CPA FAR

Cash outflows from investing activities would include which of the following?

A distribution for loans made by the enterprise is a cash outflow from investing activities.

In the statement of cash flows, advances from related parties would be reflected in which of the following sections?

Advances from related parties, like other advances, should be reflected in the statements as financing activities, and repayments of the advances should also be reflected in the statements within the financing section.

Which of the following statements concerning identifiable assets is false?

All liabilities that the partnership assumes are recorded at their present values.

Disclosure of information about significant concentrations of credit risk is required for

An entity is required to disclose all significant concentrations of credit risk arising from all financial instruments

Markson Co. traded a concrete-mixing truck with a book value of $10,000 to Pro Co. for a cement-mixing machine with a fair value of $11,000. Markson needs to know the answer to which of the following questions in order to determine whether the exchange has commercial substance?

Are the future cash flows expected to change significantly as a result of the exchange? A nonmonetary exchange has commercial substance if the entity's future cash flows are expected to change significantly as a result of the exchange. The acquisition is recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly determinable. Gains or losses should be recognized as the earnings process has culminated for the asset exchanged.

How should the acquirer recognize a bargain purchase in a business acquisition?

As a gain in earnings at the acquisition date A bargain purchase is a business combination in which the fair value of the recognized identifiable net assets acquired exceeds the fair value of the acquirer's interest in the acquiree plus the recognized amount of any noncontrolling interest in the acquiree. In such cases, the acquirer should reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed and should recognize any additional assets or liabilities that are noted in that review. The objective of the review is to ensure that the measurements appropriately reflect consideration of all available information as of the acquisition date. If the excess remains after reassessment, the acquirer will recognize the resulting gain in earnings on the acquisition date.

How should a company report its decision to change from a cash-basis of accounting to accrual-basis of accounting?

As a prior-period adjustment (net of tax), by adjusting the beginning balance of retained earnings. The change from cash-basis accounting to accrual-basis accounting is a change from an accounting principle that is not generally accepted to one that is generally accepted, which is considered a correction of an error. Correction of an error requires a prior-period adjustment, which is done net of tax, by adjusting the beginning retained earnings.

Which of the following is GASB's Concept Statement No. 4's definition of "assets"?

Assets, per Concepts Statement No. 4, must provide present service capacity and be controlled by the government. The definition of assets does not consider whether those resources are encumbered.

When an entity retires its bonds payable, either through retirement before maturity or through an extinguishment method, the entity would not be in compliance with authoritative guidance if it did which of the following?

Automatically classified an early extinguishment of debt as an extraordinary item An entity must evaluate whether early debt extinguishment is extraordinary using the same criteria as other events.

Which of the following financial instruments is not considered a derivative financial instrument?

Bank certificates of deposit A derivative financial instrument is an instrument or contract that has three characteristics; (1) an underlying and notional amount or payment provision, (2) zero or small investment, and (3) net settlement. Bank certificates of deposit do not contain these features. They are investments that normally require a minimum amount of deposit and can be classified as cash if the original maturity is three months or less. The other items listed are all derivative instruments. An interest rate swap is an arrangement where two companies swap interest payments, but not the principal, to limit interest rate risk. Currency futures are contracts to buy or sell a foreign currency on a specific date in the future at a price set today. Stock-index options are privileges to buy or sell a stock index security to be delivered by the derivative contract.

On December 31 of the current year, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on this date was 8%. The compound interest factors to convert future values into present values at 8% follow: Present value of $1 due in nine months: .944 Present value of $1 due in five years: .680At what amounts should these two notes receivable be reported in Jet's December 31 balance sheet?

Both notes were received on the balance sheet date. Since the note from Hart arose from a transaction with a customer in the normal course of business and is due in customary trade terms not exceeding one year, it can be reported at its face amount of $10,000 despite the fact that the 3% stated interest rate of the note differs from the prevailing market interest rate of 8% for similar notes at the transaction date. On the other hand, the note from Maxx is due in more than one year. Therefore, the note from Maxx cannot be reported at its face amount because its 3% stated interest rate differs from the prevailing market interest rate of 8% for similar notes at the transaction date. Because neither the fair value of the services performed by Jet nor the fair value of the note received from Maxx is indicated, the note is reported at its present value, determined by discounting all future cash payments of the note at the prevailing (market) rate of interest for a note of this type.

Derby Co. incurred costs to modify its building and to rearrange its production line. As a result, an overall reduction in production costs is expected. However, the modifications did not extend the production lines life. Should the building modification costs be capitalized?

Both the building modification costs and the production line rearrangement costs should be capitalized because they have resulted in an overall reduction of production costs, the benefits of which extend beyond the current period.

Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?

Capitalized and depreciated over its estimated useful life Materials, equipment, facilities, or intangibles purchased from others that are acquired for a particular R&D project and have no alternative use should be expensed in the period in which acquired.However,these items should be recorded as assets and amortized over their useful lives to R&D expense if alternative future uses are expected, whether in other R&D activities or in normal operations.If these assets are no longer deemed to have alternative future uses, the remaining unamortized cost is charged to R&D expense for the period.

Which of the following would cause an indefinite-lived intangible asset to have an impairment loss?

Carrying value is greater than fair value Testing for impairment occurs when events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset groups may not be recoverable. The impairment test is a one-step process: An indefinite-lived intangible asset is impaired when the fair value is less than its carrying amount. Goodwill is tested for impairment at least annually, using a one-step process, and the goodwill impairment test may be performed any time during the fiscal year, provided the test is performed at the same time every year. To identify potential impairment, we compare the reporting unit's fair value with its carrying amount, including goodwill i.e. performing a recoverability test on the carrying amount of the division's assets If the fair value exceeds its carrying amount, the reporting unit's goodwill is considered not impaired. If the carrying amount exceeds its fair value, then the Impairment Loss of the reporting unit recognized is calculated as Carrying Value - Fair Value i.e. $100,000,000 - $80,000,000 = $20,000,000.

Fogg Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after the goods were received at Fogg's warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg's favor. The resulting gain should be included in Fogg's financial statements as a(an)

Component of income from continuing operations. A change in exchange rates between the functional currency and the currency in which the transaction is denominated increases or decreases the expected amount of functional currency cash flows upon a settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign currency transaction gain or loss that generally should be included as a component of income from continuing operations for the period in which the transaction is settled.

Which of the following costs should a nongovernmental not-for-profit organization report as a supporting service expense?

Cost for the annual fundraising dinner. Program expenses are services that relate directly to the organizations mission. Support service expenses are expenses related to management and general activities of the org, its fundraising activities and membership development activities. Nongovernmental not-for-profit organizations classify the following expenses as support service expenses: Management and general Fundraising Membership development Only the cost for the annual fundraising dinner will be reported as supporting service expenses. Salary paid to a program director, printing costs incurred to create educational fliers on the prevention of illness, and costs incurred to advertise the programs of the organization are all program expenses.

Which of the following types of assets would typically be reported on a company's balance sheet as an intangible asset?

Cost of patent registrations. Intangible assets are long-lived legal rights and competitive advantages developed or acquired by a business. Intangible assets do not have physical substance. Examples of intangible assets includes patents, copyright, goodwill, trademark, etc. Patents are costs incurred to legally protect product and process ideas resulting from research and development. Cost of patent registration is capitalized as patent and is reported in the balance sheet as an intangible asset as a patent does not have physical substance.

When an entity incurs costs in fulfilling a contract with a customer, which of the following is one of the criteria for recognizing those costs as an asset?

Costs incurred in fulfilling the contract should be recognized as an asset only if they meet all the following criteria: * the cost pertain directly to a contract or to an expected contract * the costs generate or enhance the entity's resources to fulfill performance obligations in the future * the costs should be recovered

In year 1, Flynn estimated its credit loss on an available-for-sale debt security to be $900. In the subsequent year, the estimated loss was found to be only $600. How should this change be accounted for?

Decreasing the loss allowance by $300 Any decrease in expected loss shall call for a decrease in the allowance, thereby causing a reversal of the credit loss expense on the income statement. The decrease in the loss of $300 should be accounted for by decreasing the pre-existing loss allowance.

Blythe Corp. is a defendant in a lawsuit. Blythe's attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency?

Disclosed but not accrued. Where the loss is considered reasonably possible, no charge should be made to income but the nature of the contingency should be disclosed. The treatment also applies to probable losses that cannot be reasonably estimated.

If an entity has a change in accounting estimate during an accounting period, it should report the change in estimate by doing which of the following?

Disclosing the effects of the change on income from continuing operations, net income and related per share amounts in the period of the change or in future periods, if the change also affects those future periods. The effects of the change in estimate on income from continuing operations, net income, and related per share amounts should be disclosed in the period of the change or in future periods if the change affects those periods.

Carter Co. had 7,000 shares of 4% cumulative preferred stock outstanding as of the beginning of the year. The par value of such shares was $100. The dividend was not paid in the last year and during this year, the management paid a cash dividend of $20,000. The outstanding dividend should be reported as:

Disclosure of $36,000 Dividend per year = 7,000 x 100 x 4% = $28,000. This means the total dividend outstanding for two years was $56,000. It is given that $20,000 was paid, leaving $36,000 in arrears. It should be noted that arrear dividends on preferred stock do not become a liability until declared. They are just to be disclosed in parentheses or in footnotes.

How are discontinued operations that occur at mid-year initially reported?

Discontinued operations should be included in the determination of net income for the interim period in which they occur.Discontinued operations should not be prorated among interim periods.

Which ratio does the DuPont Model help in calculating and analyzing in detail?

Equity DuPont Model = net profit x Asset turnover x Financial Leverage = (Net profit/Sales) x (Sales/Assets) x (Assets/Equity) = Net profit/Equity The DuPont Model ultimately gives the return on equity.

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?

Event 1 - The gain on early retirement of bonds would be reported as a separate component of income from continuing operations. This is not unusual or infrequent as Fuqua frequently retires bonds early when the interest rates decline. Event 2 - Hurricane losses have been frequent, and hence would be reported as a non-operating item. They will be treated as a loss from continuing operations. Event 3 - The loss on disposal of a business segment is reported in discontinued operations, a separate component of net income after income from continuing operations. The total amount of gain (loss) that should be reported by Fuqua Steel, separately as a component of income from continuing operations in the current year is hurricane loss of $255,000 and the gain on early retirement of bonds of $260,000 which gives a net gain of $5,000.

Which of the following is (are) examples of contingent liabilities?

Examples of contingent liabilities include obligations related to product warranties and pending or threatened litigation.

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

Except for certain areas such as business combinations and quasi-reorganizations, the manner of reporting the tax benefits of an operating loss carryforward is determined by the source of income or loss in the current year and not by the source of the operating loss carryforward or taxes paid in a prior year. Therefore, the tax benefit of the operating loss in question reduces income tax expense from income from continuing operations because the realization of the tax benefit results from income from continuing operations.

On December 15, a U.S. company bought inventory from a European supplier. Payment is required in euros in 30 days. What exchange rate should be used to value the payable for this transaction at year-end?

Exchange rate at year-end. An organization which purchases or sells goods in currencies other than in its functional currency is required to recognize foreign currency gain/loss on them at the settlement date using the spot rate. Where the settlement date is after the year-end, the foreign currency gain/loss is recognized at such year-end using the exchange rate at year-end.

How should NSB, Inc. report significant research and development costs incurred?

Expense all costs in the year incurred. Research activities are those aimed at the discovery of knowledge that will be useful in developing or significantly improving products or processes. Development activities are those concerned with translating research findings and other knowledge into plans or designs for new or significantly improved products or processes. Since future economic benefits deriving from R&D activities are uncertain in their amount and timing, most R&D costs are required to be charged to expense the year in which incurred.

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the

Face value of the bonds at the beginning of the period by the contractual interest rate. The effective interest method of amortization calls for recognizing interest expense at the effective interest rate at which the bonds are sold. Thus, this interest method overcomes the criticism of the straight-line method because it offers more accurate measurement of interest expense. To amortize a premium using the effective interest method, multiplying the carrying amount of the bond issued by the effective yield. This equals interest expense for the period. The difference between the cash interest payment and the interest expense equals the amount of premium amortization for the period. The cash payment is always computed by multiplying the face amount of the bond by the face or stated interest rate.

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?

Factor the receivables outstanding Only factoring the receivables would ensure altering the timing of cash flows for the $3 million in receivables already recorded on its books. Factoring the receivables outstandinf is a transfer of the receivables to a factor (transferee) without recourse and is accounted for as any other sale of an asset: debit cash, credit receivables, and record a gain or loss for the difference. Changing the due date of the invoice, discounting the receivables outstanding, and demanding payment from customers before the due date will not necessarily get the cash for receivable any quicker and alter the timing of cash flows.

Which of the following statements is correct regarding fair value measurement?

Fair value is a market-based measurement Fair value measurement is a market-based measurement as the fair value is measured based on the principal market. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly arm's length transaction between market participants at the measurement date.

At what value should a nongovernmental not-for-profit organization record a share of stock when received?

Fair value on the date of donation All non-cash contributions or gifts-in-kind received by a nongovernmental not-for-profit organization are to be recorded at their fair market values as on the date of the donation. I

A city government would report each of the following categories in its government-wide statement of net position except

Fiduciary activities. In the government-wide financial statements, all government and proprietary funds are included (but not fiduciary funds) along with discreetly presented component units in the statement of net position.

Which of the following items are not eligible to be measured using the fair value option?

Financial instruments that are classified by the user as a component of shareholder's equity Financial instruments that are classified by the user as a component of shareholder's equity are not eligible to be measured at fair value using the fair value option. Certain commitments, rights and obligations, and a host financial instrument resulting from the separation of an embedded nonfinancial instrument from a nonfinancial hybrid instrument are eligible to be measured using the fair value option.

Jordan Co. had the following gains during the current period: Gain on disposal of a business segment $500,000 Foreign currency translation gain 100,000 What amount of gains should be presented on Jordan's income statement as income from continuing operations?

Gain on disposal of business segments will be reported as discontinued operations and foreign currency translation gains will be reported in other comprehensive income. Therefore, neither of the items will be reflected in income from continuing operations.

A development stage enterprise should use the same generally accepted accounting principles that apply to established operating enterprises for

Generally accepted accounting principles that apply to established operating enterprises govern the recognition of revenue by a development stage enterprise and determine whether a cost incurred by such an enterprise should be charged to expense when incurred or should be capitalized or deferred. Special accounting practices that are based on a distinctive accounting for development stage enterprises are not acceptable. Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard only to required additional information.

A(n) _________________ is a risk management strategy to protect against the possibility of loss, such as from price fluctuations.

Hedge Hedging is a risk management strategy to protect against the possibility of loss, such as from price fluctuations.

In a transaction accounted for as a business combination, the appraised values of the identifiable net assets acquired exceeded the acquisition price. How should the excess appraised value be reported?

In Income from Continuing Operations In a business combination, if the appraised values of the identifiable assets acquired exceeded the acquisition price, it would lead to a credit balance (a negative goodwill) which is recorded as a gain on the income statement from Continuing Operations.

Go Ltd. enters into a contract to provide internet services to a customer for one year. Go charges a $192 activation fee for which Go provides a router and sets up the account and connection for the customer. The customer is required to make monthly payments of $72 for the continuing service. A renewal option now exists that enables the customer to renew the contract after the first year without paying an additional activation fee. Based on historical customer data, the company expects each customer to renew for one additional year before changing service providers. What is the revenue to be recognized each month?

In many cases, even though a nonrefundable upfront fee relates to an activity that the entity is required to undertake at or near contract inception to fulfill the contract, that activity does not result in the transfer of a promised good/service to the customer. Instead, the upfront fee is an advance payment for future goods/services and, would be recognized as revenue when those future goods/services are provided. Revenue recognition period may extend beyond the initial contractual period if the entity grants the customer the option to renew the contract and that option provides the customer with a material right. If the nonrefundable upfront fee relates to a good/service, the entity should evaluate whether to account for the good/service as a separate performance obligation. In this case, the renewal option creates a material right for additional services for the customer. Based on historical data, the company expects each customer to renew for one additional year before changing service providers. With the upfront fee of $192 received, Go has a performance obligation for the next two years if the additional $72 is paid each month. The estimate of the total consideration to be received is $192 + (24 months x $72) = $1,920. The company would recognize $80 dollars per month over the two years ($1,920/24).

On January 1 of the current year, Poe Corp. sold a machine for $900,000 to Saxe Corp., its wholly owned subsidiary. Poe paid $1,100,000 for this machine, which had accumulated depreciation of $250,000. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy which Saxe continued. In Poe's December 31 consolidated balance sheet, this machine's cost should be reported as

In the consolidated balance sheet, the machine's cost must be based upon the original cost of the machine to the initial buyer. Therefore, the machine is reported at its cost to the consolidated entity of $1,100,000.

Unusual or infrequent items are reported in the

Income from Continuing Operations A transaction that is unusual in nature and/or infrequent in occurrence should be reported as a component of income from continuing operations.

According to Statements of Financial Accounting Concepts, neutrality is an ingredient of

Information faithfully represents what it purports to represent. Faithful representation must be complete, neutral, and free from error. Information is relevant if it has the capacity to make a difference in a decision by helping users form predictions about the outcomes of past, present, and future events or confirm or correct prior expectations. For information to be relevant, it must have either predictive or confirmatory value, or both.

When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on which of the following criteria?

Instrument-by-instrument basis ASC 825-10-25-2 states the fair value measurement option is irrevocable, must be applied on an instrument-by-instrument basis, and must be applied to the entire instrument as a whole.

TPC Co. manufactures a component that is exclusively purchased by a renowned automobile manufacturer. At year-end, the cost of such components stood at $30 per unit with a replacement cost of $45. It was estimated that the said component could be sold at $50 after incurring completion costs of $6 for a piece. The normal profit earned on one component was $4. If the inventory is valued using the Average Cost Method, what would be the per-unit value of these components?

Inventory valued using the FIFO or the average cost method is valued using the lower of cost or the NRV method. NRV or net realizable value is the selling price less costs to complete/sell. In this question, the component made by TPC costs $30. The NRV is = 50-6 = $44 per piece. As such, the inventory is to be valued at $30.

Which of the following statements regarding the milestone method of revenue recognition is true?

It is an application of the proportional performance method. The milestone method of revenue recognition is, at its core, an application of the proportional performance method.

Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance?

It recognizes gains and losses immediately. In an exchange with commercial substance, the transaction is accounted for at the fair value of the asset received or the asset given up, whichever is more clearly evident, and a gain or loss is recognized on the exchange.

How should a nongovernmental not-for-profit organization report depreciation expense in its statement of activities?

It should be included as a decrease in net assets without donor restrictions. In the statement of activities, expenses are reported only in the net assets without donor restrictions column. Depreciation is reported as expense resulting in a decrease of net assets without donor restrictions.

Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years, and has the ability to exercise significant influence over Devon. The following information relates to Larkin's investment in Devon during the most recent year: Carrying amount of Larkin's investment in Devon at the beginning of the year $ 200,000 Net income of Devon for the year 600,000 Total dividends paid to Devon's stockholders during the year 400,000 What is the carrying amount of Larkin's investment in Devon at year end?

Larkin Co would apply equity method to account for its investments. The earnings from Devon Co., will increase the amount of its investment and dividend will reduce the investment account. Ref Equity Method Amount ($) a Investment in Devon Co. 200,000 b Net Income ($600,000 x 25%) 150,000 c Dividend ($400,000 x 25%) (100,000) d Investment reported at year end (a+b-c) 250,000

Jay's lease payments are made at the end of each period. Jay's liability for a Finance Lease would be reduced periodically by the

Lease payment less the portion of the lease payment allocable to interest In a finance lease, each lease payment should be allocated between a reduction of the finance lease liability and interest expense. Therefore, the lessee's balance sheet liability for a Finance Lease should be periodically reduced by the Lease payment less the portion of the Lease payment allocable to interest.

The following is deducted/added from carrying value of bonds and amortized using effective interest method, except:

Loss on Extinguishment of debt A Bond issue cost is a cost directly associated with bond issuance e.g., printing & engraving costs, legal & accounting fees, underwriter commissions, promotion costs, etc. Per the FASB standard update issued in 2015, bond issue costs should be deducted from the carrying value of bonds and amortized using the effective interest method (i.e., bond issue costs are treated similar to the discount/premium on bonds payable and is reported as an adjustment to bond payable liability). Gain or loss on extinguishment of debt is the difference between cash paid at retirement and the carrying value of the bond at retirement and is recognized in the year of redemption in income from continuing operations.

Recording a credit loss on a debt security will result in which of the following?

Lower retained earnings Recording expected credit losses cause a decrease in the earnings of an entity since the credit loss expense is reflected in the income statement. Consequently, the indirect effect is lower retained earnings due to a lower net income.

When the market value of an investment in securities exceeds its carrying amount, how should each of the following assets be reported at the end of the year?

Marketable securities classifies as either trading or available-for-sale are to be accounted for at market.

After being held for 40 days, a 120-day 12% interest-bearing note receivable was discounted at a bank at 15%. The proceeds received from the bank equal

Maturity value less the discount at 15% Determining the proceeds received from discounting a note receivable consists of three steps: 1) determine the maturity value of the note. this amount is based on the face amount, the stated interest rate, and the time to maturity of the note. 2) apply the banks discount rate to the maturity value of the note to obtain the amount of the discount charged by the bank 3) subtract the discount charged by the bank from the maturity value of the note to obtain the proceeds received by the bank.

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?

Milton will retain control of the receivables. Receivables may be pledged as security for loans. Control of the receivables is retained and collections on the receivables are usually required to be applied to a reduction of the loan. Good Neighbor Financing could take title to the receivables if Milton doesn't pay the loan, does not assume the responsibility of collecting the receivables, and does not take title to the receivables until the loan is repaid.

Which basis of accounting should a voluntary health and welfare organization use?

Nongovernmental nonprofit organizations, including voluntary health and welfare orgs (VHWO), use the accrual basis of accounting for all external reporting purposes.

A not-for-profit voluntary health and welfare organization should report a contribution for the construction of a new building as cash flows from which of the following in the statement of cash flows?

Not-for-profit organizations follow the FASB format of statement of cash flows which does not include a capital financing activities section. For not-for-profit organizations, the description of cash flows from financing activities is expanded to include certain donor-restricted cash that must be used for long-term purposes. Contributions for construction of a capital asset would not be included in the operating or investing activities section.

GAAP provides sample situations where the 20-percent ownership presumption may be overcome. Which of the following is an (are) example(s) of this?

Opposition by the investee The investor and investee sign an agreement under which the investor surrenders significant rights as a shareholder The investor tries and fails to obtain representation on investee's board of directors. Sample situations where the 20% ownership presumption may be overcome include: opposition by the investee, such as litigation or complaints to governmental regulatory authorities, challenges the investor's ability to exercise significant influence; the investor and investee sign an agreement under which the investor surrenders significant rights as a shareholder; majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor; or the investor needs or wants more financial information to apply the equity method than is available to the investee's other shareholders, but fails in her/his attempts to obtain that information.

The Cats and Dogs League was organized as a non-governmental, not-for-profit organization. The League received a pledge of $10,000 to be used to build an addition to the kennel. This donation will not be received for three years. How should this pledge be recorded?

Pledges to be received at a future date are recognized as Net Assets with Donor Restrictions i.e. restricted support as there is a time restriction with a corresponding debit to accounts receivable. If collection is doubtful an allowance can be recognized for the same. A pledge to be used to build an addition to the kennel that would be received in 3 years would be recorded as restricted support with donor restrictions at its present value. Pledge Receivable XXX [PV of $10,000] Contribution: Net Assets with Donor Restrictions XXX [PV of $10,000]

When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid

Plus discount A bond will sell at a discount (less than par) when the stated interest rate is less than the market rate. The amount of the discount will be equal to the difference between the bond payable amount and the cash received. The bond discount is recorded in a separate account in the balance sheet as a direct deduction from the face amount of the bond. The discount will be amortized over the period from the date of sale to the maturity date as interest expense. Thus, the total interest expense over the term of debt equals the cash interest paid plus the discount amount at issue.

In a statement of cash fows, if used equipment is sold at a gain, the amount shown as a cash infow from investing activities equals the carrying amount of the equipment

Plus the gain In the statement of cash flows, proceeds from the sale of used equipment should be reported as a cash inflow due to an investing activity. Since the equipment was sold at a gain, the amount of the proceeds would equal the equipments carrying amount plus the gain recognized on disposal. The income tax effect of the gain on dsposal does not affect the amount reported in the investing section because all income taxes are t be classified as an operating activity on a statement of cash flows.

When purchasing a bond, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond?

Price The market value of a bond consists of two parts: * the present value of cash flows from interest (calculated at the stated rate) and discounted at market rate, and * the present value of the principal discounted at the market rate of interest. These two amounts are added together to get the market price or selling price of the bond.

Under US GAAP, public companies cannot amortize goodwill and an impairment test for such goodwill comprises a two-step approach. How does this process differ for private companies?

Private companies are allowed to amortize goodwill over 10 years and impairment is tested using a single step The Private Company Council (PCC) released a Decision-Making Framework that eases some of the requirements for private companies to lessen their administrative burden. One such provision was that, when it comes to private companies, goodwill can be amortized using a straight-line basis over 10 years and impairment is tested using a one-step process.

A company enters into a firm purchase commitment to purchase parts for its bicycle manufacturing process. 10,000 of such parts shall be purchased by the company at a value of $24.5 on 3/1 of year 2. On 12/31/year 1, it was estimated that the fair value of such parts had dropped to $23.90. The company should treat this as:

Recognize a loss of $6,000 on Income Statement with a note When there is a firm commitment to purchase goods in a future period at a set price (enforceable contract exists), any loss resulting from a drop in the market value of such goods, or cancellation of the contract by the purchaser, should be recognized in the current period. There should be a note describing the nature of the contract.

Which of the following is a significant issue for service efforts and accomplishments (SEA) reporting for governmental entities?

SEA reporting emphasizes performance results and is designed to help public policy-makers evaluate which programs are critical for a community. SEA reporting enhances financial reporting, but focuses on the government's programs and services, not the revenue sources. SEA reports may support the integration of performance management initiatives into the governmental budget process, but are primarily focused on the quality of programs and outcomes or effectiveness of those programs. GASB does not require SEA reporting.

Zero Corp. suffered a material loss on an uncollectible trade account receivable after a customer suddenly went out of business due to a natural disaster ten days after Zero's balance sheet date, but one month before the issuance of the financial statements. Under these circumstances, the financial statements:

Should not be adjusted, but should disclose the event There are two types of subsequent events. The first type requires adjustment of the financial statements because it provides evidence about conditions that existed at the balance sheet date. The second type of subsequent event provides evidence about conditions that did not exist at the balance sheet date and does not require adjustment of the financial statements; however, if material in nature, the event(s) may require disclosure to keep the financial statements from being misleading. This is an example of the second type. The event requires disclosure only.

If Tron Inc. a US-based entity has accounts payable valued in foreign currency, it should be adjusted for changes in the:

Spot rate and the foreign exchange gains or losses are reported as non-operating gains or losses on the income statement. When an entity with the US Dollar as a functional currency engages in a transaction in a foreign currency, it remeasures the transaction using the spot rate as of the transaction date. If the entity has any monetary assets or liabilities (e.g., cash, accounts receivable, accounts payable) valued in the foreign currency, these need to be adjusted for changes in the spot rate and the foreign exchange gains or losses are reported as non-operating gains or losses on the Income Statement.

In its financial statements, Hila Co. discloses supplemental information on the effects of changing prices in accordance with FASB Standards. Hila computed the increase in current cost of inventory as follows: Increase in current cost (nominal dollars)$15,000Increase in current cost (constant dollars)12,000 What amount should Hila disclose as the inflation component of the increase in current cost of inventories?

The "inflation component" of the increase in the current cost amount is defined as the difference between the nominal dollars and the constant dollars measures.

The following information relatesto two projects performed by Miley Co. during the year for laboratory research aimed at discovering new knowledge:

The R&D costs include: * new knowledge or new technology * model or prototype * application of new research findings Costs incurred for the two projects are expensed as incurred, regardless of the likelihood that efforts will result in future benefits.

On December 31, Year 1, Bit Co. had capitalized costs for a new computer software product with an economic life of five years. Sales for year 2 were 30 percent of expected total sales of the software. At December 31, Year 2, the software had a net realizable value equal to 90 percent of the capitalized cost. What percentage of the original capitalized cost should be reported as the net amount on Bit's December 31, Year 2, balance sheet?

The annual amortization of the capitalized software cost is the greater of: (1) the ratio of current revenues to current and future revenues (e.g., 30%) or (2) the straight-line method over the remaining useful life of the software including the period to be reported upon (e.g., 1 / 5 = 20%). Because the software has a net realizable value of 90% of the capitalized cost, it can be reported on the balance sheet at 70% (i.e., 1 - 30%) of its capitalized cost.

Which of the following accounts would appear in the plant fund of a not-for-profit private college?

The asset accounts in the Investment in Plant subgroup of the Plant Funds group of a college contain the carrying amounts of the institution's fixed assets. Therefore, the equipment would be reported in the Investment in Plant subgroup of the Plant Funds group of the college. The fuel inventory for the college's power plant should be reported in the Unrestricted Current Funds under Inventory of Materials and Supplies.

Environs, a community foundation, incurred $10,000 in management and general expenses during the year. In Environs' statement of activities for the year, the $10,000 should be reported as

The community foundation is a nonprofit organization. Expenses of nonprofit organizations are reported in two categories: (1) program services and (2) supporting services. Program services are related directly to the primary missions of the nonprofit organization. Supporting services do not relate to the primary missions of the nonprofit organization and include such costs as management and general administration, membership development, and fund-raising. Management and general administration costs include such costs as board meetings, business management, record keeping, budgeting, accounting, and overall direction and leadership.

In a statement of activities of a voluntary health and welfare organization, contributions to the building fund should

The contributions to the building fund are included as support in the statement of activities of a voluntary health and welfare organization.

In year 3, a company incurred $500,000 of legal costs defending several patents. Included in that amount was $400,000 of legal costs associated with successful outcomes and $100,000 of legal costs associated with unsuccessful outcomes. What amount of legal costs, if any, should the company expense for year 3?

The costs incurred in successful defense of patents are expensed as no legal benefit would exist. Thus, legal costs associated with unsuccessful outcomes is expensed.

Which of the following is true regarding depreciation?

The depreciation process matches the depreciable cost of the asset with revenues generated from its use. Depreciation is the process of allocating the depreciable cost of fixed assets over their estimated useful lives in a systematic and rational manner. This process matches the depreciable cost of the asset with revenues generated from its use.

Birk Co. purchased 30% of Sled Co.'s outstanding common stock on December 31, 20X0, 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, 20X0, what amount of goodwill should Birk attribute to this acquisition?

The difference between the purchase price paid to the investee and the fair value of its net assets is accounted as goodwill by the investor. On the date f purchase, the fair value of net assets is $600,000. The proportionate amount of the fair value of investment is $180,000 (i.e. 30% of $600,000). Hence, the goodwill amount will be $20,000 (i.e. $200,000 - $180,000).

Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of

The expense is recognized when economic benefits are consumed or assets lose their future value. The provision for uncollectible accounts matches the net credit sales for the year.

Ryan Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $720,000 at December 31, year 1, before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, year 1. Outstanding service contracts at December 31, year 1 expire as follows: During year 2-$150,000During year 3-225,000During year 4-100,000 What amounts should be reported as unearned service contract revenues in Ryan's December 31, year 1 balance sheet?

The requirement is the amount to be reported for unearned service contract revenues at December 31, Year 1. This is simply the sum of the outstanding service contracts at December 31, year 1, that expire during years 2, 3, and 4 ($150,000 + $225,000 + $100,000 = $475,000). The balance of the service contract expense account ($180,000) does not affect the amount reported as unearned service contract revenues.

What factor must be present to use the units-of-production (activity) method of depreciation?

Total units to be produced can be estimated The units-of-production depreciation method allocates the cost of plant assets on the basis of units produced (i.e., activity). Depreciation for a period is computed by multiplying the number of units produced during the period by the amount of depreciation per unit. The amount of depreciation per unit is determined by dividing the depreciable base of the plant asset (i.e., cost minus estimated salvage value) by the estimated number of total units to be produced. Thus, an estimate of total units to be produced must be available to use this method.

Which of the following is true where a foreign operation is relatively self-contained, integrated within one country and performs independently of the parent company?

Translation of financial statements from the functional currency into the parent's reporting currency will be required. Where the foreign operation is relatively self-contained and integrated within one country, the functional currency will be the local currency; and translation of financial statements from the functional currency into the parent's reporting currency will be required.

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

US GAAP permits only the following techniques for measuring the fair value of an asset or liability: Market approach income approach cost approach however, net realizable value approach is not considered to be a valid technique for fair value measurement and is not approach.

Which of the following statements is correct as it relates to changes in accounting estimates?

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.

To be considered intangible, an asset must be which of the following?

Without physical substance Intangible assets are assets without physical substance that provide economic benefits through the rights and privileges associated with their possession. Intangibles may be classified as identifiable or unidentifiable and externally acquired or internally developed.

PQR Ltd. enters into a contract with a customer for the sale of a tangible asset on January 1, 20X7, for $1 million. The contract also gives the entity the right to repurchase the asset for $1.1 million on or before December 31, 20X7. The expected market value for the asset is $1.05 million. This option is:

a call option accounted for as a financing arrangement. As PQR has the right to repurchase the asset this is a call option and as the repurchase price of 1.1 million is greater than the original price of 1 million, this is to be accounted for as a financing arrangement.

If an outlay will provide a service benefit beyond the current period, it is considered which of the following?

a capital expenditure if an outlay will provide a service benefit beyond the current period, it is a capital expenditure and is recorded as an asset.

A derivative financial instrument is best described as

a contract that has its settlement value tied to an underlying notional amount. Aderivative instrument is an instrument or other contract that has the following three characterisitics: 1) at least one underlying and at least one notional amount or payment provision or both, 2) requires no initial net investment, or one that is smaller than would be required for other types of contracts expected to have a similar response to market factor changes 3) requires or permits net settlement, can be readily settled net by means outside the contract, or provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.

At the commencement date of an operating lease, a lessor should

defer initial direct costs At the commencement date, a lessor should defer initial direct costs. Initial direct costs associated with the lease are deferred and amortized over the term of the lease as the lease income is recognized. After the commencement date, a lessor should recognize all of the following: * the lease payments as income in profit or loss over the lease term on a straight line basis * variable lease payments as income in profit or loss in the period in which the changes in facts and circumstances on which the variable lease payments occur * initial direct costs as an expense during the lease period on the same basis as income from the lease

The stockholders of Meadow Corp. approved a stock-option plan that grants the company's top three executives options to purchase a maximum of 1,000 shares each of Meadow's $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted?

he cost of services received from employees in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the options. The account Stock Options Outstanding is increased on the grant date. The subsequent exercising, forfeiture, or lapsing of the stock options reduces this account. January 1, Year 1 Deferred Compensation Cost (option/compensation value at grant date) 300,000 Stock Options Outstanding 300,000 December 31, Year 1, 2, 3 Wages and Compensation Expense 100,000 Deferred Compensation Cost 100,000

According to the input method prescribed in ASC 606 and recognize revenue over time, gross profit on contracts are to be recognized in income

in proportion to the satisfaction of the performance obligation.

Gains from remeasuring a foreign subsidiary's financial statements from the local currency, which is not the functional currency, into the parent company's currency should be reported as

part of continuing operations If an entity does not maintain its books in its functional currency, remeasuring into the functional currency is required prior to translation into the reporting currency (parent co currency). Exchange gains and losses that result for the remeasurinh process are recognized in income from continuinh operations.

In accounting for income taxes, justification for the method of determining periodic deferred tax expense is based on the concept of

recognition of assets and liabilities in accounting for income taxes,an enterprise shall recognize a deferred tax liability or asset for all temporary differences. After computing the balances of deferred tax accounts at a balance sheet date, the amount of deferred income tax expense is computed by determining the change required during the period in the deferred tax asset and liability accounts. The change is a by-product of the amount of deferred tax assets (asset and/or liability) to be reported on the balance sheet date. The method prescribed is often called the 'liability' method or the 'asset-liability' method.

A retained earnings appropriation can be used to

restrict earnings available for dividends The purpose of a retained earnings appropriation is to restrict a portion of retained earnings as to availability for dividends. A retained earnings appropriation is not used to absorb a fire loss when a company is self-insured, provide for a contingent loss that is probable or reasonably estimable, or to smooth periodic income.

What is the purpose of reporting comprehensive income?

to summarize all changes in equity from nonowner sources comprehensive income includes all the changes in equity during a period except those resulting from investments by owners and distribution to owners.

On January 2 of the current year, Cruises, Inc. borrowed $3 million at a rate of 10% for three years and began construction of a cruise ship. The note states that annual payments of principal and interest in the amount of $1.3 million are due every December 31. Cruises used all proceeds as a down payment for construction of a new cruise ship that is to be delivered two years after start of construction. What should Cruise report as interest expense related to the note in its income statement for the second year?

$0 None of the interest is expensed; it is all capitalized. Assets qualifying for interest capitalization include assets constructed or produced for self-use on a repetitive basis, assets acquired for self-use through arrangements requiring down payments or progress payments, and assets constructed or produced as discrete projects for sale or lease (ships or real estate developments).

On September 29, Wall Co. paid $860,000 for all the issued and outstanding common stock of Hart Corp. On that date, the carrying amounts of Hart's recorded assets and liabilities were $800,000 and $180,000, respectively. Hart's recorded assets and liabilities had fair values of $840,000 and $140,000, respectively. In Wall's September 30 balance sheet, what amount should be reported as goodwill?

$160,000 Goodwill is recognized and recorded at an amount equal to the excess of the cost of the enterprise acquired, plus the fair value of any noncontrolling interest, over the fair value of the identifiable net assets. Purchase price of 100% of Hart Corp's O/S common stock $860,000 Less: Fair value of identifiable net assets of Hart Corp. ($840,000 - $140,000) ($700,000) Goodwill $ 160,000

On June 19, Don Co., a U.S. company, sold and delivered merchandise on a 30-day account to Cologne GmbH, a German corporation, for 200,000 euros. On July 19, Cologne paid Don in full. Relevant currency exchange rates were: June 19 July 19 Spot rate $ .988 $ .995 30-day forward rate .990 1.000What amount should Don record on June 19 as an account receivable for its sale to Cologne?

$197,600 At the date a transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from a foreign currency transaction should be measured and recorded in the functional currency of the recording entity by use of the exchange rate (i.e. spot rate) in effect at that date. Don Co should record an account receivable of $197,600 on June 19 (200,000 x .988)

Certain balance sheet accounts of a foreign subsidiary of Rowan Inc., at December 31, have been translated into U.S. dollars as follows: Translated at Current Rates Historical Rates Note receivable, long-term $240,000 $200,000 Prepaid rent 85,000 80,000 Patent 150,000 170,000 $475,000 $450,000The subsidiary's functional currency is the currency of the country in which it is located. What total amount should be included in Rowan's December 31 consolidated balance sheet for the above accounts?

$475,000 Since the subsidiary's functional currency is the currency of the country in which it is located, all of its assets are translated at the current rate (i.e., the exchange rate in effect at the balance sheet date).

Farm Co. leased equipment to Union Co. on July 1 of the current year and properly recorded the sales-type lease at $135,000, the present value of the lease payments discounted at 10%. The first of eight annual lease payments of $20,000 due at the beginning of each year was received and recorded on July 3 of this year. Farm had purchased the equipment for $110,000. What amount of interest revenue from the lease should Farm report in its current year income statement?

$5,750 Interest revenue is calculated by adjusting the initial investment in the lease by the payment received on July 3, and then applying the interest rate and prorating for the last 6 months of the year. Net investment in lease (PV), 7/1 $135,000 Less: Payment received, 7/3 (20,000) Net investment in lease after 7/3 payment 115,000 Interest rate × 10% Whole year interest revenue 11,500 July through December, 1/2 year × 0.5 Interest revenue $ 5,750

Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in an acquisition method business combination. The market value of Sayon's common stock is $12. Legal and consulting fees incurred in relationship to the purchase are $110,000. Registration and issuance costs for the common stock are $35,000. What should be recorded in Sayon's additional paid-in capital account for this business combination?

1365000 Costs associated with the issuance and registration of debt or equity securities are netted against the proceeds. Accordingly, 35000 is netted against the proceeds and impacts APIC but has no net effect on the investment price. Dr Investment in trask 2400000 Cr Cash 35000 Cr Common stock 1000000 Cr APIC 1365000 Direct, indirect, or general costs are all expenses (legal, accounting, consulting, finders fees, G&A). Because of this, the legal and consulting fees of 110000 are expensed. Legal and consulting fees 110000 cr Cash 110000

On November 2, year 1, Platt Co. entered into a 90-day futures contract to purchase 50,000 Swiss francs when the contract quote was $0.70. The purchase was for speculation in price movement. The following exchange rates existed during the contract period: 30-day futuresSpot rateNovember 2, year 1$0.62$0.63December 31, year 10.650.64January 30, year 20.650.68 What amount should Platt report as foreign currency exchange loss in its income statement for the year ended December 31, year 1?

2500 A gain or loss on a speculative futures contract should be computed by multiplying the foreign currency amount of the futures contract by the difference bwteen the future rate availavle for the remaining maturity of the contract and the contract future rate (or the forward rate last used to measure a gain or loss on that contract for an earlier period). No separate accounting recognition is given to the discount or premium. The spot rate is the exchange rate used for immediate delivery of currencies exchanged.

Which of the following is classified as a cash outflow transaction?

A cash payment to the government for taxes is an example of a cash outflow transaction.

Which of the following types of agreements represents a split-interest arrangement?

A charitable remainder trust. In split-interest agreements, a donor makes a charitable gift to an NFP. The NFP then invests these assets and distributes the income from these donated assets to the donor at the donor's request. The NFP has a remainder interest in the trust and the donor has an income interest in the trust.

Contributed capital in foreign currency financial statements should be translated by means of which of the following?

The historical exchange rate

Finance lease criteria

* Present value equals or exceeds substantially all (90%) of the fair value * Option to purchase (exercise is reasonably certain) * Economic life - Major part (75%) of economic life is used * transfer of ownership at lease termination * specialized nature - no alternative use to the lessor at lease termination Note: the implementation guidance for ASC 842 uses the 75/90 thresholds, even though the standard is principles-based.

What are the two required financial statements of a defined controbution retirement plan?

A statement of net assets available for the benefits of the plan and a statement of changes in net assets available for benefits. Under a defined contribution plan, an employer contirbutes specific periodic amounts of contirbutions to the plan during the time the employee is in service such that after retirement, the employee would recieve these contributions along with any reutrns generated. The two required financial statements of a defined contirbution retirement plan are a statement of net assets available for benefits of the plan and a statement of changes in net assets available for beneifts.

Which of the following is a true statement related to the responsibility for full and fair disclosure in a SEC registration statement?

If all material facts regarding a security are not adequately disclosed in the registration statement the SEC will require that the registration statement be corrected or expanded by means of an amendment. If the amendment does not resolve the deficiencies, the SEC may exercise its "stop-order" or "refusal-order" powers to prevent the registration statement from becoming effective and the securities from being sold until corrected. It is the issuer's responsibility, not the SEC's to ensure full and fair disclosure in a registration statement. Once a registration statement has become effective and securities have been sold, if the registration statement contains material omissions the SEC can still issue a stop-order to prevent further sales of the securities.

Restorations of carrying value for long-lived assets ate permitted if an asset's fair value increases subsequent to recording an impairment loss for which of the following?

Impaired assets are divided into three categories: held for use, held for disposal by sale, or held for disposal other than by sale. For assets held for use, any subsequent reversal of a previously recognized impairment loss is prohibited. For assets held for disposal by sale, the asset is measured at the lower of its book value or fair value less cost to sell and its depreciation (or amortization) discontinues. Increase in the fair value, up to but not exceeding book value, would be recognized.

How should a nongovernmental, not-for-profit organization report donor-restricted cash contributions for long-term purposes in its statement of cash flows?

Financing activities, as with commercial entities, include proceeds from borrowing or issuing debt and principal repayments, but also include transactions that are unique to NFPs such as receipt of investment income restricted for reinvestment, contributions restricted for long-term investment and contributions restricted for acquisition of plant and equipment. In this case the donor restricted cash contribution would fall into this definition. Options (A), (B) and (D) are incorrect based on the above explanation.

Which of the following items should be treated in the same manner in both combined financial statements and consolidated statements?

In combined financial statements, if there are problems in connection with such matters as noncontrolling interests, foreign operations, different fiscal periods, or income taxes, they should be treated in the same manner as in consolidated statements.

On January 31, year 2, Pack, Inc. split its common stock 2 for 1, and Young, Inc. issued a 5% stock dividend. Both companies issued their December 31, year 1, financial statements on March 1, year 2. Should Pack's year 1 earnings per share (EPS) take into consideration the stock split, and should Young's year 1 EPS take into consideration the stock dividend?

Stock dividends, stock splits, and reverse splits consummated after the close of the period but before completion of the financial report are given retroactive recognition in the computation of earnings per share. The per share computations are based on the new number of shares because the reader's primary interest is presumed to be related to the current capital structure.

On January 1, year 1, Warren Co. purchased a $600,000 machine, with a five-year useful life and no salvage value. The machine was depreciated by an accelerated method for book and tax purposes. The machine's carrying amount was $240,000 on December 31, year 2. On January 1, year 3, Warren changed retroactively to the straight-line method for financial statement purposes. Warren can justify the change. Warren's income tax rate is 30%. In its year 3 income statement, what amount should Warren report as a prior period adjustment as result of this change?

$0 A change in depreciation method, such as from the accelerated to the straight-line method is a change in accounting principle that is inseparable from a change in accounting estimate. When the effects of the two changes cannot be separated, the change should be treated as a change in estimate. A change in accounting estimate should be accounted for in the period of change if the change only affects that period, or in the current and subsequent periods, if the change affects both, as a component of income from continuing operations. No prior period adjustment is made.

Althouse Co. discovered that equipment purchased on January 2 for $150,000 was incorrectly expensed at the time. The equipment should have been depreciated over five years with no salvage value. What amount, if any, should be adjusted to Althouse's depreciation expense at January 2, the beginning of the third year, when the error was discovered?

$0 The company should reverse the impact of expensing the equipment purchased and account for the depreciation of that equipment for 2 years. This correction will be recognized by adjusting the beginning retained earnings in the beginning of third year. There will be no depreciation expense reported in the beginning of the third year.

During 2004, a former employee of Dane Co. began a suit against Dane for wrongful termination in November 2003. 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, 2003, will not be issued until February 2004. In its December 31, 2003, balance sheet, what amount should Dane report as a liability with respect to the suit?

$1,300,000 Contingent liabilities arise from events or circumstances occuring before the balance sheet date, the resolution of which is contingent on a future event or circumstance. Pending or threatened litigation is one example of a contingent liability. The accounting treatment depends on the likelihood that future events will confirm the contingent loss and whether the amount can be reasonably estimated. Where the likelihood of confirmation of a loss is considered probable and the loss can be reasonable estimated, the estimated loss should be accrued by a charge to income and the nature of the contingency should be disclosed. If, however, only a range of possible loss can be estimated, with no amount in the range better than any other, the minimum amount in the range should be accrued. The wrongful termination event took place in 2003 and because a loss from it is considered probable it should be reported in the December 31, 2003, balance sheet. The most likely amount (reasonably estimated) would be reported.

On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 2,000 pounds (exchange rate, 1 pound = $1.43). At the company's December 31 fiscal year end, the exchange rate was 1 pound = $1.45. The exchange rate was 1 pound = $1.50 on collection in January of the subsequent year. What amount would the company recognize as a gain(loss) from foreign currency translation when the receivable is collected?

$100 The exchange rate to be used for translation of foreign currency transactions is as follows: at the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction should be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date. At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity should be currently recognized as transaction gains or losses and reported as a component from continuing operations. Upon settlement, a transaction gain or loss, measured from the transaction date or the most recent intervening balance sheet date, whichever is later, should be included aas a component of income from continuing operations for the period in which the transaction is settled. The US company would recognize a gain of $100 when the receivable is collected (settlement date) based on $2,000 * 0.05, the increase in the exchange rate of $1.45 on the balance sheet date to $1.50 on the settlement date.

The following information pertains to a sale and leaseback of equipment by Mega Co. on December 31 of the current year: Sales Price $400,000 Carrying amount 300,000 Monthly lease payment 3,250 Present value of lease payments 36,900 Estimated remaining life 25 years Lease term 1 year Implicit rate 12% What amount of gain on the sale should Mega report at December 31 of the current year?

$100,000 Mega concludes that the transfer of the tower assets is a sale. Mega's sale price to be $400,000 and CV is $300,000. The journal entry to record sale is: Dr Cash 400,000 Cr Asset 300,000 Cr Gain on sale 100,000

On January 1, year 1, a company's new CEO was awarded a $200,000 bonus that would be paid out in two $100,000 installments in years 3 and 4 of employment, contingent on employment through the year ended December 31, year 2. What amount should the company expense for this bonus for years 2 and 3?

$100,000 for year 2 and nil for year 3 The $200,000 bonus will be considered deferred compensation because it is contingent upon successful completion of two years of employment from Jan 1 Year 1 to Dec 31 Year 2. As the bonus will not be paid unless the CEO continues his employment for two years, the cost of the benefits should be associated with the service period required, which is years 1 and 2. Year 1 expense = $100,000 Year 2 expense = $100,000 $100,000 of expense will be recorded each in years 1 and 2 and accrued as a liability. When the actual payment occurs in years 3 and 4, there is no effect on the income statement. Therefore, Year 2 will show an expense of $100,000 for the service period, and Year 3 will show $0 because it is not a service period.

On July 1 of the current year, Glen Corp. leased a new machine from Ryan Corp. The lease contains the following information: Lease term 10 years Useful life of the machine 12 years Present value of the minimum lease payments $120,000 Fair value of the machine $200,000 Executory costs $ 3,000 No purchase option is provided, and the machine reverts to Ryan when the lease expires. What amount should Glen record as a leased asset at the inception of the lease?

$120,000 A Finance Lease must meet one of the following criteria: Present Value equals or exceeds substantially all (90%) of the Fair Value Option to Purchase (exercise is reasonably certain) Economic Life - Major part (75%) of asset's economic life is used Transfer of Ownership at lease termination Specialized Nature - No alternative use to the lessor at lease termination Note: the implementation guidance for ASC 842 uses the 75/90 thresholds, even though the standard is principles-based. If none of the above criteria is met, the lease is an operating lease for the lessee. The lease qualifies as a finance lease since the lease term is for the majority of the useful life of the property. Glen will record the finance lease by recognizing an asset and a liability at the inception of the lease. Executory costs are recurring expenses, which if incurred by the lessee, is expensed as incurred. From the annual payments, $3,000 annual executory costs are expensed and the present value of minimum lease payments of $120,000 will be capitalized as a leased asset at the inception of the lease

Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25% interest in capital and profits, for an investment of $30,000. What amount should be recorded as goodwill to the original partners?

$20,000 In the goodwill method of recording the admission of a new partner, the assets are revalued at their fair values and any excess valuation implied in the purchase price is recorded as goodwill. Robb's 25% interest for an investment of $30,000 implies that total net assets are valued at $120,000 ($30,000/25%).

On January 1 of the current year, Wren Co. leased a building to Brill under an operating lease for ten years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder's fee. The building is depreciated $12,000 per year. For the year, Wren incurred insurance and property tax expense totaling $9,000. Wren's net rental income for the year should be

$27,500

On January 1 of the current year, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a finance lease for $240,000, which includes a $10,000 option. At the end of the lease, Nori expects to exercise the purchase option. Nori estimates that the equipment's fair value will be $20,000 at the end of its 8-year life. Nori regularly uses straight-line depreciation on similar equipment. For the current year ended December 31, what amount should Nori recognize as depreciation expense on the leased ROU asset?

$27,500 A Finance Lease must meet one of the following criteria: Present Value equals or exceeds substantially all (90%) of the Fair Value Option to Purchase (exercise is reasonably certain) Economic Life - Major part (75%) of the asset's economic life is used Transfer of Ownership at lease termination Specialized Nature - No alternative use to the lessor at lease termination Note: the implementation guidance for ASC 842 uses the 75/90 thresholds, even though the standard is principles-based. If there is a transfer of ownership or a bargain purchase option at the end of a finance lease, the lessee would depreciate the leased equipment over the useful life of the asset. Since the lessee had an option that was reasonably certain of being exercised, the asset should be depreciated over its estimated useful life, instead of the lease term, because the lessee will obtain ownership of the asset. The drilling equipment has a useful life of 8 years. Depreciation on straight-line basis = (Asset value - Salvage value) / Useful life = ($240,000 - $20,000) / 8 = $27,500.

Neal Corp. entered into a nine-year Finance lease on a warehouse on December 31, year 1. Lease payments of $50,000, which are due annually, beginning on December 31, year 2, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 5.6. What amount should Neal report as Finance lease liability at December 31, year 1?

$280,000

On December 12, year 1, Imp Co. entered into three forward exchange contracts, each to purchase 100,000 euros in 90 days. The relevant exchange rates are as follows: Spot rate Forward rate (for 3/12, year 2) December 12, year 1 $1.86 $1.80 December 31, year 1 $1.96 $1.83 Imp entered into the first forward contract to hedge a purchase of inventory in November of year 1, payable in March of year 2. At December 31, year 1, what amount of foreign currency transaction gain should Imp include in income from this forward contract?

$3,000 Since the forward contract was entered into to hedge a liability that is payable in March, it would be accounted for as a cash flow hedge. At December 31, Imp has a contract to purchase 100,000 Euros on March 12 for $1.80 per Euro when the expected exchange rate is $1.83 per Euro. As a result, Imp will gain $.03 per Euro and the derivative would be worth (100,000 x $.03) $3,000. The derivative would be adjusted to fair value but any gain or loss would be recognized in comprehensive income until such time as the effect on the hedged item. In this case, the hedged item is a payable related to the purchase of inventory, which would have been originally recorded at the spot rate in November, which is not given. At December 31, year 1, the spot rate has increased to $1.96, requiring that the liability is increased to $196,000 resulting in a loss. As a result, the gain on the cash flow derivative would be recognized in income in the same period. Journal Entries 12/12/Year 1: J/E @90-day forward rate for the forward exchange contract (entered to hedge against a possible increase in the value of Euros to be paid when the invoice is due for inventory) Dr. Euro receivable $180,000Cr. US$ payable $180,000 12/31/20X0: J/E for gain or loss on a forward exchange contract at the forward rate. Dr. Euro receivable $3,000Cr. Gain on Forward Exchange Contract $3,000 Note: Foreign currency transactions can have operating transactions in the foreign currency such as buying inventory or a purchase commitment for equipment. Fluctuations in foreign exchanges (spot rate) will result in a gain or loss in inventory or receivable/payable. Such fluctuations always use the spot rate. To hedge such fluctuations, a forward contract is used, which is an agreement to exchange two different currencies at a future date, at a specific rate. Gains or losses in forward contracts use the forward rate. In this particular question when spot rates increase, the payable for inventory will increase resulting in a loss. However, the forward exchange contract will have a gain of $1.83 - $1.80 i.e. $0.03 resulting in a $3,000 gain on the forward contract.

On August 31, 20X0, Wood Corp. issued 100,000 shares of its $20 par value common stock for the net assets of Pine, Inc., in a business combination accounted for using the acquisition method. The market value of Wood's common stock on August 31 was $36 per share. Wood paid a fee of $160,000 to the consultant who arranged this acquisition. Costs of registering and issuing the equity securities amounted to $80,000. No goodwill was involved in the purchase. What amount should Wood capitalize as the cost of acquiring Pine's net assets?

$3,600,000 Investment in a subsidiary is recorded at fair value. Wood issued 100,000 shares of $20 par value and market value of $36 to acquire Pine Inc. The fair value of consideration is $3,600,000 (i.e. 100,000 shares x $36 per share). All direct, indirect and general costs for acquisition incurred are expensed. The $160,000 paid to consultant to arrange for the acquisition is expensed. Costs associated with issuance and registration of equity would be netted against the proceeds by debiting additional paid-in capital (APIC). Investment account will not be affected. The $80,000 incurred on registering and issuing equity shares is debited to Wood's APIC.

On January 1, year 1, a company with a calendar year end began developing a software program that it intends to market and sell to its customers. The software coding was completed on March 31, year 1, at a cost of $200,000, and the software testing was completed on June 30, year 1, at a cost of $100,000. The company achieved technological feasibility on July 31, year 1, at which time the company began producing product masters at a cost of $125,000. What amount should the company report for the total research and development expense for the year ended December 31, year 1?

$300,000 The company was developing a software program for sale. Following is how expenses incurred at various stages of developing such a computer software,whether to sell, lease or market, should be treated:Expense all the costs incurred until the point where technological feasibility is established as research and development cost.Capitalize all costs incurred to convert a technologically feasible program into a final commercial product. Expense as cost of goods sold (COGS) costs incurred after software sale begins.The company achieved technological feasibility on July 31, year 1. All costs incurred before this date will be expensed as research and development cost. Total research and development cost = $200,000 (software coding cost incurred till March 31, year1) + $100,000 (software testing costs incurred till June 30, year 1) = $300,000.

During the year, Pitt Corp. incurred costs to develop and produce a routine, low-risk computer software product, as follows: Completion of detail program design $13,000 Costs incurred for coding and testing to establish technological feasibility 10,000 Other coding costs after the establishment of technological feasibility 24,000 Other testing costs after the establishment of technological feasibility 20,000 Costs of producing product masters for training materials 15,000 Duplication of computer software and training materials from product masters (1,000 units) 25,000 Packaging product (500 units) 9,000 In Pitt's December 31 balance sheet, what amount should be reported in inventory?

$34,000 Computer software developed to sale, lease or market as a product: RD costs are expensed. These are costs incurred prior to technological feasibility (technological feasibility is established upon completion of a detailed program or design or completion of a working model). The completion of detail program design for $13,000 and costs incurred for coding and testing to establish technological feasibility of $10,000 are expensed. Costs associated with converting a technologically-feasible program into a final commercial form is capitalized. $24,000 in coding costs after the establishment of technological feasibility, $20,000 in testing costs after the establishment of technological materials, and costs of producing product masters for training materials of $15,000 are all capitalized. Costs incurred after software sales begin are inventoried - this will include duplication of computer software and training materials from product masters for $25,000 and packaging product for $9,000. The year-end balance sheet would report inventory of $34,000 (i.e. $25,000 + $9,000).

A company owns a financial asset that has no principal market. The financial asset is actively traded in four markets and the company has the ability to transact in all four of these markets. The following are the quoted prices for the financial asset in each of the four markets: Market Quoted Price A $20,000 B 25,000 C 30,000 D 35,000 What is the fair value of the financial asset?

$35,000 In order to determine the fair value of an asset, the principal market is considered. In the absence of a principal market, the most advantageous market which maximizes the sales proceeds for the said asset or has the least costs to sell is used. In the given case, the financial asset has no principal market. The most advantageous market shall be used. Since Market D has the maximum quoted price of $35,000, it should be used as the fair value of the asset.

Ahm Corp. owns 90% of Bee Corp's common stock and 80% of Cee Corp.'s common stock. The remaining common shares of Bee and Cee are owned by their respective employees. Bee sells exclusively to Cee, Cee buys exclusively from Bee, and Cee sells exclusively to unrelated companies. Selected information for Bee and Cee follows: Bee Corp. Cee Corp. Sales $130,000 $91,000 Cost of sales $100,000 $65,000 Beginning inventory None None Ending inventory None 65,000What amount should be reported as gross profit in Bee and Cee's combined income statement for the current year ended December 31?

$41,000

Mr. and Mrs. Gasson own 100% of the common stock of Able Corp. and 90% of the common stock of Baker Corp. Able previously paid $4,000 for the remaining 10% interest in Baker. The condensed December 31 balance sheets of Able and Baker are as follows: Able Baker Assets $600,000 $60,000 Liabilities 200,000 30,000 Common stock 100,000 20,000 Retained earnings 300,000 10,000 $600,000 $60,000In a combined balance sheet of the two corporations at December 31, what amount should be reported as total stockholders' equity?

$426,000 The amount to be reported as total stockholders' equity in a combined balance sheet at December 31, is determined as follows: Common stock ($100,000 + $20,000) $120,000 Retained earnings ($300,000 + $10,000) 310,000 Subtotal 430,000 Less Able's cost of 10% interest in Baker 4,000 Stockholders' equity in combined balance sheet $426,000

On December 31 of the previous year, Byte Co. had capitalized software costs of $600,000 with an economic life of four years. Sales for the current year were 10% of expected total sales of the software. At December 31 of the current year the software had a net realizable value of $480,000. In its December 31, current year balance sheet, what amount should Byte report as net capitalized cost of computer software?

$450,000 The annual amortization of computer software costs is the greater of the amount computed using the percentage of revenue approach and the straight-line method applied over the product's remaining estimated economic life. $600,000 - (600,000/4) = 450,000. Capitalized computer software costs are carried at the lower of unamortized cost of net realizable value.

A company leases a machine from Leasing, Inc. on January 1, year 1. The lease terms include a $100,000 annual payment beginning January 1, year 1. The machine's fair value is $500,000 and the residual value is estimated at $20,000. The company guarantees the residual value. The useful life of the machine is six years, and the lease term is five years. The implicit rate of interest is 6% and is known by the company. The following present value factors are provided: Five years Six years Present value of $1 at 6% 0.7473 0.705 Present value of an annuity due at 6% 4.4651 5.2124 Present value of an ordinary annuity at 6% 4.2124 4.9173 What is the value of the machine in the company's balance sheet at lease inception?

$461456 With a lease term equal to 5 years of the asset's 6 years useful life, as the lease term is for the major part of the remaining economic life of the underlying asset, the lease is a finance lease and will result in the recognition of an asset and a liability equal to the present value of the minimum lease payments. The guaranteed residual value on the machine is a one-time payment at the end of the lease term calculated at the PV of $1 at 6% for 5 years. Annual payments for leasing the machine $100,000 PV of an annuity at 6% for 5 Years 4.4651 PV of annual payments $446,510 Residual value of machine $20,000 PV 0f $1 at 6% 0.7473 PV of residual value of the machine $14,946 Value of machine at lease inception (PV of annual payments + PV of residual value of the machine) $461,456

At December 31 of the current year, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31 of the previous year, $300,000 of which were to be written off in the current year and the remainder in the following year. Off-Line's income tax rate is 30%. In its current year financial statements, what should Off-Line report?

$500,000 as current period transaction with no prior period adjustment A change in accounting estimate affected by a change in accounting principle is accounted for as a change in estimate. A change in accounting estimate shall be accounted for in (a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both. A change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods. Because the change was made, the total amount of $500,000 would be recorded.

A company enters into a three-year operating lease agreement effective January 1, year 1. The amounts due at the end of each year are $25,000 in year 1, $30,000 in year 2, and $35,000 in year 3. The rate implicit in the lease is 10%. What amount, if any, is the related liability on the first day of year 2? Additional Information: Present Value of $ 1 at 10% for 1 period = 0.9091 Present Value of $ 1 at 10% for 2 period = 0.8264 Present Value of $ 1 at 10% for 3 period = 0.7513

$56,198 At commencement, the initial measurement of the lease liability (regardless of lease classification) is calculated as the present value of the lease payments not yet paid by using the lease term and discount rate determined at lease commencement. Rate implicit in the lease is 10%. So lease liability will be recorded at present value of all minimum lease payments. $25,000 0.9091 $22,727 $30,000 0.8264 $24,793 $35,000 0.7513 $26,296 Total $73,816 The Journal Entry would be: Dr. ROU Asset $73,816 Cr. Lease Liability $73,816 After lease commencement, a lessee would recognize a single lease cost in the income statement on a straight-line basis. The total remaining lease cost on the commencement date would be $90,000 which is calculated as the total lease payments ($25,000 + $30,000 +$35,000). This remaining lease cost is recognized on a straight-line basis over the remainder of the lease term (i.e., Lessee would recognize $30,000 in each period, which is calculated as $90,000 ÷ 3). Lease Liability ROU Asset Year Beg. Bal. Liab. Accretion Lease Pymt End. Bal. Beg. Bal. Asset Red. End. Bal. Lease Cost 1 73,816 7,382 (25,000) 56,198 73,816 (22,618) 51,198 30,000 2 56,198 5,620 (30,000) 31,818 51,198 (24,380) 26,818 30,000 3 31,818 3,182 (35,000) 0 26,818 (26,818) 0 30,000 The liability on the first day of Year 2 is $56,198.

In the current year, on December 1, Nilo Corp. declared a property dividend of marketable securities to be distributed on December 31 to stockholders of record on December 15. On December 1 the marketable securities had a carrying amount of $60,000 and a fair value of $78,000. What is the effect of this property dividend on Nilo's current year retained earnings, after all nominal accounts are closed?

$60,000 decrease A transfer of a nonmonetary asset to a stockholder in a non-reciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset equal to the difference between the fair value and carrying amount of the asset. After all nominal accounts (e.g., Gain on Disposition of Investment) are closed, the effect of this property dividend is to decrease Retained Earnings by $60,000 (i.e., $78,000 - $18,000). Nilo records the following entries at the declaration date. Marketable securities ($78,000 - $60,000) 18,000 Gain on disposition of investment 18,000 Retained earnings 78,000 Property dividend payable 78,000

In the long-term liabilities section of its balance sheet at December 31, year 1, Mene Co. reported a Finance Lease obligation of $75,000, net of current portion of $1,364. Payments of $9,000 were made on both January 2, year 2 and January 2, year 3. Mene's incremental borrowing rate on the date of the lease was 11% and the lessor's implicit rate, which was known to Mene, was 10%. In its December 31, year 2, balance sheet, what amount should Mene report as Finance Lease obligation, net of current portion?

$73,500 The finance lease obligation must be reduced by only the principal portion of the $9000 payment. The $75,000 already is net of the $1,364 payment made on January 2, year 2, and must be further reduced by the amount of amortization of the lease obligation for year 2. The lessor's implicit rate of interest is known to the lessee and it thus must use the lessor's implicit rate. Non current finance lease obligation, 12/31 year 1 $75,000 Less: Current portion [$9000 - ($75000 * 10%)] (1500) Noncurrent finance lease obligation, 12/31, year 2 $73500

Under US GAAP, enterprises should recognize the largest amount of tax benefit that is greater than __ percent of being realized upon ultimate settlement with the taxing authority.

50%

A corporation is in the final stages of developing a computer software program that will be sold to the general public. The company's costs related to the software are as follows: Development of a working model of the software$4 millionCustomer support and training2 millionProduct master production1 million The costs associated with the product master production were incurred after the establishment of technological feasibility. What amount, if any, should the corporation expense against earnings?

6 million Cost incurred internally in creating a computer software product to be sold, leased, or otherwise marketed as a separate product, or as a part of a product or process, are charged to expense when incurred as research and development until technological feasibility has been established for the product. The costs of producing product masters incurred susbsequent to establishing technological feasibility are capitalized. The corporation should expense $6 million; the $4 million development of a working model of the software and the $2 million customer support and training that was incurred. Only the $1 million for product master production would be capitalized.

On December 30 of the current year, Haber Co. leased a new machine from Gregg Corp. The following data relate to the lease transaction at the inception of the lease: Lease term 10 years Annual rental payable at the end of each lease year $100,000 Useful life of machine 12 years Implicit interest rate 10% Present value of an annuity due of $1 for 10 periods at 10% 6.76 Present value of an ordinary annuity of $1 for 10 periods at 10% 6.15 Fair value of the machine $700,000 The lease has no renewal option, and the possession of the machine reverts to Gregg when the lease terminates. At the inception of the lease, Haber should record a lease liability of

615000 Per ASC 842, at lease commencement, the lessee must measure their lease assets and liabilities at the present value of the lease payments using either the lessor's implicit interest rate or if not readily determinable, at lessee's incremental borrowing rate. Since lease payments are payable at end of each year, we will use the Present Value of an ordinary annuity of $1 for 10 periods at 10% (the implicit interest rate is given), which is 6.15. That will give us the lease liability of $100,000 x 6.15 = $615,000.

For a customer to have obtained control of a product in a bill-and-hold arrangement, which of the following criteria must be met: i. Product must be identified separately as belonging to the customerii. Product must be ready for physical transfer to the customeriii. Entity cannot use the product or direct it to another customeriv. Substantive reason for the bill-and-hold arrangement

A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point in time in the future. Revenue should be recognized only when the customer obtains control of the product. For a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria must be met: i. Substantive reason for the bill-and-hold arrangement (e.g., the customer has requested the arrangement). ii. Product must be identified separately as belonging to the customer. iii. Product currently must be ready for physical transfer to the customer. iv. Entity cannot use the product or direct it to another customer.

During the current year, 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 $71,000 $77,000 December 31 79,000 83,000 Orca's income tax rate is 30%. In its year-end financial statements, what amount should Orca report as the cumulative effect of this accounting change?

A change from the FIFO method of inventory valuation to the weighted-average method is a change in accounting principle. The cumulative affect of the change in accounting principle is the difference between the amount of retained earnings at the beginning of the period of change and the amount of retained earnings that would have been reported at that date if the new accounting principle had been applied retrospectively for all affected periods. Since the new (weighted-average) method results in a $6000 higher inventory valuation than the old (FIFO) method at the beginning of the period of change, the amount of expense recognized as cost of goods sold in prior periods is reduced by $6000. This has the effect of increasing the beginning balance of retained earnings. The beginning balance of retained earnings cannot be increased by the full $6000, because the reduction in the cost of goods sold would have increased the amount of income tax expense by $1800 ($6000 x 30%). Since it's a change from FIFO to weighted-average, the beginning inventory, which is ending inventory last year, would be $6000 more. Retained earnings would be $4200 higher ($6000 x 0.7).

A company signed a five-year contract with a customer in year 1 and agreed to modify the contract at the beginning of year 2. Which of the following is a condition that must be present in order for the contract modification to be accounted for as a separate contract?

A contract modification is a change in the scope or price of a contract (or both) that is approved by the parties to the contract. A contract modification exists when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract. An entity should account for a contract modification as a separate contract if both of the following conditions are present: The scope of the contract increases because of the addition of goods or services that are distinct. The price of the contracts increases by an amount of consideration that reflects the entity's standalone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract.

When a loan receivable is impaired but foreclosure is not probable, which of the following may the creditor use to measure the impairment? The loan's observable market price The fair value of the collateral if the loan is collateral dependent

A creditor should consider a loan to be impaired when, "based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement." If foreclosure is not probable, the creditor measures the impaired loan at one of the following: (1) the loan's observable market price, (2) the fair value of collateral pledged, or (3) the present value of future principal and interest cash inflows, net of discounted disposal costs, all discounted at the loan's effective interest rate. If foreclosure is probable, the second method is to be used to value a collateral dependent impaired loan.

Dodd Corp.is preparing its December 31 current year financial statements and must determine the proper accounting treatment for the following situations: For the current year ended December 31, Dodd has a loss carry forward of $180,000 available to off set future taxable income.However ,there are no temporary differences.Based on an analysis of both positive and negative evidence, Dodd has reason to believe it is more likely than not that the benefits of the entire loss carry forward will be realized with in the carry forward period. On 12/31 of this year, Dodd received a $200,000 offer for its patent. Dodd's management is considering whether to sell the patent. The offer expires on 2/28 of next year. The patent has a carrying amount of $100,000 at 12/31. Assume a current and future income tax rate of 30%. In its current year income statement, Dodd should recognize an increase in net income of

A deferred tax asset is recognized for the future benefits of a loss carry forward. Therefore, Dodd will increase income by $54,000 ($180,000 x 30% future tax rate) when the benefits of the NOL carry forward are recorded in the current year by a debit to Deferred Tax Asset and a credit to Benefits of Loss Carry Forward ( a component of income tax expense on the income statement). No valuation allowance is required (which would reduce the deferred tax asset and the described impact on income) because the company expects the benefits of the loss carry forward to be realized in the future. In addition, the potential gain of $100,000 (i.e., $200,000 offer - $100,000 carrying amount) from the possible sale of the patent should not be recognized in the current year. Dodd Corp. has not sold the patent as of December 31; it is only considering whether to sell the patent. The excess of fair value over book value of the patent does serve, however, as some positive evidence in evaluating the realizability of the deferred tax asset related to the tax loss carry forward.

Which of the following should be used to measure the deferred tax consequences of temporary differences that will result in taxable amounts in future years?

A deferred tax liability is computed at the date of the financial statements by applying tax law provisions to measure the deferred tax consequences of differences that will result in taxable amounts in each future year. Enacted changes in tax laws and rates that are scheduled for a particular future year (or years) are used to measure a liability for the deferred tax consequences of taxable amounts that will arise in that year (or years). Tax laws and rates for the current year are used if no changes have been enacted for future years.

Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values. The exchange has commercial substance. As a consequence of the exchange, Sable recognizes A. A gain equal to the difference between the fair value and carrying amount of the truck given up. B. A gain determined by the proportion of cash received to the total consideration. C. A loss determined by the proportion of cash received to the total consideration. D. Neither a gain nor a loss.

A gain determined by the proportion of cash received to the total consideration. Sable exchanged a truck with a fair value in excess of its carrying amount for a similar truck and received monetary consideration. Hence, Sable experiences a gain on the exchange. The recipient of monetary consideration in an exchange measured based on the recorded amount recognizes a portion of the gain experienced. The amount of the gain recognized is based on the ratio of the monetary consideration to the total consideration received.

Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values. As a result of this exchange with commercial substance, Slate should recognize

A gain equal to the difference between the fair value and the carrying amount of the land given up. In general, accounting for nonmonetary transactions should be based on the fair values of the assets involved. he acquisition is recorded at the fair value of the asset surrenedred of the FV of the asset received, whichever is more clearly determinable, and gains or losses should be recognized. The amount would be the difference between the fair value received and the carrying value of the consideration given up.

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 three-year balloon note. The company has no other liabilities. How should the company's debt be presented in its classified balance sheet on December 31, year 2 if no debt repayments were made in December?

A line-of-credit (LOC) is an agreement that provides the borrower with the option to make multiple borrowings up to a specified maximum amount, to repay portions of previous borrowings, and to then reborrow under the same contract. Short-term obligations are those that are scheduled to mature within one year (or the operating cycle, if applicable) after the date of an entity's balance. Long-term obligations are those scheduled to mature beyond one year (or the operating cycle, if applicable) from the date of an entity's balance sheet. Total current liabilities would be $400,000 - the amount outstanding on the LOC ($250,000) and the current amount due on the secured note ($750,000/5 = $150,000). Total long-term liabilities would be $900,000 - the remaining $600,000 secured note and the $300,000 balloon note (i.e., no payment is due until the third year).

Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets?

A loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price. In general, accounting for nonmonetary transactions (those involving nonmonetary assets or liabilities) should be based on the fair values of the assets involved. The acquisition is recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly determinable, and gains or losses should be recognized. The rationale associated with immediate gain/loss, recording the transactions at fair value, is that the exchange represents the culmination of the earnings process associated with the assets surrendered. The best statement describing the proper accounting for losses when nonmonetary assets are exchanged is that a loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price.

Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of five 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?

A trademark is an identifiable tangible asset.With an externally acquired trademark, normally the acquisition costs are capitalized and amortized over the useful life of the trademark.If an intangible asset has an indefinite life, as is the case with the trademark in this question, it is not amortized but rather tested at least annually for impairment until its useful life is determined to be no longer indefinite.If the trademark had been internally developed the costs would have been expensed as incurred.

Pine City owned a vacant plot of land zoned for industrial use. Pine gave this land to Medi Corp. solely as an incentive for Medi to build a factory on the site. The land had a fair value of $300,000 at the date of the gift. This nonmonetary transaction should be reported by Medi as

APIC The contribution of land by a governmental unit to an enterprise for industrial use is an example of a nonreciprocal transfer. A nonmonetary asset received in a nonreciprocal transfer should be recorded at the fair value of the asset received. The corresponding credit for a corporation is 'Additional Paid-in Capital-- Donated Assets.' Donated assets should not be recorded as income or gain or added to retained earnings when received from governmental entities. Assets donated by entities other than governmental units should be included in revenue in the period of receip

In a sale-leaseback transaction, the seller-lessee retains the right to substantially all of the remaining use of the equipment sold. The profit on the sale should be deferred and subsequently amortized by the lessee when the lease is classified as:

According to ASC 842, the transfer of the asset must meet the requirements for a sale per the revenue recognition standards If there is no sale for the seller-lessee, the buyer-lessor also does not account for a purchase. Any consideration paid for the asset is accounted for as a financing transaction by both the seller-lessee and the buyer-lessor. If the leaseback is a finance lease from seller-lessee's perspective, the transfer of the asset is not a sale and therefore, no gain would be recognized. However, if the leaseback is an operating lease from the seller-lessee's perspective, transfer of the asset is a sale and gain would be recognized immediately.

A company incurred the following costs to complete a business combination in the current year: Issuing debt securities$30,000Registering debt securities25,000Legal fees10,000Due diligence costs1,000 What amount should be reported as current-year expenses, not subject to amortization?

Acquisition related costs are costs the acquirer incurs to effect a business combination. Those costs include finder's fees, advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs; and costs of registering and issuing debt and equity securities. The acquirer should account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception- the costs to register and issue debt or equity securities shall be recognized in accordance with other applicable GAAP. Costs asociated with the issuance and registration of debt or equity securities, are treated as bond issue costs and netted against the proceeds.

In the Adel-Brick partnership, Adel and Brick had a capital ratio of 3:1 and a profit and loss ratio of 2:1, respectively. The bonus method was used to record Colter's admittance as a new partner. What ratio would be used to allocate, to Adel and Brick, the excess of Colter's contribution over the amount credited to Colter's capital account?

Adel and Brick's old profit and loss ratio. Under the bonus method, the excess of the partner's contribution over the amount credited to the new partner's capital account is viewed as a bonus to the original partners. The bonus is allocated to the original partners based upon their old profit and loss ratio.

Which of the following should be considered part of one of the three primary user groups of the external financial reports of a state government?

Advocate groups are part of one of three categories of primary users of government financial reports as identified by GASB Concept Statement No. 1: The citizenry to which the government is accountable, Legislative and oversight bodies who represent the citizenry, and The investors and creditors who lend or participate in the lending process. Note: The citizenry includes citizens, the media, advocacy groups, and public finance researchers. Citizens of a neighboring state, Preparers of state government financial reports and Internal managers in the executive branch of the state government are not one of the three primary user groups of external financial reports of a state government.

Ball Corp. had the following foreign currency transactions during the current year: Merchandise was purchased from a foreign supplier on January 20 for the U.S. dollar equivalent of $90,000. The invoice was paid on March 20 at the U.S. dollar equivalent of $96,000. On July 1, Ball borrowed the U.S. dollar equivalent of $500,000 evidenced by a note that was payable in the lender's local currency on July 1 in two years. On December 31, the U.S. dollar equivalents of the principal amount and accrued interest were $520,000 and $26,000, respectively. Interest on the note is 10% per annum. In Ball's year-end income statement, what amount should be included as foreign exchange loss?

All foreign exchange transaction losses whether realized or unrealized would be recorded in the income statement. Foreign exchange translation (not transaction) gains and losses are parked in other comprehensive income. The payable resulting from the merchandise purchased from the foreign supplier and the borrowing are transactions denominated in a foreign currency. The payable from the merchandise purchased was recorded at $90,000 on 1/20. It was paid on 3/20 at the U.S. dollar equivalent of $96,000, resulting in a $6,000 foreign exchange loss. The payable from the borrowing was recorded at $500,000 at 7/1. Accrued interest on the borrowing was $25,000 ($500,000 × 10% × 6/12) at 12/31. At 12/31, the U.S. dollar equivalents of principal and accrued interest were $520,000 and $26,000, respectively, resulting in an additional $21,000 [($520,000 + $26,000) - ($500,000 + $25,000)] foreign exchange loss. Thus, the total amount of foreign exchange loss to be recognized in the year end income statement is $27,000 ($6,000 + $21,000).

Financial statements prepared by a voluntary health and welfare nongovernmental not-for-profit organization must report expenses by the following classifications

All nongovernmental not-for-profit organizations are mandated to disclose the expenses incurred by it during a fiscal year as per their functional as well as the natural classifications. This rule, as mandated by FASB, results in the statement of functional expenses being presented like a matrix where each expense is reported by its function and then by the nature or type of expense.

An entity is required to account for each business combination by applying the acquisition method. In applying the acquisition method, which of the following is not required?

Allocating the excess of fair value over purchase price as a pro rata reduction of acquired assets is not a part of applying the acquisition method. Applying the acquisition method requires (1) identifying the acquirer, (2) determining the acquisition date, (3) recognizing and measuring identifiable assets acquired, liabilities assumed, and (4) recognizing and measuring goodwill or a gain from a bargain purchase.

West Co. paid $50,000 for an intangible asset other than goodwill. The fair value of the asset is $55,000. West signed a contract to sell the asset for $10,000 in 10 years. What amount of amortization expense should West record each year?

Amount to be capitalized is equal to the fair value of the consideration given or the fair value of the asset acquired, whichever is more clearly evident. When both are given, the fair value of the consideration given is used. Amortization for an identifiable intangible with a definite life is done using the straight-line method. Amortization per year = (Capitalized amount less value of the asset at the end of its useful life) / Lower of useful life or legal life of the asset. The amount of an intangible asset to be amortized is the amount initially assigned to that asset ($50,000) less any residual value ($10,000). The amount to be amortized is $40,000 ($50,000 - $10,000) over 10 years, or $4,000 a year. Note: The residual value is the estimated fair value of the intangible asset at the end of its useful life to the reporting entity less any disposal costs.

On June 30, Peppy, Corp. purchased for cash at $17.50 per share 80% of Spunky Company's 100,000 total shares of outstanding common stock. The active market price for shares on that date was $15 per share. At June 30, Spunky's balance sheet showed a carrying amount of net assets of $1,500,000 and the fair value of Spunky's assets and liabilities equaled their carrying amounts except for property, plant, and equipment which exceeded its carrying amount by $250,000. In its June 30 consolidated balance sheet, what amount should Peppy report as noncontrolling interest?

An acquirer can measure the acquisition-date fair value of a noncontrolling interest on the basis of active market prices for the equity shares not held by the acquirer. The active market prices for the acquiree's equity shares on that date was $15 per share. Peppy purchased 80% of the 100,000 total common shares outstanding, or 80,000 shares of Spunky (.80 × 100,000 = 80,000). If Peppy owns 80,000 shares, that means 20,000 shares (100,0000 - 80,000 = 20,000) are owned by the noncontrolling interest. The 20,000 shares multiplied by the active market price of $15 per share results in a total fair value of $300,000 which must be reported as noncontrolling interest.

The primary criteria for determining a fair value hedge includes the fact that the hedged item does which of the following?

An asset or a liability is eligible for designation as a hedged item in a fair value hedge if all of the following criteria are met: * the hedged item is specifically identified as either all or a specific portion of a recognized asset or liability or of an unrecognized firm commitment * The hedged item is a single asset or liability (or a specific portion thereof) or is a portfolio of similar assets or a portfolio of similar liabilities. * The hedged item presents an exposure to changes in fair value attributable to the hedged risk that could affect reported earnings. For determining a fair value hedge includes the fact that the hedged item does all of the above.

Which of the following statements regarding foreign exchange gains and losses is correct?

An exchange gain occurs when the exchange rate increases between the date a receivable is recorded and the date of cash receipt. Receivable: Rate increase results in a gain (receive more at settlement), rate decrease results in a loss (receive less at settlement). Payable: Rate increase results in a loss (pay more at settlement), rate decrease results in a gain (pay less at settlement).

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?

An expense and liability of $10,000 is recognized. Advanced payments received from customers and others are liabilities until the transaction is completed. The travel and lodging services that were used by KLU is a liability because use of the service indicated a payment in advance for the advertising time to be provided at a later date. Use of the services is an expense.

Invern Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and other claims. As a result of an accident this year, Invern is a defendant in a lawsuit in which it will probably have to pay damages of $190,000. What are the effects of this lawsuit's probable outcome on Invern's current year financial statements?

An increase in both expenses and liabilities The potential loss for damages that may be paid should be reported by accruing a loss in the income statement and a liability in the balance sheet. Accrual is required because both of the following conditions are met: (1) it is considered probable that a liability has been incurred, and (2) the amount of the loss can be reasonably estimated. In addition, the nature of the lawsuit should be separately disclosed in the notes to the financial statements. The loss should not be charged to the appropriation of retained earnings for contingencies.

Orleans Co., a cash basis taxpayer, prepares accrual basis financial statements. In its current year balance sheet, Orleans' deferred income tax liabilities increased compared to the previous year. Which of the following changes would cause this increase in deferred income tax liabilities? An increase in prepaid insurance. An increase in rent receivable. An increase in warranty obligations.

An increase in prepaid insurance can cause an increase in deferred tax liabilities because an expense deducted this period for tax purposes but deferred for financial accounting purposes will cause future taxable amounts. An increase in rent receivable can cause an increase in deferred tax liabilities because a revenue accrued for book purposes but not recognized for tax purposes until it is collected will give rise to future taxable amounts. A deferred tax liability represents the deferred tax consequences attributable to taxable temporary differences. An increase in cumulative temporary differences giving rise to future taxable amounts results in an increase in deferred tax liabilities. An increas in warranty obligation can cause an increase in deferred tax assets rather than deferred tax liabilities. An expense accrued for book purposes, but deducted for tax purposes when paid, causes a temporary difference which gives rise to future deductible amounts. A deferred tax asset is the deferred tax consequences attributable to deductible temporary differences and carry forwards.Options (a), (c) and (d) are incorrect based on the above explanation.

On July 1 of the current year, Dewey Co. signed a 20-year building lease that it reported as a finance 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 current year statement of cash flows?

An outflow equal to the current year principal payments only. Finance lease payments ate comprised of interest expense and a reduction of principal. Cash outflows for financing activities include principal payments to creditors who have extended long-term credit. Therefore, the amount of the finance lease payments that consists of principal payments is reported in the statement of cash flows as a cash outflow for financing activities. Cash outflows for operating activities include cash payments to lenders and other creditors for interest.Therefore, the amount of the finance lease payments that consists of interest payments should be reported as a cash outflow for operating activities in the statement of cash flows.

Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?

An overview of the FASB standards setting process as established by the Rules of Procedure includes: identify financial reporting issues based on recommendations from stakeholders or through other means; deliberate at one or more public meetings; issue an Exposure Draft to solicit broad stakeholder input; and finally, issue an Accounting Standards Update describing amendments to the Accounting Standards Codification.

A U.S. publicly-traded company's second fiscal quarter ends on March 31. If the company is an accelerated filer, what is the latest date that the 10-Q should be filed with the U.S. SEC?

Any publicly traded company in US is required to file form 10q which contains unaudited financial statements prepared using US GAAP which are reviewed by an independent auditor. If the company is a large accelerated or accelerated company, the form is to be filed within 40 days of the end of the financial quarter.

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 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. This is a change in accounting principle with retrospective application of the new accounting principle to all prior periods. Financial Statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle. For the retrospective application of the change in accounting principle, an adjustment to the beginning year 2 inventory balance with an offsetting adjustment to beginning year 2 retained earnings is made.

Busy Co. applied the provisions of the tax law to its taxable loss figure for the period. What period of time is Busy allowed to carryback and carryforward a net operating loss?

As per the TCJA, NOLs for tax years beginning in 2018 and onwards may be carried forward indefinitely but may be deducted only up to 80% of taxable income (wherein the taxable income is computed without regard to any NOL carryover).

Under current generally accepted accounting principles, which approach is used to determine income tax expense?

Asset and liability approach Income tax expense (deferred) is reported using the 'liability method' where the income statement figure flows from the balance sheet calculations of deferred asset and liability (think of it as a balance sheet is prepared first and then the income statement). Thus, income tax expense is as per the asset and liability approach.

Cart Co. purchased an office building and the land on which it is located for $750,000 cash and an existing $250,000 mortgage. For realty tax purposes, the property is assessed at $960,000, 60% of which is allocated to the building. At what amount should Cart record the building?

Assets are to be recorded at their acquisition cost of the office building and the land together is $1,000,000; the total of the $750,000 cash and $250,000 mortgage. The property is assessed with 60% allocated to the building.

Which of the following financial categories are used in a nongovernemental not-for-profit organizations statement of financial position?

Assets, liabilities, and net assets. Statement of fianncial position reports assets, liabilities, and net assets of the NFP. ASsets and liabilities may be classified and reported in order of liwuidity and payment date. Net assets sections includes 2 accounts: Net assets without donor restrictions and net assets with donor restrictions

Arena Corp. leased equipment from Bolton Corp. and correctly classified the lease as a finance lease. The present value of the minimum lease payments at the lease inception was $1,000,000. The initial direct costs paid by Arena were $50,000, and the fair value of the equipment at lease inception was $900,000. What amount should Arena report as the lease liability and ROU Asset at the lease inception?

At commencement, the initial measurement of the lease liability, regardless of lease classification, is calculated as the present value of minimum lease payments. The present value of minimum lease payments for the equipment was $1,000,000. $1,000,000 would be recorded as the lease liability, whereas the initial measurement of the ROU asset, regardless of lease classification, is calculates as the lease liability, increase by any initial direct costs and prepaid lease payments, reduced by any lease incentives received before commencement, ie $1,000,000 (lease liability) + $50,000 (Initial Direct costs) = $1,050,000.

Peg Co. leased equipment from Howe Corp. on July 1 of the current year for an 8-year period. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1 of the current year. The rate of interest contemplated by Peg and Howe is 10%. The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe's accounting records is $2,800,000. The lease is appropriately recorded as a sales-type lease. What is the amount of profit on the sale and interest revenue that Howe should record for the current year ended December 31?

At the commencement date, a lessor shall recognize each of the following and derecognize the underlying asset. A net investment in the lease. Selling profit or selling loss arising from the lease: Initial direct costs as an expense if, at the commencement date, the fair value of the underlying asset is different from it carrying amount. If the fair value of the underlying asset equals it carrying amount, initial direct costs are deferred at the commencement date and included in the measurement of the net investment in the lease. Net Investment in Lease 3,520,000 Carrying Value of the underlying Asset 2,800,000 Selling Profit 720,000 The interest revenue is determined by applying the interest rate implicit in the lease to the lessor's net receivable. The excess of the fair value of leased property at the lease inception over its cost or carrying amount is dealer's profit from a sales-type lease and recognized fully at lease inception. Sales price of equipment $ 3,520,000 Equipment cost (2,800,000) Profit on sale $ 720,000 Net Investment in Lease before receipt, 7/1 $ 3,520,000 Less receipt, 7/1 (600,000) Net Investment in Lease after receipt, 7/1 2,920,000 Interest (10% / 2) × 5% Interest revenue $ 146,000 Cash 600,000 Interest Income 146,000 Net Investment in Lease 454,000

Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock. No dividends on common stock were declared during the year. Net income was $2,000,000. What was Jen's basic earnings per share?

Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding during the period. The income available for common stockholders is net income, less any adjustments for senior claims. Senior claims include preferred stock. The total adjustment for preferred dividends is $200,000 (20,000 shares × $100 par value × 10%). The net income of $2,000,000 less preferred dividends earned of $200,000 leaves $1,800,000 of income available to common stockholders. The $1,800,000 divided by 200,000 shares provides basic EPS of $9.00.

On October 1 of the current year, Mild Co., a US company, purchased machinery from Grund, a German Company, with payment due on April 1 of next year. if Mild's current-year operating income included no foreign exchange transaction gain or loss, then the transaction could have

Been denominated in US dollars Foreign currency transactions are transactions denominated in a currency other than the entity's functional currency. Hence, no foreign currency transaction gain or loss would occur if the purchase of the machinery by the US company is denominated in US dollars.

Which of the following should be included in the current funds revenues of a not-for-profit private university?

Both tuition waivers and unrestricted bequests are included under current fund revenues. For colleges and universities, current funds revenues include (1) all unrestricted gifts and other unrestricted resources earned during the reporting period and (2) restricted current funds to the extent that such funds were expended for current operating purposes. Additionally, tuition remissions or exemptions should be assessed and reported as revenue even though there is no intention of collecting from the student. (such remissions or exemptions are then offset as expenditures and appropriately classified.)

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?

Cash flows from operating activities include the cash effects of transactions and other events that enter into the determination of net income, including the gain on sale of plant assets. The sale of fixed assets is an investing activity. The payment of dividends and the issuance of common stock are financing activities.

A company using the composite depreciation method for its fleet of trucks, cars and campers, retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts would be decreased by the

Cash proceeds received. Under the composite or group method of depreciation, no gain or loss is recognized upon the retirement of a plant asset. This practice is justified because some assets will be retired before the average service life and others after the average service life. Accumulated depreciation is debited for the difference between original cost and the cash received; no gain or loss is recorded on the disposition. The net carrying amount of these composite asset accounts is decreased by the cash proceeds received of $3,000 (cost removed of $18,000 minus accumulated depreciation removed of $15,000). Cash 3,000 Accumulated Depreciation 15,000 Truck 18,000To record sale of truck

Grey Co. purchased stock in Cherry Co. Grey purchased a put option on the stock. The strike price is the current market price. What is the most likely reason Grey purchased the put option?

Cherry stock has increased in price, but Grey is concerned that the price might decrease. Buying a put option confers the right on the holder of the option to sell the stock at a price, regardless of the trading price of the underlying asset/stock. In essence, the put option buyer buys the right to sell the underlying stock to the put option holder at a predetermined rate. Hence, put options are purchased mainly when the buyer is bearish and aims at hedging itself of price falls in the future.Since Grey Co. has purchased a put option on the Cherry stocks, it means that the company is concerned that the price might decrease.

Which of the following computer software costs should be expensed?

Conceptual formulation of alternatives in the preliminary project stage In the case of computer software developed for sale, costs prior to technological feasibility are expensed as R&D and costs associated with converting a technologically feasible program into final commercial form are capitalized. Costs incurred after software sales begin are inventories and included in COGS. Computer software costs that are incurred in the preliminary project stage should be expensed as incurred. Activities in this stage include conceptual formulation and evaluation of alternatives; determination of the existence of needed technology; and final selection of alternatives. The following should be capitalized: Design of the software configuration during the application development stage Costs of producing product masters after technology feasibility was established Installation to hardware during the application development stage

Green Co. was preparing its year-end financial statements. Green had a pending lawsuit against a competitor for $5,000,000 in damages. Green's attorneys indicate that obtaining a favorable judgment was probable and the amount of damages is reasonably estimated. Green incurred $100,000 in legal fees. The income tax rate was 30%. What amount, if any, should Green recognize as a contingency gain in its financial statements?

Contingencies arise from events or circumstances occurring before the balance sheet date, the resolution of which is contingent on a future event or circumstance. Where the likelihood of a loss is considered probable and the loss can be reasonably estimated, the estimated loss should be charged to income and the nature of the contingency should be disclosed. Gain contingencies should be disclosed but not recognized as income.

An accumulated balance of other comprehensive income (OCI) is a component of which of the following?

Corporations equity A corporation's equity consists of three main components: contributed capital, which includes capital stock and additional paid-in capital; retained earnings; and the accumulated balance of OCI.

Which of the following should be reported in accumulated other comprehensive income?

Cumulative foreign exchange translation loss If an entity's functional currency is a foreign currency, which has not experienced significant inflation, translation adjustments result from the process of translating that entity's financial statements in to the reporting currency. Translation adjustment should not be included in determining net income bit should be reported in OCI. A cumulative foreign exchange translation loss would be reported in accumulated OCI as a stockholder's equity contra account.

DeeCee Co. adjusted its historical cost income statement by applying specific price indexes to its depreciation expense and cost of goods sold. DeeCee's adjusted income statement is prepared according to

Current cost accounting. DeeCee adjusts the depreciation and cost of goods sold reported in the historical cost income statement by applying specific price indexes to these amounts. Therefore, DeeCee's adjusted income statement is prepared using current cost accounting. The income statement is not prepared using fair value accounting because only depreciation expense and cost of goods sold are restated by applying specific price indexes. The income statement is not prepared using general purchasing power accounting because DeeCee's historical costs are not remeasured into units of a currency with the same general purchasing power. The income statement is not prepared using current cost/general purchasing power accounting because amounts are not remeasured into units of a currency with the same general purchasing power.

In a period of rising general price levels, Pollard Corp. discloses income on a current cost basis in accordance with standards on financial reporting and changing prices. Compared to historical cost income from continuing operations, which of the following conditions increases Pollard's current cost income from continuing operations?

Current cost of goods sold is less than historical cost.

A U.S. company purchased inventory on account at a cost of 1,000 foreign currency units (FCU) from a non-U.S. company on November 15, to be paid on December 15. The FCU is valued at $0.85 on November 15 and at $0.90 on December 15. The journal entry to record payment on December 15 should include which of the following?

Debit exchange gains and losses and credit accounts payable for $50 Purchased inventory would have been recorded for $850 on November 15th because of $0.85 FCU value x 1,000. On December 15th, with an exchange rate of $0.90, it will require $900 to make the payment. Accounts payable will be increased with a credit of $50 and an exchange loss will be recognized with a debit of $50. Exchange loss $50A/P $50

Lion Co.'s income statement for its first year of operations shows pretax income of $6,000,000. In addition, the following differences existed between Lion's tax return and records: Tax returnAccounting recordsUncollectible accounts expense$220,000$250,000Depreciation expense860,000570,000Tax-exempt interest revenue---50,000 Lion's current year tax rate is 30% and the enacted rate for future years is 40%. What amount should Lion report as deferred tax expense in its income statement for the year?

Deferred tax liabilities or assets are recognized for the future tax consequences of, among other things, revenues, expenses, gains, or losses that are included in taxable income of an earlier or later year than the year in which they are recognized. The difference in uncollectible accounts expense between the tax return and the accounting records would result is a $30,000 deferred tax asset. The difference in depreciation expense between the tax return and the accounting records would result in a $290,000 deferred tax liability. The difference in tax-exempt interest revenue between the tax return and the accounting records results in no tax asset or liability because the revenue was tax exempt. This results in a net future tax liability of $260,000. The$260,000 times the future tax rate of 40% equals $104,000.

Eagle Co. has cosigned the mortgage note on the home of its president, guaranteeing the indebtedness in the event that the president should default. Eagle considers the likelihood of default to be remote. How should the guarantee be treated in Eagle's financial statements?

Disclosed only Contingent liabilities that are considered to have a remote possibility of loss normally do not require disclosure. Exceptions include the guarantees of indebtedness of others, in which case disclosure, but not accrual, is required.

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?

Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements. An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued. Some nonrecognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. Since property losses were of a material nature, the entity should disclose the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.

On 12/31, a share trades at $100 on market A and at $102 on market B. If the transaction costs are $2 in A and $3 in B, determine the fair value of the share if none of the markets qualify to be the principal market.

Fair value is a market-based (not an entity-based) measurement. The objective is to estimate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, an exit price from the perspective of a market participant that holds the asset or owes the liability). The term "orderly transaction" assumes that the item has been exposed to the marketplace prior to the measurement date for a reasonable period of time (not a forced transaction). The principal market, or otherwise most advantageous market, is determined from the standpoint of the entity that holds the asset or liability and requires the entity to consider the market in which it conducts its highest volume or level of activity. The net realizable value is considered when using the most advantageous market approach. The NRV is $98 and $99 in markets A and B, respectively. Because NRV is the maximum in market B, the share price in that market is the fair value of the security.

During the year, Granite Co. sold a building for $100,000 resulting in a gain of $20,000. The building has a net book value of $80,000 at the time of the sale. Granite uses the indirect method when preparing its statement of cash flows. What is the amount that would be included in Granite's financing activities section because of the building sale?

Financing activities within a cash flow statement represent the cash inflows and outflows resulting from activities like issuance of stock, debt issuance and financing, payment of dividends and repurchase of existing stock. Sale of a building cannot be classified as a financing activity under any circumstances. Rather, it qualifies to be shown in the Investing Activities section.

The controller of Pane Co. was preparing the company's financial statements. Pane had a wholly owned subsidiary in a foreign country that used the euro as its currency. At December 31, the exchange rate was $1 U.S. for 1.25 euro. The weighted-average exchange rate for the year was $1 U.S. for 1.50 euro. At December 31, the subsidiary had assets of 1 million euro and revenue for the year of 2 million euro. What amounts would assets and revenue translate for consolidation?

Foreign currency financial statements should be translated by means of the following rates: Assets All assets and liabilities are translated at the current exchange rate as of the balance sheet date: ⇒ 1 Dollar = 1.25 Euro ⇒ 1 Euro = 1/1.25 Dollar ⇒ 1 Euro = 0.8 Dollar Assets (Dollars) = Assets (Euros) x Direct Exchange Rate = 1,000,000 Euro x 0.8 = $800,000. Revenues Revenues and expenses are translated at the exchange rate as of the time revenue or expense was recognized. However, due to the impracticability of this where rates change frequently, a weighted-average exchange rate for the period may be used, which is as follows: ⇒ 1 Dollar = 1.5 Euro ⇒ 1 Euro = 1/1.5 Dollar ⇒ 1 Euro = 0.6667 Dollar Revenues (Dollars) = Revenues (Euros) x Direct Exchange Rate = 2,000,000 Euro x 0.6667 = $1,333,333.

A foreign subsidiary's functional currency is its local currency, which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating

Foreign currency financial statements should be translated by means of the following rates: all assets and liabilities at the current exchange rate at the balance sheet date; revenues and expenses at the exchange rate at the time the revenue or expense was recognized, however, due to the impracticability of this where rates change frequently, a weighted-average exchange rate for the period may be used; contributed capital at the historical exchange rate; and retained earnings at the translated amount of retained earnings for the prior period, plus (less) net income(loss) at the weighted-average rate, less dividends declared during the period at the exchange rate when declared. The weighted average exchange rate would be an appropriate exchange rate for salaries expense and sales to external customers.

Stam Co. incurred the following research and development project costs during the current year: Equipment purchased for current and future projects $100,000 Equipment purchased for current projects only 200,000 Research and development salaries for current projects 400,000 Legal fees to obtain patent 50,000 Material and labor costs for prototype product 600,000The equipment has a five-year useful life and is depreciated using the straight-line method. What amount should Stam recognize as research and development expense at year end?

Future economic benefits deriving from research and development (R &D) activities, if any, are uncertain in their amount and timing. Due to these uncertainties, most R&D costs are required to be charged to expense the year in which incurred. However, any materials, equipment, facilities, or intangibles purchased that have alternative future uses should be recorded as assets. Assets recorded for R&D costs with alternative future uses should be amortized over their useful lives by periodic charges to R&D expense. Stam should recognize only the amortization amount of $20,000 as R&D expense for the $100,000 worth of equipment purchased for current and future projects. Stam should also recognize the $200,000 of equipment purchased for current projects only, the $400,000 of R&D salaries for current projects, and the $600,000 of material and labor costs for a prototype product as R& D expense at year end for a total of $1,220,000. The legal fees to obtain a patent would not be included in R&D expense. Only R&D costs incurred to internally develop a patent would be expensed as incurred.

In a partnership liquidation proceeding, where a partnership converts its assets into cash and distributes the cash to creditors and partners, the partnership does which of the following?

Gives priority to creditors on any distribution In a partnership liquidation, creditors have priority on any distribution.

A company should recognize goodwill in its balance sheet at which of the following points?

Goodwill has been created in the purchase of a business. Goodwill arises when one entity purchases another entity, and is recognized as the excess of the acquisition-date fair value of the purchase price over the recognized amounts of assets, liabilities, and noncontrolling interests. Internally generated goodwill is not recognized or recorded.

Bear Co., which began operations on January 2, Year 1 appropriately uses the input method prescribed in ASC 606 and recognizes revenue over time. The performance by Bear Co. does not create an asset with an alternative use and Bear Co., has an enforceable right to payment for the completed performance to date. The following information is available for the year: Total Contract Price$300,000Costs incurred$70,000Estimated costs to complete at year end$200,000 Calculate the income (or loss) recognized in Year 1?

Gross Profit recognized in each period of the contract on an accrual basis and is calculated as follows: Gross Profit = (Cost incurred to date / Total Estimated Cost) x Estimated Profit Total Contract price$300,000Actual cost to date$70,000Estimated costs to complete$200,000Estimated total costs at completion$270,000Estimated Gross Profit$30,000Profit Recognized in Year 1 ($70,000/$270,000) x $30,000$7,778 Note: Revenue recognized over time is similar to the Percentage-of-Completion Method allowed under the previous standard. Revenue recognized at a point in time is similar to the Completed Contract Method allowed under the previous standard.

According to ASC 842, lease payments include all of the following except:

Guarantee of the lessor's debt Per ASC 842, Lease payments include: * fixed lease payments * variable lease payments * renewal, purchase, and termination option payments * fees paid to owners of special-purpose entities * residual value guarantees Lease payments dont include: * payments for variable leases not depended on an index or rate * guarantee of the lessor's debt

Compared to its year 2 cash basis net income, Potoma Co.'s year 2 accrual basis net income increased when it

Had lower accrued expenses on December 31, year 2, than on January 1, year 2. Potoma's accrued expenses decreased during year 2. Hence, Potoma's year 2 payments for expenses exceeded the amount of expense recognized on the accrual basis in year 2. The increased amount of expenses recognized in year 2 under the cash basis increases Potoma's year 2 accrual basis net income as compared to its year 2 cash basis net income. The declaration or payment of a cash dividend does not affect net income computed under either the cash or accrual basis. Compared to its year 2 cash basis net income, Potoma's year 2 accrual basis net income decreased when it recognized uncollectible accounts expense in year 2. Potoma's year 2 cash basis net income is not affected by either the accounts receivable balances written off in year 2 or the uncollectible account expense recognized in year 2. The sale of the used equipment at a gain increases net income under both the cash and accrual basis by equal amounts.

When remeasuring foreign currency financial statements into the functional currency, which two of the following items would be remeasured using historical exchange rates? Inventories carried at cost. Equity securities reported at market values. Bonds payable. Accrued liabilities. Prepaid expenses.

I and V Nonmonetary balance sheet items, including intangibles, fixed assets, inventory, and prepaid expenses, are remeasured at historical rates.

A company's foreign subsidiary operation maintains its financial statements in the local currency. The foregin operation's capital accounts would be translated to the functional curerncy of the reporting entity using which of the following rates?

Historical exchange rate Prior to translation, the foreign currency statements must be conformed to US GAAP and be measured in the functional currency of the foreign entity (otherwise, remeasurement into the functional currency is required). The remeasuring process should achieve the same result as if the books had been initially recorded in the functional currency. This requires the remeasuring of certain accounts (nonmonetary items) at historical exchange rates, including the foreign operations' capital accounts. All other accounts are remeasured at current rates.

Zephyr City has adopted GASB Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments. Which activities and basis of accounting must appear in Zephyr's statement(s) of cash flows? Business-type activities on the accrual basis in the fund financial statements Government-type activities on the modified accrual basis in the fund financial statements Business-type and government-type activities on the accrual basis in the government-wide financial statements

I only Governmental-type funds pose problems for developing a meaningful government-wide cash flows statement. Only funds for business-type activities are required in the statement of cash flows.

Which of the following errors could result in an overstatement of both current assets and stockholders' equity?

Holiday pay expense for administrative employees is misclassified as manufacturing overhead. Since holiday pay for administrative employees is a period cost, it should have been expensed when incurred. Instead, it was misclassified and inventoried as manufacturing overhead. This error overstates both inventory and net income, thus overstating both current assets and stockholder's equity. The understatement of an accrued expense overstates net income and stockholders' equity and understates current liabilities. Misclassifying noncurrent note receivable principal as a current asset overstates current assets and understates noncurrent assets. The understatement of depreciation expense overstates net income, noncurrent assets, and stockholders' equity.

Gains resulting from the process of translating a foreign entity's financial statements from the functional currency, which has not experienced significant inflation, to U.S. dollars should be included as a (an)

If an entity's functional currency is the foreign currency, and it has not experienced significant inflation, translation adjustments result from the process of translating that entity's financial statements into the reporting currency. Translation adjustments (gains or losses) are not included in net income, but in other comprehensive income.

The following data pertains to Pell Co.'s construction jobs, which commenced during the current year: Project 1Project 2Contact price$420,000$300,000Cost incurred during the year240,000280,000Estimated costs to complete120,00040,000Billed to customers during the year150,000270,000Received from customers during year90,000250,000 If Pell recognizes revenue at a point in time, and the performance obligations were not fulfilled in the current year, what amount of gross profit (loss) would Pell report in its current year income statement?

If revenue is recognized at a point in time, Pell recognizes a gross loss of $20,000 on the two projects because: (1) no portion of the $60,000 estimated gross profit on Project 1 can be recognized in the current year since the performance obligation has not been satisfied: • Entity currently has a right to collect payment for the asset • The legal title for the asset is with the customer • Physical possession of the asset is transferred by the entity to the customer • Significant risks and rewards of ownership of the asset is with the customer • Asset has been accepted by the customer (2) the full amount of the $20,000 anticipated loss on Project 2 must be recognized in the current year because the anticipated loss cannot be deferred to future periods. Amounts below have been rounded (000s).

Restorations of carrying value for long-lived assets are permitted if an asset's fair value increases subsequent to recording an impairment loss for which of the following?

Impairment assets are divided into three categories: held for use, held for disposal by sale, and held for disposal other than by sale. For assets held for use, any subsequent reversal of a previously recognized impairment loss is prohibited. For assets held for disposal by sale, the asset is measured at the lower of its book value or fair value less cost to sell and its depreciation (or amortization) discontinues. Increases in the fair value, up to but not exceeding book value, would be recognized.

Which of the following defines equity as it relates to a business entity?

In a broad sense, equity is total assets less total liabilities. Equity means the ownership interest of investors in a business firm. It includes capital stock, additional paid-in capital, non-controlling interest, retained earnings and accumulated other comprehensive income. From these treasury stock is reduced.

Ace Corp. entered into a troubled debt restructuring agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in exchange for a note with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain on troubled debt restructuring in its income statement?

In a debt restructuring, the debtor follows a two-step process: 1. Revalues the asset to its fair value and recognizes a gain or loss and then 2. determines restructuring gain = carrying value of debt - fair value of asset given up

Casey entered into a troubled debt restructuring agreement with First State Bank. First State agreed to accept land with a carrying amount of $85,000 and a fair value of $120,000 in exchange for a note with a carrying amount of $185,000. Casey has restructured debt twice in the last five years. Disregarding income taxes, what amount should Casey report as gain on troubled debt restructuring in its income statement?

In a debt restructuring, the debtor follows a two-step process:- Revalues the asset to its Fair Value and recognizes a gain or loss and then Determines Restructuring Gain = Carrying Value of debt - Fair Value of asset given up. In the given case, Casey first recognizes a gain for revaluing the real estate to its fair value = Fair Value of real estate - Carrying Value of the real estate Revaluation Gain = $120,000 - $85,000 = $35,000 gain Casey then would recognize a restructuring gain for the difference between the carrying value of the liability and the fair value of the real estate transferred Restructuring Gain = $185,000 - $120,000 = $65,000.

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 90,000At what amount should Mene record the real estate transferred?

In a troubled debt restructuring, the creditor, Mene, records the assets and/or equity securities (real estate transferred) at fair value.

In an exchange with commercial substance, Vey Co. traded equipment with an original cost of $100,000 and accumulated depreciation of $40,000 for similar productive equipment with a fair value of $120,000. In addition, Vey received $30,000 cash in connection with this exchange. What should be Vey's carrying amount for the equipment received on the day of exchange?

In an exchange with commercial substance, the transaction is recorded at the fair value of the asset received or the asset given up, whichever is more clearly evident, and a gain or loss is recognized on the exchange. The fair value of the equipment received is given in the scenario. Therefore, it is more clearly evident than the fair value of the equipment given up. Gain recognized Gain recognized = FV of asset given up - CV of asset given up As FV of the asset given up is unknown, we will use fair value of asset received + boot received - boot paid as implied Fair value of the asset given up, i.e., = $120,000 + $30,000 = $150,000. Gain Recognized = Implied Fair Value of asset given up - Carrying Value of Asset Given up = $150,000 - ($100,000 - $40,000) = $90,000. Carrying Value of the New Asset The New asset is recorded at FV of the Asset Received or Fair Value of Asset Given up + Boot Paid - Boot Received Fair Value of Asset received is evident. As such, the new asset would be recorded at the FV of the Asset Received, i.e., $120,000. The journal entry to be recorded in Vey's books is: Cash$30,000 New Equipment$120,000 Accumulated Depreciation$40,000 Old Equipment $100,000Gain on Exchange $90,000

How should a U.S. publicly traded company report a change in fair value of a hedged available-for-sale security attributable to foreign exchange risk if the hedge is a fair value hedge?

In earnings. With fair value hedges, the gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period. A net loss or gain in the hedging activity indicates the effectiveness of the hedge.

Included within the financial assets of Z square Co. at December 31, 2017 are the following two recently purchased investments in publicly-traded (listed in NASDAQ) equity shares: Investment 1: 10% of the issued share capital of ABC Co. This shareholding was acquired as a long-term investment as Z square Co. wishes to participate as an active shareholder of ABC Co. Investment 2: 10% of the issued share capital of XYZ Co. This shareholding was acquired for speculative purposes and Z square Co. expects to sell these shares in the near future. Neither of these shareholdings gives Z square Co. significant influence over the investee companies. Wherever possible, the directors of Z square Co. wish to avoid taking any fair value movements to income statement, so as to minimize volatility in reported earnings. How should the fair value movements in these investments be reported in Z square Co's financial statements for the year ended December 31, 2017?

In income statement for both investments As the shares of both the companies ABC Co. and XYZ Co. are listed in NASDAQ, thus, the fair value of both investments is readily determinable and for any movement in fair value should be reported in the income statement as Fair Value Through Net Income (FVTNI). ASC 321 require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income (FVTNI). However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An equity security has a readily determinable fair value if it meets any of the following conditions: The fair value of an equity security is readily determinable if sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the over the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations (NASDAQ) systems or by OTC Markets Group Inc. Restricted stock meets that definition if the restriction terminates within one year. The fair value of an equity security traded only in a foreign market is readily determinable if that foreign market is of a breadth and scope comparable to one of the U.S. markets referred to above. The fair value of an equity security that is an investment in a mutual fund or in a structure similar to a mutual fund (that is, a limited partnership or a venture capital entity) is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions.

A company manufactured 1,000 units of product during the year and sold 800 units. Costs incurred during the current year are as follows: Direct materials and direct labor $7,000 Indirect materials and indirect labor $2,000 Insurance on manufacturing equipment $3,000 Advertising $1,000 What amount should be reported as inventory in the company's year-end balance sheet?

In order to compute the inventory cost, the following items are considered: Direct material, labor, and overheads Freight inwards, insurance and warehousing (up to the point of sale) Handling expenses, normal spoilage, repacking Discounts received, if any In the given case, per unit inventory cost can be computed as under:

On 01/01, a company had 100,000 shares of common stock outstanding, each having a par value of $10. During the year, no shares were issued except for a stock dividend of 30,000 shares on 5/15. The fair values of shares are given as under: On 01/01: $14 On 5/15: $16 On 12/31: $13 What should be the journal entry for the stock dividend?

In regarding the stock dividend, a charge is made to retained earnings (thereby making a portion of the retained earnings no longer available for distribution) and credits are made to paid-in capital accounts. Total stockholders' equity is not affected. The amount of retained earnings capitalized depends on the size of the stock dividend and the apparent effect that the dividend has on the market value of the shares. *When the stock dividend is relatively small (not in excess of 20 to 25 percent of outstanding stock) the fair value (at the date of declaration) of the additional shares should be transferred from retained earnings to paid-in capital. *When the stock dividend is large (greater than 25% of the outstanding shares) only the par or stated value of the additional shares is to be capitalized. In the given case, 30,000 shares were declared which constitute 30% of outstanding shares. As such, this is a large stock dividend. Only the par value is to be capitalized. Retained Earnings300,000Common Stock300,000

Arpco Inc., a for-profit provider of the healthcare services, recently purchased two smaller companies and is researching accounting issues arising from the two business combinations. Which of the following accounting pronouncements are the most authoritative?

In the hierarchy of authoritative Generally Accepted Accounting Principles (GAAP), the FASB Statements of Financial Accounting Standards (SFAS) has the highest authority. Options (A) and (B) are incorrect because the AICPA Statements of Positions and the Industry and Audit guides are the second level of GAAP pronouncements. Option (C) is incorrect because FASB Statements of Financial Accounting Concepts do not come under authoritative GAAP.

For a company to obtain a retail business license in a particular state, the company is required to pay the state the equivalent of three months of sales taxes on its projected retail sales. This amount is fully refundable after five years, provided the company has filed all required sales tax returns and paid all sales taxes due. Initially the company should report the payment related to this licensing requirement as

Initially, the company should report the payment related to the licensing requirement as a noncurrent asset. The company will receive the monies back, provided it meets the requirements, so it is considered an asset. Because the refund period is in 5 years, not within one year, it is considered a noncurrent asset.

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?

Interest cost incurred during the construction period needs to be capitalized to the asset. The interest to be capitalized is lower of the following: Weighted average accumulated expenditure x Interest rate The actual interest cost incurred. The amount of capitalized interest is based on the weighted average amount of accumulated expenditures. Weighted average amount of accumulated expenditures is: $1,000,000 (12/12) + $1,000,000 (0/12) = $1,000,000 $1,000,000 * 8% = $80,000 The full $80,000 should be capitalized because the total interest on the loan is $240,000 ($3,000,000 * 8%).

In the previous year, Lee Co. acquired, at a premium, Enfield, Inc. 10-year bonds as a long-term investment. At December 31 of the current year, Enfield's bonds were quoted at a small discount. Which of the following situations is the most likely cause of the decline in the bonds' market value?

Interest rates have increased since Lee purchased the bonds. The purchaser of a bond acquires the right to receive two cash flows: a lump sum paid at maturity for the face amount of the bond, and an annuity consisting of periodic interest payments over the life of the bond. The price the market is willing to pay for the bond is equal to the present value of these two cash flows, discounted at the prevailing market interest rate for bonds having the same maturity and perceived degree of risk. When interest rates increase, the present value of the two cash flows decreases, causing the market value of the bonds to decline. The issuance of a stock dividend should not cause a decline in the market value of the bonds. If the bonds currently are quoted at a small discount and the bonds are expected to be called at a premium (i.e., above face amount), this situation would most likely have the effect of causing a rise in the market value of the bonds. A decline in interest rates would cause a rise in the bond's market value.

When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using historical exchange rates?

Inventories carried at cost. If an entity does not maintain its books in its functional currency, remeasuring into the functional currency is required prior to translation into the reporting currency (i.e., the parent company's currency). In this process, nonmonetary balance sheet items are remeasured using historical exchange rates. Hence, inventories carried at cost should be remeasured using historical exchange rates because it is an example of a nonmonetary balance sheet item. Marketable equity securities, bonds payable, and accrued liabilities balance sheet items are remeasured using the current exchange rate.

On January 1, a company entered into an operating lease for office space and received control of the property to make leasehold improvements. The company began alterations to the property on March 1 and the company's staff moved into the property on May 1. The monthly rental payments began on July 1. The recognition of rental expense for the new offices should begin in which of the following months?

January Leasehold improvements made by the lessee are amortized over the lower of remaining lease life or useful life. Total rent expense payable for the entire lease term is divided evenly over each period in line with matching principle. Since the lease started on January 1, rental expense is recognized evenly throughout the year, even though the rent payments began July 1st.

Which of the following expenditures qualifies for asset capitalization?

Legal costs associated with obtaining a patent on a new product The external acquisition costs of a patent, which includes the legal costs associated with obtaining a patent on a new product, qualifies for asset capitalization. Cost of materials used in prototype testing, costs of testing a prototype and modifying its design, and salaries of engineering staff developing a new product are all examples of research and development costs. These research and development costs are not capitalized, but instead expensed in the year in which incurred. Costs incurred to legally protect product and process ideas resulting from R&D. Following costs are capitalized: * costs include costs of patent application * costs of purchase if the patent is purchased from another party * costs incurred in successful defense of a patent if infringed during its economic life

Which of the following items would most likely require a subsequent event adjustment to the financial statements for the year ended December 31, year 1?

Loss on an uncollectible trade receivable recorded in year 1 from a customer that declared bankruptcy in year 2 before the financial statements were issued There are two types of subsequent events: recognized and nonrecognized. The first type requires adjustment of the financial statements because it provides evidence about conditions that existed at the balance sheet date. The second type of subsequent event provides evidence about conditions that did not exist at the balance sheet date and does not require adjustment of the financial statements; however, if material in nature, the event(s) may require disclosure to keep the financial statements from being misleading. Loss on an uncollectible trade receivable recorded in year 1 from a customer that declared bankruptcy in year 2 is a classic example of providing evidence about conditions that existed at the balance sheet date and thus it requires a financial statement adjustment.

The Low and Rhu partnership agreement provides special compensation to Low for managing the business. Low receives a bonus of 15 percent of partnership net income before salary and bonus, and also receives a salary of $45,000. Any remaining profit or loss is to be allocated equally. During the current year, the partnership had net income of $50,000 before the bonus and salary allowance. As a result of these distributions, Rhu's equity in the partnership would

Low's bonus results in a residual loss for the partnership for the year. Low's equity would still increase due to the bonus Low received. Partnership profit prior to distributions $ 50,000 Less: Bonus to Low (15% × $50,000) (7,500) Salary to Low (45,000) Residual partnership loss $ (2,500) Times: Rhu's loss percentage × 50% Decrease in Rhu's equity in partnership $ (1,250)

On December 1 of the current year, Bann Co. entered into an option contract to purchase 2,000 shares of Norta Co. stock for $40 per share (the same as the current market price) by the end of the next two months. The time value of the option contract is $600. At the end of December, Norta's stock was selling for $43, and the time value of the option is now $400. If Bann does not exercise its option until January of the subsequent year, which of the following changes would reflect the proper accounting treatment for this transaction on Bann's December 31, year-end financial statements?

Net income will increase by $5,800. An option contract is a derivative. Derivatives are recognized as assets or liabilities on the financial statements and measures using fair value. Changes in fair value of non-hedge securities are reported as gains or losses in earnings. On December 1, Bann would initially record the option contract at $80,600 (2,000 shares × $40 market price on December 1 + $600 time value). At the end of December, the fair value of the option contract was $86,400 (2,000 shares × $43 market price on December 31 + $400 time value). Bann would report this change in fair value which would result in net income increasing by $5,800.

In sales-type leases, the lessor must disclose which of the following?

Net investment components In sales-type and direct financing leases, the lessor must disclose the net investment components, including: future MLP; unguaranteed residual value; unearned income; and the future MLP to be received in each of the succeeding 5 years. For operating leases, the lessor must disclose: the cost and carrying amount, if different, of property leases or held for leasing, by major class and total accumulated depreciation; the minimum future rentals on noncancellable leases, in aggregate, for each of the next 5 years; and a general description of leasing arrangements.

Each of the following is a component of the changes in the net assets available for benefits of a defined benefit pension plan trust, except

Net plan assets include amounts contributed by the employer (and by employees for a contributory plan) and amounts earned from investing the contributions, less benefits paid. The net change in the actuarial present value of accumulated plan benefits is not part of net plan assets.

In general, accounting for nonmonetary transactions should be based on the fair values (FV) of the assets involved. Nonmonetary exchanges should be based on recorded amounts, rather than FV, of the exchanged assets if any of the following apply: 1) neither the FV of the assets received nor FV of the assets surrendered is reasonably determinable, or 2) the transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers, or 3) the exchange lacks commercial substance.

New truck (plug) Acc Depr Old truck (cost) Cash

SEC Regulation S-K requires that contracts that are not made in ordinary course of business ie material contracts to be filed for:

Newly SEC reporting entities to file material contracts that were entered into past two years before filing/registration with SEC. Previously all companies are required to file material contracts that were entered within past two years before registration but with applicable changes as per the FAST act Modernization and Simplification of Regulation S-K only newly reporting companies would be required to file material contracts thatw ere entered within past two years before registration/filing with SEC.

Which of the following is the characteristic of a perfect hedge?

No possibility of future gain or loss Hedging is a risk management strategy to protect against the possibility of loss, such as from price fluctuations. Generally, the strategy involves counterbalancing transactions in which a loss on one financial instrument or cash flow stream would be offset by a gain on the related derivative. A perfect hedge would result in no possibility of future gain or loss.

True Co. did not record an accrual for a probable loss from a lawsuit in its financial statements. Which of the following explanations for True's not accruing the probable loss is in accordance with generally accepted accounting principles?

No reasonable estimate of the loss can be made. Contingent liabilities arise from events or circumstances occurring before the balance sheet date, the resolution of which is contingent upon a future event or circumstance. The distinction between contingencies and other liabilities hinges on the uncertainty as to the existence of the liability and not on the uncertainty as to the amount of the liability. "Probable" means the event is likely to occur. Where the likelihood of confirmation of a loss is considered probable and the loss can be reasonably estimated, the estimated loss should be accrued by a charge to income and the nature of the contingency should be disclosed. If, however, only a range of a possible loss can be estimated—and no amount in the range is a better estimate than the others—the minimum amount in the range should be accrued. In addition, the nature of the contingency and the additional exposure to loss should be disclosed. However, when the amount of the loss is not estimable, an accrual is not possible.

Mill Co. reported pre-tax income of $152,500 for the year ended December 31. During the year-end audit, the external auditors discovered the following errors: Ending inventory $30,000 overstated Depreciation expense $64,000 understated What amount should Mill report as the correct pre-tax income for the year ended December 31?

Over the life of the lease The lease bonus is treated as deferred (prepaid) rent and amortized using the Straight-Line Method (SLM) over the lease term.

Spring Corp. entered into a five-year lease agreement with Fall Corp. Spring, the lessee, paid an additional $5,000 nonrefundable lease bonus to Fall upon signing the operating lease agreement. When would Fall recognize in income the nonrefundable lease bonus paid by Spring?

Over the life of the lease The lease bonus is treated as deferred (prepaid) rent and amortized using the Straight-Line Method (SLM) over the lease term.

How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord's financial statements?

Prepaid rent by tenants (paid 8 months in advance) should be recorded by a landlord as a current liability. This is essentially unearned rent. Unearned rent is a liability to the landlord, not an asset. The landlord would debit cash and credit unearned revenue for all 8 months of rent. Since the rent is for eight months (less than one year), the liability would be classified as a current liability.

The present value of lease payments should be used by the lessee in determining the amount of a lease liability under a lease classified by the lessee as a (an)

Per ASC 842, for both finance and operating leases, a lessee will use the present value of lease payments to determine the lease liability.

At December 31, Dorr, Inc., has a net operating loss carryforward of $90,000 available to offset future taxable income. At this date, Dorr has temporary differences that will result in taxable amounts of $60,000 during the operating loss carryforward period. The company has sufficient positive evidence to support an assumption that the benefits of the carryforward will be realized in the near future. Assuming a present and future enacted income tax rate of 30%, what amount of the tax benefit of the operating loss carryforward should be recognized in the income statement for the year ended December 31?

Per the Tax Cuts and Jobs Act (TCJA, C Corporations are not allowedto carry back losses. They can only be carried forward. The net operating loss can be fully claimed. The income tax benefit realized is $27,000 (90,000 x 30%) A deferred tax asset is to be recognized for the future tax benefits of a loss carryforward ($90,000 × 30% future tax rate = $27,000). A valuation allowance is to be established only if it is more likely than not that a portion or all of the asset will not be realized. Dorr expects to realize the asset and does not need a valuation allowance.

A company has experienced operating losses from its appliances division for the past five years. The division is the lowest level of identifiable cash flows. Having determined the division is the lowest level of identifiable cash flows, the company's next step in performing its impairment test is to

Perform a recoverability test on the carrying amount of the division's assets Testing for impairment occurs when events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset groups may not be recoverable. The impairment test is a one-step process: An indefinite-lived intangible asset is impaired when the fair value is less than its carrying amount. Goodwill is tested for impairment at least annually, using a one-step process, and the goodwill impairment test may be performed any time during the fiscal year, provided the test is performed at the same time every year. To identify potential impairment, we compare the reporting unit's fair value with its carrying amount, including goodwill ie performing a recoverability test on the carrying amount of the divisions asset * if the fair value exceeds its carrying amount, the reporting unit's goodwill is considered not impaired * if the carrying amount exceeds its fair value, then the impairment loss of the reporting unit recognized is calculated as carrying value - fair value.

Which of the following is not considered in evaluating the highest and best use of an asset by market participants at the measurement date?

Readily accessible An asset being readily accessible is not considered in evaluating an asset for fair value measurement. The highest and best use of an asset establishes the valuation premise used to measure the fair value of an asset. The highest and best use of the asset is applied considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date.

Wagner, a holder of a $1,000,000 Palmer, Inc. bond, collected the interest due on March 31 of the current year, 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 interest amounts reported in Palmer's March 31 consolidated balance sheet?

Retained earnings increase by $100,000 Noncontrolling interest no change An investment by one member of a consolidated group of companies in the bonds of another member of that group is, in substance, the same thing as the purchase by a member of its own bonds. Although bonds cannot physically be retired, since two separate entities are involved in the transaction, from a consolidated viewpoint, the transaction is treated as a constructive retirement of the bonds to the extent f the investment in the bonds. Thus, the consolidated financial statements will reflect any gain or loss on the retirement of bonds in the year of purchase. This is true despite the fact that the books of the affiliates involved in the transaction continue to reflect the investment in bonds and bond payable accounts, respectively. Thus, the consolidated entity in question recognizes a gain of $100,000 ( i.e., $1,075,000 carrying amount of bond - $975,000 cost to subsidiary) on the bond retirement. Gains and losses on the early retirement of bonds can only be reflected on the books of the issuer. Thus, Palmer, the parent company, is attributed the entire $100,000 gain on the retirement, thereby increasing consoldated Retained Earnings by the same amount. Since no porton of the gain on retrement is attributed to the subsidiary, the amount rported in the consolidated financial statemetns for the 25% noncontrolling interest in the subsidiary is unaffected by the intercompany bond transaction.

When there is a change in the reporting entity, how should the change be reported in the financial statements?

Retrospectively, including note disclosures, and application to all prior period financial statements presented A change in reporting entity occurs when an accounting change results in financial statements that are, in effect, the statements of a different reporting entity. The change is reported by retrospectively applying the change to the financial statements of all prior periods presented to include the financial information for the new reporting entity for the periods. A description of both the nature of the change and the reason for it shall be disclosed in the note disclosures for the period of the change.

Hospital, Inc., a not-for-profit organization with no governmental affiliation, reported the following in its accounts for the current year ended December 31: Gross patient services revenue from all services provided at the established billing rates of the hospital (note that this figure includes charity care of $25,000) $775,000 Provisions for bad debts 100,000 Difference between established billing rates and fees negotiated with third-party payors (contractual adjustments) 70,000 What amount would the hospital report as net patient service revenue in its statement of operations for the year ended December 31, 2018?

Revenue from charity care is excluded $25,000 and provisions for bad debts is not considered while calculating net patient revenue. Gross patient services revenue $775,000 Less: Charity care include in gross revenue (25,000) Less: Contractual adjustments (70,000) $ 680,000 Option (b) and (d) are incorrect as per the above explanation. Option (c) is incorrect because revenue from charity care of $25,000 should be excluded.

On January 1, Year 1, Sip Co. signed a 5-year contract enabling it to use a patented manufacturing process beginning in year 1. 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 year 1, only minimum fees were incurred. The royalty prepayment should be reported in Sip's December 31, Year 1, financial statements as

Royalties were prepaid equal to the sum of two year's minimum annual fees on the contract date. Only the minimum annual fees were incurred in the first year of the contract. Since the second year's minimum annual fees will be consumed in the upcoming year, half of the royalty prepayment should be reported as an expense and half should be reported as a current asset at the end of the first contract year.

A foreign subsidiary's functional currency is its local currency, which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating:

Salaries expense and sales to external customers Foreign currency financial statements should be translated by means of the following rates: all assets and liabilities at the current exchange rate at the balance sheet date.; revenues and expenses at the exchange rate at the time the revenue or expense was recognized, however due to the impracticability of this where the rates change frequently, a weighted-average exchange rate for the period may be used; contributed capital at the historical exchange rate; and retained earnings at the translated amount of retained earnings for the prior period, plus (less) net income (loss) at the weighted-average rate, less dividends declared during the period at the exchange rate when declared. The weighted average exchange rate would be an appropriate exchange rate for salaries expense and sales to external customers.

An entity leases a highly specialized underwater vehicle with patented technology to another entity. The asset took three years to produce. The lessee uses the asset to search the deep ocean floor for buried treasure in a remote area of the Arctic Ocean. The cost of transporting the asset to the search site was approximately half the cost of the asset itself, and it is not expected that any other entity is going to want to use that asset in that specific location. The lessor should classify this transaction as:

Sales-Type Lease A Finance Lease must meet one of the following criteria: Present Value equals or exceeds substantially all (90%) of the Fair Value Option to Purchase (exercise is reasonably certain) Economic Life - Major part (75%) of asset's economic life is used Transfer of Ownership at lease termination Specialized Nature - No alternative use to the lessor at lease termination Note: the implementation guidance for ASC 842 uses the 75/90 thresholds, even though the standard is principles-based. The lessor does not believe that any other entities would be interested in a similar use (searching the Arctic Ocean for buried treasure), and the asset is designed for that particular environment and no other. As a result, the lessor in this example would meet the criterion for classifying the lease as a sales-type lease.

Some costs cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted in the period in which the costs are incurred. An example of such a cost is

Salespersons' monthly salaries. GAAP guidance specifically mentions salesmen's monthly salaries as an example that fits the description of a cost that cannot be directly related to particular revenues, but rather it is incurred in order to obtain benefits that are exhausted during the period. Salespersons' commissions and transportation to customers are mentioned as examples of items that are directly related to sales revenues. Prepaid insurance is mentioned as an asset yielding benefits over several periods.

Which of the following Acts requires the filing of periodic reports with the SEC?

Securities Exchange Act of 1934 Once companies registered, the Securities Exchange Act of 1934 requires that companies file periodic reports to update financial information on their companies. The most common exchange act reports include form 10-k (annual) form 10-q (quarterly) and form 8k (current reports).

The lower-of-cost-or-market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application generally results in the lowest inventory amount?

Separately to each item The application of the lower of cost or market (LCM) rule directly to each inventory item generally results in the lowest inventory amount because unrealized losses on inventory items cannot be offset by unrealized gains on other inventory items. Generally, a different inventory amount would be reported when the LCM rule is applied to (1) total inventory, (2) groups of similar inventory items, or (3) each inventory item. The total inventory and groups of similar items methods of applying the LCM rule for inventories would allow unrealized losses on some inventory items to be offset by unrealized gains on others. This would result in a higher inventory amount than if the LCM rules were applied to each inventory item.

___________________ is(are) used to alter the terms and conditions of recorded sales transactions to entice customers to accept the delivery of goods and services.

Side agreements are used to alter the terms and conditions of recorded sales transactions to entice customers to accept the delivery of goods and services. They may create obligations or contingencies relating to financing arrangements or to product installation or customization that may relieve the customer of some of some of the risks and rewards of ownership.

A construction company recognizes revenue at a point in time. Which of the following is one of the criteria for recognizing revenue at a point in time?

Significant risks and rewards of ownership of the asset are with the customer. To recognize revenue at a point in time, the following criteria must be met: * entity currently has a right to collect payment for the asset * the legal title for the asset is with the customer * physical possession of the asset is transferred by the entity to the customer * Significant risks and rewards of ownership of the asset are with the customer. * asset has been accepted by the customer

Bain Co. entered into a 10-year lease agreement for a new piece of equipment worth $500,000. At the end of the lease, the asset will be transferred to Bain Co. Which of the following would require the lease to be accounted for as a finance lease?

Since the equipment is transferred to Bain Co. at the end of lease term, it should be classified as Finance Lease. A Finance Lease must meet one of the following criteria: Present Value equals or exceeds substantially all (90%) of the Fair Value Option to Purchase (exercise is reasonably certain) Economic Life - Major part (75%) of asset's economic life is used Transfer of Ownership at lease termination Specialized Nature - No alternative use to the lessor at lease termination Note: the implementation guidance for ASC 842 uses the 75/90 thresholds, even though the standard is principles-based.

Smith Co. has a checking account at Small Bank and an interest-bearing savings account at Big Bank. On December 31, year 1, the bank reconciliations for Smith are as follows: Big BankBank balance$150,000Deposit in transit5,000Book balance$155,000 Small BankBank balance$ 1,500Outstanding checks(8,500)Book balance$(7,000) What amount should be classified as cash on Smith's balance sheet at December 31, year 1?

Smith would classify the $150,000 bank balance and $5,000 deposit in transit for Big Bank as cash on the balance sheet. The bank balance of $1,500 in small bank is negated by the $8,500 in outstanding checks. Overdrafts in accounts with no available cash in another account at the same bank to offset are classified as current liabilities. They are not deducted from the total amount of cash at another bank.

Drew Co. uses the average cost inventory method for internal reporting purposes and LIFO for financial statement and income tax reporting. At December 31, the inventory was $375,000 using average cost and $320,000 using LIFO. The unadjusted credit balance in the LIFO Reserve account on December 31 was $35,000. What adjusting entry should Drew record to adjust from average cost to LIFO at December 31?

Some companies use LIFO for tax and external reporting purposes, but they maintain a FIFO, average cost, or standard cost system for internal reporting purposes. The difference between the inventory method used for internal reporting purposes and LIFO is often referred to as the LIFO reserve. The LIFO reserve is a contra-inventory account that must be adjusted to its required balance at the financial statement date. At 12/31 Drew's inventory was $375,000 using average cost and $320,000 using LIFO. The required balance in the LIFO reserve at 12/31 is $55,000 (i.e., $375,000 - $320,000). Since the unadjusted LIFO reserve balance was $35,000, the reserve must be increased by $20,000 (i.e., $55,000 - $35,000).

Stock dividends on common stock should be recorded at their fair market value by the investor when the related investment is accounted for under which of the following methods?

Stock dividends received on common stock may be recorded only by memorandum entry, regardless of whether the investment is accounted for by the cost or equity method. Under the cost method, the cost of the common stock investment would be divided by the number of common shares owned after the stock dividend to compute a new cost basis per share. Under the equity method, the carrying amount of the investment would be divided by the increased number of common shares owned as a result of the stock dividend to compute a new carrying amount per share. These amounts would be used to determine any gain or loss on a subsequent disposal of shares.

In year 2, Ajax, Inc. reported taxable income of $400,000 and pretax financial statement income of $300,000. The difference resulted from $60,000 of nondeductible premiums on Ajax's officers' life insurance and $40,000 of rental income received in advance. Rental income is taxable when received. Ajax's effective tax rate is 30%. In its year 2 income statement, what amount should Ajax report as income tax expense?

The $60,000 difference for the officers' life insurance premiums is a permanent difference that is deducted from Financial Statement Income but not from Taxable Income and as such would be added back. The $40,000 difference for rental income received in advance is a temporary difference that is not included in Financial Statement Income but included in Taxable Income and as such would be added back. Book Income $300,000 Add/Less: Permanent Differences $60,000 Book Income (After Permanent Differences) $360,000 Add: Temporary Differences $40,000 Less Temporary Differences $ - Taxable Income $400,000 ⇒ Income Tax Expense = Income Tax Liability - Deferred Tax Assets ⇒ Income Tax Expense = ($400,000 x 30%) - ($40,000 x 30%) ⇒ Income Tax Expense = $120,000 - $12,000 = $108,000

A company is required to file quarterly financial statements with the United States Securities and Exchange Commission on Form 10-Q. The company operates in an industry that is not subject to seasonal fluctuations that could have a significant impact on its financial condition. In addition to the most recent quarter end, for which of the following periods is the company required to present balance sheets on Form 10-Q?

The Form 10-Q is a report of a public company's performance that must be filed quarterly with the SEC. It includes unaudited financial statements and provides a continuing view of the company's financial position during the year. In addition to the most recent quarter end balance sheet, a company is required to present the balance sheet for the end of the preceding fiscal year on the Form 10-Q..

Which of the following is a true statement related to the SEC's accounting standard setting process?

The SEC does have broad statutory powers to make, amend, and rescind any rules and regulations that may be necessary to carry out the provisions of the law. The SEC also has the statutory authority to prescribe the accounting principles to be followed in financial statements under the 1933 and 1934 Acts, is authorized to define accounting, technical, and trade terms used in the law, and may prescribe the methods to be followed in the preparation in the appraisal or valuation of assets and liabilities.

On January 1 of the current year, Carr Company purchased Fay Corp., 9% bonds with a face amount of $400,000 for $375,600 to yield 10%. The bonds are dated this January 1, mature on December 31 in ten years, and pay interest annually on December 31. Carr uses the effective interest method of amortizing bond discount. In its income statement for the current year ended December 31, what total amount should Carr report as interest revenue from the long-term bond investment?

The amount of interest revenue recognized is determined as follows: Bond investment carrying amount, January 1 $375,600 Effective interest rate × 10% Interest revenue recognized in the current year $ 37,560

At December 31 of the previous year, Rama Corp. had 20,000 shares of $1 par value treasury stock that had been acquired during that year at $12 per share. In May of the current year, Rama issued 15,000 of these treasury shares at $10 per share. The cost method is used to record treasury stock transactions. Rama is located in a state where laws relating to acquisition of treasury stock restrict the availability of retained earnings for declaration of dividends. At December 31 of the current year, what amount should Rama show in notes to financial statements as a restriction of retained earnings as a result of its treasury stock transactions?

The amount that Rama discloses as a restriction of retained earnings as a result of treasury stock held is $60,000 [(20,000 - 15,000) × $12 per share].

Which of the following statements are correct when a company applying the lower-of-cost-or-market method reports its inventory at replacement cost? The original cost is less than replacement cost. The net realizable value is greater than replacement cost.

The answer to this question assumes that the original cost, replacement cost, and net realizable value of the inventory differ in amount. Statement II is correct. Under lower-of-cost-or-market (LCM) procedures for inventory valuation, market value cannot exceed a 'ceiling' of net realizable value and cannot be below a 'floor' of net realizable value reduced by a normal profit margin. Since the inventory is reported at its replacement cost, the net realizable of the inventory exceeds its replacement cost. Statement I is incorrect. Under LCM procedures, inventory is reported at the lower of original cost or market value (which is replacement cost in this case). Since the inventory is reported at replacement cost, the original cost of the inventory is greater than its replacement cost.

On February 1, Tory began a service proprietorship with an initial cash investment of $2,000. The proprietorship provided $5,000 of services in February and received full payment in March. The proprietorship incurred expenses of $3,000 in February, which were paid in April. During March, Tory drew $1,000 against the capital account. In the proprietorship's financial statements for the two months ended March 31, prepared under the cash basis method of accounting, what amount should be reported as capital?

The balance in the capital account at March 31, is the beginning balance plus the service revenues received less the owner's draw. The expenses incurred in February and paid in April are not included in the calculation, as Tory has a cash basis of accounting. $2,000 + $5,000 - $1,000 = $6,000.

For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated

The best estimate of the effective tax rate to be applicable for the fiscal year be made at the end of each interim period. This rate should reflect foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives.

A company from the United Kingdom uses British pounds in its normal operations, reports in the European Union in euros, and reports in the United States in U.S. dollars. The company is owned by a private equity firm in Japan. What is the company's functional currency?

The british pound Functional currency represents the primary economic environment in which an entity generates cash and expends cash. The functional currency is the currency primarily used by a business or business unit. As a monetary unit of account, a functional currency represents the primary economic environment in which that entity operates. It would be the British pound for a company from the United Kingdom that uses British pounds in its normal operations.

A corporation issued debt to purchase 10 acres of land for development purposes. Expenditures related to this purchase are as follows: Description Amount Purchase Price $1,000,000 Real estate taxes in arrears $15,000 Debt issuance costs $2,000 Attorney fee title search on land $5,000 The company should record its acquisition of the land in its financial statements at a value of

The company should record its acquisition of the land in its financial statements at a value of $1,020,000. All costs necessary to acquire an asset and prepare it for its intended use may be included in the total cost of the asset. The Purchase price of $1,000,000 + Real estate taxes in arrears or $15,000 + Attorney fees of $5,000 were all necessary expenditures to buy the land. Finance costs, such as debt issuance costs, are generally not capitalizable into the purchase price of an asset.

On January 1 of the current year, Jambon purchased equipment for use in developing a new product. Jambon uses the straight-line depreciation method. The equipment could provide benefits over a 10-year period. However, the new product development is expected to take five years, and the equipment can be used only for this project. Jambon's current year expense equals

The cost of equipment or facilities that are acquired or constructed for research and development (R&D) activities and have alternative future uses (in R&D or otherwise) should be capitalized when acquired or constructed. However, the cost of equipment or facilities that are acquired or constructed for a particular R&D project and have no alternative future uses (in other R&D projects or otherwise) are expensed as R&D costs at the time the costs are incurred.

Cody Corp. incurred the following costs during the year: Design of tools, jigs, molds, and dies involving new technology$125,000Modification of the formulation of a process160,000Trouble-shooting in connection with breakdowns during commercial production100,000Adaptation of an existing capability to a particular customer's need as part of a continuing commercial activity110,000 In its year-end income statement, Cody should report research and development expense of

The design of tools, jigs, molds, and dies involving new technology ($125,000) and the modification of the formulation of a process ($160,000) are activities that typically would be included in research and development expense. Troubleshooting in connection with breakdowns during commercial production and the adaptation of an existing capability to a particular customer's need as part of continuing commercial activity typically are excluded from research and development.

Two years ago Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31 of the current year when Fogg acquired some of the issued shares for $20 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement?

The effect of the acquisition and retirement of each common share is to decrease APIC by $10 (i.e., $15 - $5). A corporation cannot record a gain or loss on the acquisition and retirement of its own common stock. Retained earnings can be decreased, but never increased, as a result of the acquisition and retirement of its own common stock. Common stock 10 APIC--common stock 15 Cash 20 APIC--retirement of stock 5To record the acquisition and retirement of one share of Fogg's own common stock.

A foreign subsidiary of a U.S. parent company should measure its assets, liabilities and operations using

The subsidiary's functional currency The assets, liabilities, and operations of a foreign subsidiary of a U.S. parent company should be measured in its functional currency. An entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. The functional currency of a foreign subsidiary may be its local currency, the U.S. dollar, or another foreign currency.

On incorporation, Dee, Inc., issued common stock at a price in excess of its par value. No other stock transactions occurred except treasury stock was acquired for an amount exceeding this issue price. If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?

The entry to record the acquisition of the treasury stock in excess of its original issue price using the par method will involve a debit to Treasury Stock for the par value of the stock, a debit to Additional Paid-in Capital for the amount of the premium on the original issuance, a debit to Retained Earnings for the excess of the cost of the treasury stock over the original issuance price, and a credit to Cash for the cost of the treasury shares. When the par method is used, the balance of the Treasury Stock account is classified contra to the Common Stock account. Therefore, the use of the par method of recording will result in a decrease in net common stock, a decrease in additional paid-in capital and a decrease in retained earnings.

John Reynolds established a $500,000 trust, the income from which is to be paid to Mansfield University for general operating purposes. The present value of the income is estimated at $500,000. The Wyndham National Bank was appointed by Reynolds as trustee of the fund. What journal entry is required in Mansfield's books?

The establishment of an endowment requires a nonprofit organization (NPO) to recognize restricted contribution revenue. The NPO includes an asset in its balance sheet. When a beneficiary has an unconditional right to specific cash flows from a trust, the beneficiary interest is measured and subsequently remeasured at fair value, using a valuation technique such as the present value of the estimated expected future cash flows.

An expenditure to install an improved electrical system is a

The expenditure to install an improved electrical system represents a betterment (or improvement); that is, the substitution of a better asset for an existing asset. The expenditure increases the service potential of the electrical system. Because this increased service potential is a benefit that will be enjoyed throughout the life of the electrical system, the expenditure should be capitalized and depreciated over the life of the system. Revenue expenditures, on the other hand, are recurring expenditures that do not add to the service potential of a plant asset; they serve merely to maintain a given level of services. Revenue expenditures should be expensed when incurred.

Which of the following statements is correct regarding accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity?

The financial statements of all prior periods presented should be reported by retrospective application. Retrospective application based on the earliest period presented is provided for an accounting change that is change in reporting entity. Here, the term "restatement" refers only to correction of errors in previously issued financial statements.

A holder of a variable interest that is not the primary beneficiary acquired additional variable interests in the variable interest entity (VIE). What action, if any, should follow?

The holder of the variable interest should reconsider whether it is now the primary beneficiary. A variable interest entity, ordinarily referred to as a VIE, is a legal entity subject to consolidation according to GAAP. Generally, whether an entity is subject to consolidation under GAAP, and is, therefore, a VIE, depends on whether the entity's equity investors have a sufficient amount of equity investment at risk and the characteristics of a controlling financial interest. In those cases, focusing on voting interests is usually ineffective for determining if a controlling financial interest exists. An entity is the primary beneficiary when it has the power to direct activities and it has the obligation to absorb loss/benefits from the VIE. An entity should determine whether it is the primary beneficiary of a variable interest entity at the time the entity becomes involved with the variable interest entity and should reconsider, on an ongoing basis, whether it is the primary beneficiary of the variable interest entity. Only one entity (if any) is expected to be identified as the primary beneficiary of a VIE.

On October 1, year 4, Host Co. approved a plan to dispose of a segment of its business. Host expected that the sale would occur on April 1, year 5, at an estimated gain of $350,000. The segment had actual and estimated operating losses as follows: 1/1 to 9/30, year 4 $(300,000) 10/1 to 12/31, year 4 (200,000) 1/1 to 3/31, year 5 (400,000) In its December 31, year 4 income statement, what should Host report as a loss from discontinued operations before income taxes?

The income statement of a business enterprise for current and prior periods shall report the results of operations of the component in discontinued operations in the period(s) in which they occur. The loss on disposal of the segment in year 4 is $500,000 [$300,000 + $200,000].

On January 1 of the current year, Lundy Corp. purchased 40% of the voting common stock of Glen, Inc., and appropriately accounts for its investment by the equity method. During the year, Glen reported earnings of $225,000 and paid dividends of $75,000. Lundy assumes that all of Glen's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividends-received deduction. Lundy's current enacted income tax rate is 25%. Lundy uses the liability method to account for temporary differences and expects to have taxable income in all future periods. The increase in Lundy's deferred income tax liability for this temporary difference is

The investor recognizes income for financial purposes based on its equity in the investee's earnings; for tax purposes, investment income is recognized on the cash basis when dividends are received. Deferred taxes are recorded on this temporary difference. In this question, we are told to ignore the 80% dividends-received deduction (DRD).

In September of the current year, Koff Co.'s operating plant was destroyed by an earthquake. The portion of the resultant loss not covered by insurance was $700,000. Koff's income tax rate for the year is 21%. In its year-end income statement, what should Koff report as a loss?

The loss is $700,000. The tax rate is not considered in the calculation and is included as a distractor, along with the fact that it's an earthquake.

During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000, and its effective income tax rate was 15%. Worth's effective annual income tax rate for the previous year was 30%. Worth expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%. In its first quarter interim income statement, what amount of income tax expense should Worth report?

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an enterprise's financial statements or tax returns. One of the following basic principles applied in accounting for income taxes at the date of the financial statements is that a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. The effective annual income tax rate for the entire year will be 25%, thus $25,000 (25% of the first quarter $100,000 income) should be reported as income tax expense in the first quarter interim income statement. The first quarter effective rate, previous year effective rate, and statutory tax rate are not considered.

Which of the following information about threatened litigation should not be considered to determine whether an accrual is appropriate prior to issuance of a company's financial statements?

The period in which the threatened litigation became known to management The following information about the threatened litigation should be considered to determine whether an accrual is appropriate prior to issuance of a company's financial statements: * the period in which the underlying cause of the threatened litigation occurred * the degree of probability of an unfavorable outcome * the ability to make a reasonable estimate of the amount of loss. This would be quantitative but a range is permissible The disclosure and accrual of contingency loss in the financial statements depend on the probability of occurrence of the loss and the possibility of reasonably estimating the amount of loss and the period in which the underlying cause of threatened litigation occurred. If the contingency loss is probable (likely to occur) and the amount of loss can be reasonably estimated and underlying cause of the threatened litigation occurred in last period then it should be accrued for prior to issuance of the company's financial statements. Hence, the period in which the threatened litigation became known to management is irrelevant.

Which of the following criteria must be met for a lease to be classified as a direct financing lease?

The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and/ or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset. A lessor shall classify the lease as either a direct financing lease or an operating lease. A lessor shall classify the lease as an operating lease unless both of the following criteria are met, in which case the lessor shall classify the lease as a direct financing lease: The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and/ or any other third party unrelated to the lessor equals or exceeds substantially all of the fair value of the underlying asset. It is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.

Midway Corp. had the following transactions during year 2: $800,000 pretax loss on equipment damaged by a hurricane. Midway also received $1,000,000 from its insurance company to replace a building, with a carrying value of $300,000, that had been destroyed by the hurricane. What amount should Midway report in its year 2 income statement as an ordinary loss before income taxes?

The pretax loss on the equipment damaged in the hurricane must be offset by the excess of the building insurance proceeds over the carrying amount. Total ordinary loss: $100,000 Pretax loss on damaged equipment $800,000 Proceeds from insurance company $1,000,000 Carrying amount of building (300,000) Less: pretax gain on building destroyed by hurricane (700,000) Ordinary loss before income taxes $100,000

The fair value for an asset or liability is measured as

The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants. The fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly arm's length transaction between market participants at the measurement date (at exit price).

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 retained earnings were overstated by $1,000. In a periodic inventory system the inventory on hand is periodically determined by physical count. No entries are made to the inventory account during the period; the account reflects the amount at the beginning of the period until inventory is counted. A firm's ending inventory balance being overstated by $1,000 would cause the retained earnings to be overstated by $1,000. COGS is obtained by subtracting the ending inventory from the sum of beginning inventory and net purchases, so COGS would be understated by $1,000. Thecost of goods available is the sum of the beginning inventory and net purchases, and thus it is not affected by the ending inventory being overstated. The gross margin is a percentage used as part of the gross margin method to determine COGS. It may be used to verify the accuracy of the year-end physical count but otherwise it is not affected by the periodic inventory system.

Accumulated other comprehensive income is reported in which of the following financial statements?

The statement of financial position An entity is required to report accumulated other comprehensive income separately from retained earnings, capital stock, and additional paid-in capital in the equity section of the statement of financial position (balance sheet). It is not reported in the income statement, statement of comprehensive income, or statement of cash flows. Accumulated other comprehensive income is a component of equity that includes the total of other comprehensive income for the current period and previous periods. Total shareholders' equity is reported in the statement of financial position.

A company issued 10-year term bonds at a discount in year 1. Bond issue costs were incurred at that time. The company uses the effective interest method to amortize bond issue costs. Reporting the bond issue costs as a deferred charge would result in

The same reduction in net income in year 2 as reporting the bond issue costs as a reduction of the related debt liability Bond issue cost is the cost directly associated with bond issuance eg printing & engraving costs, legal and accounting fees, underwriter commissions, promotion costs, etc. As per FASB standard update issued in 2015, bond issue costs should be deducted from the carrying value of bonds and amortized using effective interest method ie bond issue costs is treated similar to discount/premium and is reported as an adjustment to bond payable liability. Prior to this update, bond issue costs were capitalized and deferred as a separate asset on a company's balance sheet and amortized using the straight-line method. In either of the two methods of reporting- either as a deferred asset or as a reduction in the liability, the same amount will be deducted as an expense in the income statement using the effective interest method.

Which of the following should be disclosed in a summary of significant accounting policies?

The summary of significant accounting policies describes the accounting policies & methods, recognition criteria, and measurement basis. It must include the accounting principles especially when alternatives exist. Basis of consolidation is a commonly required disclosure under significant accounting policies. Certain items are required disclosures in a summary of significant accounting policies, and they include the following: The basis of consolidation Depreciation methods Amortization of intangible assets (excluding Goodwill) Inventory pricing Recognition of Profit on long-term construction-type contracts Recognition of Revenue from franchising and leasing operations

Which of the following should be disclosed in a summary of significant accounting policies? Management's intention to maintain or vary the dividend payout ratio. Criteria for determining which investments are treated as cash equivalents. Composition of the sales order backlog by segment.

The summary of significant accounting policies should identify and describe the accounting principles followed by the reporting entity and the methods of applying those principles. Examples of disclosures by a business enterprise commonly required with respect to accounting policies include those relating to basis of consolidation, depreciation methods, amortization of intangibles, inventory pricing, recognition of profit on long-term construction type contracts, and criteria for determining which investments are treated as cash equivalents. Items (I) and (III) are examples of disclosures that are not accounting policies.

In its financial statements, Pare, Inc. uses the cost method of accounting for its 15% ownership of Sabe Co. At December 31, Pare has a receivable from Sabe. How should the receivable be reported in Pare's December 31 balance sheet?

The total receivable should be reported separately. The total receivable from Sabe should be separately reported in Pare's financial statements since Sabe is not a subsidiary of Pare (i.e., Pare has only a 15% interest in Sabe). Pare would have to own a majority voting interest (i.e., > 50%) in Sabe in order for Sabe to be considered a subsidiary.

Concerning combined financial statements, which of the following statements is true?

There are circumstances where combined financial statements of commonly controlled companies are likely to be more meaningul than their separate statements. Combined financial statements are often prepared for a group of related companies or a group of commonly controlled companies. Combined financial statements are prepared by combining the individual companies' financial statement classifications into one set of financial statements.

Which of the following is not a characteristic of market participants when measuring fair value?

They are related parties Market participants are buyers and sellers in the market for the asset or liability that are independent of the reporting entity, knowledgeable, willing and able to transact for the asset or liability (not forced).

Which of the following common characteristics of derivative financial instruments distinguishes them from other types of financial instruments?

They have a notional amount or payment provision that is based on the changes in one or more underlying variables. A derivative is a financial instrument or other contract that derives its value from the movement of prices, interest rates, or foreign exchange rates associated with an underlying asset or financial instrument. A notional amount is a number of currency units, shares, bushels, pounds, or other units specified in the contract. The notional amount is called a face amount in some contracts. A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner. Derivatives are the only financial instruments to have such notional amounts or payment provisions based on underlying variables. Contractual rights and obligations are not unique to derivatives and are features of other financial instruments as well. Derivatives are valued on the balance sheet at their fair values and not at cost.

What is a primary purpose and focus of the statement of activities for a nongovernmental not for profit org?

To demonstrate how the organizations resoruces are used in providing various programs and services The primary purpose and focus of the statement of activities for a nongovernmental not for profit org is to demonstarte how the organizations resources are used in providing various programs and services. This statement is similar to a forprofits entitys income statement. Its primary purpose is to provide relevant information about the effects of transactions and other events that change the amount and nature of net assets, types, and amounts of revenues received, and how the organization's resources are used in providing various programs or services. It combines revenues, expenses, gains, and losses with the changes i net assets(ie equity). The statement must report the changes in total net assets and the change in each class of net assets.

Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the current year ended December 31, its first year of operations: Pretax financial income$160,000Nontaxable interest received on municipal securities(5,000)Long-term loss accrual in excess of deductible amount10,000Depreciation in excess of financial statement amount(25,000)Taxable income$140,000 Zeff's tax rate for the year is 40%. In its income statement, what amount should Zeff report as income tax expense - current portion?

To determine the current portion of income tax expense, taxable income is multiplied by the current year's enacted corporate income tax rate.

At the end of year 1, Lane Co. held trading debt securities that cost $86,000 and which had a year-end market value of $92,000. During year 2, all of these securities were sold for $104,500. At the end of year 2, Lane had acquired additional trading debt securities that cost $73,000 and which had a year-end market value of $71,000. What is the impact of these stock activities on Lane's year 2 income statement?

Trading debt securities that are bought and held principally for the purpose of selling them in the near term. They are reported at fair value (market value) and any unrealized holding gains and losses are included in current earnings.

The following information pertains to each unit of merchandise purchased for resale by Vend Co.: March 1December 31Purchase price$ 8Selling price12$ 15Price level index110121Replacement cost10 Under current cost accounting, what is the amount of Vend's holding gain on each unit of this merchandise?

Under current cost accounting, the amount of holding gain on a unit of inventory is the increase in current cost from holding the inventory from period to period. The inventory in question was purchased at $8 per unit on March 1 and has a replacement cost of $10 on December 31. Thus, under current cost accounting, Vend has a holding gain of $2 on each unit of inventory.

Cor-Eng Partnership was formed on January 2 of the current year. 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 while Eng contributed $20,000 in cash. Eng's initial capital balance in Cor-Eng is

Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Cor is given an initial capital balance of $60,000, equal to the fair value of the identifiable assets Cor contributed to the partnership. Eng is also given an initial capital balance of $60,000. Since Eng only contributed identifiable assets with a fair value of $20,000, Eng must have also contributed an unidentifiable asset (i.e., goodwill) with a fair value of $40,000.

For an OCBOA presentation, which of the following statements is false regarding the pure cash basis of accounting?

Under the pure cash basis, revenues are recognized when cash is received, rather than when earned; expenses are recognized when cash is disbursed rather than when incurred; long-term assets are not capitalized, and, hence, no depreciation or amortization is recorded; and no accruals are made for taxes and no prepaid expenses are recorded.

Universal Corporation borrowed $500,000 in notes on 9/30 at an interest rate of 10%. The first interest instalment was paid on 12/31. What should be the interest expense and liability reported on the balance sheet?

Universal has paid interest for 3 months: 500,000 x 10% x 3/12 = $12,500. This amount should be reported as an expense on the income statement. Liability would be the principal of $500,000. On 12/31, the company has no accrued interest liability since all interest obligations up until 12/31 have been paid. As such, no interest accrual is to be recognized.

For a marketable debt securities portfolio classified as available-for-sale, which of the following amounts should be included in the period's net income? Unrealized holding losses during the period Realized gains during the period Changes in the Market Adjustment account during the period

Unrealized holding gains and losses for AFS debt securities are excluded from earnings and reported in other comprehensive income until realized. Any changes in the Market Adjustment account would have no effect on net income.

Sun Corp. had investments in debt securities classified as trading debt securities costing $650,000. On June 30 of the current year, Sun decided to hold the investments indefinitely and accordingly reclassified them from trading debt securities to available-for-sale debt securities on that date. The investment's fair value was $575,000 on December 31 of the previous year; $530,000 this June 30; and $490,000 on December 31 of the current year. Assuming no expected credit losses, what amount should Sun report as a net unrealized loss on investments in debt securities in other comprehensive income at the end of the current year?

Unrealized holding losses for available-for-sale (AFS) debt securities are excluded from earnings and reported in other comprehensive income until realized. The decrease in fair value over the time period in which the securities were classified as trading debt securities would have been reported in earnings. However, the loss occurring after the transfer to the AFS category, $40,000 ($530,000 - $490,000), would be reflected in OCI.

A corporation recently issued $4 million of 10-year, 3% bonds at 101. There were 200,000 detachable stock warrants included as part of the sale. Each warrant allows the bondholder to purchase one share of no-par common stock for $12 per share. On the date of issuance, the stock warrants had a fair value of $1 per warrant. By what amount did the corporation's long-term debt increase as a result of this issuance?

When bonds are issued with detachable warrants, the value for such detachable warrants is posted in APIC. A value is given to both the bond and the warrant for the simple reason that warrants are clearly separable from the bond. If the fair market values of both security values are known, values are determined as per relative FMV approach. However, in case the FMV of only one of the securities is known, the other security's value is derived using a plug. In the given problem statement, the fair value of only the detachable warrant is known i.e. $1 x 200,000 = $200,000. Since the bonds were issued at 101, the cash inflow = $4,000,000 x 101 = $4,040,000. The value of bonds i.e. long-term debt = 4,040,000 - 200,000 = $3,840,000.

Tiger Rags is evaluating its financial statement disclosures relating to gain contingencies. When should Tiger Rags recognize the gain on the contingency?

When realized Contingent liabilities arise from events or circumstances occurring before the balance sheet date, the resolution of which is contingent upon a future event or circumstance. The distinction between contingencies and other liabilities hinges on the uncertainty as to the existence of the liability and not on the uncertainty as to the amount of the liability. Gain contingencies are a type of contingency where the entity expects to gain something but the gain is contingent upon a future event or circumstance. Gain contingencies should be disclosed but not recognized as income. These are recognized as gain only when they are realized. Gain contingencies are not recorded even when they are reasonably probable, and with determinable amounts, they are just disclosed.

Mentor Co., a U.S. corporation, owned 100% of a Swiss corporation. The Swiss franc is the functional currency. The remeasurement of Mentor's financial statements resulted in a $25,000 gain at year-end. The translation of the financial statements resulted in a $40,000 gain at year-end. What amount should Mentor recognize as foreign currency gain in its income statement?

When the company executes a transaction in a currency other than the one in which the books are maintained, the transaction is remeasured to the functional currency. This remeasurement gain or loss is recognized in the income statement. If the company maintains its books in a foreign currency, but issues its financial statements using a different currency, all transactions are translated to the reporting currency. This translation gain or loss is recognized in the other comprehensive income.

Which of the following statements is (are) true regarding temporary differences?

When there is a temporary difference that results from an event that has been recognized in the financial statements, that will result in taxable or deductible amounts in future years.

A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following?

With the redeemable gift certificates are sold, the sales price collected represents unearned revenue and an unearned revenue account is credited (i.e. increased). As the certificates are redeemed, the earned revenue is recognized, decreasing the unearned portion. Lapsed certificates would also decrease unearned revenue account. In either case, the Deferred Revenue account is decreased.

Which of the following would be accounted for as a change in accounting principle and treated retrospectively?

a change in the method of inventory pricing, such as from LIFO to FIFO A change in the method of inventory pricing is accounted for as a change in accounting principle and treated retrospectively. Per SFAS 15 changes in depreciation, amortization, and depletion methods are treated as changes in accounting estimates affected by a change in accounting principle and treated prospectively.

The correction of an error in the financial statements of a prior period should be reported

as a prior period adjustment by restating the prior-period financial statements

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be

expensed as incurred in the current period Acquisition costs are those costs the acquirer incurs to effect a business combination, and include: finder's fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs; and costs of registering and issuing debt and equity securities. Acquisition costs are expensed in the period in which the costs are incurred and the services are received.

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?

https://mcq.ninjacpareview.com/mcq-page/#:~:text=FASB%20ASC%20470,a%20current%20liability.

According to the FASB's conceptual framework, asset valuation accounts are

neither assets nor liabilities a separate item that reduced or increases the carrying amount of an asset is somemes found in financial statements. For example, an estimate of uncollectible amounts reduces receivables to the mount expected to be collected, or a premoum on a bond receivable increases the receivable to its cost or presetn value. those 'valuation accounts' are part of the related asste or liability and do not stand on their own.

Which of the following is not a valuation technique approach used to measure fair value?

sale approach The sales approach is not a valuation technique used to measure fair value. Valuation techniques consistent with the market approach, and/or cost approach shall be used to measure fair value. The technique(s) used shall be the best appropriate in the circumstance and for which sufficient data is available.

The per-share amount must be reported on the face of a public company's income statement for which of the following items?

Earnings per share (EPS) is reported on the face of the company's income statement for income from continuing operations and net income. The per-share amount need not be reported on the face of the company's income statement for a preferred stock dividend, U.S. Treasury stock, or any compensation effect of fair value on stock options.

Which of the following is a qualitative characteristic that enhances the usefulness of financial information?

Enhancing qualitative characteristics include: Comparability Verifiability Timeliness Understandability. These characteristics enhance the usefulness of information that is relevant and faithfully represented. Materiality & Confirmatory Value is a fundamental qualitative characteristic under relevance. Neutrality is a fundamental qualitative characteristic under faithful representation.

Lori Hospital received a pure endowment grant. The pure endowment grant

The receipt of the pure endowment grant is recorded as Net Assets with Donor Restrictions upon receipt. The principal of a pure endowment may not be expended. Donations with a donor's specified purpose must be recognized in the period of receipt, not in the period of expenditure for the donor's specified purpose.

A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?

A security is dilutive if the inclusion of the security in the computation of earnings per share (EPS) results in a smaller EPS or increases loss per share. Categories of potentially dilutive securities include (1) convertible securities where the if-converted method is used, (2) options, warrants, and their equivalents where the treasury stock method is used, and (3) contingently issuable shares. If the 7% convertible bonds are converted with each $1,000 bond into 40 shares of common stock. Numerator is increased by the after-tax interest expense and the denominator by number of shares, if the bond is converted. After tax interest = $49 [$1,000 x 7% x (1-0.3)]. Effect of converting each bond into 40 shares would be $1.225 ($49/40 Shares) per share which is less than $1.29 per share, resulting in dilution of basic EPS of $1.29. Option (A) is incorrect because preferred stock is not convertible and would not have a dilutive effect. Option (B) is incorrect because if the 10% bonds were converted, it will be $3.5 per share [($100-$30)/20], which would not dilute the EPS. Option (D) is incorrect because the effect of conversion will be $1.5 per share [($100 x 6%)/4], which would not dilute the EPS.

The FASB amends the Accounting Standards Codification through the issuance of

Accounting Standards Updates Statements of Financial Accounting Standards (SFAS) contains other FASB pronouncements like interpretations of accounting standards, technical bulletins, staff positions, staff implementation guides, etc. in order to enable companies to understand the objective and fundamental concept of GAAP pronouncements and adhere to them. It is not used by FASB to amend the ASC. Technical bulletins are issued to provide guidance on certain financial accounting and reporting problems and not to amend the ASC. Staff Accounting Bulletin (SAB) provides a summary of the views of the Securities and Exchange Commission's staff regarding the manner and application of GAAP. The SAB bulletins are more restrictive than GAAP from where they derive their interpretation. Hence, we can also derive by elimination that FASB amends the ASC through the issuance of Accounting Standards Updates (ASU) which describes the amendment to the ASC and date from when the amendment will be effective.

Accumulated Other Comprehensive Income is reported in which of the following financial statements?

An entity is required to report Accumulated Other Comprehensive Income separately from Retained Earnings, Capital Stock, and Additional Paid-In Capital in the Equity section of the Statement of Financial Position (Balance Sheet). It is not reported in the Income Statement, Statement of Comprehensive Income, or Statement of Cash Flows. Accumulated Other Comprehensive Income is a component of equity that includes the total of Other Comprehensive Income for the current period and previous periods. Total Shareholders' Equity is reported in the Statement of Financial Position.

An operating segment is a component of an enterprise that has all the following characteristics except:

An operating segment is a component of an enterprise that has all the following characteristics: It engages in business activities from which it may earn revenues and incur expenses. Its operating results are regularly reviewed by the entity's chief operating decision-maker. Its discrete financial information is available. There is no requirement for an operating segment to be present in all the primary business locations of the company. As long as a segment satisfies the three criteria above, it would qualify to be called an operating segment.

In year 1, Gamma, a not-for-profit organization, deposited at a bank $1,000,000 given to it 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 classified balance sheet?

Assets restricted to a particular use assume the liquidity of that use. Endowment funds are typically long-term assets. (Endowment implies a net asset with donor restrictions.) Amounts available to spend on ongoing programs are current. The $2,000 was available and spent on programs. Options (A), (C) and (D) are incorrect as per above explanation.

Unusual or infrequent items are reported:

Component of income from continuing operations, but not net of applicable income taxes A transaction that is unusual in nature or infrequent in occurrence should be reported as a component of income from continuing operations. It cannot be shown as net of taxes as tax is a separate line item to arrive at the income from continuing operations.

The following information relates to the capital structure of Parke Corporation: December 31 Previous Current Outstanding shares of: Common stock 90,000 90,000 Preferred stock, convertible into 30,000 shares of common 30,000 30,000 10% convertible bonds, convertible into 20,000 shares of common $1,000,000 $1,000,000 During the current year, Parke paid $45,000 dividends on the preferred stock, which was earned in this year. Parke's net income for the year was $980,000 and the income tax rate was 40%. For the current year ended December 31, diluted EPS is

Basic Earnings per share (EPS) is computed by dividing net income less preferred stock dividends by the weighted average shares of common stock outstanding. Diluted EPS adjusts this calculation to reflect all potentially dilutive securities. To compute diluted EPS for this question, the convertible securities are assumed to have been converted at the beginning of the year. The preferred stock dividend of $45,000 is added back to the numerator (canceling out its original subtraction, since in this question we already have Net Income, Preference Dividend wasn't subtracted and hence need not be added back) and the 30,000 shares of converted common stock are added to the denominator. The bond interest expense, net of tax, of $60,000 [($1,000,000 × 10%) × (1 - 40%)] is added back to the numerator as it was subtracted from Net Income and the 20,000 shares of converted common stock are added to the denominator. Diluted EPS = $980,000 Net income + $60,000 Bond interest (net tax) = $7.43 90,000 (CS) + 30,000 (conv. PS) + 20,000 (conv. bonds)

On January 1, Brecon Co. installed cabinets to display products in customers' stores. Brecon expects to use these cabinets for five years. Brecon's year-end multi-step income statement should include:

Brecon Co. will use the installed cabinets to display its merchandise in customers' stores, which are fixed assets that would be used to generate day to day sales/revenue. The cost of installing the cabinets will be capitalized and depreciated over a period of 5 years. Depreciation is calculated on a straight-line basis for 5 years which means 1/5th of the cost per year will be charged to the income statement. The cabinets are used to display products for sale, depreciation will be reported under selling expense.

One of the elements of a financial statement is comprehensive income. Comprehensive income excludes changes in equity resulting from which of the following?

Comprehensive income includes all items of the income statement and changes in equity during a period except those resulting from investments by owners and distributions to owners.

Which of the following items is included in the financing activities section of the statement of cash flows?

Cash effects of transactions obtaining resources from owners and providing them with a return on their investment Included in the financing activities section of the statement of cash flows are cash effects of (1) obtaining resources from owners and providing them with a return on their investment, (2) borrowing money and repaying amounts borrowed, or otherwise settling the obligation, (3) obtaining and paying for other resources obtained from creditors on long-term credit, and (4) derivatives that contain a financing component and are accounted for a fair-value or cash-flow hedges. The cash effects of transactions involving making and collecting loans and those of acquiring and disposing of investments and property, plant, and equipment would be included in the investing activities section. The cash effects of transactions and other events that enter into the determination of net income would be included in the operating activities section.

Baker Co. began its operations during the current year. The following is Baker's balance sheet at December 31: Assets Cash $192,000 Accounts receivable 82,000 Total assets $274,000 Liabilities and stockholders' equity Accounts payable $ 24,000 Common stock 200,000 Retained earnings 50,000 Total liabilities and stockholders' equity $274,000 Baker's net income for the current year was $78,000 and dividends of $28,000 were declared and paid. Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its statement of cash flows for the current year?

Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. Both the $28,000 from dividends that were declared and paid and the $200,000 from issuance of common stock are cash flows from financing activities, not operating. With the limited information provided it is best to use the indirect method to compute the cash provided by operating activities. Computation under this method is done by converting net income to net cash flow from operating activities. Start with net income and then make adjustments to reconcile net income to net cash provided by operating activities. Take the $78,000 net income less the $82,000 increase in accounts receivable plus the $24,000 increase in accounts payable and the result is $20,000 net cash provided by operating activities. Option (B) is incorrect because it is retained earnings. Option (C) is incorrect because it is the cash balance. Option (D) is incorrect because it is the sum of common stock and retained earnings ($250,000 = $200,000 + $50,000).

During the current year, Xan, Inc. had the following activities related to its financial operations: Payment for the early retirement of long-term bonds payable (carrying amount $370,000) $375,000 Distribution cash dividend declared in the previous year to preferred shareholders 31,000 Carrying amount of convertible preferred stock in Xan, converted into common shares 60,000 Proceeds from sale of treasury stock (carrying amount at cost, $43,000) 50,000In Xan's current year statement of cash flows, net cash used in financing operations should be

Cash inflows from financing activities include proceeds from issuing equity securities (e.g., treasury stock). Cash outflows for financing activities include payments of dividends and repayments of amounts borrowed. Conversion of preferred stock into common stock is a noncash financing activity. Payment for early retirement of bonds payable $(375,000) Payment of preferred stock dividend (31,000) Proceeds from sale of treasury stock 50,000 Net cash used in financing operations $ 356,000

A company that uses the accrual method of accounting started the fiscal year with assets of $600,000 and liabilities of $400,000. During the fiscal year, the company recorded credit sales of $250,000, of which $8,000 remained to be collected at year-end, and incurred expenses of $90,000, of which $72,000 was paid in cash. A stock dividend valued at $10,000 was declared and issued to stockholders during the year. What is the year-end balance of total equity?

Closing Stockholders' equity can be calculated simply by adding Profit for the year to the Opening Stockholders' equity, i.e., the difference between the total assets and liabilities. In this specific problem statement, the year-end balance of equity is: Description $ Opening Equity (Assets - Liabilities) ($600,000- $400,000) $200,000 Add: Profit (Sales - Expense) ($250,000 - $90,000) $160,000 Closing Equity $360,000 Note: The stock dividend is a dividend paid in the form of stock and results in a decrease in Retained Earnings and in Common Stock, meaning total equity will not change.

Gridiron University is a private university. A successful alumnus has recently donated $1,000,000 to Gridiron for the purpose of funding a "center for the study of sports ethics." This donation is conditional upon the university raising matching funds within the next 12 months. The university administrators estimate that they have a 50% chance of raising the additional money. How should this donation be accounted for?

Conditional donations = recognize when earned. Conditional donations are not revenues until they become unconditional or the conditions are substantially met. Good faith deposits associated with conditional promises would be recorded as a liability "refundable advance". The use of the $1,000,000 gift is conditional upon raising matching funds from others. Until the matching funds are received (or the condition has been substantially met), the monies contributed are payable back to the donor. No revenue is recognized.

Water Co. owns 80% of the outstanding common stock of Fire Co. On December 31, Fire sold equipment to Water at a price in excess of Fire's carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, the carrying amount of the equipment should be reported at

Consolidated statements should not include gain or loss on transactions among the companies in the group. Any inter-company profit or loss on assets remaining within the group should be eliminated. Therefore, the carrying amount of the equipment should be reported at the cost of the equipment to the purchasing affiliate (Water) less the entire gain recorded by the selling affiliate (Fire)".

A voluntary health and welfare organization received a cash donation in year 1 from a donor specifying that the amount donated be used in year 3. The cash donation should be accounted for as

Contributions received in advance of the year the donor intends them to be used—even if usable then for unrestricted purposes—are initially recorded in a "restricted support" account. They should be accounted for as support in the year the unconditional promise to give is made. The term "deferred" is no longer applied to donations in non-governmental nonprofit accounting.

In computing the weighted-average number of shares outstanding during the year, which of the following midyear events must be treated as if it had occured at th beginning of the year?

Declaration and distribution of stock dividend. In computing the weighted-average number of shares outstanding, stock dividends, stocksplits, and reverse stock splits are refleced retroactively, bevause they change the total nuber of shares outstanding but not the proportionate shares outstanding. The purchase of treasury stock, the sale of additioanl common stock and preferred convertile stock affect the total number of shares and the proportionate shares outstadninf. these shares participate in earnings for ony the time the stock is outstanding.

An increase in the cash surrender value of a life insurance policy owned by a company would be recorded by

Decreasing annual insurance expense

A company that issues quarterly financial statements shuts down a business unit in one of the first three quarters, resulting in a loss. In which of the following ways would the company report the discontinued operations?

Discontinued operations should be included in the determination of net income for the interim period in which they occur. Discontinued operations should not be prorated among interim periods.

In year 2, the Nord Association, a nongovernmental not-for-profit organization, received a $100,000 contribution to fund scholarships for medical students. The donor stipulated that only the interest earned on the contribution be used for the scholarships. Interest earned in year 2 of $15,000 will be used to award scholarships in year 3. What amount should Nord report as net assets with donor restrictions at the end of year 2?

Entities are required to classify net assets based upon the existence or absence of donor-imposed restrictions. Net assets are classified into two categories: Net Assets with donor restrictions and Net Assets without donor restrictions. Contributions with donor-imposed restrictions are reported as restricted support. Restricted support increases Net Assets with donor restrictions. Note: The $100,000 received as a contribution to fund scholarships for medical students is permanently restricted and will be classified as Net Assets with Donor Restrictions, whereas the $15,000 from interest is also temporarily restricted to award scholarships and will be classified as Net Assets with Donor Restrictions. When the amount is expended to award scholarships, then it is reclassified from Net Assets with Donor Restrictions to Net Assets without Donor Restrictions.

Lex Corp. was a development stage enterprise from October 10, year 1 (inception), to December 31, year 2. The year ended December 31, year 3, is the first year in which Lex is an established operating enterprise. The following are among the costs incurred by Lex:

Financial statements issued by a development stage enterprise should be presented in conformity with GAAP that apply to established operating enterprises. These accounting principles determine whether a cost incurred by a development stage enterprise should be charged to expense when incurred or should be capitalized or deferred. Lex should capitalize both the cost of the leasehold improvements, equipment, and furniture and the cost of the security deposits. Research and development ($750,000 + $900,000) $1,650,000 Laboratory operations ($175,000 + $550,000) 725,000 General and administrative ($225,000 + $685,000) 910,000 Depreciation ($25,000 + $115,000) 140,000 Total amount of costs charged to operations $3,425,000

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?

For interim financial reporting, costs and expenses other than product costs should be charged to income in interim periods as incurred or be allocated among interim periods based on an estimate of time expired, benefit received, or activity associated with the periods. The $60,000 in property taxes is for the entire calendar year and would be allocated evenly as $15,000 of expenses for each quarter. The $240,000 for major repairs happened on April 2 and will benefit operations for just the remainder of the year. The $240,000 divided by the three remaining quarters equals $80,000 in expenses for each of those three quarters. The $15,000 plus $80,000 equals $95,000 in expenses to be reported in the third quarter of the interim financial statements for the three months ended September 30.

Who must generally register with the SEC under The Securities Act of 1933?

In general, securities sold in the US must be registered with the SEC. Registration statements and prospectuses become public shorts after filing with the SEC. There are some limited exemptions from the registration requirement. Those exemptions include securities sold in overseas exchanges, private offerings to a very limited number of investors, and securities of municipal, state and federal governments.

On September 30, year 1, a commitment was made to dispose of a business segment in early year 2. The segment operating loss for the period October 1 to December 31, year 1, should be included in the year 1 income statement as part of

In the 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 enterprise for current and prior periods shall report the results of operations of the component in discontinued operations in the period(s) in which they occur. The segment operating loss for the period October 1 to December 31, year 1, would be included in the year 1 income statement discontinued operations section as part of the operating loss of the discontinued segment.

Which of the following is not a major source of increase in net worth in personal financial statements?

Increases in estimated income taxes on the differences between the estimated current value of assets and the estimated current amounts of liabilities and their tax bases represent a major source of decrease in net worth.

According to the FASB conceptual framework, SFAC No. 8, predictive value is an ingredient of:

Information is faithfully represented if it represents what it purports to represent and is complete, neutral, and free from error. Information is relevant if it has the capacity to make a difference in a decision by helping users form predictions about the outcomes of the past, present, and future events or confirm or correct prior expectations. For information to be relevant, it must have predictive value, confirmatory value, or both.

According to the FASB conceptual framework, which of the following correctly pairs a fundamental qualitative characteristic of accounting information with one of its components?

Information is relevant if it is capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations. Components of relevance are predictive value or confirmatory value or both. Information must faithfully represent what it purports to represent. It must be complete, neutral, and free from error.

Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis?

Monetary unit assumption implies that the economic activity should be measured in money. Option (A) is incorrect because the going concern concept assumes that the entity will continue to operate in the foreseeable future. Option (B) is incorrect because periodicity means the economic activity being divided into meaningful time periods. Option (D) is incorrect because economic entity is defined as an identifiable set of activities.

Ragg Coalition, a nongovernmental not-for-profit organization, received a gift of treasury bills. The cost to the donor was $20,000, with an additional $500 for brokerage fees that were paid by the donor prior to the transfer of the treasury bills. The treasury bills had a fair value of $15,000 at the time of the transfer. At what amount should Ragg report the treasury bills in its statement of financial position?

NFPs are required to use fair value accounting for most equity and debt investments and reports investment income (dividends/interest) as well as realized AND unrealized gains/losses on marketable securities directly in the statement of activities. Treasury bills are recorded at $15,000 which is the fair market value on the date of the transfer. (b) is incorrect because brokerage charges are included which are paid by the donor. (c) is incorrect because FV is used to recognize the treasury bills, not the cost. (d) is incorrect because instead of using fair value, cost and brokerage charges are included.

Valley's community hospital normally includes proceeds from the sale of cafeteria meals in

Other Revenue of a healthcare entity is the usual day-to-day revenue not derived from patient care and services. It includes (1) proceeds from cafeteria meals sold, (2) revenue from educational programs, and (3) revenue from miscellaneous sources, such as from gift shops and parking lots. The proceeds from the sale of cafeteria meals do not offset dietary service expenses. Patient service revenues consist of revenue from routine services (e.g., room, board, and general nursing), other nursing services (e.g., operating, recovery, and delivery rooms), and professional services (e.g., physicians' care, lab work, and pharmacy).

_________________ is (are) classified as current liabilities.

Overdrafts in accounts with no available cash in another account at the same bank to offset are classified as current liabilities. Restricted cash is classified based upon the date of availability or disbursement. If restricted for a current asset or current liability, the restricted cash is classified as a current asset, but segregated from unrestricted cash. If restricted for a noncurrent asset or noncurrent liability (e.g., cash to be used for plant expansion or the retirement of long-term debt), the restricted cash is classified as a noncurrent asset in either the investments or other assets section regardless of whether the cash is expected to be disbursed within one year of the financial statement date.

Which of the following is one of three standard sections of a governmental comprehensive annual financial report?

Statistical The comprehensive annual financial report contains the following sections: Introduction section, Financial section, and the statistical section.

The purpose of a statement of financial position for a nongovernmental not-for-profit entity is to provide relevant information about

Purpose of a statement of financial position for a non-governmental, not-for-profit entity is to provide relevant information about the assets, liabilities, net assets, and about their relationships to one another at a moment in time.

Which of the following is the principal accounting regulation of the SEC that governs an issuer's annual report?

Regulation S-X is the principle accounting regulation of the SEC, governing the annual report. All financial statements presented in annual reports must conform to the S-X accounting and disclosure rules. Regulation S-T is the cornerstone of the EDGAR rules, prescribing requirements for electronic filing and the procedures for making such filings. There is no regulation 10-K, but there is a form 10-K which typically contains more detailed information about the company's financial condition than the annual report. Regulation 12B governs all registration statements.

For the eight months ended August 31, year 5, the carpet division of a flooring company, which is considered a major line of business, had an operating loss of $115,000 from operations. On September 1, year 5, the board of directors voted to discontinue the division's operations. On December 31, year 5, the division was sold for a pre-tax loss of $135,000. The division's operating loss for year 5 was $240,000. The company's income tax rate is 30%. What amount of loss should the company report as discontinued operations in the December 31, year 5, income statement?

Results of all discontinued operations are reported net of tax as a separate component on the income statement. The loss to be reported as discontinued operations by the flooring company in question is as follows: Loss on sale of division $135,000 Add: Division's operating loss $240,000 Total loss from discontinued operations $375,000 Less: Income Tax @ 30% ($112,500) After-tax loss $262,500

The primary means for disseminating unofficial administrative interpretations and practices of the SEC's Division of Corporation Finance in reviewing financial information in SEC filings is which of the following?

Staff Accounting Bulletins are intended to achieve dissemination of administrative interpretations and practices of the SEC staff in reviewing financial information in SEC filings. The bulletins are not rules or interpretations of the Commission, nor have they been officially approved. They represent interpretations by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws. Financial Reporting Releases (FRRs) may require an additional disclosure or define accounting to be followed by issuers. Accounting andAuditing Enforcement Releases (AAERs) communicate enforcement actions involving accountants. Concept releases are published to solicit the public's views on securities issues so that it can better evaluate the need for future rulemaking.

How should the amortization of bond discount on long-term debt be reported in a statement of cash flows prepared using the indirect method?

The amortization of bond discount on long-term debt is reported as an addition to income in the operating activities section of a statement of cash flows prepared using the indirect method.

Janna Association, a nongovernmental not-for-profit organization, received a cash gift with the stipulation that the principal be held for at least 20 years. How should the cash gift be recorded?

The cash gift should be recorded as a restricted asset because the donor-imposed restriction that the principal is held, will lapse upon the occurrence of conditions specified by the donor, after the 20 years. The gift is not a liability.

In the loan fund of a college, each of the following types of loans would be found except

The loan funds group of a college is used to account for loans to students, faculty, and staff (and of resources available for such purposes).

When an entity insures the lives of its key executives, the entity accounts for the life insurance policies in which of the following ways?

The savings portion of the policies is represented by the growing cash surrender value of the policies, as the entity continues to pay premiums on the policies. The entity classifies the cash surrender value of these life insurance policies as noncurrent assets. The entity computes its annual life insurance expense by deducting the increase in cash surrender value and deducting any dividends received from the annual premiums paid. The savings portion key executives' life insurance policies is represented by the growing cash surrender value of the policies, as the entity continues to pay policy premiums; the entiry classifies the cash surrender value of these life insurance policies as noncurrent assets; and the entity computes its annual life insurance expense by deducting the increase in cash surrender value and any dividends received from the annual premiums paid.

The par-value method of accounting for treasury stock differs from the cost method in that

The theoretical justification for the par value method is that the purchase of treasury stock is in fact a constructive retirement of those shares; therefore, reacquired stock is recorded essentially by reversing the amounts at which the stock was originally issued and adjusting any difference to Additional Paid-In Capital or Retained Earnings. Reissuance of the stock is treated as if it were a new issue, i.e., the excess purchase price received over par is credited to Additional Paid-In Capital.

P Co. purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Co., P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts in the two companies would be

To the consolidated entity, the acquisition of an affiliate's debt from an outside party is the equivalent of retiring the obligation. Therefore, the consolidated entity must immediately recognize any difference between the price paid and the carrying amount of the bonds as a gain or loss. The consolidated entity would recognize a loss from the acquisition because the price paid for the bonds exceeded their carrying amount on the affiliate's books (i.e., the bonds were originally issued at a discount and were purchased in the open market at a premium). The loss that the consolidated entity recognizes would be included in the consolidated balance sheet as a decrease to retained earnings.

Which of the following is a true statement related to electronic filing of equired SEC submissions?

Unanticipated technical difficulties can result in a temporary hardship exemption for electornic filing. Rule 201 of regulation S-T provides a temporary hardship exemption for electronic filers, generally for unanticiapeted technical difficulties in submitting an electronic document. The exemption may be appropruate, for example, for a particular document that a filer is unable to file electronically becasue of problems with the filer's computer equipment that had been used previously to transmit witheer test or required electonic filings succesfully.

Savor Co. had $100,000 in accrual basis pretax income for the year. At year end, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their prior year-end balances. Under the cash basis of accounting, what amount of pretax income should Savor report for the year?

Under cash basis accounting, the effects of transactions on the assets and liabilities of a business enterprise are recognized and reported only when cash is received or paid; while in accrual accounting, these effects are recognized and reported in the time periods to which they relate. Cash basis accounting does not attempt to match revenues and the expenses associated with those revenues. As such, both the $10,000 increase in accounts receivable and $6,000 decrease in accounts payable would reduce the pretax income under the cash basis of accounting. $100,000 - $10,000 - $6,000 = $84,000.

Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders' equity and the book value per common share?

When treasury stock is acquired, total stockholders' equity decreases by the cost of the treasury shares, regardless of the method used to account for the treasury stock. The book value per common share is computed by dividing total stockholders' equity applicable to common stock by the number of common stock shares outstanding. The acquisition of treasury shares at a price less than their book value will reduce both the numerator and denominator of the book value ratio; however, the reduction of the numerator is less than the amount that was in there for these shares. Therefore, the excess book value for those shares would now be spread over the remaining common shares outstanding, resulting in an increase in the book value per common share.

what is the basic accounting principle that supports the immediate recognition of a contingent loss?

conservatism