no effect
Current ratio decreased and quick ratio increased
Current ratio decreased and quick ratio no effect
Current ratio increased and quick ratio decreased
This is a question regarding the common ratios used to assess liquidity. The current ratio divides current assets by current liabilities, and the quick ratio divides some current assets (cash, accounts receivable, and some marketable securities) by the same amount (current liabilities).
The easiest way to answer the question, though, is to assign some values to the items involved. Since cash is $200,000, say that current assets are $1,500,000, total current liabilities are $1,000,000 (for a current ratio of 1.5:1), that the quick assets are $500,000 (giving a quick ratio of 0.5:1), and that accounts payable (part of current liabilities) is at least $200,000 so that cash can all be used to pay for it, and then see what happens to the ratios.
With no more cash, current assets are $1,300,000 ($1,500,000 less $200,000), and quick assets are now $300,000 ($500,000 less $200,000). Current liabilities are also lower by the $200,000 paid against accounts payable, down to $800,000. The current ratio is now 1,300,000/800,000, and the quick ratio is now 300,000/800,000. The current ratio is now increased to 1.625:1, and the quick ratio is now decreased to 0.375:1.
375
Last year, Katt Co. reduced the carrying amount of its long-lived assets used in operations from $120,000 to $100,000, in connection with its annual impairment review. During the current year, Katt determined that the fair value of the same assets had increased to $130,000. What amount should Katt record as restoration of previously recognized impairment loss in the current year's financial statements?
$0
$10,000
$20,000
$30,000
$0
After an impairment loss is recognized, the reduced carrying amount of the asset should be treated as the new cost and the restoration of the impairment is not recognized. IFRS will allow the restoration of an impairment loss, but U.S. GAAP will not allow the restoration.
376
Which of the following would be added back to net income when reporting operating activities' cash flows by the indirect method?
Excess of treasury stock acquisition cost over sales proceeds (cost method)
Bond discount amortization
Both excess of treasury stock acquisition cost over sales proceeds (cost method) and bond discount amortization
Neither excess of treasury stock acquisition cost over sales proceeds (cost method) nor bond discount amortization
Bond discount amortization
FASB ASC 230-10-55-1 describes the indirect method briefly as follows: "Given sufficiently detailed information, major classes of operating cash receipts and payments may be determined indirectly by adjusting revenue and expense amounts for the change during the period in related asset and liability accounts."
Thus, bond discount amortization would be deducted from interest expense to compute the amount of cash paid for bond interest. The net effect would be to add this amortization amount to net income (as a noncash expense).
The excess of treasury stock acquisition cost over sales proceeds is not an income item; rather, the excess is an equity item debited to contributed capital from treasury stock transactions.
377
During the current year, a voluntary health and welfare entity receives $300,000 in unconditional promises to give expected to be collected in less than one year. Of this amount, $100,000 has been designated by donors for use next year to support operations. If 15% of the unrestricted promises are expected to be uncollectible, what amount of unrestricted support should the entity recognize in its current-year financial statements?
$300,000
$270,000
$200,000
$170,000
$170,000
The contributions that donors intend to be used to finance the next year's operations are restricted support. Promises that donors intend to be used to finance current-year operations are reported as unrestricted support after deducting the uncollectible portion of the receivables.
$300,000 - $100,000 = $200,000
$200,000 × 0.15 = $30,000
$200,000 - $30,000 = $170,000
378
A lessee uses all of the following factors to determine if a lease is a finance or operating lease, except:
inclusion of a purchase option that the lessee is reasonably certain to exercise.
transfer of the asset title at the end of the lease.
lease payments represent more than half (>50%) of the asset fair value.
the lease term is for a major portion of the asset’s life.
lease payments represent more than half (>50%) of the asset fair value.
Lease payments must represent substantially all of the asset fair value, not more than half (>50%).
The other answer choices are correct. A lessee uses the following factors to determine if a lease is a finance or operating lease:
<>Inclusion of a purchase option that the lessee is reasonably certain to exercise
<>Transfer of the asset title at the end of the lease
<>The lease term is for a major portion of the asset’s life
379
Tomson Co. installed new assembly line production equipment at a cost of $175,000. Tomson had to rearrange the assembly line and remove a wall to install the equipment. The rearrangement cost $12,000 and the wall removal cost $3,000. The rearrangement did not increase the life of the assembly line, but it did make it more efficient. What amount of these costs should be capitalized by Tomson?
$175,000
$178,000
$187,000
$190,000
$190,000
The rearrangement cost and wall removal cost were reasonable and necessary costs to put the equipment “in a location and condition” for its use. These costs benefit future periods and should be capitalized along with the equipment cost.
380
Which of the following is not a special-purpose framework?
Cash receipts and disbursements basis of accounting
Basis of accounting used by an entity to file its income tax return
Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency
Modified cash basis of accounting where some fixed assets are capitalized while others are expensed
Modified cash basis of accounting where some fixed assets are capitalized while others are expensed
Financial statements may be prepared using a comprehensive basis of accounting other than generally accepted accounting principles (often referred to as a special purpose framework). Examples given by AU-C 800.07 are as follows:
a. "Cash basis. A basis of accounting that the entity uses to record cash receipts and disbursements and modifications of the cash basis having substantial support (for example, recording depreciation on fixed assets).
b. "Tax basis. A basis of accounting that the entity uses to file its income tax return for the period covered by the financial statements.
c. "Regulatory basis. A basis of accounting that the entity uses to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject (for example, a basis of accounting that insurance companies use pursuant to the accounting practices prescribed or permitted by a state insurance commission).
d. "Contractual basis. A basis of accounting that the entity uses to comply with an agreement between the entity and one or more third parties other than the auditor.
e. "Other basis. A basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements."
For the modified cash basis to be an acceptable form, the modifications must be applied logically and consistently. Capitalizing some fixed assets while expensing others would not represent a consistent or logical application of the framework.
381
Although future-oriented information requires considerable judgment and tends to not be disclosed, the FASB recommends in Statement of Financial Accounting Concepts 8 (SFAC 8) disclosure for the following two future-oriented types of information:
(1) Estimates and assumptions and (2) management’s plans and strategies
(1) Estimates and assumptions and (2) alternative accounting methods
(1) Common knowledge and (2) management’s plans and strategies
(1) Terms and timing of cash flows and (2) nonperformance risk
(1) Estimates and assumptions and (2) management’s plans and strategies
The Securities and Exchange Commission (SEC) provides protection for issuers regarding SEC-required information; however, that protection does not extend beyond SEC filings, potentially resulting in negative impacts (e.g., litigation) for entities providing information based upon predictions, projections, and forecasts about uncertain or unknown future events. Therefore, the FASB does not require entities to disclose predictions of future outcomes that could result in negative consequences. However, two types of forward-looking information are useful and should be provided: (1) estimates and assumptions, and (2) management’s existing plans and strategies for management-controlled matters.
382
Sea Manufacturing Corp. is constructing a new factory building. During the current calendar year, Sea made the following payments to the construction company:
January 2 $1,000,000
December 31 1,000,000
Sea has an 8%, three-year construction loan of $3,000,000. What is the amount of interest costs that Sea may capitalize during the current year?
$0
$80,000
$160,000
$240,000
$80,000
Interest expense is capitalized for assets that are constructed or otherwise produced for an enterprise’s own use. The amount of interest to be capitalized during a given accounting period is determined by applying the appropriate capitalization rate to the average amount of accumulated expenditures for the asset during that period. In general, the capitalization rate is a weighted average of the rates applicable to borrowings (debt) outstanding during the accounting period. Sea Manufacturing only had one borrowing, at a rate of 8%. Capitalized interest is computed as follows:
Average accumulated expenditures: $1,000,000 × 12/12 = $1,000,000
Capitalization rate 8%
Capitalized interest expense $ 80,000
383
For purposes of consolidating financial interests, a majority voting interest is deemed to be:
50% of the directly or indirectly owned outstanding voting shares of another entity.
50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned outstanding nonvoting shares of another entity.
greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.
greater than 50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned outstanding nonvoting shares of another entity.
greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.
GAAP requires that consolidated financial statements be prepared when one of the entities in the group directly or indirectly has a controlling financial interest in the other entities. FASB ASC 810 specifies that, in general, the usual condition for consolidated financial statements is ownership (direct or indirect) of a majority voting interest (i.e., at least one share in excess of 50%).
384
On January 3, 20X1, Quarry Co. purchased a manufacturing machine for $864,000. The machine had an estimated 8-year useful life and a $72,000 estimated salvage value. Quarry expects to manufacture 1,800,000 units over the life of the machine. During 20X1, Quarry manufactured 300,000 units. Quarry uses the units-of-production depreciation method. In its December 31, 20X1, balance sheet, what amount of accumulated depreciation should Quarry report for the machine?
$99,000
$108,000
$132,000
$144,000
$132,000
The units of production method charges a fixed amount of depreciation expense per unit produced. The per-unit amount is computed as the depreciable cost of the assets (cost less salvage value) divided by the total expected units of production. For Quarry Company's machine, the per-unit amount is ($864,000 - $72,000) ÷ 1,800,000 units, or $0.44 per unit. For 20X1, the depreciation expense is 300,000 units manufactured × $0.44, or $132,000. Because this is the first year in the machine's life, the December 31, 20X1, accumulated depreciation also is $132,000.
385
Which of the following expenditures qualifies for asset capitalization?
Cost of materials used in prototype testing
Costs of testing a prototype and modifying its design
Salaries of engineering staff developing a new product
Legal costs associated with obtaining a patent on a new product
Legal costs associated with obtaining a patent on a new product
Assets are probable future economic benefits obtained or controlled by a particular enterprise as a result of past transactions or events. (SFAC 6.25)
The incorrect answer choices are research and development costs. Since there is a great deal of uncertainty about the future benefit of these costs, they must be expensed. (FASB ASC 730-10-05-3)
386
Wall Co. sells a product under a 2-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall's first two years in business, it made the following sales and incurred the following warranty repair costs:
Year 1
Total sales $250,000
Total repair costs incurred 4,500
Year 2
Total sales $300,000
Total repair costs incurred 5,000
What amount should Wall report as warranty expense for Year 2?
$1,000
$5,000
$5,900
$6,000
$6,000
In order to properly match warranty expense with the revenue generating the expenses, 2% of Year 2's sales (0.02 × $300,000 = $6,000) should be expensed.
387
Blue Corp.'s December 31, 2005, balance sheet contained the following items in the long-term liabilities section:
9-3/4% registered debentures
(callable in 2010 and due in 2015) $700,000
9-1/2% collateral trust bonds (convertible into
common stock beginning in 2008 and due in 2018) 600,000
10% subordinated debentures ($30,000 maturing
annually beginning in 2005) 300,000
What is the total amount of Blue's term bonds?
$600,000
$700,000
$1,000,000
$1,300,000
$1,300,000
Term bonds are bonds which are scheduled to be outstanding for a fixed period of time, or term.
Blue Corp.'s term bonds include:
9-3/4% registered debentures $ 700,000
9-1/2% collateral trust bonds 600,000
Total term bond $1,300,000
==========
Note: The 10% subordinated debentures are serial bonds, bonds which mature at regular intervals over a specified time period.
388
Four years ago on January 2, Randall Co. purchased a long-lived asset. The purchase price of the asset was $250,000, with no salvage value. The estimated useful life of the asset was 10 years. Randall used the straight-line method to calculate depreciation expense. An impairment loss on the asset of $30,000 was recognized on December 31 of the current year. The estimated useful life of the asset at December 31 of the current year did not change. What amount should Randall report as depreciation expense in its income statement for the next year?
$20,000
$22,000
$25,000
$30,000
$20,000
Depreciation should be modified when an asset has been determined to be impaired.
Cost $250,000
Accumulated depreciation (4 years at $25,000) 100,000
Book value before impairment $150,000
Impairment 30,000
Book value after impairment $120,000
```
Remaining useful life 6 years
Annual depreciation ($120,000 / 6 years) $ 20,000
```
389
Deed Co. owns 2% of Beck Cosmetic Retailers. A property dividend by Beck consisted of merchandise with a fair value lower than the listed retail price. Deed in turn gave the merchandise to its employees as a holiday bonus.
How should Deed report the receipt and distribution of the merchandise in its income statement?
At fair value for both dividend revenue and employee compensation expense
At listed retail price for both dividend revenue and employee compensation expense
At fair value for dividend revenue and listed retail price for employee compensation expense
By disclosure only
At fair value for both dividend revenue and employee compensation expense
FASB ASC 845-10-30-1 provides that "a nonmonetary asset received in a nonreciprocal transfer should be recorded at the fair value of the asset received. A transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred."
Both receipt of the dividend and the distribution of the merchandise to employees should be recorded at fair value as dividend revenue and employee compensation expense.
390
A parcel of land was donated to Palm City in 20X1. The city intends to use the land as a parking lot for general government purposes. Site preparation costs were $20,000. The land's fair market value on the donation date was $60,000. What amount should be reported as a capital asset in the government-wide statement of net position in the governmental activities column for this land?
$0
$20,000
$60,000
$80,000
$80,000
Donated capital assets should be reported at their estimated fair value at donation date plus ancillary charges, if any. General capital assets are capital assets not specifically related to activities reported in proprietary or fiduciary funds. They are reported in the governmental activities column of the government-wide statement of net position. Site preparation costs of $20,000 and the $60,000 fair market value of the land are both properly included in the cost of the land.
391
On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, what amount should World report as interest expense?
$0
$14,200
$22,500
$30,000
$22,500
The interest expense is:
Principal × Interest rate × Time
In this case, it is:
$1,000,000 × .09 × .25 = $22,500
392
For a sales-type lease with selling profit, initial direct costs incurred by the lessor are:
deferred (recorded as an asset) and expensed over the term of the lease.
expensed at the beginning of the lease.
capitalized as a contra asset and recognized over the term of the lease.
expensed when the first lease payment is made.
expensed at the beginning of the lease.
Costs incurred by the lessor that are associated directly with originating a lease, that are essential to acquire that lease, and would not have been incurred had the lease agreement not occurred are called initial direct costs (IDC). The method of accounting for IDC depends on the nature of the lease. For a sales-type lease with selling profit, initial direct costs are expensed in the period of "sale"—that is, at the beginning of the lease. For an operating lease, direct financing lease, and sales-type lease without selling profit, initial direct costs are deferred (recorded as an asset) and expensed over the term of the lease. Initial direct costs are not contra assets.
393
Alton Co. had a cash balance of $32,300 recorded in its general ledger at the end of the month, prior to receiving its bank statement. Reconciliation of the bank statement reveals the following information:
Bank service charge: $15
Check deposited and returned for insufficient funds check: $120
Deposit recorded in the general ledger as $258 but should be $285
Checks outstanding: $1,800
After reconciling its bank statement, what amount should Alton report as its cash account balance?
$30,338
$30,392
$32,138
$32,192
$32,192
Alton’s cash balance is $32,192, calculated as follows:
Balance per books $32,300
Less bank's service charge $ (15)
Less NSF check (120)
Plus net difference from check error ($285 - $258) 27
Adjusted book balance $32,192
394
Which of the following best describes a situation in which an unconditional contribution should be recognized as revenue by a private not-for-profit organization?
In the period when cash or other assets are received at the carrying value on the books of the donor
In the period received at fair value
In the period in which the donor states its unconditional promise to make the contribution and at the carrying value on the books of the donor
In the period in which the donor states its intention to make the contribution and at fair value
In the period received at fair value
Unconditional contributions, whether promised or received as cash, are recognized as revenue in the period received. Contributions revenue should be measured at fair value, not donor's book value. Donor intentions to give, rather than unconditional promises, are not considered revenue.
395
Must an entity identify immaterial performance obligations and allocate a portion of the transaction price to them?
Yes. All performance obligations in a contract must be identified, with transaction price allocated to each identified performance obligation.
No. An entity needs to identify all performance obligations related to contracts accounted for in a foreign currency but not those accounted for in U.S. dollars.
No. An entity only needs to identify material performance obligations in a contract and allocate transaction price to those.
No. Entities can combine all performance obligations into one for revenue recognition purposes if the contract period is for greater than one year.
No. An entity only needs to identify material performance obligations in a contract and allocate transaction price to those.
The FASB decided that, for purposes of identifying performance obligation in a contract, an entity would not be required to identify goods or services promised in a contract that are immaterial in the context of the contract.
396
Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, provides descriptions and examples for all of the following areas that require consideration for note disclosure except:
past events and current conditions that could impact an entity’s cash flow.
the reporting entity.
financial statement line item explanations.
non–entity specific information that is common knowledge.
non–entity specific information that is common knowledge.
The FASB provides descriptions and examples for three areas that require consideration when preparing financial statement notes: financial statement line item explanations, information about the reporting entity, and information about past events and current conditions that could impact the entity’s cash flows but have not yet been incorporated into financial statement line items. The FASB also provides a list of questions to be used as a tool when considering financial statement disclosures. A “yes” response to a question means the FASB should consider disclosure but does not mean the FASB should require disclosure.
397
On January 1, 20X1, Owen Corp. purchased all of Sharp Corp.'s common stock for $1,200,000. On that date, the fair values of Sharp's assets and liabilities equaled their carrying amounts of $1,320,000 and $320,000, respectively. During 20X1, Sharp paid cash dividends of $20,000.
Selected information from the separate balance sheets and income statements of Owen and Sharp as of December 31, 20X1, and for the year then ended follows:
BALANCE SHEET ACCOUNTS
Owen
Investment in subsidiary $1,300,000
Retained earnings 1,240,000
Total stockholders' equity 2,620,000
Sharp
Investment in subsidiary ---
Retained Earnings 560,000
Total Stockholders' equity 1,120,000
INCOME STATEMENT ACCOUNTS
Owen
Operating income 420,000
Equity in earnings of Sharp 120,000
Net income 400,000
Sharp
Operating Income 200,000
Equity in earnings of Sharp ---
Net Income 140,000
In Owen's December 31, 20X1, consolidated balance sheet, what amount should be reported as total retained earnings?
$1,240,000
$1,360,000
$1,380,000
$1,800,000
$1,240,000
In accounting for business combinations, the stockholders' equity of the acquired entity is eliminated against the investment account. As a result, consolidated retained earnings include only the retained earnings of the parent company. Thus, the Owen Corp. consolidated balance sheet on December 31, 20X1, would show a retained earnings amount of $1,240,000, an amount equal to Owen's separate retained earnings.
398
In 20X3, Clear Vision, a voluntary health and welfare entity, received a donation of $350,000 of debt securities that mature at the end of 20X5. When the donation was made, the donor stipulated that the debt securities be held until maturity and the interest revenue be used to fund a summer camp for blind children. Interest revenue was $52,500 for 20X3, 20X4, and 20X5 combined. When the debt securities matured and the proceeds were received, the board of trustees adopted a formal resolution designating $75,000 of the proceeds for the future funding of the summer camp. At the end of 20X5, Clear Vision had not yet provided the summer camp experience.
What amount should Clear Vision report in its 20X5 statement of financial position as net assets with donor restrictions as the result of the bequest?
$0
$52,500
$75,000
$127,500
$52,500
The only donor restriction of the use of the donation is that the interest of $52,500 be used to provide a summer camp experience for blind children. The restriction will be satisfied when the $52,500 is spent for the specific purpose stipulated. The $350,000 principal from the debt securities is classified as net assets without donor restrictions, even though a portion of it is designated by the board of trustees, because the board is not a donor.
399
In September 20X1, West Corp. made a dividend distribution of one right for each of its 120,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's $50 variable rate preferred stock at an exercise price of $80 per share. On March 20, 20X5, none of the rights had been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a result of this redemption, West's stockholders' equity was reduced by:
$120.
$2,400.
$12,000.
$36,000.
$12,000.
Summary journal entries for issuance and redemption of rights:
Dr. Cr.
September 20X1 Memo entry only
March 20, 20X5, Retained Earnings 12,000
(120,000 x $.10)
Cash 12,000
The result is a reduction of $12,000 in West's stockholders' equity.
400
In which of the following situations should a company report a prior-period adjustment?
A change in the estimated useful lives of fixed assets purchased in prior years
The correction of a mathematical error in the calculation of prior years' depreciation
A switch from the straight-line to double-declining-balance method of depreciation
The scrapping of an asset prior to the end of its expected useful life
The correction of a mathematical error in the calculation of prior years' depreciation
The correction of an error in prior year financial statements requires restatement of the financial statements. A prior-period adjustment to beginning retained earnings is required to correct the retained earnings for the error. Changes in estimates and changes in depreciation methods are accounted for prospectively.
401
Grand Corporation acquired all of the outstanding stock of Modest Corporation on February 23, 20X3. The purchase price of the acquisition was $3,680,000. The book value of Modest’s net assets was $3,345,000. In preparing the acquisition, Grand determined that Modest had assets whose book values were $218,000 less than their fair values. How much goodwill will Grand Corporation record as a result of this acquisition?
$101,000
$117,000
$218,000
$335,000
$117,000
Grand will record goodwill of $117,000, computed as follows:
Purchase price less book value of net assets: $3,680,000 – $3,345,000 = $335,000
Purchase price in excess of net assets less undervalued assets equals goodwill: $335,000 – $218,000 = $117,000
402
Grayson Jewelers will purchase 10,000 ounces of gold on January 1, 20X2. To hedge the purchase, Grayson enters into a 6-month futures contract on July 1, 20X1, to purchase 10,000 ounces of gold for $400 an ounce. On December 31, 20X1, the price of gold has climbed to $420 an ounce. What adjusting entry does Grayson record on December 31, 20X1?
Option (Futures Contract) 200,000
Unrealized holding gain-equity 200,000
Unrealized holding loss 200,000
Futures Contract 200,000
Futures Contract Expense 200,000
Unrealized holding gain-equity 200,000
No entry is made.
Option (Futures Contract) 200,000
Unrealized holding gain-equity 200,000
Since the price of gold has risen, the value of the futures contract (the derivative) increased in value. Since the contract was a 6-month contract, it expires on December 31, 20X1, and has a fair value just before it expires of $200,000 ($4,200,000 price of gold at December 31, 20X1, less $4,000,000 contract price of the futures contract). That $200,000 increase in fair value of the derivative results in a debit to the Futures Contract account (an asset) of $200,000 and a credit to unrealized gain of $200,000. Since the futures contract serves as a hedge of an “anticipated” transaction (the probable purchase of 10,000 ounces of gold on January 1, 20X2), if it satisfies all other conditions for a hedge, the derivative represents a cash flow hedge rather than a fair value hedge. Accordingly, the unrealized gain of $200,000 would be included in other comprehensive income rather than in net income.
403
Assuming no outstanding encumbrances at year-end and a budgetary entry not using a separate budgetary fund balance account, closing entries for which of the following situations would increase the unassigned fund balance at year-end?
Actual revenues were less than estimated revenues.
Estimated revenues exceed actual appropriations.
Actual expenditures exceed appropriations.
Appropriations exceed actual expenditures.
Appropriations exceed actual expenditures.
wo general approaches to recording budgetary information are used. One approach uses a budgetary fund balance account, which does not impact the unassigned fund balance amount. The other approach debits or credits the budgeted decrease or budgeted increase for the year to unassigned fund balance. The question presumes use of the latter approach. Thus, appropriations recorded using this approach would decrease unassigned fund balance.
At the end of the year, the budgetary accounts are removed from the books, removing their impact on the fund balance totals. At the same time, the closing of the temporary accounts impacts fund balance. In the case of appropriations exceeding expenditures, the decrease to unassigned fund balance from closing expenditures would be less than the increase to fund balance from removing appropriations from the books.
404
What is the appropriate balance sheet classification for the portion of the principal balance owed on a 30-year mortgage note payable that will be paid in monthly installments during the next year?
Stockholders’ Equity
Long-Term Investments
Current Liabilities
Long-Term Liabilities
Current Liabilities
Current liabilities represent obligations whose liquidation is expected to require the use of current assets or the creation of other current liabilities and include obligations that have entered into the operating cycle (oftentimes, one year). Monthly mortgage payments meet this definition because they will require the use of current assets to be settled (i.e., cash) and are due within the next operating cycle. Based on these factors, they should be reported as current liabilities in the balance sheet.
The other answer choices are not the appropriate balance sheet classifications for the upcoming mortgage payments. The payments are not stockholders' equity because they are a repayment of debt, not a distribution to shareholders. They are not long term because they are due within one operating cycle.
405
A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements?
The names and ownership percentages of the other stockholders in the investee company
The reason for the company's decision to invest in the investee company
The company's accounting policy for the investment
Whether the investee company is involved in any litigation
The company's accounting policy for the investment
Accounting policy disclosure includes the selection of accounting principles from existing acceptable methods. This would include the company's use of the equity method. The equity method must be used if the company has significant influence over the company whose stock has been acquired. Generally, 20% ownership is evidence of significant influence, but it is possible that other factors would indicate otherwise. Consequently, the use of the equity is the selection of an accounting principle from existing alternatives (equity method or cost method).
406
When preparing the balance sheet of governmental funds statements, which of the following statements is incorrect?
The general fund is always considered a major fund.
Nonmajor funds should be reported individually in a separate column.
Nonmajor funds are aggregated into a column entitled “Other Governmental Funds.”
Each major fund should have a separate column on the statement.
Nonmajor funds should be reported individually in a separate column.
The following are reporting requirements for the balance sheet of the governmental funds statements: (1) Each major fund should have a separate column on the statement; (2) nonmajor funds are aggregated into a column entitled “Other Governmental Funds"; and (3) the general fund is always considered a major fund.
407
An entity should combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if:
the contracts are negotiated as a package with a single commercial objective.
the amount of consideration to be paid in one contract does not depend on the price or performance of the other contract.
the goods or services promised in the contracts (or some of the goods or services promised in each of the contracts) are multiple performance obligations.
the determination was based upon quantitative information and no judgment was applied in making that determination.
the contracts are negotiated as a package with a single commercial objective.
An entity should combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met:
1. The contracts are negotiated as a package with a single commercial objective.
2. The amount of consideration to be paid in one contract depends on the price or performance of the other contract.
3. The goods or services promised in the contracts (or some of the goods or services promised in each of the contracts) are a single performance obligation.
In determining whether contracts have been entered into “at or near the same time,” an entity should apply judgment, keeping in mind that the longer the period between the commitments of the parties to the contracts, the more likely it is that the economic circumstances affecting the negotiations have changed.
408
The following trial balance of Mint Corp. on December 31, 20X1, has been adjusted except for income tax expense.
Trial Balance
December 31, 20X1
Cash $ 600,000
Accounts receivable (net) 3,500,000
Cost in excess of billings
on long-term contracts 1,600,000
Billings in excess of costs
on long-term contracts $ (700,000)
Prepaid taxes 450,000
Property, plant, and equipment (net) 1,480,000
Note payable (noncurrent) (1,620,000)
Common stock (750,000)
Additional paid-in capital (2,000,000)
Retained earnings (unappropriated) (900,000)
Retained earnings (restricted for)
note payable (160,000)
Earnings from long-term contracts (6,680,000)
Costs and expenses 5,180,000
$12,810,000 $12,810,000
=========== ===========
Other financial data for the year ended December 31, 20X1:
Mint uses the same method to account for long-term construction contracts for financial statement and income purposes. All receivables on these contracts are considered to be collectible within 12 months.
During 20X1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expense. There were no temporary or permanent differences, and Mint's effective tax rate is 30%.
In Mint's December 31, 20X1, balance sheet, what amount should be reported as total noncurrent liabilities?
$1,620,000
$1,780,000
$2,320,000
$2,480,000
$1,620,000
The only noncurrent liability appearing on Mint Corp.'s December 31, 20X1, trial balance is the $1,620,000 noncurrent note payable.
409
Accrual accounting involves accruals and deferrals. Which of the following best describes accruals and deferrals?
Accruals are concerned with expected future cash receipts and payments, while deferrals are concerned with past cash receipts and payments.
Accruals are concerned with past cash receipts and payments, while deferrals are concerned with expected future cash receipts and payments.
Both accruals and deferrals are concerned with expected future cash receipts and payments.
Both accruals and deferrals are concerned with past cash receipts and payments.
Accruals are concerned with expected future cash receipts and payments, while deferrals are concerned with past cash receipts and payments.
Accrued items represent economic events that have already occurred, such as expenses, but have not yet been settled or paid. Deferrals represent items that have been settled or paid for in advance, but their associated underlying economic event has not yet occurred.
410
As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Lander Corporation's sole depreciable asset, acquired in 20X3, exceeded its tax basis by $73,000 at December 31, 20X3. The difference will reverse in future years. The enacted tax rate is 35% for 20X3 and 30% for future years. Lander has no other temporary differences. In its December 31, 20X3, balance sheet, how should Lander report the deferred tax effect of this difference?
As a noncurrent asset of $21,900
As a noncurrent liability of $21,900
As a noncurrent liability of $25,550
As a noncurrent asset of $25,550
As a noncurrent liability of $21,900
This temporary difference will result in additional taxes being paid in future years, so the related tax effect will be a liability, computed as follows: $73,000 × 0.30 = $21,900. Remember that all deferred taxes are noncurrent.
