Financial Practice Exam #1
Nu Corp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machine's original cost was $140,000. The note's face amount was $110,000. On the date of the agreement: The note's carrying amount was $105,000, and its present value was $96,000. The machine's carrying amount was $109,000, and its fair value was $96,000. What amount of net gains (losses) should Nu recognize in its income statement? A. $(4,000) B. $(13,000) C. $(9,000) D. $0
A. $(4,000)
The following information pertains to certain monies held by Blair County at December 31, Year 1, that are legally limited to expenditures for specified purposes: Proceeds of short-term notes to be used for advances to private purpose trust funds = $8,000 Proceeds of long-term debt to be used for a major capital project = $90,000 What amount of these monies should Blair account for as restricted or committed in special revenue funds? A. $0 B. $8,000 C. $90,000 D. $98,000
A. $0
Selected amounts from Rufus Inc.'s December 31, Year 3 and December 31, Year 4 trial balances are: Dec31Y3 Dec31Y4 Sales $1,250k $1,320k COGS $860k $940k Inv. $280k $271k A/P $86k $113k A/R $124k $109k Rufus Inc.'s Year 4 statement of cash flows will report "cash receipts from customers" in the amount of: A. $1,335,000 B. $1,211,000 C. $1,320,000 D. $1,305,000
A. $1,335,000 Sales 1,320,000 + Decrease in A/R during period 15,000 Cash receipts from customers 1,335,000
During the current year, Wythe County levied $2,000,000 property taxes, 1% of which is expected to be uncollectible. During the year, the county collected $1,800,000 and wrote off $15,000 as uncollectible. What amount should Wythe County report as property tax revenue in its government-wide statement of activities for the current year? A. $1,980,000 B. $1,985,000 C. $1,800,000 D. $2,000,000
A. $1,980,000
On December 31, Day Co. leased a new machine from Parr with the following pertinent information: Lease term -- 6 years Annual rental payable at beginning of each year -- $50,000 Useful life of machine -- 8 years Day's incremental borrowing rate -- 15% Present value of an annuity of 1 in advance for 6 periods at: 12% -- 4.61 15% -- 4.35 Day Co. uses U.S. GAAP for its financial reporting method. The lease is not renewable, and the machine reverts to Parr at the termination of the lease. The cost of the machine on Parr's accounting records is $375,000. At the beginning of the lease term, Day should record a lease liability of: A. $230,500 B. $0 C. $217,500 D. $375,000
A. $230,500 50,000 x 4.61 = 230,500
Atomized Enterprises' Neutron Division qualified as a component held for sale during the year ended December 31, Year 2. The net book value of the division is $1,800,000 while its fair market value is $1,500,000. The Division lost $240,000 during the year ended December 31, Year 1. The Division lost $150,000 in Year 2 prior to qualifying as being held for sale and $80,000 for the balance of that year. Ignoring income taxes, the results of Atomized Enterprises Discontinued operations displayed in their Year 2 comparative income statements for the year ended December 31, Year 1, would be equal to: A. $240,000 B. $0 C. $540,000 D. $390,000
A. $240,000
In accounting for its merchandise inventory, Ingewald International, a company that uses U.S. GAAP, changed from LIFO to FIFO. Assuming the change in beginning inventory was $400,000 and that the change at the end of the year was $300,000 and that the tax rate was 30 percent, what was the amount of the cumulative effect of an accounting change that should have been displayed in Ingewald's retained earnings statement? A. $280,000 B. $210,000 C. $70,000 D. $0
A. $280,000 400,000 x (1-.3) = 280,000
Give the World a Puppy Foundation is organized as a not-for-profit organization with the mission of ensuring that everyone on the planet owns a puppy. A local veterinarian has volunteered her time to provide medical care to the puppies in the care of the foundation. The Foundation estimates that it would pay $40,000 per year for this service if it were not donated. The Foundation also enjoys the services of 20 volunteers who walk and otherwise attend to the animals. The Foundation estimates the value of the services provided at $25,000 per year that would be handled by current salaried staff without these donated hours. As a result of these donations Give the World a Puppy would record: A. $40,000 in revenue without donor restrictions B. $25,000 in revenue without donor restrictions and $40,000 in revenue with donor restrictions C. $25,000 in revenue without donor restrictions D. $65,000 in revenue without donor restrictions
A. $40,000 in revenue without donor restrictions
Park, Inc. acquired 100% of Gravel Co.'s net assets. On the acquisition date, Gravel's accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. Park's consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities? A. $400,000 B. $350,000 C. $50,000 D. $0
A. $400,000
The Arts & Crafts Theater had unearned ticket revenues of $20,000 as of December 31, Year 1 and unearned revenues of $40,000 at December 31, Year 2. The theater's records included $500,000 and $340,000 in cash receipts during the years ended December 31, Year 2 and Year 1, respectively. What were ticket revenues for the year ended December 31, Year 2? A. $480,000 B. $390,000 C. $500,000 D. $450,000
A. $480,000 B Unearned Rev 20k A Cash receipts 500k S Revenues ? E Unearned Rev 40k Revenues = 480k
On December 31, Planet Company acquired 80% of the voting common stock of Star Company by issuing 100,000 shares of its own common stock (fair value $8/share). In the acquisition, Planet paid legal fees in the amount of $15,000 and paid SEC registration fees of $10,000. The book value of Star on December 31 was $700,000. Star's only balance sheet item with a fair value different from book value was a building. The building had a book value of $100,000 and a fair value of $150,000. In Planet's December 31 consolidating work paper elimination entry, "Building" is debited for: A. $50,000 B. $65,000 C. $215,000 D. $250,000
A. $50,000
Emma Construction Company started building a new administrative headquarters on January 1, Year 1. Emma intends to occupy the building at the project completion date of January 1, Year 3. At December 31, Year 1, Emma had incurred $2,000,000 of construction costs, evenly spread during that first year. Projected remaining costs are $2,500,000. During Year 1, Emma incurred interest cost on specific construction debt in the amount of $40,000 and interest on other unrelated loans in the amount of $30,000. All loans carry 5% interest. How much interest should Emma capitalize for Year 1? A. $50,000 B. $70,000 C. $0 D. $40,000
A. $50,000 $2,000,000/2 = $1,000,000 $1,000,000 x .05 = $50,000
On July 1, Year 1, Black & Associates issued 2,000 of its 8%, $1,000 bonds for $1,752,000. The bonds were issued to yield 10%. The bonds are dated July 1, Year 1 and mature on July 1, Year 11. Interest is payable semiannually on January 1st and July 1st. Using the effective interest method, how much of the bond discount should be amortized for the six months ended December 31, Year 1? A. $7,600 B. $15,200 C. $12,400 D. $9,920
A. $7,600 Effective interest = $1,752,000 x .10 = $175,200 Cash interest = 2,000,000 x .08 = 160,000 175,200 - 160,000 = 15,200 15,200 / 2 = 7,600
On December 31, Year 1, Rice Inc. authorized Graf to operate as a franchisee for an initial franchise fee of $150,000. Of this amount, $60,000 was received upon signing the agreement and the balance, represented by a note due in three annual payments of $30,000 each beginning December 31, Year 2. The present value on December 31, Year 1, of the three annual payments appropriately discounted is $72,000. According to the agreement, the nonrefundable down payment represents a fair measure of the services already performed by Rice; however, substantial future services are required of Rice. Collectibility of the note is reasonably certain. In Rice's December 31, Year 1, balance sheet, unearned franchise fees from Graf's franchise should be reported as: A. $72,000 B. $100,000 C. $90,000 D. $132,000
A. $72,000 Present value of 3 annual payments require substantial future services
Which format must an enterprise fund use to report cash flow operating activities in the statement of cash flows? A. Direct method B. Indirect method, beginning with operating income C. Indirect method, beginning with change in net assets D. Either direct or indirect method
A. Direct method
General purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users? A. Investors and creditors and their advisors B. The board of directors of the corporation C. Regulatory and taxing authorities D. The management of the corporation
A. Investors and creditors and their advisors
Lemonville Township issued $75,000 of bond anticipation notes at face amount in the current fiscal period. The proceeds were recorded in the capital projects fund. These notes are due within one year. Lemonville intends to repay the bond anticipation notes with a bond issue. Lemonville has taken legal steps to refinance the notes on a long-term basis. Under these circumstances, what account should be credited in the capital projects fund? A. Other financing sources B. Revenues control C. Bond anticipation notes payable D. Tax anticipation notes payable
A. Other financing sources
A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements? Current assets Gross profit Over Over Over Under Under Over Under Under
A. Over Over
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? A. Price B. Yield C. Interest D. Par
A. Price
If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses? A. The other asset group should be tested for an impairment loss before goodwill is tested B. If goodwill is impaired, the loss should be recognized prior to testing the other assets for impairment C. Impairment testing may be conducted concurrently for the other asset group and goodwill D. If the other asset group is impaired, the loss should not be recognized prior to goodwill being tested for impairment
A. The other asset group should be tested for an impairment loss before goodwill is tested
Which of the following choices is least likely to represent an actual debt covenant? A. Times interest earned must stay below a specific level B. The debt-to-equity ratio must stay below a specific level C. Working capital levels cannot fall below a specific amount D. Collateral cannot fall below a specific amount
A. Times interest earned must stay below a specific level
Vadis Co. sells appliances that include a three-year warranty. Service calls under the warranty are performed by an independent mechanic under a contract with Vadis. Based on experience, warranty costs are estimated at $30 for each machine sold. When should Vadis recognize these warranty costs? A. When the machines are sold B. When payments are made to the mechanic C. When the service calls are performed D. Evenly over the life of the warrany
A. When the machines are sold
On December 31, Year 1, an entity awaiting judgment on a lawsuit determined that a loss from the suit ranging between $1,000,000 and $2,000,000 was reasonably possible. On March 15, Year 2, after the entity issued its financial statements, the suit was settled. The settlement required the entity to pay damages of $1,400,000. What amount of contingent liability should the entity have reported on its December 31, Year 1 balance sheet? A. $1,400,000 B. $0 C. $1,000,000 D. $2,000,000
B. $0
Topper Company began operations during the current year and experienced the following events: I. Unrealized holding gains from trading debt securities of $12,000 II. Realized gains from selling AFS debt securities of $15,000 III. Unrealized holding gains from AFS debt securities of $20,000 Topper's tax rate is 30%. In Toppers December 31 balance sheet, Accumulated Other Comprehensive Income would be: A. $47,000 B. $14,000 C. $20,000 D. $32,900
B. $14,000 20,000 x (1 - .3) = 14,000
The following costs were incurred by Griff Co., a manufacturer, during the current year: Accounting and legal fees $25,000 Freight-in $175,000 Freight-out $160,000 Officers salaries $150,000 Insurance $85,000 Sales representatives salaries $215,000 What amount of these costs should be reported as general and administrative expenses for the current year? A. $550,000 B. $260,000 C. $635,000 D. $810,000
B. $260,000 Accounting and legal $25,0000 + Officers salaries $150,000 + Insurance $85,000 = $260,000
Wizard Co. purchased two machines for $250,000 each on January 2 of the current year. The machines were put into use immediately. Machine A has a useful life of five years and can only by used in one research project. Machine B will be used for two years on a research and development project and then used by the production division for an additional eight years. Wizard uses the straight-line method of depreciation. What amount should Wizard include in the current year research and development expense under U.S. GAAP? A. $50,000 B. $275,000 C. $500,000 D. $375,000
B. $275,000 Machine A (no alternate use) 250,000 Machine B (alternate use) (250,000/10 years) 25,000 Total 275,000
Lizzy Co. traded an old machine to Chang Co. for a similar new machine. The exchange is assumed to lack commercial substance. Lizzy also received $10,000 in cash. The following information relates to the machines on the date of the exchange: CV FV Old machine $70k $100k New machine $45k $90k What amount of gain should Lizzy record from this exchange under U.S. GAAP? A. $10,000 B. $3,000 C. $30,000 D. $0
B. $3,000
Quinn Co. reported a net deferred tax asset of $9,000 in its December 31, Year 1, balance sheet. For Year 2, Quinn reported pretax financial statement income of $300,000. Temporary differences of $100,000 resulted in tax income of $200,000 for Year 2. At December 31, Year 2, Quinn had cumulative taxable differences of $70,000. Quinn's effective income tax rate is 30%. In its December 31, Year 2, income statement, what should Quinn report as deferred income tax expense? A. $12,000 B. $30,000 C. $21,000 D. $60,000
B. $30,000
On March 4, Year 1, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, Year 1, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, Year 2. On September 30, Year 1, LVC's common stock had a market value, ex-rights, of $95 per share and the stock rights had a market value of $5 each. What amount should Evan report on its September 30, Year 1 balance sheet for investment in stock rights? A. $5,000 B. $4,000 C. $10,000 D. $15,000
B. $4,000 $5,000/ ($5,000 + $95,000) x $80,000 = $4,000
The following data pertains to Tyne Co.'s investment in marketable debt securities: Class. Cost FVYear2 FVYear1 Trad. $150k $155k $100k AFS $150k $130k $120k If the present value of expected cash flows for the AFS security is equal to amortized cost, what amount should Tyne report as unrealized holding gain in its Year 2 income statement? A. $80,000 B. $55,000 C. $50,000 D. $65,000
B. $55,000
A company had 400,000 shares of common stock issued and outstanding on January 1, Year 1, and had the following equity transactions for year 1: April 1 - Issued 200,000 new shares for cash July 1 - Issued new shares as a result of a 3-for-1 stock split October 1 - Purchased 300,000 shares treasury stock for cash What should the company use as the denominator for the calculation of basic earnings per share for year ended December 31, Year 1? A. 1,325,000 B. 1,575,000 C. 1,075,000 D. 1,650,000
B. 1,575,000 Jan-Mar 400,000 1,200,000 x 3/12 = 300,000 Apr-June 600,000 1,800,000 x 3/12 = 450,000 July-Sept 1,800,000 x 3/12 = 450,000 Oct-Dec 1,500,000 x 3/12 = 375,000 Total 1,575,000
The reconciliation of governmental fund financial statements to a government-wide presentation would most likely be found in a city's: A. Required Supplementary Information B. Basic Financial Statements C. Management's Discussion and Analysis D. Notes to the Financial Statements
B. Basic Financial Statements
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: A. Deferred credit B. Component of income from continuing operations C. Separate component of other comprehensive income D. Asset valuation allowance
B. Component of income from continuing operations
Harland County received a $2,000,000 capital grant to be equally distributed among its five municipalities. The grant is to finance the construction of capital assets. Harland had no administrative or direct financial involvement in the construction. In which fund should Harland record the receipt of cash? A. Special revenue fund B. Custodial fund C. General fund D. Private purpose trust fund
B. Custodial fund
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 occurred at the beginning of the year? A. Purchase of treasury stock B. Declaration and distribution of stock dividend C. Sale of preferred convertible stock D. Sale of additional common stock
B. Declaration and distribution of stock dividend
Which of the following is not a disclosure requirement related to risks and uncertainties under U.S. GAAP? A. Disclosure of the relative importance of each business when an entity operates multiple businesses B. Disclosure of vulnerability due to all identified concentrations C. Estimates of the effects of changes in significant estimates D. A statement that actual results could differ from the estimates included in the financial statements
B. Disclosure of vulnerability due to all identified concentrations
Which of the following revenues should generally be recorded in the accounting period in which they become susceptible to accrual (regardless of timing of collection) by a state or local governmental body? Property Pub.Park Inc. Sales Tax Tax Tax Tax Yes No Yes No No No No No Yes Yes Yes Yes Yes No Yes Yes
B. No No No No
On December 31, Year 1, the end of its fiscal year, Smarti Company held a derivative instrument which it had acquired for speculative purposes during November, Year 1. Since its acquisition the fair value of the derivative had increased materially. On December 31, how should the increase in fair value of the derivative instrument be reported by Smarti in its financial statements? A. Disregarded until the instrument is settled B. Recognized in current net income for Year 1 C. Recognized as a deferred credit until the instrument is settled D. Recognized as a component of other comprehensive income for Year 1
B. Recognized in current net income for Year 1
Liquid Industries defines cash and cash equivalents as cash and time certificates of deposit whose original maturity date is less than ninety days. When preparing their financial statements, Liquid industries would most likely present this policy in the: A. Supplemental Schedule of Non-Cash Investing and Financing Activities B. Summary of Significant Accounting Policies C. Face of the Statement of Cash Flows D. Notes to the financial statements other than the Summary of Significant Accounting Policies
B. Summary of Significant Accounting Policies
On December 31, Planet Company acquired 80% of the voting common stock of Star Company by issuing 100,000 shares of its own common stock (fair value $8/share). In the acquisition, Planet paid legal fees in the amount of $15,000 and paid SEC registration fees of $10,000. The book value of Star on December 31 was $700,000. Star's only balance sheet item with a fair value different from book value was a building. The building had a book value of $100,000 and a fair value of $150,000. In Planet's December 31 consolidating work paper elimination entry, what part of Star's stockholders' equity is eliminated? A. Only Star's common stock and paid-in-capital are eliminated B. The entire equity section of Star is eliminated C. 80% of Star's stockholders' equity is eliminated D. Only Star's retained earnings is eliminated
B. The entire equity section of Star is eliminated
Which of the following is not a valuation technique that can be used to measure the fair value of an asset or liability? A. The income approach B. The impairment approach C. The market approach D. The cost approach
B. The impairment approach
On January 1, Year 1, the City of Potterville approved a 30-year bond issue for $20,000,000 to construct a civic center to bring tourism to the city. The principal and interest payments on the bond are secured by a pledge of the city's tourist development tax revenues collected on sales volume from tourist-related industries. Potterville anticipates collecting $1,200,000 in tourist development taxes during the year ending December 31, Year 1. The bonds will be issued at 98 to yield 4 percent on July 1, Year 1, and Potterville will make its first payments on the debt on January 2, Year 2. In its fund financial statements dated December 31, Year 1, Potterville will display the following in its debt service fund: Debt Principal Interest TouDev Proceeds Expen. Expen. Rev. $20mil $0 $0 $1.2mil $19.6mil $360k $800k $0 $0 $0 $0 $0 $0 $0 $400k $0
C. $0 $0 $0 $0
Baker, Inc. reported the following stockholders' equity balances: 8% cumulative preferred stock, par value $100 per share; 10,000 shares issued and outstanding (liquidation value at $107) = $1,000,000 Common stock, par value $10 per share, 50,000 shares issued and outstanding = 500,000 Additional paid-in capital = 75,000 Retained earnings = 450,000 Dividends are in arrears on the preferred stock for three years including the current year. What is book value per share of common stock? A. $20.50 B. $19.10 C. $14.30 D. $15.70
C. $14.30 8% cumulative preferred stock 1,000,000 Common stock 500,000 APIC 75,000 Retained earnings 450,000 Total 2,025,000 Less: preferred stock: liquidation value 1,070,000 Less: Dividends in arrears (10,000 x $8 x 3 years) 240,000 Total value of common stock 715,000 Divided by common shares outstanding 50,000 Book value per share of common stock 14.30
On November 15, Quazar Co. declared a property dividend of marketable securities to be distributed on December 15 to stockholders of record on December 1. The market value of the securities was as follows: November 15 $225,000 December 1 $220,000 December 15 $250,000 The marketable securities originally cost Quazar $200,000. What is the net effect on Quasar's retained earnings as a result of declaring this property dividend? A. $195,000 B. $250,000 C. $200,000 D. $225,000
C. $200,000 Gain on marketable securities = 25,000 Property dividend = (225,000) Net effect on retained earnings (200,000)
On January 1, Year 2, West Co. adopted the dollar-value LIFO inventory method. Inventory data for Year 2 and Year 3 are as follows: Date Inv.CY PriceIndex 1/1/Y2 $250k 1.00 12/31/Y2 $278,250 1.05 12/31/Y3 $364k 1.12 West's dollar-value LIFO inventory under U.S. GAAP at December 31, Year 3 is: A. $364,000 B. $325,000 C. $332,950 D. $328,750
C. $332,950 C / I = B -> L x I = R 250k/1.00 = 250k -> 250k x 1.00 = 250k 278250/1.05 = 265k 250k x 1.00 = 250k 15k x 1.05 = 15,750 Total 265,750 364k/1.12 = 325k 250k x 1.00 = 250k 15k x 1.05 = 15750 60k x 1.12 = 67200 Total 332,950
On December 31, an entity analyzed equipment with a net carrying value of $250,000 for impairment. The entity determined the following: Fair Value $215,000 Undiscounted future cash flows $240,000 What is the impairment loss that will be reported on the December 31 income statement under U.S. GAAP? A. $25,000 B. $10,000 C. $35,000 D. $0
C. $35,000 Impairment loss = Fair value - Carrying value
Pugh Co. reported the following in its statement of stockholders' equity on January 1 of the current year: Common stock, $5 par value, authorized 200,000 shares, issued 100,00 share -- $500,000 Additional paid-in capital -- $1,500,000 Retained earnings -- $516,000 Total -- $2,516,000 Less treasury stock, at cost, 5,000 shares -- (40,000) Total stockholders' equity = $2,476,000 The following events occurred during the current year: May 1 1,000 shares of treasury stock were sold for $10,000 July 9 10,000 shares of previously unissued common stock were sold for $12 per share October 1 The distribution of a 2-for-1 stock split resulted in the common stock's per share par value being halved Pugh accounts for treasury stock under the cost method. Laws in the state of Pugh's incorporation protect shares held in treasury from dilution when stock dividends or stock splits are declared. The number of outstanding common shares at December 31 should be: A. 216,000 B. 222,000 C. 212,000 D. 220,000
C. 212,000 Original shares outstanding 100,000 Less: Shares in treasury (5,000) Plus: Treasury shares sold 1,000 Plus: New shares issued 10,000 Total shares O/S before split 106,000 Two for one stock split x 2 Shares O/S after stock split 212,000
TGR Enterprises provided the following information from its statement of financial position for the year ended December 31, Year 1: January 1 Dec. 31 Cash $10k $50k A/R $120k $100k Inv. $200k $160k Prepaid exp. $20k $10k A/P $175k $120k Accrued laib. $25k $30k TGR's sales and cost of sales for Year 1 were $1,400,000 and $840,000, respectively. What is TGR's days sales in accounts receivable? A. 31.3 B. 41.7 C. 26.1 D. 28.7
C. 26.1 $100,000/($1,400,000/365) = 26.1
A publicly traded corporation reported a $10,000 deduction in its current year tax return for an item it expects to be disallowed. The tax rate is 40 percent. How should the corporation report this tax position in the financial statements? A. As a temporary difference disclosed in the notes to the financial statements that is not recognized B. As a $10,000 deferred tax asset C. As a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit D. As a $4,000 deferred tax asset and a $4,000 income tax benefit
C. As a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit
How should a nongovernmental, not-for-profit organization report donor-restricted cash contributions for long-term-purposes in its statement of cash flows? A. As a noncash transaction B. Operating activity inflow C. Financing activity inflow D. Investing activity inflow
C. Financing activity inflow
The portion of special assessment debt maturing in 5 years, to be repaid from general resources of the government, should be reported in the A. Agency fund B. Capital projects fund C. Government-wide statement of net position D. General fund
C. Government-wide statement of net position
The financial statements of governments have focused on two forms of accountability. Government-wide financial statements focus the reader on accountability in which ways: Fiscal Operational Accountability Accountability No No Yes No No Yes Yes Yes
C. No Yes
Which of the following statements is not required of not-for-profit organizations? A. Statement of activities B. Statement of cash flows C. Statement of retained earnings D. Statement of financial position
C. Statement of retained earnings
Salvage value on a piece of equipment is changed from $1,000 to $3,000 in Year 3. Also, the useful life was changed from 10 years to 5 years. The equipment cost $20,000 and is depreciated straight-line. Type of Change? Dollar impact? Change is reflected in?
Change in Accounting Estimate $2500 Current Earnings
Inventory which was previously accounted for using Specific Identification is now accounted for using Average Cost. Pretax income was $375,000 and will now be $400,000. The effective tax rate is 35% Type of change? Dollar impact? Change is reflected in?
Change in Accounting Principle $16,250 Beginning Retained Earnings
The depreciation method on a piece of equipment which cost $50,000 (with a 10-year life and $5,000 salvage value) was changed from accelerated to straight-line in Year 4. The old method was double declining balance. Type of Change? Dollar impact? Change is reflected in?
Change in Accounting Principle inseparable from a Change in Estimate $2,177 Current Earnings
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 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? A. $60,000 B. $300,000 C. $20,000 D. $100,000
D. $100,000 $300,000/3 years = $100,000 per year
On January 2, Year 1, Union Co. purchased a machine for $264,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 2, Year 4, Union determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $24,000. An accounting change was made in Year 4 to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, Year 4, of: A. $154,000 B. $176,000 C. $160,000 D. $146,000
D. $146,000
On December 31, Year 4, Prone, Inc. sold a piece of equipment to it's 90% owned subsidiary, Supine Co. Details are as follows: Original purchase date -- Jan. 1, Y1 Original cost to Prone -- $65,000 Original estimate of salvage value -- $10,000 Original estimate of economic life -- 5 years Intercompany selling price -- $60,000 Supine's estimate of remaining economic life -- 4 years Supine's estimate of salvage value -- $5,000 Both companies use straight-line depreciation. In preparing its consolidated financial statements for Year 4, how much intercompany gain will Prone have to eliminate? A. $31,590 B. $49,000 C. $35,100 D. $39,000
D. $39,000 Cost = 65,000 -Salvage value = 10,000 Depreciable amount = 55,000 55,000 / 5 = 11,000 x 4 = 44,000 Accum. Depr. Cost 65,000 - Accum. Depr. 44,000 = Book Value 21,000 Selling price 60,000 - Book Value 21,000 = Intercompany gain 39,000
Bentley Company leased equipment from Babson Company for a six-year beginning July 1, Year 1. The lease was appropriately accounted for as an operating lease. The rent for the first lease year is $8,000, and the rental charge for each of the remaining five years is $10,600. However, as an incentive to lease its equipment, Babson provided the first six months of the lease rent free. In its December 31, Year 1 income statement, what was Bentley's rental expense? A. $9,500 B. $4,000 C. $8,000 D. $4,750
D. $4,750 Annual (years 2-6) $10,600 Term (years 2-6) x 5 years Expense (years 2-6) 53,000 Expense (1st year) 8,000 Free rent (4,000) Total rent to be paid 57,000 Total years 6 years Annual rental expense 9,500 Period (July - Dec.) x 1/2 year Period rental expense 4,750
On January 1, Year 1, David Corp. issued 1000 of its $1,000 bonds at 94. David Corp. uses U.S. GAAP. The bonds mature in 10 years but are callable at 102 any time after issuance. On January 1, Year 1, David incurred bond issue costs of $50,000. On July 1, Year 8, David called all of the bonds and retired them. Assuming that bond discount and issue costs were amortized using the straight-line method, what amount of pretax loss would David report from this extinguishment of debt? A. $20,000 B. $58,500 C. $85,000 D. $47,500
D. $47,500 Bond face $1 mil Issued at 94 $940k Issue cost $(50k) NCV $(890k) $110k / 10 years Amort./year 11,000 Jan Year 1 - July Year 8 x 7.5 Total amort. 82,500 Orig. NCV 890,000 Curr. NCV 972,500 Call price @ 102 (1,020,000) Loss on call of bonds (47,500)
Wall Co. sells a product under a two-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall's first two years in business, it made the following sales and incurred the following warranty repair costs: Year 1 Total Sales $250,000 Total repair costs incurred $4,500 Year 2 Total Sales $300,000 Total repair costs incurred $5,000 What amount should Wall report as warranty expense for Year 2? A. $5,000 B. $5,900 C. $1,000 D. $6,000
D. $6,000 Year 2 sales x 2% = $6,000
On December 31, Year 4, Prone Inc. sold a piece of equipment to its 90 percent owned subsidiary, Supine Co. Details are as follows: Original purchase date -- Jan1,Y1 Original cost to Prone -- $65,000 Original estimate of salvage value -- $10,000 Original estimate of economic life -- 5 years Intercompany selling price -- $60,000 Both companies use straight-line depreciation. Both companies think that, as of the end of Year 4, the equipment's remaining useful life will be four years and the salvage value will become zero. In preparing its Year 5 consolidated financial statements, consolidated depreciation expense will be reduced by: A. $8,775 B. $7,800 C. $7,020 D. $9,750
D. $9,750 21,000/4 years = $5,250 $60,000/4 = $15,000 $15,000 - $5,250 = $9,750
Under Regulation S-X, an entity's interim financial statements filed with the SEC should include all of the following, except: A. A balance sheet as of the end of the preceding fiscal year B. An income statement for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter C. An income statement for the cumulative 12 month period ending during the most recent fiscal quarter D. A statement of cash flows for the most recent fiscal quarter
D. A statement of cash flows for the most recent fiscal quarter
Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles? A. Cash receipts and disbursements basis of accounting B. Basis of accounting used by an entity to file its income tax return C. Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency D. Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution
D. Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution
When a purchase order is released, a commitment is made by a governmental unit to buy a computer to be manufactured to specifications for use in property tax administration. This commitment should be recorded in the general fund as an: A. Expenditure B. Appropriation C. Fixed asset D. Encumbrance
D. Encumbrance
Which of the following qualifies as a reportable segment? A. Corporate headquarters, which oversees $1 billion in sales for the entire company B. Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company's assets, 12% of revenues, and 11% of profits. C. South American segment, whose results of operations are reported directly to the chief operating officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits D. North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer
D. North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer
Pinellas Company owns 30% of the voting stock of Sanibel Company. Pinellas will probably use the equity method of accounting to account for this investment because: A. Pinellas will be able to appoint 30% of the directors of Sanibel Co. B. No other shareholder holds more than 29% interest in Sanibel Co. C. Pinellas receives 30% of dividends paid by Sanibel Co. D. Pinellas is assumed to be able to exercise significant influence over the affairs of Sanibel Co.
D. Pinellas is assumed to be able to exercise significant influence over the affairs of Sanibel Co.
Cott, Inc. prepared an interest amortization table for a five-year lease payable with a written purchase option of $2,000 which the lessee is reasonable certain to exercise. At the end of the five years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error? A. Cott subtracted the annual interest amount from the lease payable balance instead of adding it. B. The present value of the written purchase option was subtracted from the present value of the annual payments. C. Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period. D. The beginning present value of the lease did not include the present value of the written purchase option.
D. The beginning present value of the lease did not include the present value of the written purchase option.
ABC Company and XYZ Company entered into a nonmonetary exchange lacking commercial substance. In the exchange, ABC gave XYZ a building with a book value of $90,000 ($150,000 cost - $60,000 accumulated depreciation) and a fair value of $125,000 in exchange for $25,000 and an XYZ building with a book value of $80,000 ($95,000 cost - $15,000 accumulated depreciation) and a fair value of $100,000. Prepare the journal entry to record the exchange in ABC's and XYZ's books. Journal entry to record the exchange in XYZ's books
Dr. New building $105k Dr. Acc. Dep. $15k Cr. Old building $95k Cr. Cash $25k
ABC Company and XYZ Company entered into a nonmonetary exchange lacking commercial substance. In the exchange, ABC gave XYZ a building with a book value of $90,000 ($150,000 cost - $60,000 accumulated depreciation) and a fair value of $125,000 in exchange for $25,000 and an XYZ building with a book value of $80,000 ($95,000 cost - $15,000 accumulated depreciation) and a fair value of $100,000. Prepare the journal entry to record the exchange in ABC's and XYZ's books. Journal entry to record the exchange in ABC's books
Dr. New building $72k Dr. Cash $25k Dr. Acc. Dep. $60k Cr. Old building $150k Cr. Gain $7k
Charisma Corporation pays premium on key man life insurance for its charismatic CEO
Permanent difference, no financial statement presentation
Interest is received on an investment in tax-exempt municipal obligations
Permanent difference, no financial statement presentation
A landlord collects some rents in advance. Rents received are taxable in the period in which they are received
Temporary timing difference, asset, non-current
Costs of one-year warranties are estimated and accrued for financial reporting purposes
Temporary timing difference, asset, non-current
Start-up company incurs significant organizational costs in its first year of operation
Temporary timing difference, asset, non-current
A company elects to prepay its liability insurance for a one-year period that overlaps its balance sheet date
Temporary timing difference, liability, non-current
A parent corporation accounts for an investment in a subsidiary using the equity method of accounting. Undistributed earnings will be paid over multiple years beginning more than one-year from the balance sheet date
Temporary timing difference, liability, non-current
For plant assets, the depreciation expense deducted for tax purposes is in excess of the depreciation expense used for financial reporting purposes
Temporary timing difference, liability, non-current
Testlet 3 TBS 2
workout on the exam
Testlet 4 TBS 1
workout on the exam
Testlet 4 TBS 2
workout on the exam
Testlet 4 TBS 3
workout on the exam
Testlet 5 TBS 3
workout on the exam