ACCY 111 FOR EXAM 2

Which of the following statements are accurate? a. Equity attributable to noncontrolling interests in the net assets of a company's subsidiaries is shown separately on the balance sheet. b. An election to report certain individual asset at fair market value can be revoked at a subsequent balance sheet date. c. Investments in nonconsolidated subsidiaries should be reported as Long-term investments. d. Companies with operating cycles longer than one year should use one year when classifying assets or liabilities as current. e. The cost of unusable and unsaleable warehouse equipment should be reported as an Other asset until the equipment is fully depreciated.

a & c

An indication that a promise in a contract should be considered a separate performance obligation is

That the seller regularly sells the good separately through online sales.

A company's external auditors are responsible for which of the following?

. All of the opinions expressed in auditor reports included in Form 10-K Auditors are solely responsible for the opinions included in their audit reports. Management is responsible for the accuracy of the financial information presented.

On December 1, 2020, Eastern Co. enters into a two-year contract with a customer where outside attorney costs of $4,800 to establish the contract were incurred. The amount is due in 60 days. Eastern Co. expects to recover the legal fees from the amounts billed on the contract. The contract does not have a renewal option. How would Eastern account for the contract cost in its year-end financial statements dated December 31, 2020, assuming that payment was not made to the attorneys by this date?

Eastern Co. would recognize an asset (Contract Cost) of $4,600 and a liability (Accrued Legal Expense) of $4,800, on December 31, 2020, and expense (Contract Cost Expense) of $200 for the year 2020.

Which of the following would not need to be disclosed in a related party transaction note? (Assume all related dollar amounts are material.)

Corporate guarantee of CEO's home mortgage Lease of factory equipment from subsidiary Sale of land to parent entity

ASC 606 includes a list of indicators in determining whether control has transferred from a seller to a customer. Which of the following is not included as an indicator to a transfer of control.

Seller has communicated the transaction price to the customer.

Planning Wizards, LLC is an event-planning company. Which of the following would be included in the current asset section of a classified balance sheet dated December 31, 2019? a. 15-month certificate of deposit b. Customer advances on New Year's parties c. Last month rent payment (lease expires in 2021) d. Investment in stocks, to be sold in 2020 e. Income tax refund receivable f. Inventory

b Customer advances on New Year's parties d Investment in stocks, to be sold in 2020 e Income tax refund receivable f Inventory

In order for a performance obligation to be considered a separate performance obligation under the revenue recognition standard, the obligation must be

Economically beneficial to the customer. and Identifiable from other promises within the contract.

Which account types are listed in order of permanence in a classified balance sheet?

Equity

Which of the following components of Form 10-K is not directly covered by the Accounting Standards Codification?

Management's discussion and analysis (MD&A requirements are set by the SEC in Regulation S-K. p. 4-23)

PNG Construction builds custom homes. In accordance with the _________________ principle, PNG includes information about the timing of revenue recognition in its notes to the financial statements.

full disclosure ("Notes to financial statements are a way to provide additional information to financial statement users in accordance with the full disclosure principle." p. 4-15)

Which of the items above would be reported on the face of Limerick Enterprises' classified balance sheet? a. Limerick has three wholly owned subsidiaries. All companies operate in the retail industry. b. Limerick loaned $250,000, a material amount, to its Chief Executive Officer during the year. The loan is payable over 20 years with interest at 5%. c. Limerick's current liabilities exceeded its current assets as of the balance sheet date. d. Limerick records investments in equity securities at fair market value. All investments are in shares of publicly traded companies e. Limerick uses FIFO to value its inventory f. Limerick has issued 200,000 shares of Common stock, par value $1 g. Limerick terminated one of its Regional Sales Managers subsequent to year end. (The Manager was terminated for poor performance.) h. Limerick uses estimates in determining the useful lives of factory equipment.

C & F

A pet supply company enters into a contract to supply 1,000 pet crates to a national retailer at $40 per unit. The contract specifies that the pet crates will be delivered to a specific distribution center with date(s) of delivery to be supplied by the retailer. The retailer expects to have sufficient shelf space at the time of delivery. As of year-end, the pet supply company has inventory of 3,000 pet crates, including the 1,000 pet crates relating to the contract with the retailer. The 1,000 pet crates are stored with its other 2,000 pet crates, which are all interchangeable products. However, the pet supply company put controls in place to assure that they will not deplete total inventory below 1,000 units. At the inception of the contract, how much revenue should the pet supply company recognize?

$0

Best Subs Inc. grants franchisees the right to operate a restaurant using the company's name, menu, and operational procedures. On March 1, a franchisee enters into a 4-year contract with Best Subs Inc. and pays a $150,000 initial franchise fee. The franchisee also pays $10,000 for equipment for the restaurant with a delivery date scheduled in 10 days. Per the contract, the franchisee will also pay a royalty equal to 3% of the franchisee sales over the contract life. The commission for the month of March is estimated to be $3,000 based upon Best Subs Inc. extensive experience with new franchises. What amount of revenue will Best Subs Inc. record on March 1?

$0

The following revenue recognition steps, listed in no particular order, provided below relate to a merchandiser (Epple) and a customer (Jasmine). 1. The transaction price of a smartwatch manufactured by Epple is determined to be $200. 2. A performance obligation is identified as the providing of one fully functioning smartwatch to Jasmine. 3. Jasmine takes possession of the smartwatch after providing her credit card as a means of payment of $200. At this point, Epple recognizes revenue. 4. A contract is established through common business practices where Epple provides a fully functioning smartwatch to Jasmine for the listed retail price of $200. 5. The $200 retail price of the smartwatch is fully allocated to the obligation of Epple to provide a fully functioning smartwatch to Jasmine.

4, 2, 1, 5, 3

Which of the above items would normally be disclosed in the Summary of significant accounting policies note of Limerick Enterprises? a. Limerick has three wholly owned subsidiaries. All companies operate in the retail industry. b. Limerick loaned $250,000, a material amount, to its Chief Executive Officer during the year. The loan is payable over 20 years with interest at 5%. c. Limerick's current liabilities exceeded its current assets as of the balance sheet date. d. Limerick records investments in equity securities at fair market value. All investments are in shares of publicly traded companies. e. Limerick uses FIFO to value its inventory. f. Limerick has issued 200,000 shares of Common stock, par value $1 g. Limerick terminated one of its Regional Sales Managers subsequent to year end. (The Manager was terminated for poor performance.) h. Limerick uses estimates in determining the useful lives of factory equipment.

A E H

On January 1, 2020, ABC Inc. sells equipment to Armstrong Inc. for $5,000. The contract includes a repurchase option effective one year from the contract's inception. Choose one statement from the following statements relating to this equipment sale on January 1 that is not true.

If Armstrong Inc. has the right to require ABC Inc. to repurchase the equipment, the expected market value is $4,800, and the repurchase price is $5,100, ABC Inc. would record the transaction as a lease.

Which of the following statements about Limerick Enterprises' Investment in equity securities is not correct? a. Limerick has three wholly owned subsidiaries. All companies operate in the retail industry. b. Limerick loaned $250,000, a material amount, to its Chief Executive Officer during the year. The loan is payable over 20 years with interest at 5%. c. Limerick's current liabilities exceeded its current assets as of the balance sheet date. d. Limerick records investments in equity securities at fair market value. All investments are in shares of publicly traded companies. e. Limerick uses FIFO to value its inventory. f. Limerick has issued 200,000 shares of Common stock, par value $1 g. Limerick terminated one of its Regional Sales Managers subsequent to year end. (The Manager was terminated for poor performance.) h. Limerick uses estimates in determining the useful lives of factory equipment.

A, B, and C and c. Since Limerick Enterprises intends to hold the investments for over a year, the investments would be considered non-recurring items.

A seller offers a promotion to customers which provides one free box of golf balls (valued at $20) if the customer purchases three boxes of golf balls at the regular price of $20 each. In order to receive the free box of golf balls, the customer must fill out a request form and mail it to the seller within three weeks of the date of purchase of the golf balls. The seller estimates that approximately 45% of customers will complete the request form necessary to take advantage of the promotion. In addition, the seller provides three free golf tees (valued at $.15) with every purchase. The seller

Considers the sale of golf balls and the right to the fourth box of golf balls as two separate performance obligations.

A seller offers a promotion to customers which provides one free box of golf balls (valued at $20) if the customer purchases three boxes of golf balls at the regular price of $20 each. In order to receive the free box of golf balls, the customer must fill out a request form and mail it to the seller within three weeks of the date of purchase of the golf balls. The seller estimates that approximately 45% of customers will complete the request form necessary to take advantage of the promotion. In addition, the seller provides three free golf tees (valued at $.15) with every purchase. The seller

Considers the sale of golf balls and the right to the fourth box of golf balls as two separate performance obligations. A is incorrect because the golf tees of $.15 would be considered immaterial to the context of the contract ($80). B is incorrect because the items are not interrelated and D is incorrect because even considering the redemption rate, the promotion would be considered material to the context of the contract. C is correct because the material customer right is accounted for as a separate performance obligation from the original sale of golf balls.

On December 31, 2020, Eastern Co. enters into a two-year contract with a customer. An allocation of the cost of salaries of sales and administrative staff is estimated to be $4,800. Salaries are paid in January of 2021. Eastern Co. expects to recover the allocated salary costs from the amounts billed on the contract. The contract does not have a renewal option. How would Eastern account for the contract cost in its year-end financial statements dated December 31, 2020?

Eastern Co. would recognize a liability (Salaries Payable) of $4,800, on December 31, 2020, and expense (Salaries Expense) of $4,800 for the year 2020.

Which of the following is not a condition of a valid contract?

Full collection on the contract is probable.

Which of the above items above would not need to be disclosed or reported in Limerick Enterprises' financial statements? a. Limerick has three wholly owned subsidiaries. All companies operate in the retail industry. b. Limerick loaned $250,000, a material amount, to its Chief Executive Officer during the year. The loan is payable over 20 years with interest at 5%. c. Limerick's current liabilities exceeded its current assets as of the balance sheet date. d. Limerick records investments in equity securities at fair market value. All investments are in shares of publicly traded companies. e. Limerick uses FIFO to value its inventory. f. Limerick has issued 200,000 shares of Common stock, par value $1 g. Limerick terminated one of its Regional Sales Managers subsequent to year end. (The Manager was terminated for poor performance.) h. Limerick uses estimates in determining the useful lives of factory equipment.

G

Which of the following statements is true?

In order to recognize revenue, a company must fulfill all five steps in revenue recognition.

Which of the following statements is not true regarding the standalone selling price of a performance obligation in a revenue contract.

Is always equal to the stated price of the good or service.

A customer enters into a contract with Tablets Inc. to purchase an electronic tablet plus a one-year internet data plan for the tablet for a combined price of $700. The standalone selling price of the electronic tablet is $500 and the standalone selling price of the one-year internet data plan is $25 a month. Tablet Inc. collects $400 upfront and bills the remaining balance evenly over the contract period of one year. Choose the correct answer regarding the accounting for the sale of a tablet plus the data plan by Tablets Inc. (Assume all amounts below are rounded to the nearest whole dollar.)

Tablets Inc. would record sales revenue of $438 when the customer takes control of the tablet.

Which of the following circumstances most likely indicates that a contract between a seller and a customer is not valid.

The customer, but not the seller, may cancel the contract at any time without a reimbursement of costs.

In the event that a contract does not meet all five conditions of a valid contract outlined in ASC 606,

The seller generally records a liability for any consideration received.

In what order would the following accounts normally be listed in a classified balance sheet? a. Retained earnings b. Accumulated other comprehensive income c. Noncontrolling interest d. Common stock

d Common stock a Retained Earnings b AOCI c Noncontrolling interest

Management is required to provide information about ________________ in the Management's Discussion and Analysis of Financial Operations section of Form 10-K.

the company's liquidity (Liquidity is a required component of the MD&A. p 4-25)

Paddington, Inc. has a working capital ratio (Current assets divided by Current liabilities) of .9. Accounts payable equals $10,000. If Paddington uses $5,000 of its available cash to reduce Accounts payable, the working capital ratio ________.

will decrease (Subtracting equal amounts from the numerator and the denominator of a ratio less than one will decrease the ratio.)

Paddington, Inc. has a working capital ratio (Current assets divided by Current liabilities) of 1.5. Accounts payable equals $10,000. If Paddington uses $5,000 of its available cash to reduce Accounts payable, the working capital ratio ________.

will increase (Subtracting equal amounts from the numerator and the denominator of a ratio greater than one will increase the ratio.)