1B - General-Purpose Financial Statements: For-Profit Business Entities

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? a. $0 b. $6,000 c. $12,000 d. $18,000

b. $6,000

A company's activities for Year 2 included the following: Gross sales $3,600,000 Cost of goods sold 1,200,000 Selling and administrative expense 500,000 Adjustment for a prior-year understatement of amortization expense 59,000 Sales returns 34,000 Gain on sale of investment in equity securities 8,000 Gain on disposal of a discontinued business segment 4,000 The company has a 30% effective income tax rate. What is the company's net income for Year 2? a. $1,267,700 b. $1,273,300 c. $1,314,600 d. $1,316,000

c. $1,314,600

New England Co. had cash provided by operating activities of $351,000; cash used by investing activities of $420,000; and cash provided by financing activities of $250,000. New England's cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000 and proceeds of $40,000 were received from the sale. What was New England's cash balance at the end of the year? a. $27,000 b. $40,000 c. $208,000 d. $248,000

c. $208,000

Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of $100,000 for the current year. What is the total amount of dividends that should be reported in the December 31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech? a. $10,000 b. $100,000 c. $190,000 d. $200,000

a. $10,000 Explanation: Intercompany dividends are eliminated in consolidation. The only dividends that remain after the eliminating entries are dividends paid to noncontrolling shareholders: 10% of Dun's dividend of $100,000, or $10,000.

A company decided to sell an unprofitable division of its business. The company can sell the entire operation for $800,000, and the buyer will assume all assets and liabilities of the operations. The tax rate is 30%. The assets and liabilities of the discontinued operation are as follows: Buildings $5,000,000 Accumulated depreciation 3,000,000 Mortgage on buildings 1,100,000 Inventory 500,000 Accounts payable 600,000 Accounts receivable 200,000 What is the after-tax net loss on the disposal of the division? a. $140,000 b. $200,000 c. $1,540,000 d. $2,200,000

a. $140,000

Karr, Inc., reported net income of $300,000 for 20X1. Changes occurred in several balance sheet accounts as follows: Equipment $25,000 increase Accumulated depreciation 40,000 increase Note payable 30,000 increase Additional Information - During 20X1, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000. - In December 20X1, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000. - Depreciation expense for the year was $52,000. In Karr's 20X1 statement of cash flows, net cash used in investing activities should be: a. $2,000. b. $12,000. c. $22,000. d. $35,000.

a. $2,000.

Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, Year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, Year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, Year 1? a. $3,000 b. $9,000 c. $12,000 d. $30,000

a. $3,000 Explanation: Cash payments to purchase equipment are outflows from investing activities. The $3,000 down payment is an investing activity outflow. The $27,000 financed and the principal payments are financing activities.

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? a. $30,100 b. $13,900 c. $22,000 d. $47,100

a. $30,100

Wagner, a holder of a $1,000,000 Palmer, Inc., bond, collected the interest due on March 31, 20X1, and then sold the bond to Seal, Inc., for $975,000. On that date, Palmer, a 75% owner of Seal, had a $1,075,000 carrying amount for this bond. What was the effect of Seal's purchase of Palmer's bond on the retained earnings and noncontrolling (minority) interest amounts reported in Palmer's March 31, 20X1, consolidated balance sheet? a. Retained earnings: $100,000 increase; Noncontrolling interest: $0 b. Retained earnings: $75,000 increase; Noncontrolling interest: $25,000 increase c. Retained earnings: $0; Noncontrolling interest: $25,000 increase d. Retained earnings: $0; Noncontrolling interest: $100,000 increase

a. Retained earnings: $100,000 increase; Noncontrolling interest: $0 Remember: A noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent.

When a full set of general purpose financial statements are presented, comprehensive income and its components should: a. appear as a part of discontinued operations and cumulative effect of a change in accounting principle. b. be reported net of related income tax effect, in total and individually. c. appear in a supplemental schedule in the notes to the financial statements. d. be displayed in a financial statement that has the same prominence as other financial statements.

a. appear as a part of discontinued operations and cumulative effect of a change in accounting principle.

Bay Manufacturing Co. purchased a 3-month U.S. Treasury bill. In preparing Bay's statement of cash flows, this purchase would: a. have no effect. b. be treated as an outflow from financing activities. c. be treated as an outflow from investing activities. d. be treated as an outflow from operating activities.

a. have no effect. Explanation: 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.

On January 2, 20X1, Pare Co. purchased 75% of Kidd Co.'s outstanding common stock. Selected balance sheet data on 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. In its December 31, 20X1, consolidated statement of retained earnings, what amount should Pare report as dividends paid? a. $5,000 b. $25,000 c. $26,250 d. $30,000

b. $25,000 Explanation: The amount reported on the consolidated statement retained earnings as "dividends paid" would include only dividends paid to majority shareholders directly, the $25,000 distributed by Pare Co. Of the $5,000 dividends paid by Kidd, the parent's share ($3,750) would be eliminated on the consolidated worksheet and the other $1,250 would be included in the noncontrolling (minority) interest. However, the $1,250 would not be included in "dividends paid" on the consolidated statement of retained earnings.

Bake Co.'s trial balance included the following at December 31, 20X1: Accounts payable $ 80,000Bonds payable, due 20X2 300,000Discount on bonds payable 15,000Deferred income tax liability 25,000 The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in 20X2. What amount should be included in the current liability section of Bake's December 31, 20X1, balance sheet (statement of financial position)? a. $390,000 b. $365,000 c. $395,000 d. $420,000

b. $365,000

Rory Co.'s prepaid insurance was $50,000 at December 31, Year 2, and $25,000 at December 31, Year 1. Insurance expense was $20,000 for Year 2 and $15,000 for Year 1. What amount of cash disbursements for insurance would be reported in Rory's Year 2 net cash flows from operating activities presented on a direct basis? a. $55,000 b. $45,000 c. $30,000 d. $20,000

b. $45,000

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? a. Babcock has the right to set off the amount owed with the amount owed by the other party. b. Babcock must have a signed agreement from Mendenhall to report the items in an offsetting manner. c. Babcock's right to offset the items is enforceable by law. d. The amounts owed by Babcock and Mendenhall to each other are clearly determinable.

b. Babcock must have a signed agreement from Mendenhall to report the items in an offsetting manner. Explanation: 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.

On July 4, 20X1, ABC, Inc., adopted a plan to terminate 100 employees effective September 1, 20X1. Each employee received a one-time termination benefit of $10,000 on September 4, 20X1. The termination was communicated to the employees on July 20, 20X1. Employees were not required to render service after August 1, 20X1, in order to receive the termination benefit. On what date should ABC record the cost of the termination benefit? a. July 4, 20X1 b. July 20, 20X1 c. August 1, 20X1 d. September 4, 20X1

b. July 20, 20X1 Explanation: FASB ASC 420-10-25-4 provides that the costs of one-time termination benefits be recognized and measured at its fair value on the communication date.

Parisian Company has bonds that have an original maturity of 10 years. The bonds will mature and be retired on May 25, Year 17. Parisian established a bond sinking fund, as required by the bond indenture (contract). The bond sinking fund will be used to retire the bonds when they mature in May of Year 17. How should the bonds be classified in the December 31, Year 16, balance sheet? a. The bonds should be classified as a current liability. b. The bonds should be classified as a long-term liability. c. Parisian can choose whether to classify the bonds as either current or noncurrent. d. Because of the sinking fund, Parisian can eliminate both the bonds and the sinking fund from the balance sheet.

b. The bonds should be classified as a long-term liability. Explanation: Even though the bonds will mature in less than one year, they are classified as long-term liabilities (not current maturities of long-term liabilities) because the cash to be used to pay off the bonds is restricted and has therefore been classified as a long-term asset. Bonds in this situation should not be classified as current liabilities. Choice of classification (current vs. long-term) is not permitted. The presence of both the liability and the related asset (bond-sinking fund) are not offset on the balance sheet but are both reported in total.

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, relates to: a. objectives of financial reporting. b. notes to financial statements. c. qualitative characteristics of financial reporting. d. elements of financial statements.

b. notes to financial statements. Explanation: The Statement of Financial Accounting Concepts (SFAC) 8, Chapter 8, Notes to Financial Statements, issued in 2018, provides guidance regarding relevant supplemental or further explanatory information provided in the notes about the information appearing on the face of the financial statements. This guidance is for the benefit of existing and potential investors, lenders, and others to help them make decisions regarding resources. The objectives of financial reporting, qualitative characteristics, and elements of financial statements are addressed in other SFAC statements.

Statement of Financial Accounting Concepts 8 (SFAC 8), Chapter 8, lists all of the following examples of past events and current conditions potentially impacting the entity's future line items and cash flows except for: a. existing or potential litigation. b. related party reporting. c. dependency on a few customers or suppliers. d. suspected regulatory violations.

b. related party reporting. Explanation: Examples of past events and current conditions potentially impacting the entity's future line items and cash flows but which have not yet been incorporated into financial statement line items include existing or potential litigation; suspected or known statute, judicial, regulatory, or contract violations; unrecognized existing commitments expected to be recognized in the future; events where significant uncertainty led to the decision to not recognize the event; and subsequent events. Items not necessarily impacting line items that may require disclosure include dependency on one or a few customers or suppliers for profitability, input or output market volatility, uncertainty regarding an entity's access to markets for inputs or outputs or ability to maintain a qualified workforce, and other significant specific entity risk. Related party reporting is considered to be a reporting entity disclosure.

Which of the following statements regarding reporting for discontinued operations is incorrect? a. The resulting gain or loss from discontinued operations should be reported net of applicable taxes. b. In order to qualify to be reported as a discontinued operation, the portion of the business being sold must have separate and identifiable cash flows. c. A strategic shift is the sale of a product line that represents 25% or more of the entity's total revenues. In order for a sale to qualify as a discontinued operation, it needs to represent a strategic shift for the entity.

c. A strategic shift is the sale of a product line that represents 25% or more of the entity's total revenues. Explanation: In order for the sale of a portion of an entity to qualify for discontinued operations, it must represent a strategic shift for the entity, meaning that the sale will have a significant effect on the entity's operations and financial results. A strategic shift is the sale of a product line that represents 15% (not 25%) or more of the entity's total revenues. Discontinued operations are reported after income from continuing operations and therefore need to be reported net of tax. The cash flows of the portion of the business to be sold must be clearly distinguishable from the other operations of the portion to be sold.

Payne Co. prepares its statement of cash flows using the indirect method. Payne's unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in unamortized bond discount in its statement of cash flows? a. As a financing cash inflow b. As a financing cash outflow c. As an addition to net income in the operating activities section d. As a subtraction from net income in the operating activities section

c. As an addition to net income in the operating activities section Explanation: The amortization of a bond discount is the difference between cash interest and interest expense. Cash paid for interest is reported in operating activities. Amortization of a discount on bonds payable results in interest expense greater than cash interest. Because more expense has been deducted in computing income than the amount of cash paid for interest, the difference (captured in the change in the bond discount account) must be added to income to reconcile to the cash provided or used for operating activities.

Which of the following items is included in the financing activities section of the statement of cash flows? a. Cash effects of transactions involving making and collecting loans b. Cash effects of acquiring and disposing of investments and property, plant, and equipment c. Cash effects of transactions obtaining resources from owners and providing them with a return on their investment d. Cash effects of transactions that enter into the determination of net income

c. Cash effects of transactions obtaining resources from owners and providing them with a return on their investment

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? a. The names and ownership percentages of the other stockholders in the investee company b. The reason for the company's decision to invest in the investee company c. The company's accounting policy for the investment d. Whether the investee company is involved in any litigation

c. The company's accounting policy for the investment

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a statement of cash flows, what amount is included in financing activities for the transaction? a. Cash payment b. Acquisition price c. Zero d. Mortgage amount

c. Zero Explanation: The only cash involved in this transaction is the cash paid. It would be included in cash flows from investing activities.

Duke Co. reported cost of goods sold of $270,000 for 20X1. Additional information is as follows: December 31 January 1 Inventory $60,000 $45,000 Accounts payable 26,000 39,000 If Duke uses the direct method, what amount should Duke report as cash paid to suppliers in its 20X1 statement of cash flows? a. $242,000 b. $268,000 c. $272,000 d. $298,000

d. $298,000

In a statement of cash flows, which of the following items is reported as a cash outflow from financing activities? I. Payments to retire mortgage notes II. Interest payments on mortgage notes III. Dividend payments a. I, II, and III b. II and III c. I only d. I and III

d. I and III Explanation: Cash outflows from financing activities include cash payments for dividends and principal payments to creditors. Interest payments are cash flows from operating activities.

On July 1, 20X1, Dewey Co. signed a 20-year building lease that it reported as an operating lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its 20X1 statement of cash flows? a. An inflow equal to the present value of future lease payments on July 1, 20X1, less 20X1 principal and interest payments b. An outflow equal to the 20X1 principal and interest payments on the lease c. An outflow equal to the 20X1 principal payments only d. The lease payments should not be reported in the financing activities section.

d. The lease payments should not be reported in the financing activities section. Explanation: Cash outflows for operating activities per FASB ASC 230-10-45-17 include "cash payments to other suppliers or employees for other goods or services." Operating lease payments are to appear in the operating activity cash flow section.