Intermediate Accounting III Units 5-9

A lessor leases a piece of equipment to a lessee, under lease terms that qualify as an operating lease. The present value of required rental payments is $280,000; and the present value of the estimated residual value, which is unguaranteed, is $30,000. The lessor incurred total costs of $160,000 to build the leased asset.Which amount of lease receivable, if any, should the lessor record? $0 Correct! Under an operating lease, the lessor does not recognize a lease receivable because the asset never left the books. $280,000 $160,000 $310,000

$0 Correct! Under an operating lease, the lessor does not recognize a lease receivable because the asset never left the books.

Company A leases a piece of machinery to Company B on January 1, Year 1. Information pertaining to the lease is as follows: The lease is non-cancellable with a term of three years. The machinery has a cost and fair value at the start of the lease of $40,000; an estimated economic life of five years; and a residual value at the end of the lease of $7,500 (unguaranteed). The lease contains no renewal options, and the machinery reverts to Company A at the end of the lease. The present value of the residual value has been calculated as $6,478. How much should Company A record as the right of use asset on January 1, Year 1? $46,478 $40,000 $33,522 $32,500

$33,522 Correct! $33,522 = $40,000 - $6,478. Company A will record the asset at the amount it will recover over the lease payments. This amount is determined by using the fair value of the asset, less the present value of the residual value.

Company A (lessee) has reached an operating lease agreement with Company B (lessor) to lease a new boom lift beginning January 1, Year 1. The lease agreement contains no renewal options and contains the following information: The lease is for three years, requiring annual payments at the beginning of the year of $10,213. The boom lift has a cost and fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and a non-guaranteed residual value of $12,500. Present value of the residual value is $10,798. Company B depreciates assets like the boom lift using straight-line depreciation. What is the depreciation expense for Year 2 that the lessor will record? $10,213 $8,000 $13,333 $5,500

$8,000 $8,000 = $40,000 / 5. Company B uses the straight-line depreciation method to depreciate assets. The cost of the boom lift is $40,000, and the economic life is five years.

Company A (lessee) has reached an operating lease agreement with Company B (lessor) to lease a new boom lift beginning January 1, Year 1. The lease agreement contains no renewal options and contains the following information: The lease is for three years, requiring annual payments at the beginning of the year of $10,213. The boom lift has a cost and fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and a non-guaranteed residual value of $12,500. Present value of the residual value is $10,798. Company B depreciates assets like the boom lift using straight-line depreciation. What is the depreciation expense for Year 2 that the lessor will record? 0 / 1 $5,500 $10,213 $8,000 $13,333

$8,000 Correct! $8,000 = $40,000 / 5. Company B uses the straight-line depreciation method to depreciate assets. The cost of the boom lift is $40,000, and the economic life is five years.

Change in reporting entity

A change from reporting as one type of entity to another type of entity. As an example, a company might change the subsidiaries for which it prepares consolidated financial statements.

operating lease

A contractual agreement allowing one party (the lessee) to use the asset of another party (the lessor); accounted for as a rental by the lessee, longer than 12 months

lessor

A party that has agreed contractually to let another party use its asset for a period at an agreed price.

A lessor incurs $10,000 of initial direct costs related to an operating lease. How should the $10,000 cost be treated? Allocate the cost using the straight-line method to each period of the lease and expense it each period. Add the cost to the net investment in the lease and amortize it over the life of the lease as a yield adjustment. Defer the cost and allocate it over the term of the lease in proportion to the recognition of rental revenue. Expense the cost in the period in which the lessor recognizes the profit from the sale.

Defer the cost and allocate it over the term of the lease in proportion to the recognition of rental revenue. Correct! Initial direct costs are allocated in proportion to rental revenue and expenses over the term of the lease.

A lessor incurs $10,000 of initial direct costs related to an operating lease.How should the $10,000 cost be treated? Defer the cost and allocate it over the term of the lease in proportion to the recognition of rental revenue. Add the cost to the net investment in the lease and amortize it over the life of the lease as a yield adjustment. Allocate the cost using the straight-line method to each period of the lease and expense it each period. Expense the cost in the period in which the lessor recognizes the profit from the sale.

Defer the cost and allocate it over the term of the lease in proportion to the recognition of rental revenue. Initial direct costs are allocated in proportion to rental revenue and expenses over the term of the lease.

Which type of plan is a 401(k)? Defined benefit Individual retirement account - traditional Individual retirement account - Roth Defined contribution

Defined contribution Correct! A 401(k) states the defined contribution an employer will make to the account on behalf of the employee.

Which type of U.S. pension plan has grown in the number of active participants over the past 40 years? Defined contribution plans Government-sponsored pension plans Individual retirement accounts Defined benefit plans

Defined contribution plans Correct! Defined contribution plans have become much more popular with employers than defined benefit plans due to lower employer costs.

what does the lessor report on the balance sheet for a sales-type lease?

Lease receivable presented separate from other assets Derecognize the leased asset

A company is leasing cars for four years at an agreed price of $500 per month, per car. The company provides the option to lease one additional year for $100 per month, per car. Each car has a useful life of six years. The company classifies the lease as a finance lease based on a specific test.Which test did the company use for this purpose based on the information provided? Purchase option Transfer of ownership Lease term Alternative use

Lease term

guaranteed residual value

Lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value at the end of the lease term and the lessee includes the full amount of the residual value guarantee at the end of the lease term in the present value test

What is included in the present value for the lease receivable amount? Rental payments plus the present value of the guaranteed residual value only Rental payments plus the present value of guaranteed and unguaranteed residual values Rental payments plus the present value of the unguaranteed residual value only Rental payments only

Rental payments plus the present value of guaranteed and unguaranteed residual values Correct. The lease receivable amount includes the present value of rental payments plus the present value of guaranteed and unguaranteed residual values.

What is included in the present value for the lease receivable amount? Rental payments plus the present value of the guaranteed residual value only Rental payments only Rental payments plus the present value of the unguaranteed residual value only Rental payments plus the present value of guaranteed and unguaranteed residual values

Rental payments plus the present value of guaranteed and unguaranteed residual values The lease receivable amount includes the present value of rental payments plus the present value of guaranteed and unguaranteed residual values.

what does the lessor report on the income statement for a operating lease?

Revenue generally recognized on a straight-line basis Depreciation expense on the leased asset

what does the lessee report on the balance sheet for a financing lease?

Right-of-use asset Lease liability

what does the lessee report on the balance sheet for an operating lease?

Right-of-use asset Lease liability

Projected Benefit Obligation (PBO)

The actuary's estimate of the total retirement benefits (at their discounted present value) earned so far by employees, applying the pension formula using estimated future compensation levels. (If the pension formula does not include future compensation levels, the PBO and the ABO are the same.)

Prepaid expenses 20,000 (year 3) 30,000 (year 2) 25,000 (year 1) How does the change in prepaid expenses affect the statement of cash flows for year 3? The change increases cash flows from investing activities. The change decreases cash flows from investing activities. The change increases cash flows from operating activities. The change decreases cash flows from operating activities.

The change increases cash flows from operating activities. A decrease in prepaid expenses increases cash flows from operating activities.

A company provides employees with a noncontributory defined benefit plan as part of the overall compensation package. Which characteristic is associated with this type of plan? The benefits paid out are not guaranteed. The employee bears part of the cost of the plan. The company is at risk for payments falling short of the future benefits. An asset is reported on the company's books if the contribution is less than the required amount.

The company is at risk for payments falling short of the future benefits. Correct! An employer is not at risk for a short fall in defined contribution plans but is at risk for defined benefit plans falling short of projections.

A business made an investment that was recorded as an asset. Which financial statement note disclosure specification is required? the cost fair value of the investment the amortization calculation for the investment expenses Revenues received from dividends on the investment Owners of the investment who have a controlling interest

The cost and fair value of the investment

Lease Receivable (sales-type lease)=

The present value of the minimum lease payments plus the present value of the unguaranteed and guaranteed residual values

defined benefit plan

a pension plan in which the amount an employee is to receive on retirement is specifically set forth

lessee

a person who acquires the right to possession and use of goods under a lease

401(k) plan

a tax-deferred investment and savings plan that acts as a personal pension fund for employees

pension fund

a type of mutual fund that holds assets in order to provide retirement income to its members (not on company books, 3rd party manages)

Operating activities include

adjustments for inventory

bargain purchase option

allows the lessee to purchase the leased property for a price that is significantly lower than the property's expected fair value at the date the option becomes exercisable

Most finance leases are ___ on the basis of constant payments over the lease term and structured according to the individual requirements of the lessee .

amortized

direct effect

an adjustment to an inventory balance as a result of a change in the inventory valuation method or Related changes, such as deferred income tax effects of the impairment adjustment

vesting

an employee's right to at least a portion of the benefits accrued under an employer pension plan, even if the employee leaves the company before retiring

Which single lease expense is recognized on the income statement? A finance lease An operating lease A short-term lease A long-term lease

an operating lease

lessee's calculation of the present value of the minimum lease payments

annual lease payment multiply by the present value factor of either ordinary annuity or annuity due =present value of the annual lease payments difference between GRV and Expected residual value multiply by the present value fact0r of a single sum =present value of the expected residual value difference amount to capitalize as the lease liability =sum of the PVs

indirect effect

any change to current or future cash flows of a company that results from making a change in accounting principle that is applied retrospectively.

how is the failure to record depreciation expense in a given year accounted for?

as a prior period adjustment

equation to convert CF from operations to net income

change in cash= -change in liabilities + change in equity + change in other assets

equation to adjust net income to CF from operations

change in cash= change in liabilities + change in equity - change in other assets

Companies should consider careful estimates that later prove to be incorrect as ___.

changes in estimate

for a new reporting entity, a company must report the change by

changing the financial statements of all prior periods presented. The revised statements show the financial information for the new reporting entity for all periods.

what does the lessor report on the balance sheet for a operating lease?

continue to recognize assets subject to operating leases as property, plant, and equipment

A debit to retained earnings will

decrease it

In addition to pension expense, the employer must disclose the following for a ___ plan: a plan description, including employee groups covered; the basis for determining contributions; and the nature and effect of significant matters affecting comparability from period to period.

defined contribution

The employer reports a liability on its balance sheet only if it does not make the contribution in full. The employer reports an asset only if it contributes more than the required amount. For a ___plan

defined contribution

which plan involves an employer adding a certain sum to a pension trust each period based on a formula?

defined contribution plan

The employees are the beneficiaries of a ___ trust, but the employer is the beneficiary of a ___ trust

defined contribution, defined benefit

Indirect effects do or do not change prior period amounts?

do not

Journal entry for the Amortization of the right-of-use asset over a five-year lease term. lease liability is 95,890.35

dr: Amortization Expense 19,178.07 ($95,890.35 ÷ 5 years), cr: Right-of-Use Asset ($95,890.35 ÷ 5 years) 19,178.07

journal entry to record operating lease expense

dr: lease expense, cr: right of use asset (amortization of right of use asset), cr: lease liability (recording interest of the lease liability)

operating lease (lessee) journal entry for inception and first lease payment

dr: right of use asset, cr: lease liability, dr: lease liability, cr: cash

journal to accrue interest revenue (lessor, sales-type)

dr: unearned interest, cr: interest revenue

To arrive at net cash flow from operating activities, a company must determine revenues and expenses on a cash basis. It does this by ___the effects of income statement transactions that do not result in an increase or decrease in cash.

eliminating

who do the trust assets and liabilities belong to under a defined benefit plan?

employer

who makes contributions in a defined benefit plan?

employer only

noncounterbalancing errors

errors that are not offset in the next accounting period And take more than 2 periods to correct themselves

Counterbalancing errors

errors that will be offset or corrected over two periods, Errors that typically affect both the income statement and balance sheet

companies account for a change in depreciation methods as a change in___ effected by a change in accounting principle.

estimate

Lessor's Calculation of Lease Payments with residual value

fair value of the equipment less: present value of the residual value divide by the present value factor of an ordinary annuity (or annuity due) for the lease term and interest rate =lease payment for lessee

Investing Activities

generally involve long-term assets and include (a) making and collecting loans, and (b) acquiring and disposing of investments and productive long-lived assets.

Operating activities involve

income statement items

If a bargain purchase option exists, the lessee must ___ the present value of the lease payments by the present value of the option price.

increase

lessee uses the LOWER of the lessee's ____borrowing rate on similar debt or lessor's implicit rate (if known and lower than ____ borrowing rate)

incremental

For the ____ method, to compute net cash flow from operating activities, a company adds back noncash charges in the income statement to net income and deducts noncash credits.

indirect

Financing Activities

involve liability and stockholders' equity items and include (a) obtaining cash from creditors and repaying the amounts borrowed, and (b) obtaining capital from owners and providing them with a return on, and a return of, their investment.

Operating Activities

involve the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services, and cash payments to suppliers and employees for acquisitions of inventory and expenses.

what does the lessee report on the income statement for an operating lease?

lease expense

In an operating lease, what does the lessee record

lease expense ONLY

net lease receivable=

lease receivable-unearned interest

the lease term is 75 percent or greater of the economic life of the leased asset

lease term test

In the case of a guaranteed residual value, the lessee amortizes the right-of-use asset over the___. In the case of a bargain purchase option, it uses the ___ of the underlying asset, given that the lessee takes ownership of the asset.

lease term; economic life

$288,000 Net Income + 48,000 add back loss on sale of equipment ($240,000 sales price - $288,000 book value) + 80,000 add back change in accumulated depreciation ($320,000 - $304,000 + $64,000 accumulated depreciation on sold asset) -144,000 less change in accounts receivable + 96,000 add change in inventory + 80,000 add change in accounts payable - 40,000 less change in taxes payable =$408,000 represents

net cash provided (used) by operating activities

($192,000) dividends paid + ($240,000) decrease in bonds payable = ($432,000) represents

net cash provided by financing activities

under the accrual basis of accounting, net income is ___net cash flow from operating activities.

not the same as

Which single lease expense is recognized on the income statement? An operating lease A long-term lease A finance lease A short-term lease

operating lease

oif

operating, investing, financing

FV of plan assets > PBO =

overfunded (pension benefit asset)

additional future benefits earned by employees each year must be discounted to their ____ value

present

due to the uncertainty surrounding the realization of the unguaranteed residual value, sales revenue and related cost of goods sold are reduced by the____.

present value of the residual value.

the present value of the lease payments equals or exceeds 90 percent of the fair value of the asset, then a lessee should use the finance method to record the lease

present value test

Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period. Such corrections are called ____

prior period adjustments

corrections of errors are treated as a ____ adjustment and are recorded in the year in which _____ and report them in the financial statements of the proper periods

prior period, they were discovered

change in estimate

prospective

Companies report ___changes in accounting estimates

prospectively

error corrections

restatement

change in accounting principle/method

restrospective

defined contribution plan

retirement plan in which the employer sets up an individual account for each employee and specifies the size of the investment into that account

The FASB requires that companies use the ____ approach for newly adopted principles

retrospective

Under a defined benefit plan, the trust's primary purpose is to ___

safeguard and invest assets so that there will be enough to pay the employer's obligation to the employees.

no asset or liability recorded for a ____ lease

short-term lease, less than 12 months

indirect method (reconciliation method)

starts with net income and converts it to net cash flow from operating activities. In other words, the indirect method adjusts net income for items that affected reported net income but did not affect cash.

incremental borrowing rate

the rate that, at the inception of the lease, the lessee would have incurred to borrow the funds necessary to buy the leased asset on a secured loan with repayment terms similar to the payment schedule called for in the lease (used if implicit can't be found)

A defined contribution plan defines only the employer's contribution. It makes no promise regarding ____

the ultimate benefits paid out to the employees

Write-downs, amortization charges, and similar "book" entries, such as depreciation of plant assets, represent neither inflows nor outflows of cash because ___

they have no effect on cash.

During 2021, Stout Inc. had the following activities related to its financial operations: Payment in 2021 of cash dividend declared in 2020 to preferred shareholders: $279,000 Payment for the early retirement of long-term bonds payable (carrying amount $3,930,000): $3,975,000 Proceeds from the sale of treasury stock (on books at cost of $387,000): $450,000 Which amount of net cash used in financing activities should appear in Stout's statement of cash flows? $3,264,000 $2,985,000 You Selected $3,822,000 $3,804,000

$3,804,000 Net cash used in financing activities is calculated as Proceeds from the sale of treasury stock less the cash used in payment of dividends and payment for the retirement of bonds payable. $450,000 - $3,975,000 - $279,000 = ($3,804,000) net cash used.

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021, it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $175,820 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is Silver Point's book value of the leased asset at December 31, 2021? $624,000 $468,000 $499,200 $780,000

$468,000 Correct. Because the lease term is equal to the expected economic life of the asset, this is a finance lease. Silver Point record the asset at the sales price of $780,000 less depreciation in 2021. 100% divided by 5 years is 20% per year or 40% using a double-declining balance method. Therefore, Silver Point's book value is: [$780,000 - (780,000 x 40%)] = $468,000.

Haystack, Inc. manufactures machinery used in the mining industry. On January 2, 2021, it leased equipment with a cost of $480,000 to Silver Point Co. The 5-year lease calls for a 10% down payment and equal annual payments of $175,820 at the end of each year. The equipment has an expected useful life of 5 years. Silver Point's incremental borrowing rate is 10%, and it depreciates similar equipment using the double-declining balance method. The selling price of the equipment is $780,000, and the rate implicit in the lease is 8%, which is known to Silver Point Co. What is Silver Point's book value of the leased asset at December 31, 2021? $499,200 $468,000 $624,000 $780,000

$468,000 Because the lease term is equal to the expected economic life of the asset, this is a finance lease. Silver Point record the asset at the sales price of $780,000 less depreciation in 2021. 100% divided by 5 years is 20% per year or 40% using a double-declining balance method. Therefore, Silver Point's book value is: [$780,000 - (780,000 x 40%)] = $468,000.

Company A agrees to lease a robotic welding unit from Company B on January 1, Year 1. The following conditions apply to the lease: The term of the lease is five years, is non-cancellable, and requires payments of $101,350 at the beginning of each year. The robotic welding unit will have a fair value of $50,000 at the end of the lease; an estimated useful life of five years; and $45,000 guaranteed residual value. There are no renewal options, so the unit will revert to Company B at the termination of the lease. Company A can borrow at a 5% interest rate. Company A uses straight-line depreciation on its assets. Company B set its annual rate of return at 4%, and Company A is aware of this rate. Present values are as follows: Present value of lease payments at 4%: $469,240 Present value of lease payments at 5%: $460,737 Present value of residual at 4%: $38,457 Present value of residual at 5%: $37,021 Which amount should be used to record the lease on January 1, Year 1? $507,697 $469,240 $460,737 $506,750

$469,240 Correct! Company A will record the lease at present value using the known implicit rate of Company B (4%) and will not consider the expected fair value of $50,000 when considering the lease liability.

Hull Co. bought equipment and immediately leased it to Riggs Company on May 1, 2021. At that time, the collectibility of the lease payments was not probable. The lease expires on May 1, 2022. Riggs could have bought the equipment from Hull for $5,600,000 instead of leasing it. Hull's accounting records showed a book value for the equipment on May 1, 2021, of $4,900,000. Hull's depreciation on the equipment in 2021 was $630,000. During 2021, Riggs paid $1,260,000 in rentals to Hull for the 8-month period. Hull incurred maintenance and other related costs under the terms of the lease of $112,000 in 2021. After the lease with Riggs expires, Hull will lease the equipment to another company for two years. What is Hull's income before income taxes related to his lease for the year ended December 31, 2021? $630,000 $1,260,000 $1,148,000 $518,000

$518,000 Correct. This is an operating lease because the lease does not pass any of the classification tests. (1) The ownership of the asset remains with Hull, (2) there is no purchase option, (3) the lease term is less than 75% of the economic life of the asset, (4) the total payments (and therefore the present value of the payments) of $1,260,000 is less than the fair value of the asset of $5,600,000, and (5) the asset is not specialized and is expected to have an alternate use after the end of Riggs' lease term. Therefore, the Hulls' revenue related to the lease with Riggs is the number of lease payments less any expenses related to the leased asset. $1,260,000 - $112,000 - $630,000 = $518,000.

A company is trying to determine how many years that the aggregate amount of maturities for all long-term borrowing must be reported. How many years should be disclosed?

5

Full Disclosure Principle

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

What describes current practice in accounting for leases? Leases are not capitalized. All leases are capitalized. All long-term leases are capitalized. Leases similar to installment purchases are capitalized.

All long-term leases are capitalized. Correct. Capitalize all long-term leases. This approach requires the long-term right to use the property in order to capitalize. This property-rights approach capitalizes all long-term leases.

what does the lessee report on the income statement for a financing lease?

Amortization expense Interest expense

Management's Discussion and Analysis (MD&A)

An annual report disclosure that provides management's analysis of the results of operations and financial condition.

During the current year, a manufacturer was served with a lawsuit, and the company's attorney predicts that it will most likely result in a loss, but the dollar amount is not estimable. The company does have a large line of credit available that they believe could cover any amount of loss. Additionally, the manufacturer guaranteed $1,000,000 in indebtedness of a smaller company in which it holds 50% stock, although the manufacturer does not think the smaller company will default.Which partial disclosure note for contingent liabilities is appropriate for this manufacturer? An explanation that an estimate of the lawsuit contingency is unpredictable An explanation that the indebtedness of the smaller company is unrecorded because the loss is improbable A statement of guarantee of indebtedness for half of the $1,000,000 loan of the smaller company A statement that a line of credit is available to pay for the lawsuit

An explanation that an estimate of the lawsuit contingency is unpredictable Correct! If there is a reasonable probability of liability, the company must disclose an estimate of the loss, or range of loss, or a statement that an estimate cannot be made.

Rondelli Manfuacturing Company employs a standard cost system. In December 2017, the company is working on the budgets for 2018 and plan a volume variance for the first quarter of 2018. If the variance is expected to be absorbed by the end of 2018, how would the planned volume variance be described in the 2017 financial statements? As a nonrecognized subsequent event to be deferred at the end of the first quarter if it is favorable; unfavorable variances are to be recognized in the period incurred As a nonrecognized subsequent event that should be deferred at the end of the first quarter, regardless of whether it is favorable or unfavorable As a recognized subsequent event that never is deferred beyond the quarter in which it occurs As a recognized subsequent event to be deferred at the end of the first quarter if it is unfavorable; favorable variances are to be recognized in the period incurred

As a nonrecognized subsequent event that should be deferred at the end of the first quarter, regardless of whether it is favorable or unfavorable Because this is a planned production variance, it has not yet occurred. Therefore, the condition did not exist at the balance sheet date and is referred to as a nonrecognized subsequent event.

After the balance sheet date but before the issue date a company discovers that 1 of its top selling products is defective and will need to be recalled. How should the situation be treated?

As a recognised subsequent event with adjustments made to the financial statements

An accountant is gathering the information necessary to prepare the statement of cash flows. The first section in the statement of cash flows necessitates the use of information from a comparative financial statement.Which comparative financial statement is used for this purpose? Statement of retained earnings Balance sheet Income statement Statement of owner's equity

Balance sheet Correct! Changes in these account balances are useful in completing the operating cash flow section.

What is the reason why companies prefer certain accounting methods? Comparability Asset allocation Bonus payments Asset structure

Bonus payments Studies have found that if compensation plans tie mangers' bonus payments to income, management will select accounting methods that maximize their bonus payments.

A manufacturing company measured its raw materials inventory using the LIFO method for all years prior to Year 2. Beginning with January 1, Year 2, the company elects to use the FIFO method and will present two years in the financial statements. How should the company account for any additional changes? ` By reporting inventory using FIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to the cost of goods sold for the year ended December 31, Year 2 By reporting inventory using LIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to retained earnings on January 1, Year 1 By reporting inventory using FIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to retained earnings on January 1, Year 1 By reporting inventory using LIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to the cost of goods sold for the year ended December 31, Year 2

By reporting inventory using FIFO on the December 31, Year 1 balance sheet and recording a one-time adjustment to retained earnings on January 1, Year 1 A change in accounting principle requires a company to restate prior-year financial statements that are included in the current presentation.

A company is looking for additional guidance on which equipment to lease. The company is using a lessor that has knowledge about the parent's product that can be passed on to the company.Which lessor is being used by the lessee? Banks Independents Captive leasing companies Credit unions

Captive leasing companies Correct! Captive leasing companies have product knowledge that gives an advantage when financing the parent's product. Credit unions

What is an example of a correction of an error in previously issued financial statements? Change in the tax assessment related to a prior period Change to compensation expense for bonuses earned in the prior. That are paid in the subsequent period

Change to compensation expense for bonuses earned in the prior. That are paid in the subsequent period bonuses are to be accrued in the period earned not in the period paid

Company A acquires all shares of Company B on January 1 of Year 2. Both companies have conducted operations for the past 10 years. Company A presents two years of its financial position and results of operations when preparing financial statements. What is the appropriate financial statement treatment for this situation? Both Years 1 and 2 financial statements should report Company A's information, and Company A should begin reporting consolidated information after Year 2. Company A should report consolidated information for both Year 1 and Year 2 financial statements. Year 1 financial statements should report Company A's information, and Year 2 financial statements should report consolidated information. Company A should restate the past 10 years to reflect consolidated information.

Company A should report consolidated information for both Year 1 and Year 2 financial statements. Correct! This situation is a change in reporting entity. When changing a reporting entity, U.S. GAAP requires companies to restate all prior periods presented. Because Company A presents two years of financial results, both Years 1 and 2 should be presented on a consolidated basis. Year 1 financial statements should not just report Company A's information.

For an asset lease with a four-year term, where should a Lease Liability be classified on the balance sheet?

Current portions in current liabilities and the remainder in noncurrent liabilities Correct. As with all liabilities, the portion that is payable within the operating cycle or one year, whichever is less, is reported as a current liability. The remaining lease liability is shown as a non-current liability on the balance sheet.

journal entry for lessor at inception of the lease

DR: lease receivable, cr: unearned interest and cr: to sales revenue Dr: COGS, credit: equipment

Company A (lessee) has reached a lease agreement with Company B (lessor) to lease a new boom lift beginning January 1, Year 1. This is an operating lease with no renewal option and contains the following information: The lease is for three years, requiring annual payments at the beginning of the year of $10,213. The boom lift has a cost and fair value at the beginning of the lease of $40,000; an estimated economic life of five years; and a non-guaranteed residual value of $12,500. Present value of the residual value is $10,798. Company B depreciates assets like the boom lift using straight-line depreciation. How should Company B record the lease payments received on January 1, Year 2? Debit Cash for $10,798; Credit Lease Revenue for $10,798 Debit Cash for $10,213: Credit Unearned Lease Revenue for $10,213 Debit Cash for $9,167; Credit Lease Revenue for $9,167 Debit Cash for $8,000; Credit Unearned Lease Revenue for $8,000

Debit Cash for $10,213: Credit Unearned Lease Revenue for $10,213 Correct! Company B will record a debit for the cash received from the lease payment. It will credit the Unearned Lease Revenue account since the payment is on the annuity-due basis.

A company purchases $1,000 of inventory that is subsequently sold. The company incorrectly records the purchase for $10,000.Which entry should be used to correct this material error on the balance sheet? Debit Retained Earnings for $10,000; Credit Inventory for $10,000 Debit Inventory for $9,000; Credit Retained Earnings for $9,000 Debit Retained Earnings for $9,000; Credit Inventory for $9,000 Debit Inventory for $10,000; Credit Retained Earnings for $10,000

Debit Retained Earnings for $9,000; Credit Inventory for $9,000 The entry decreases Retained Earnings and Inventory.

The estimated life of a building that has been depreciated for 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. There is no salvage value. Based on this information, how should the accountant record depreciation and adjustments, if any? Adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years Adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years Continue to depreciate the building over the original 50-year life Depreciate the remaining book value over the remaining life of the asset

Depreciate the remaining book value over the remaining life of the asset Changes in useful lives of assets are classified as a change in accounting estimate. Changes in accounting estimates are reported prospectively. Therefore, no adjustments are necessary. The company will depreciate the remaining book value over the remaining 10 years (the remaining life of the asset).

What is an example of a counterbalancing error? Failure to record depreciation Failure to sign an agreement Failure to record prepaid expenses Failure to hire a new employee

Failure to record prepaid expenses Correct. Failure to record prepaid expenses, overstatement of ending inventory, and understatement of purchases are all example of counterbalancing errors.

Which of these would be included in the Lease Receivable account? I. Guaranteed residual value II. Unguaranteed residual value III. Overhead costs IV. Rental payments

I, II, and IV

A company has decided to use the indirect cash flow method to reconcile the differences between accrual accounting net income and cash from operating activities. The company is making a deduction from net income when calculating cash flow from operating activities.Which deduction is possible under this method? Increase in prepaid expense Increase in deferred tax liability Decrease in bonds payable Decrease in receivables

Increase in prepaid expense Correct! An increase in prepaid expense is a deduction from net income when using the indirect cash flow method.

what does the lessor report on the income statement for a sales-type lease?

Interest revenue Selling profit or loss

A company is determining whether a disclosure to the financial statements must be included in a note. Which of the following disclosures would be required? Balance due for any equipment financed Average historical cost for all equipment in service Liens held against equipment

Liens held against equipment Liens on equipment are disclosed in notes to the financial statement

In computing amortization of a leased asset where there is no bargain purchase option, what should the lessee subtract? An unguaranteed residual value and depreciation over the term of the lease A guaranteed residual value and depreciation over the life of the asset An unguaranteed residual value and depreciation over the life of the asset No residual value and depreciation over the term of the lease In computing amortization of a leased asset where there is no bargain purchase option, the lessee should subtract no residual value and depreciate over the term of the lease.

No residual value and depreciation over the term of the lease In computing amortization of a leased asset where there is no bargain purchase option, the lessee should subtract no residual value and depreciate over the term of the lease.

Fluffle Company bears the entire cost of its employee pension. Which type of plan does Fluffle have? Funded plan Noncontributory plan Defined contribution plan Contributory plan

Noncontributory plan Under a noncontributory plan, the employer bears the entire cost of the pension plan.

A company includes a pension plan as part of its overall compensation package. The employer bears the entire cost of the plan.Which type of plan is described in this scenario? Contributory plan Immediate recognition plan Noncontributory plan Deferred recognition plan

Noncontributory plan Correct! The cost of a noncontributory plan is borne by the employer.

A company's considering circumstances that will require related party note disclosures and has identified 4 items for consideration: Management requires that all purchases Are made from a list of pre approved vendors, and there's only one vendor for some products The accounting software is programmed to permit adjusting journal entries only upon successful entry of the thumbprint of the CFO A non interest bearing note receivable from the 4th largest customer is on the trial balance Minutes of the board of directors meetings revealed That 1 director serves on the board of a local nonprofit, which accepts voluntary employee payroll contributions Which circumstance will require this type of note disclosure in the financial statements?

Note receivable from the 4th largest customer

qualified pension plan

Pension plans that offer tax benefits, by permitting deductibility of the employer's contributions to the pension fund and tax-free status of earnings from pension fund assets.

Which calculation is used to measure the funding needed for projected benefit obligations of a defined benefit plan? Cost of benefits Time value of benefit Present value Future value

Present value Correct! Cash flows will not be paid until a future date, so the present value is used to determine present funding.

Which amount should be recorded as the cost of an asset under a finance lease? Present value of the lease payments plus the present value of any unguaranteed residual value Carrying value of the asset on the lessor's books Present value of the lease payments Present value of the lease payments or the fair value of the asset, whichever is lower

Present value of the lease payments Correct. The amount to be recorded as the cost of an asset under a finance lease is equal to the present value of the lease payments.

Which amount should be recorded as the cost of an asset under a finance lease? Present value of the lease payments or the fair value of the asset, whichever is lower Present value of the lease payments plus the present value of any unguaranteed residual value Present value of the lease payments Carrying value of the asset on the lessor's books

Present value of the lease payments The amount to be recorded as the cost of an asset under a finance lease is equal to the present value of the lease payments.

A lessee had a ten-year finance lease requiring equal annual payments. What should the reduction of the lease liability in year 2 be equal to? The reduction of the lease liability in year 1 The current liability shown for the lease at the end of year 2 The current liability shown for the lease at the end of year 1 One-tenth of the original lease liability

The current liability shown for the lease at the end of year 1 A lessee had a ten-year finance lease requiring equal annual payments. The reduction of the lease liability in year 2 should equal the current liability shown for the lease at the end of year 1.

In computing the present value of the lease payments, which rate should the lessee use? The implicit rate in all cases The implicit rate of the lessor, assuming that the implicit rate is known to the lessee The incremental borrowing rate in all cases The incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee

The implicit rate of the lessor, assuming that the implicit rate is known to the lessee Correct. In computing the present value of the lease payments, the lessee should use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.

implicit interest rate

The interest rate used by the lessor in determining the lease payments; it ensures a desired rate of return for the lessor in the leasing arrangement.

A sales-type lease has an unguaranteed residual value at the end of the lease term. At which amount would the lessor report sales revenue in the period of the inception of the lease? The lease payments plus the unguaranteed residual value The present value of the lease payments plus the present value of the unguaranteed residual value The cost of the asset to the lessor, less the present value of any unguaranteed residual value The sales price less the present value of the residual value

The sales price less the present value of the residual value Correct. Sales revenue of a sales-type lease is determined by calculating the sales price minus the present value of the residual value of the asset at the end of the lease

A sales-type lease has an unguaranteed residual value at the end of the lease term. At which amount would the lessor report sales revenue in the period of the inception of the lease?

The sales price less the present value of the residual value Correct. Sales revenue of a sales-type lease is determined by calculating the sales price minus the present value of the residual value of the asset at the end of the lease.

What best describes the primary purpose of the information provided by the statement of cash flows?

To provide information about the cash receipts and cash payments of an entity during a period

for the classification test for the lessee how do they treat the unguaranteed and guaranteed residual value?

Unguaranteed Residual Value: Ignore Guaranteed: Include full amount of residual value in present value test

for the measurement of liability for the lessee how do they treat the unguaranteed and guaranteed residual value?

Unguaranteed Residual Value: ignore Guaranteed Residual Value: If expected value of residual value >/= to guaranteed residual value, ignore If expected value of residual value

for the classification test for the lessor how do they treat the unguaranteed and guaranteed residual value?

Unguaranteed Residual Value: ignore Guaranteed Residual Value: include

for the measurement of liability for the lessor how do they treat the unguaranteed and guaranteed residual value?

Unguaranteed Residual Value: include Guaranteed Residual Value: include

Xanthe Corporation had the following transactions occur in the current year: 1. Cash sale of merchandise inventory 2. Sale of delivery truck at book value 3. Sale of Xanthe common stock for cash 4. Issuance of a note payable to a bank for cash 5. Sale of a security held as an available-for-sale investment 6. Collection of loan receivable. How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year? Two items Five items Four items Three items

three items Three items will appear as a cash inflow from investing activities: 1. Cash sale of merchandise inventory. - Operating Activities 2. Sale of delivery truck at book value. - Investing Activities 3. Sale of Xanthe common stock for cash. - Financing Activities 4. Issuance of a note payable to a bank for cash. - Financing Activities 5. Sale of a security held as an available-for-sale investment. - Investing Activities 6. Collection of loan receivable. - Investing Activities

Subsequent Events

transactions and other pertinent events that occurred after the balance sheet date that affect the fair presentation or disclosure of the statements being audited

error corrections should NOT make cumulative adjustments to comprehensive income. True or false?

true

financing activities include treasury stock. True or false?

true

FV of plan assets < PBO =

underfunded (pension benefit liability)

contra account to lease receivable

unearned interest

private company council

uses the recently developed Private Company Decision-Making Framework 3 to evaluate whether alternatives to existing GAAP are necessary to address the needs of users of private company financial statements.

do you include unguaranteed residual value in the lessor's measurement of receivable?

yes