Personalized Review 2

Dodd Co's debt securities at 12/31 included available-for-sale securities with a cost basis of 24k and a fair value of $300k. Dodd's income tax rate was 20%. What amount of unrealized gain or loss should Dodd recognize in its income statement at 12/31? 1. 0 2. 6k loss 3. 4,800 gain 4. 6k

1. 0 Unrealized gains on available-for-sale (AFS) securities are recorded in other comprehensive income (OCI). The entire 6k unrealized gain (30k fair value-24k cost basis) will go in OCI, with no amount reflected on the income statement

Goodwill should be tested for impairment at which of the following levels under IFRS? 1. each reporting unit 2. each acquisition unit 3. each cash generating unit 4. entire business as a whole

3. each cash generating unit Under IFRS, goodwill impairment is analyzed at the cash-generating unit level

An employer's obligation for postretirement health benefits that are expected to b provided to or for an employee must be fully accrued by the date the: 1. employee is fully eligible for benefits 2. employees retires 3. benefits are utilized 4. benefits are paid

1. employee is fully eligible for benefits Postretirement health benefits are accrued in a manner similar to pension benefits. The expected postretirement health benefits must be fully accrued by the date the employee is fully eligible for the benefits. The accrual will begin when the employee is hired through the eligibility (vesting) date.

Which of the following defined benefit pension plan disclosures should be made in a company's financial statements? i. the fundeds status of the plan ii. the amount of net periodic pension cost for the period iii. the fair value of plan assets 1. i, ii, and iii 2. i and ii 3. ii and iii 4. i only

1. i, ii, and iii Defined benefit pension plan disclosures should be made in a company's financial statements of the following: i. the funded status of the plan (now show on the face of the balance sheet) ii. the amount of net periodic pension cost for the period iii. the fair value of plan assets

A property dividend should be recorded in retained earnings at the property's: 1. market value at date of declaration 2. market value at date of issuance (pmt) 3. book value at date of declaration 4. book value at date of issuance (pmt)

1. market value at date of declaration A property dividend should be recorded in retained earnings at the property's market value at date of declaration

Tang City received land from a donor who stipulated that the land must remain intact, but any income generated from the property may be used for general government services. In which fund should Tang City record the donated land? 1. permanent 2. special revenue 3. private purpose trust 4. custodial

1. permanent The fact pattern describes the circumstances req'd for a permanent fund. Permanent funds shoudl be used to report resources that are restricted to the extent that only earnings and not principal, may be used for the purposes that support the government (that benefit the public). The land rec'd by Tang City is to be kept intact with income used for general government services

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? 1. Expensed in the year in which the research and development project started 2. capitalized and depreciated over the term of the research and development project 3. capitalized and depreciated over its estimated useful life 4. either capitalized or expensed, but not both, depending on the term of the research and development project

3. capitalized and depreciated over its estimated useful life Equipment used in research and development activities that has alternative future users is capitalized and depreciated over its useful life.

Park Co. useless the equity method to accounts for its 1/1/Y1, purchase of Tun, Inc's common stock. On 1/1/Y1, the fair values of Tun's FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park's reported equity in Tun's year 1 earnings? Inventory excess \ Land excess 1. decrease no effect 2. decrease decrease 3. increase increase 4. increase no effect

Inventory excess \ Land excess 1. decrease no effect Park would record the additional COGS associated with the undervalued beginning inventory by debiting investment income and crediting the investment in Tun's account. Because the difference between book value and fair value on land is not amortized, the difference in the land value would have no effect on equity in earnings.

Wagner, a holder of $1m Palmer Inc, bond, collected the interest due on March 31 Y1, and then sold the bond to Seal, Inc for $975k. On that date, Palmer a 75% owner of Seal, had a $1.075m carrying amount fo this bond. What was the effect of Seal's purchase of Palmer's bond on the retained earnings and non controlling interest amounts reported in Palmer's March 31, Y1, consolidated balance sheet? Retained Earnings Noncontrolling Int 1. 75k increase 25k increase 2. 100k 0 3. 0 25k increase 4. 0 100k increase

RE Noncntrling Int 2. 100k 0 $100k increase in consolidated earnings. $0 effect on non controlling interest. The purchase of the parent company bond by the subsidiary is treated as if the bond were retired when the financial statements are consolidated. Because the bond had a book value of $1.075m, but was "retired" for $975k a gain is recorded upon consolidation JE on consolidated worksheet Bond premium Dr. Bond premium (Palmer's books) 75k Dr. Bond payable (Palmer's books) 1m Cr. Bond investment (Seal's books) 975k Cr. Retained earnings-Consolidated 100k Cr. Noncontrolling interest 0 Noncontrolling interest is only adjusted if the bonds were originally issued by the subsidiary and, as a result, a portion of the gain must be allocated to the non controlling interest. In this problem, the parent issued the bonds, so the elimination has no impact on non controlling interest

In Dart Co.'s Year 2 single-step income statement , as prepared by Dart's controller, the section Titled "Revenues" consisted of the following: Sales $250,000 Purchase discounts 3,000 Recovery of accounts written off 10,000 Total revenues $263,000 In its Year 2 single-step income statement, what amount should Dart report as total revenues? 1. $250,000 2. $253,000 3. $260,000 4. $263,000

1. $250,000 The sing step income statement will include in total revenues all sales of goods, services, and rentals. Purchase discounts are not included in revenue, but instead reduce cost of goods sold. The recover of accounts written off doe snot hit the revenue account

The Turtle Society, a nongovernmental not-for-profit organization, receives numerous contributed hours from volunteers during its busy season. Chris, a clerk at the local tax collector's office, volunteered ten hours per week for 24 weeks transferring turtle food from the port to the turtle shelter. This tax typically is handled in the normal course of the business at no charge to the Society and, consequently, no resources have been budgeted for service, but Chris' help has been accepted. His rate of pay at the tax office is $10 per hour, and the prevailing wage rate for laborers is $6.50 per hour. What amount of contribution revenue should Turtle Society record this service? 1. 0 2. 840 3. 1,560 4. 2,400

1. 0 No expense would be recognized for this work performed. Donated services should be recorded as contribution revenue and expense at fair value if the services meet the following criteria: -The create or enhance a non financial asset -They require specialized skills that the provider possesses and would otherwise have been purchased by the organization. Contributed services are, therefore, only recognized SOME of the time: when the service is SPECIALIZED, OTHERWISE needed, and MEASURED EASILY. Chris' work for the Turtle Society does not meet the criteria for expense recognition. The fact pattern makes a point of describing the work as being different from his normal profession and valued at an amount less than his normal wage. Also, Chris' work does not replace a cost so, financially, it is not "otherwise needed"

On 1/1/Y1, Owen Corp, acquired all of Sharp Corp's common stock for $1.2m. On that date, the fair values of Sharp's assets and liabilities equaled their carrying amounts of $1.32m and $320k, respectively. During Y1, Sharp paid cash dividends of 20k. Selected information from the separate balance sheets and income statements of Owen and Sharp as of 12/31/Y1, and for the year then ended follows: Acct | Owen | Sharp Bal sht accts Investment in sub 1.3m - RE 1.24m 540k Total SE 2.62m 1.1m Inc stmt accts Operating Inc 420k 200k Equity in earnings 120k - Net Inc 400k 120k In Owen's 12/31/y1, consolidated balance sheet reported as total retained earnings? 1. 1.24m 2. 1.36m 3. 1.38m 4. 1.8m

1. 1.24m The parent company equity account at 12/31/Y1 (per the facts of the question) becomes the consolidated equity account when the acquisition method is used. Note: When using the acquisition method, 100% of the subsidiary equity accounts are eliminated in consolidation

At 12/31/Y1, Eage Corp. reported 1.75m of appropriated retained earnings for the construction of a new office building, which was completed in Y2 at a total cost of 1.5m. In y2, Eagle appropriated 1.2m of retained earnings for the construction of a new plant. Also 2m of cash was restricted for the retirement of bonds due in Y3. In its Y2 balance sheet, Eagle should report what amount of appropriated retained earnings? 1. 1.2m 2. 1.45m 3. 2.95m 4. 3.2m

1. 1.2m 1.2m appropriated retained earnings at 12/31/Y2 (for the construction of a new plant only). When the purpose of the appropriation has been achieved, it should be restored to unappropriated has been achieved, it should be restored to unappropriated retained earnings

Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On 12/30, Dun and Beech each declared a cash dividend of $100k for the current year. What is the total amount of dividends that should be reported in the 12/31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech? 1. 10k 2. 100k 3. 190k 4. 200k

1. 10k Since Jane owns 90% of Dun and 100% of Beech, when they declare and pay dividends, the only amounts that should appear in their year-end consolidated financial statements are the dividends paid to outsiders or external parties. Intercompany dividends should be eliminated upon consolidation. In this case, the only non-controlling interest that exists is the 10% of Dun that Jane does not own. So all 100% of Beech's $100k dividend would be eliminated, but only 90% of Dun's $100k would be eliminated. Therefore, just 10% of Dun's 100k dividends, or 10k, will appear in Jane and sub's year end consolidated financial statements, specifically, the consolidated statement of cash flows and the consolidated statement of equity.

On 9/29/Y1, Wall Co. paid $860k 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 $800k and $180k, respectively. Hart's recorded assets and liabilities had fair values of $840k and $140k, respectively. In Wall's September 30, Y1, balance sheet, what amount should be reported as goodwill? 1. 160k 2. 20k 3. 180k 4. 240k

1. 160k The allocation of the investment purchase price is calculated as follows: BS FV adjustment = FV net assets - BV net assets = (840k -140k) - (800k -180k) =700k - 620k =80k

On 6/1/y1 Oak Corp granted stock options to certain key employees as additional compensation. The options were for 1k shares of Oak's $2 par value common stock at an option price of $15 per share. Market price of this stock on 6/1/Y1 was $17 per share. Using an acceptable option pricing model Oak determined that total compensation cost under the stock option plan was $5k. The options were exercisable beginning 1/2/Y2 and expire on 12/31/Y3. On 4/1/Y2, when Oak's stock was trading at $21 per share, all options were exercised. What amount of pretax compensation should Oak report in Y1 in connection with options? 1. 5k 2. 6k 3. 2.5k 4. 2k

1. 5k Compensation cost should be recognized as expense over the service period. Since the options are exercisable beginning in Y2, the service period is only Y1

A company reported the following information for Y1: Net income 34k Owner contribution 9k Deferred gain on an effective cash flow hedge 8k Foreign currency translation gain 2k Prior service cost not recognized in net periodic pension cost 5k What is the amount of other comprehensive income for Y1? 1. 5k 2. 14k 3. 15k 4. 43k

1. 5k Other comprehensive income for Y1 is 5k. (8k + 2k -5k). This includes the 8k of deferred gain on an effective cash flow hedge, plus 2k of foreign currency translation gain, less the 5k of prior service cost not recognized in net periodic pension cost. The 5k of prior service cost would be a positive addition to comprehensive income in the year that it was amortized to net periodic pension cost. In this problem, it is not being recognized in net periodic pension cost.

Zest Co. owns 100% of Cinn Inc. On 1/2/Y1, Zest sold equipment with an original cost of 80k and a carrying amount of 48k to Finn for 72k. Zest had been depreciating the equipment over a 5 yr period using str8 line depreciation with no residual value. Cinn is using str8 line depreciation over 3 yrs with no residual value. In Zest's 12/31/Y1 consolidating worksheet, by what amount should depreciation expense be decreased? 1. 8k 2. 0 3. 16k 4. 24k

1. 8k Depreciation expense should be decreased by the difference between the depreciation expense calculated by Cinn and the depreciation that would have been calculated by Zest had Zest not sold the asset in an intracompany transaction: Depreciation expense after i/c sale 24k = 72k/3 Depreciation expense if no i/c sale 16k = 80k/5 Difference = 8k Note that this 8k depreciation expense adjustment can also be calculated by dividing the difference between the pre-intercompany sale asset book value by the useful life to be used by the new owner: (72k-48k)/3 = 8k

On 12/31/y4, Prune Inc sold a piece of equipment to its 90% owned subsidiary, Supine Co. Details are as follows: Org purchase date: Jan 1, y1 orig cost to prone: 65k Orig est of sale val: 10k Orig est econom life: 5 yrs Interco selling price: 60k Both companies use str8 line depreciation. Both companies think that, as of the end of Y4, the equipments useful life will extend an add'l four years and salvage value will become 0. In preparing its y5 consolidated statement, consolidated depreciation expense will be reduce by: 1. 9,750 2. 7,800 3. 8,775 4. 7,020

1. 9,750 With accumulated depreciation through Y4 at 44k (11k per year in depreciation calculated as: 65-10/5), the carrying value of the equipment on Prone's books at the end of Y4 would have been 21k. With another 4 years of useful life and no salvage value, depreciation expense would have been 5,250 per year. For Supine, the annual depreciation expense would be 15k (60/4 yrs). The difference between the two amount is 9,750, and this represents the overstatement of depreciation that must be corrected

On 12/31 a company has the following bank accounts and corresponding cash balances: California Bank: Op-Summit Ridge (400k) Op-Bakersvile 300k Op-Smithville 50k Savings 500k Sedona Bank: Checking (375k) How should the company report the above bank account balances in the balance sheet at 12/31? 1. Cash of 450k and a liability of 375k 2. Cash of 75k 3. Cash of 850k and a liability of 775k 4. Cash of 800k and a liability of 725k

1. Cash of 450k and a liability of 375k Although the balances in the various accounts within the same bank can be netted, balance totals for different banks must be accounted for separately on the balance sheet when one has a negative position. Here, because the checking account in Sedona Bank is negative, it must be accounted for separately as a liability. All of the accounts of California Bank can be netted to produce a $450k cash position.

When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of: 1. Declaration 2. record 3. payment 4. declaration or record, whichever is earlier

1. Declaration When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of declaration by the board of directors

Encumbrances outstanding at YE in a state's general fund would most likely be reported as a: 1. Fund balance commitment in the general fund 2. Liability in the general fund 3. Liability in the general long-term debt account group 4. Fund balance restriction in the general fund

1. Fund balance commitment in the general fund Encumbrances are commitments or assignments of fund balance representing the amount of unperformed contracts for goods or services. Encumbrances at year-end do not constitute expenditures or liabilities. Therefore, at year end encumbrances are reclassified as a commitment of assignment of fund balance that is not appropriable for expenditure.

Which of the following conditions must exist in order for an impairment loss to be recognized under US GAAP? I. The carrying amount of the long lived asset is less than its fair value II. The carry amount of the long lived asset is not recoverable. 1. II only 2. I only 3. Both I and II 4. Neither I nor II

1. II only A long lived asset is impaired if the carrying amount of the asset is greater than, not less than, its fair value and if that carrying amount is not recoverable (the fair value would be recoverable, but the difference would not be). An impairment loss would then be recognized for the amount of the difference between book value and fair value.

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: 1. Included as a decrease to retained earnings 2. Included as an increase to retained earnings 3. Reported as a deferred debit to be amortized over the remaining life of the bonds 4. Reported as a deferred credit to be amortized over the remaining life of the bonds

1. Included as a decrease to retained earnings In a consolidated balance sheet, the difference between the bond carrying amounts would be included as a decrease to retained earnings because a premium was paid to "retire" the bonds. RULE: When members of a consolidated group have intracompany bond holdings, the bonds are eliminated in consolidation and the difference (gain or loss) between the discounted issue price and the premium on reacquisition would be included in retained earnings

A 70% owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and non controlling interest balances in the parent company's consolidated balance sheet? 1. No effect on retained earnings and a decrease in non controlling interest 2. No effect on either retained earnings or non controlling interest 3. Decreases in both retained earnings and non controlling interest 4. A decrease in retained earnings and no effect on non controlling interest

1. No effect on retained earnings and a decrease in non controlling interest No effect on retained earnings and a decrease in non controlling interest (NCI). The parent's balance sheet would reflect 70% of the sub's earnings. Receipt of 70% of the dividends would simply transfer cash from one company to another. The dividend would be eliminated in consolidation. However, 30% of the dividend would be paid to the noncontrolling shareholders and would reduce non controlling interest on the consolidated balance sheet because under the equity method, the ending noncontrolling interest is calculated as follows: Beginning non controlling interest +NCI share of subsidiary net income -NCI share of subsidiary dividends = Ending non controlling interest

When computing diluted earnings per share, convertible securities are: 1. Recognized only if they are dilutive 2. ignored 3. recognized only if they are anti-dilutive 4. recognized whether they are dilutive or anti-dilutive

1. Recognized only if they are dilutive RULE: Convertible securities are recognized when computing diluted EPS only if the conversion is dilutive

If a city legally adopts its annual general fund budget on the modified accrual basis of accounting, its estimated revenues should be: 1. Reported on the modified accrual basis of accounting in the general fund budgetary comparison schedule. 2. Converted to the cash basis of accounting and reported in the general fund budgetary comparison schedule 3. Reported as current assets in the general fund balance sheet 4. Reported as noncurrent assets in the general fund balance sheet

1. Reported on the modified accrual basis of accounting in the general fund budgetary comparison schedule. If a city legally adopts its annual general fund budget on the modified accrual basis of accounting, its estimated revenues should be reported on the modified accrual basis of accounting in the general fund budgetary comparison schedule. Although the budgetary comparison schedule should appear in the required supplementary information, it may appear in the basci financial statements at the election of the government.

How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported? 1. as a component of income from continuing operations 2. by restating the financial statements of all prior period presented 3. as a correction of an error 4. by footnote disclosure only

1. as a component of income from continuing operations When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospectively as a component of income from continuing operations

An investor uses fair value through net income to account for an investment in common stock. Dividends rec'd this year exceeded the investor's share of investee's undistributed earnings since the date of investment. The amount of dividend revenue that should be reported in the investor's income statement for this year would be: 1. the portion of the dividends rec'd this year that were not in excess of the investor's share of investee's undistributed earnings since the date of investment 2. the portion of the dividends rec'd this year that were in excess of the investor's share of investee's undistributed earnings since the date of investment 3. The total amount of dividends rec'd this year 4. zero

1. the portion of the dividends rec'd this year that were not in excess of the investor's share of investee's undistributed earnings since the date of investment The amount of dividend revenue that should be reported in the investor's income statement for this year would be the portion of the dividends rec'd this year that were not in excess of the investor's share of investee's undistributed earnings since the date of investment RULE: Dividend revenue, under the fair value method, should be recognized to the extent of cumulative earnings since the acquisition and return of capital beyond that point

Falton Co. had the following first-year amounts related to its $9,000,000 construction contract: Actual costs incurred and paid: 2m Estimated costs to complete: 6m Progress billings: 1.8m Cash collected: 1.5m What amount should Falton recognize as a current liability at year end, using the percentage-of-completion method? 1. 200k 2. 0 3. 250k 4. 300k

2. 0 The excess of accumulated costs (2m) plus estimated earnings (250k) over related billings (1.8m) will represent a current asset. A liability only exists when progress billings exceed costs and estimated earnings. Estimated earnings under the percentage of completion method are calculated as follows: 1. Calc estimate profit: 9m - (2m + 6m)=1m 2. Percent complete: 2m / (2m+6m)= 25% 3. Calc gross profit earned to date: 1m x 25%= 250k

On 6/30m Mill corp incurred a 100k net loss from disposal of a component of a business. Also, on 6/30, Mill paid 40k for property taxes assessed for the calendar year. What amount of the foregoing items should be included in the determination of MIll's net income or loss for the six month interim period ended 6/30? 1. 140k 2. 120k 3. 90k 4. 70k

2. 120k 120k expenses included in the determination of net income or loss fro the six month interim period ended 6/30 RULES: The net loss on disposal of a component is recorded in the interim period incurred 100k Property taxes should be allocated over the periods (40k / 2) 20k Expenses for six month interim period: 120k

On 12/31, Planet Co acquired 80% of the voting common stock of Star Co by issuing 100k shares of its own common stock (FV $8/share). In the acquisition, Planet paid legal fees in the amount of 15k and paid SEC registration fees of 10. The book value of Star on 12/31 was 700k. Star's only balance sheet item with a fv different from bv was a building. The bldg had a bv of 100k and a fv of 150k. Goodwill to be shown on Planet's 12/31 consolidated balance sheet under IFRS partial goodwill method is: 1. 65k 2. 200k 3. 50k 4. 250

2. 200k Under the IFRS partial goodwill method, goodwill is the difference between the purchase price and the fv of the net assets acquired. partial goodwill = purchase price - FV net assets acquired Partial goodwill= (100k shares x $8/share) - [80% x (700k + 50k) Partial goodwill = 800k - 600k = 200k

On 1/1/Y1, Parker Inc acquired 30% of Smith Inc's outstanding common stock for $400k. During Y1, Smith had net income of $100k and paid dividends of $30k. On 1/1/Y2, Parker acquired an add'l 45% interest on Smith for $1,012,500. The fair value of Smith on 1/1/Y2 was $2,250,000. What amount of gain from this transaction will Parker recored in Y2? 1. 0 2. 254k 3. 275k 4. 675k

2. 254k When an investor goes from non-control to control of a subsidiary through a step acquisition, the previously held equity investment must be adjusted to fair value. The fair value adjustment is recognized as a gain or loss by the investor in the period of the add'l acquisition. FV of 30% interest = 2.25m x 30%= $675k To compute the adjustment made on 1/1/Y2, the carrying amount of the Parker's investment in Smith on that date must first be calculated. Because Parker previously owned 30% of Smith, the investment would have been accounted for using the equity method: Investment in Smith, 1/1/Y1 $400k + 30% share of Smith's Y1 earnings 30k - 30% share of Smith's Y1 dividends (9k) = Investment in Smith 12/31/Y1 421k The $254k adjustment necessary to adjust the original investment to its 1/1/Y2 fair value is recorded by Parker as a gain in Y2.

On 1/1/Y1, Parker Inc. acquired 30% of Smith Inc's outstanding common stock for 400k. During Y1, Smith had net income of 100k and paid dividends of 30k. On 1/1/Y2, Parker acquired an additional 45% interest on Smith for $1.0125m. The fair value of Smith on 1/1/Y2 was 2.25m. What amount of gain from this transaction will Parker record in Y2? 1. 0 2. 254k 3. 275k 4. 675k

2. 254k When an investor goes from non-control to control of a subsidiary through a step acquisition, the previously held equity investment must be adjusted to fair value. The fair value adjustment is recognized as a gain or loss by the investor in the period of the additional acquisition. FV of 30% interest= 2.25m x 30% = 675k To compute the adjustment made on 1/1/y2, the carrying amount of Parker's investment is Smith on that date must first be calculated. B/c Parker previously owned 30% of Smith, the investment would have been accounted for using the equity method: Invstmt in Smith 1/1/Y1 400k + 30% share os Smith's Y1 earnings 30k -30% share os Smith's Y1 dividends -9k Invstmt in Smith 12/31/Y1 421k See more in One Note (To review 2-1) MCQ-05616 The 254k adjustment necessary to adjust the original investment to its 1/1/y2 fair value is recorded by Parker as a gain in Y2.

Port, Inc., owns 100% of Salem, Inc. On January 1, Port sold Salem delivery equipment at a gain. Port had owned the equipment for 2 years and used a 5-year straight-line depreciation rate with no residual value. Salem is using a 3-year straight-line depreciation rate with no residual value for the equipment. In the consolidated income statement, Salem's recorded depreciation expense on the equipment for the year 1 will be decreased by: 1. 20% of the gain on sale 2. 33 1/3% of the gain on sale 3. 50% of the gain on sale 4. 100% of the gain on sale

2. 33 1/3% of the gain on sale Depreciation expense will be decreased by 33 1/3% of the gain on sale, the amount that depreciation expense has been overstated E.g. Orig puch price by Port 100 2 yrs depreciation (100/5=20 per year x 2) (40) NBV at date of sale 60 Sale price to Salem 75 Gain on sale 15 Depreciation exp recorded by Salem 25 (75/3 yr life) Consolidated depreciation expense 20 (100/5 yr life) Elimination of excess depreciation (15 gain x 1/3) 5

On 7/1/Y1, an entity that uses IFRS acquired equipment with a cost of 84k and an estimated life of 12 yrs. The cost of the machine included 9k cost of a component that must be replaced every 6 years and an initial inspection fee of 3k. The equipment must be re-inspected every 3 years at an additional cost of 3k per inspection. The entity uses straight-line depreciation. What is depreciation expense for the year ended 12/31/Y1? 1. 7k 2. 4,250 3. 8.5k 4. 9.5k

2. 4,250 IFRS requires component depreciation. Under component depreciation, the equipment, component, and inspection cost are recognized and depreciated separately: Equipment (84k - 9k - 3k)/12 yrs = 72k / 12yrs= 6k Component: 9k/6yrs = 1.5k Inspection cost: 3k/3 yrs= 1k Total annual str8 line depreciation= 6k + 1.5k + 1k= 8.5k Depreciation for 7/1/y1 - 12/31/ya = 8.5k x 6/12= 4,250

During the Y1, Abaco Co. the 100% owned subsidiary of Walker Inc, sold merchandise to Walker at a 25% markup over its cost. Intracompany sales to Walker totaled $800k during Y1. On 12/31/Y1, Walker held 200k of the inventory purchased from Abaco in its ending inventory. In Walker's 12/31/Y1 elimination of the intracompany sales transaction, the intracompany profit that must be eliminated of the intracompany sales transaction, the intracompany profit that must be eliminated from ending inventory is: 1. 120k 2. 40k 3. 160k 4. 200k

2. 40k Because Abaco sold to Walker at 25% above cost, the cost of the inventory sold to Walker is: Cost x 1.25=$800k Cost=$640k The $160k difference between the sales price of $800k and the cost of 640k is the intracompany profit from the sale that must be eliminated. This account is eliminated against Walker's ending inventory and cost of goods sold. At YE, Walker held $200k or 25% of the inventory purchased from Abaco in ending inventory, implying that 75% of the inventory was sold. Therefore, 25% of the intracompany profit of 160k is eliminated from ending inventory and 75% is eliminated from cost of goods sold: 160k x 25%=$40k eliminated from ending inventory 160k x 75%=120k eliminated from COGS The eliminating entry would be: Dr. Intercompany revenue-Abaco 800k Cr. Intercompany COGS-Abaco 640k Cr. COGS-Walker 120k Cr. Inventory-Walker 40k

Ahm Corp. owns 90% of Bee Corps common stock and 80% of Cee Corps common stock. The remaining common shares of Bee and See are owned by their respective employees. Bee sells exclusively to Cee, Cee buys exclusively from Bee and Cee sells exclusively to unrelated companies. Selected Y1 information for Bee and Cee follows: Bee Cee Sales 130k 91k Cost of sales 100k 65k Beg Inventory none none End Inventory none 65k What amount should be reported as gross profit in Bee and Cee's combined income statement for the year ended 12/31/Y1? 1. 26k 2. 41k 3. 47,800 4. 56k

2. 41k 41k gross profit in combined income statement RULE: "Combined financial statements" do not eliminated "equity" accounts (they are all added across), however, all other intercompany "transactions" and "balances" are eliminated in combined financial statements just as they are in consolidated financial statements

On 7/1/Y1, Roxy Co. obtained fire insurance for a 3 yr period at an annual premium of 72k payable on 7/1 of each year. The first premium payment was made 7/1/Y1. On 10/1/Y1, Roxy paid 24k for real estate taxes to cover the period ending 9/30/Y2. This prepayment was made to obtain a discount. In its 12/31/Y1, balance sheet, Roxy should report prepaid expense of: 1. 60k 2. 54k 3. 48k 4. 36k

2. 54k 54k prepaid expenses in 12/31/Y1 BS (all figures in thousands)

Which of the following factors determines whether an identified segment of an enterprise should be reported in the enterprises's financial statements? I. The segment's assets constitute more than 10% of the combined assets of all operating II. The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments. 1. II only 2. I only 3. Both I and II 4. Neither I nor II

2. I only Fore segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities. The candidate does not have to remember the 10% and also the 10% of "what".

Under US GAAP, interest cost included in the net periodic pension cost recognized for by an employer sponsoring a defined benefit pension plan represents the: 1. Shortage between the expected and actual returns on plan assets 2. Increase in the projected benefit obligation due to the passage of time 3. Increase in the fair value of plan assets due to the passage of time 4. Amortization of the discount on unrecognized prior service costs

2. Increase in the projected benefit obligation due to the passage of time Under US GAAP, interest cost included in the net periodic pension cost by an employer sponsoring a defined benefit pension plan represents the increase in the projected benefit obligation due to the passage of time.

Arkin Corp. is a nongovernmental not-for-profit organization involved in research. Arkin's statement of functional expenses should classify which of the following as support services? 1. Salaries of staff researchers involved in research. 2. Salaries of fundraisers for funds used in research. 3. Costs of equipment involved in research. 4. Costs of laboratory supplies used in research.

2. Salaries of fundraisers for funds used in research. Support services typically involve items such as fundraising, administration, management, and membership development. Salaries for fundraisers would be classified as support

The following data have been extracted from the financial statements of Hutton Inc. Y2. y1 Sales (all on credit). $3m. 2.6m COGS. (2m). (1.7m) Gross profit. 1m. 900k Operating expenses. (450k). (400k) Interest expense. (50k). (60k) Net income before income tax. 500k. 440k Income taxes (30%). (150k). (132k) Net income after income taxes. 350k. 308k What was Hutton Inc's net profit margin for Y2 and 1? Y2. Y1 1. 11.85%. 11.67% 2. 11.67%. 11.85% 3. 16.67%. 16.92% 4. 33.33%. 34.62%

2. Y2- 11.67%. Y1-11.85% Net profit margin is calculated as net income / net sales. For Hutton Inc., net profit margin is calculated as follows: Y2. Y1 Net income. 350k. 308k Net sales. 3m. =11.67%. 2.6m. = 11.85%

Which of the following assets of a nongovernmental not-for-profit charitable organization must be depreciated? 1. building costs of $500k for construction in progress for senior citizen housing 2. a freezer costing $150k for storing food for the soup kitchen 3. land valued at $1m being used as the site of the new senior citizen home 4. a bulk purchase of $20k of linens for its nursing home

2. a freezer costing $150k for storing food for the soup kitchen A nongovernmetnal not-for-profit chartiable organization is accounted for using the accrual method, so normal accrual accounting is used. A freezer would be considered a fixed asset and would be depreciated.

Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts in an exchange that lacks commercial substance under US GAAP. In addition, Bensol paid Sable to compensate for the difference in truck values. As a consequence of the exchange, Sable recognizes: 1. A gain equal to the difference between the fair value and carrying amount of the truck given up 2. a gain determined by the proportion of cash received to the total consideration 3. a loss determined by the proportion of cash received to the total consideration 4. neither a gain nor a loss

2. a gain determined by the proportion of cash received to the total consideration This transaction is a non monetary exchange that lacks commercial substance under US GAAP. As such, the transaction is an exception to the general rule of basing the measurement value of the exchange on fair value. In this question, as in many such question the CPA exam, cash (boot) is rec'd. Since the cash appears to be minor part of the total consideration (there is no way to be sure since that information was not provided in the question), a proportional amount of the gain is recognized. This question does not ask that the gain actually be calculated.

On 12/31/Y1 Paxton Co. had a note payable due on 8/1/Y2. On 1/20/y2, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On 2/1/Y2, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton's financial statements were issued on March 31, Y2. How should Paxton classify the note on its balance sheet at 12/31/Y1? 1. as a current liability because the financing agreement was signed after the balance sheet date. 2. as a current liability because the lender is not expected to be financially capable of honoring the agreement. 3. as a long term liability because the agreement does not expire within one year. 4. as a long term liability because no violation of any provision in the financing agreement exists

2. as a current liability because the lender is not expected to be financially capable of honoring the agreement. A short term obligation may be excluded from current liabilities and included in non current debt if the company has both the intent and the ability to refinance the debt on a long term basis, as evidenced by an actual refinancing before the issuance of the financial statements, or by the existence of a non cancelable financial resources to accomplish the refinancing. Because Paxton's lender does not have the financial resources to accomplish the refinancing, the note must be reported as a current liability on 12/31/Y1 balance sheet.

When a snowplow purchased by a governmental unit is received, it should be recorded in the general fund as a(n): 1. encumbrance 2. expenditure 3. capital asset 4. appropriation

2. expenditure Expenditures are decreases in net financial resources other than through interfund transfers. General fixed assets, such as land, building, and equipment, purchased with general fund resources should be recorded as expenditures in the general fund. The journal entry is: Dr: expenditures Cr. vouchers payable

Which of the followign activities shoudl be EXCLUDED when governmental fund financial statements are converted to government-wide financial statements? 1. proprietary activies 2. fiduciary activies 3. government activities 4. enterprise activities

2. fiduciary activities Fiduciary activities are excluded from the government-wide financial statements. Transaction with fiduciary funds are treated as if those transactions were conducted with an independent trustee for purposes of display in the government-wide financial statements

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: 1. Maturity value less the discount at 12% 2. maturity value less the discount at 15% 3. Face value less the discount at 12% 4. Face value less the discount at 15%

2. maturity value less the discount at 15% Maturity value less the discount at 15%. The discount is always applied on the maturity value.

Which of the following is the characteristic of a perfect hedge? 1. no possibility of future gain only 2. no possibility of future gain or loss 3. no possibility of future loss only 4. the possibility of future gain and no future loss

2. no possibility of future gain or loss A perfect hedge results in neither gains nor losses. In a perfect hedge, the gain or loss on the derivative instrument exactly offsets the loss or gain on the item or transaction being hedged.

All of the following distributions to stockholders are considered asset or capital distributions, except: 1. liquidating dividends 2. stock splits 3. property distributions 4. cash dividends

2. stock splits A "stock split" increases the number of shares. Only the number of shares changes. The capital stock and retained earnings do not change. It is not considered a capital or asset distribution.

Young & Jamison't modified cash basis financial statements indicates cash paid for operating expenses of 150k , end of year prepaid expenses of 15k, and accrued liabilities of 25k. At the beginning of the year, Young & Jamison had prepaid expenses of 10k while acc'd liabilities were 5k. If cash paid for operating expenses is converted to accrual basis operating expenses, what would be the amount of operating expense? 1. 125k 2. 135k 3. 165k 4. 175k

3. 165k During the year, prepaid expenses increased 5k from 10k to 15k. Prepaid expenses represent assets where no benefit has been received yet. In accrual accounting, they are not officially expenses until there is associated benefit. Therefore, the 5k needs to be subtracted from 150k. Also during the year, acc'd liabilities increased from 5k to 25k. This represents benefit rec'd but no cash paid out yet. The expense of $20k (representing the increase) should be booked now (which creates the liability), and when cash payment is made, the liability will be removed. Given the starting point of $150k, subtraction 5k and adding 20k will bring the acc'd expenses to $165k

Thyme Inc. owns 16k of Sage Co's 20k outstanding common shares. The carrying value of Sage's equity is $500k. Sage subsequently issues an add'l 5k previously unissued shares for $200k to an outside party that is unrelated to either Thyme or Sage. What is the total non controlling interest after the add'l shares are issued? 1. 140k 2. 172k 3. 252k 4. 300k

3. 252k Sage's equity (assets - liabilities) is $500k prior to the stock issuance. When Sage issues the add'l shares, equity increases $200k to $700k. Thyme Inc still owns 16k shares, but outstanding shares total 25k after issuance. Thyme owns 64 percent of the stock (16k/25k); therefore the non controlling interest (the portion Thyme does not own) is 36 percent. $700k x 36%= $252k

Clark Co. had the following transactions with affiliated parties during Y1: -Sales of $60k to Dean, Inc. with $20k gross profit. Dean had 15k of inventory on hand at year-end. Clark owns a 15% interest in Dean and does not exert significant influence. -Purchases of raw materials totaling $240k from Kent Corp., a wholly-owned subsidiary. Kent's gross profit on the sale was $48k. Clark had $60k of this inventory remaining on 12/31/Y1 Before eliminating entries, Clark had consolidated current assets of $320k. What amount should Clark report in its 12/31/Y1, consolidated balance sheet for current assets? 1. $320k 2. 317k 3. 308k 4. 303k

3. 308k $308k current assets in the 12/31/Y1 consolidated balance sheet ($320 less 12k unrealized profit in inventory) The unrealized profit to be eliminated from inventory is calculated as follows: Interco profit on inventory x % of inventory purchased still on hand = $48k x ($60k / $240k) =$12k NOTE: No elimination is made related to the transaction with Dean, Inc. because Dean (owned less than 50%) is not consolidated

On 12/31/Y1, the BOD of Maxy Manufacturing, Inc committed to a plan to discontinue the operations of its Alpha division. The decision represents a major strategic shift and will have a significant effect on its operations and financial results. Maxy estimated that Alpha's Y2 operating loss would be 500k and that the fair value of Alpha's facilities was 300k less than their carrying amounts. The estimate for Y2 turned out to be correct. Alpha's Y1 operating loss was 1.4m and the division was actually sold for 400k less than its carrying amount. Maxy's effective tax rate is 30%. In its Y2 income statement, what amount should Maxy report as loss from discontinued operations? 1. 350k 2. 500k 3. 420k 4. 600k

3. 420k The Y2 loss from discontinued operations would include both the Y2 operating loss of 500k (which turned out to be a correct estimate) and the "add'l" loss (on disposal) of 100k, net of tax, for a total of 600k x .70 or $420k

Star Co. leases a building for its product showroom. The 10 yr nonrenewable lease will expire on 12/31/Y10. In 1/Y5 Star redecorated its showroom and made leasehold improvements of 48k. The estimated useful life of the improvements is 8 yrs. Star uses the str8 line method of amortization. What amount of leasehold improvements, net of amortization, should Star report in its June 30/Y5, balance sheet? 1. 45,600 2. 45k 3. 44k 4. 43.2k

3. 44k Leasehold improvements should be amortized over the lesser of the remaining life of the lease (6 yrs), the life of the improvement (8 years). $48k / 6= $8k amortization for a year or $4k for 1/Y5 through 6/30/y5. $48k - 4k =44k

Ace Co. sold King Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments. This note was discounted to yield a 9% rate to King. The present value factors of an ordinary annuity of $1 for five periods are as follows: 8% 3.992 9% 3.890 What should be the total interest revenue earned by King on this note? 1. 9k 2. 8k 3. 5,560 4. 5,050

3. 5,560 5, 560 total interest revenue Annual pmts= $20k / 3.992 = 5,010 5 equal pmts of principal and interest. x 5 total pmts. 25,050 Discounted note= $5,010 x 3.890 = (19,490) total interest over five years = 5,560

The Jackson Foundation, a not for profit organization, received contributions in Y1 as follows: -Cash contributions of $500k w/o donor restrictions -Cash contributions of $200k with donor restrictions w/ specific requirements relative to the acquisition of property Jackson's statement of cash flows in Y1 should include which of the following amounts? Op Act | Inv Act | Fin Act 1. 700k 0 0 2. 500k 200k 0 3. 500k 0 200k 4. 0 500k 200k

3. 500k 0 200k The cash contributions w/o donor restrictions totaling 500k are reported as increases in operating activities in the statement of cash flows. The 200k cash contributions w/ donor restrictions are reported as increases in financing activities because the restriction is the acquisition of property, not general operations.

Tree City reported a $1.5k net increase in fund balance for governmental funds. During the year, Tree purchased general capital assets of 9k and recorded depreciation expense for 3k. What amount should Tree report as the change in net position for governmental activities? 1. 1,500 2. (4,500) 3. 7,500 4. 10,500

3. 7,500 The reconciliation of the change in fund balance in governmental fund financial statements to the change in net position for governmental activities in gov't wide financials is computed using the CPAS RIDES mnemonic. The face pattern only describes measurement focus and basis of accounting issues, computed as follows: Change in gov'tal fund balance 1,500 C Capital outlay 9,000 P Principal pmts of debt 0 A Asset disposals 0 S Sources (uses) financing 0 R Revenue (accrual)0 I Interest exp (acc'l) 0 DE Deprec Exp (3,000) S Service (internal) net income 0 Change in net position in gov't wide financial stms 7,500

Which of the following subsequent events could have a negative impact on a company's debt-to-equity ratio computed using the information reported on the company's balance sheet for the year ended 12/31/y1? Assume that the company files its financial statements with the Securities and Exchange Commission and that its financial statements were issued 2/4/Y2. 1. A fire that destroyed all of the company's office buildings and warehouse (all uninsured) on 1/18/Y2. 2. A lawsuit that was filed against the company on 2/22/Y2 3. A lawsuit that was filed against the company on 10/12/Y1 and settled on 1/2/Y2. 4. The bankruptcy of a major customer on 2/2/Y2

3. A lawsuit that was filed against the company on 10/12/Y1 and settled on 1/2/Y2. Because the lawsuit had been filed prior to the balance sheet date of 12/31/Y1, the condition (the lawsuit) existed prior to the balance sheet date. Since the condition was resolved prior to the issuance of the financial statements, the effects of the resolution of the lawsuit must be taken into account in determining the amount of the lawsuit liability to be recognized on the 12/31/Y1, balance sheet. If the resulting liability is larger than the liability originally recorded, there would be a detrimental effect on the company's debt-to-equity ratio (the company's debt would be higher and its equity would be lower because of the add'l loss recorded along with the add'l liability).

In a business combination accounted for as a purchase, the appraised values of the identifiable assets acquired exceeded the acquisition price. How should the excess appraised value be reported? 1. As a reduction of the values assigned to non-current assets and a loss for any unallocated portion 2. As negative goodwill 3. As a gain, after adjusting the balance sheet, including identifiable intangible assets, to fair value 4. As positive goodwill

3. As a gain, after adjusting the balance sheet, including identifiable intangible assets, to fair value When a subsidiary is acquired with an acquisition cost that is less than the fair value of the underlying assets, the following steps are required: 1. The balance sheet is adjusted to fair value, which creates a negative balance in the acquisition account 2. Identifiable intangible assets are recognized at fair value, which increases the negative balance in the acquisition account. 3. The total negative balance in the acquisition account is recorded as a gain

On April 30, Algee, Belger, and Ceda formed a partnership by combining their separate business proprietorships. Algee contributed cash of $50k. Belger contributed property with a a 36k carrying amount, a 40k original cost, and 80k fair value. The partnership accepted responsibility for the 35k mortgage attached to the property. Ceda contributed equipment with a 30k carrying amount, a 75k original cost, and 55k fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest 4/30 capital account balance? 1. Belger 2. Algee 3. Ceda 4. All capital account balances are equal

3. Ceda Ceda's capital account balance is the fair market value of the equipment donated. The 55k contribution is greater than Algee's 50k contribution and Belger's 45k contribution, (80k fair value - 35k mortgage assumed by the partnership)

Which funds would most appropriately use the current financial resources measurement focus and modified accrual basis of accounting in their fund financial statements? Gov'tal. Proprietary. Fiduciary 1. no. yes. yes 2. yes. no. yes 3. yes. no. no 4. yes. yes. yes

3. Gov'tal-yes. Proprietary-no. Fiduciary-no Governmental funds use the current financial resources measurment focus and modified accrual basis of accounting in thier fund financial statements. Proprietary and fiduciary funds use the economic resources measurement focus and accrual basis of accounting

Water to give consideration to an entity's plans to mitigate the conditions or events that raise substantial doubt about its ability to continue as a going concern depends on: I. Whether it is probable that the plans will be effectively implemented II. Whether the condition(s) that gave rise to substantial doubt about the entity's ability to continue as a going concern is expected to continue. III. Whether it is probable that the plans, if implemented, will actually be successful in mitigating the adverse conditions or events. 1. I only 2. I and II 3. I and III 4. I, II, and III

3. I and III Consideration should be given to an entity's plans to mitigate the conditions or events that raise substantial doubt about its ability to continue as a going concern only if: -It is probable that the plans will be effectively implemented, and -It is probable that the implemented plans will be successful in mitigating the adverse conditions or events. Other factors, including whether the condition(s) that gave rise to substantial doubt about the entity's ability to continue as a going concern is expected to continue, are not considered in determining whether the entity's plans to mitigate the adverse conditions or events do, in fact, mitigate the substantial doubt about the entity's ability to continue as a going concern

When the market value of an investment in debt securities in which the company has a positive intent and ability to hold to maturity exceeds its carrying amount, how should each of the following assets be reported at the end of the year? Lg term debt sec | St mktble debt sec 1. market value carrying amount 2. carrying amount market value 3. carrying amount carrying amount 4. market value market value

3. Lg term debt sec-carrying amount | St mktble debt sec-carrying amount Marketable debt securities that the company has the intent and ability to hold to maturity, both "long" and "short" term, are reported at carrying amount (amortized cost) unless there is a permanent decline in market value

Which of the following information should be disclosed as supplemental information in the statement of cash flows? Cash flow per share conversion of debt:equity 1. yes yes 2. yes no 3. no yes 4. no no

3. No - yes. Conversion of debt to equity should be disclosed as supplemental information in the statement of cash flows cash flow per share should not be disclosed.

How would a 5% stock dividend affect each of the following? Assets | Total SE | RE 1. No effect Decrease Decrease 2. Increase Increase Decrease 3. No effect no effect decrease 4. decrease decrease no effect

3. No effect no effect decrease No effect on assets. No effect on equity. Decrease to retained earnings. RULE: A stock dividend (less than 20-25% of the stock outstanding) transfers the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid-in capital. There is no effect on total stockholders' equity because all transfers take place within stockholders' equity

Which of the following is a financial statement required of BOTH defined benefit pension plans and defined contribution pension plans? 1. Statement of Net Funded Status 2. Statement of Accumulated Plan benefits 3. Statement of Changes in Net Assets Available for Benefits 4. Statement of Cash Flows

3. Statement of Changes in Net Assets Available for Benefits Both defined benefit pension plans and defined contribution pension plans require the preparation of Statement of Net Assets Available for Benefits and Statement of Changes in Net Assets Available for Benefits. In addition, defined benefit pension plans (but not defined contribution pension plans) are also required to prepare Statement of Accumulated Plan Benefits and Statement of Changes in Accumulated Plan Benefits. For both defined benefit pension plans and defined contribution pension plans, the preparation of a Statement of Cash Flows is optional, but not required. There is no pension plan financial statement called a "Statement of Net Funded Status"

How should the acquirer recognize a bargain purchase in a business acquisition? 1. as negative goodwill in the statement of financial position 2. as goodwill in the statement of financial position 3. as a gain in earnings at the acquisition date 4. as a deferred gain that is amortized into earnings over the estimated future periods benefited

3. as a gain in earnings at the acquisition date Assets and liabilities acquired in a business combination must be valued at their fair value. In a bargain purchase where the fair value of the net assets acquired is more than the consideration exchanged for the net assets, the difference is recognized as a gain by the acquirer at the time of the acquisition.

Interim financial reporting should be viewed primarily in which of the following ways? 1. As useful only if activity is spread evenly throughout the year 2. As if the interim period were an annual accounting period 3. as reporting for an integral part of an annual period 4. As reporting under a comprehensive basis of accounting other than GAAP/IFRS

3. as reporting for an integral part of an annual period Interim financial reporting should be viewed as reporting for an integral part of an annual period

Which of the following should be reported in a stockholders' equity contra account? 1. Discount on convertible bonds that are common stock equivalents 2. premium on convertible bonds that are common stock equivalents 3. cumulative foreign exchange translation loss 4. organization costs

3. cumulative foreign exchange translation loss Cumulative foreign exchange translation loss should be reported as a component of accumulative other comprehensive income. A cumulative foreign exchange translation loss would be a debit to accumulative other comprehensive income; therefore contra to shareholders' equity. RULE: "Translation" adjustments are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until sale or until liquidation of the investment takes place.

A deferred tax liability may result from which of the following items? 1. life insurance proceeds received on the death of key employees 2. penalties paid for legal violations 3. depreciation of tangible assets 4. interest on municipal bonds

3. depreciation of tangible assets A deferred tax liability may result from depreciation of tangible assets because the MACRS depreciation method used for tax purposes is an accelerated method. The depreciation expense taken on the tax return may be in excess of the depreciation taken on the income statement, which will result in a deferred tax liability

Which of the following is a required disclosure under IFRS but not under US GAAP? i.Statement of compliance with applicable accounting principles ii. disclosure of all significant accounting policies iii. disclosure of judgements made in the preparation of the financial statements 1. i and II 2. i only 3. i and iii 4. i, ii. and iii

3. i and iii IFRS requires that a statement of compliance with IFRS be included in the financial statements; US GAAP does not require inclusion of a statement of compliance with US GAAP. Both IFRS and US GAAP require disclosure of all significant accounting policies. Likewise, both IFRS and US GAAP require disclosure of estimates made in the preparation of financial statements; however, IFRS also requires disclosure of judgements made (e.g., whether a financial asset is categorized as "held to maturity" or "available for sale") but US GAAP does not require disclosure of judgments made.

Which of the following funds of a governmental unit records depreciation? 1. debt service fund 2. captial projects fund 3. internal service fund 4. special revenue fund

3. internal service fund Internal service funds are proprietary funds that use the economic resources measurement focus that includes capitalization of assets and income determination. They used the accrual basis of accounting and recognize depreciation expense.

Consolidated financial statements are typically prepared when one company has a controlling financial interest in another unless: 1. the fiscal year ends of the two companies are more than three months apart 2. the subsidiary is a finance company 3. the subsidiary is in bankruptcy 4. the two companies are in unrelated industries, such as manufacturing and real estate

3. the subsidiary is in bankruptcy The exceptions to not consolidating a majority-owned subsidiary are when the subsidiary is in legal reorganization or bankruptcy and/or the subsidiary operates under sever foreign currency exchange restrictions, controls, or other governmentally imposed uncertainties so sever that they cast significant doubt on the parent's ability to control the subsidiary.

Macklin Co. entered into a franchise agreement with Heath Co. for an initial fee of $50k. Macklin received $10k when the agreement was signed. The balance was to be paid at a rate of $10k per year, starting the next year. All services were performed by Macklin and the refund period had expired. Operations started in the current year. What amount should Macklin recognize as revenue in the current year? 1. $0 2. $10k 3. $20k 4. $50k

4. $50k The franchisor should report revenue from initial franchise fees when all performance obligations of the sale have been satisfied. Macklin Co will recognize the entire initial fee in the current year.

Beni Corp. purchased 100% of Carr Corp's outstanding capital stock for 430k cash. Immediately before the acquisition, the balance sheets of both corporations reported the following: Beni Carr Assets 2m 750k Liabilities 750k 400k Common stock 1m 310k Retained Earnings 250k 40k Liab and SE 2m 750k At the date of purchase, the fair value of Carr's assets was 50k more than the aggregate carrying amounts. In the consolidated balance sheet prepared immediately after the acquisition, the consolidated stockholders' equity should amount to: 1. 1,680,000 2. 1,650,000 3. 1,600,000 4. 1,250,000

4. 1,250,000 1,250,000 consolidated stockholders' equity (the same as the parent company) RULE: At date of acquisition, the consolidated equity will be equal to the parent company's equity plus the fair value of any non-controlling interest. The subsidiary company's equity accounts are eliminated.

A company issues $1.5m of par bonds at 98 on 1/1/Y1, with a maturity date of 12/31/Y30. Bond issuance costs are $90k, and the stated interest rate of the bonds is 6%. Interest is paid semiannually on 1/1 and 7/1. Ten years after the issue date, the entire issue was called at 102 and canceled. The company uses the str8 line method of amortization for bond discounts and issuance costs, and the result of this method is not materially different from the effective interest method. The company should classify what amount as the loss on extinguishment of debt at the time the bonds are called? 1. $30k 2. 50k 3. 90k 4. 110k

4. 110k The gain/loss on extinguishment is equal to the difference between the reacquisition price and the net carrying amount. Reacquisition price: 1.5m x 102%=1.53m Carrying value: Face 1.5m less: unamortized disc (20k) Less: unamortized bond issuance cost (60k) Net carrying value: 1.42m

East Corp. manufactures stereo systems that carry a two year warranty against defects. Based on past experience, warranty costs are estimated at 4% of sales for the warranty period. During the current year, stereo system sales totaled $3m, and warranty costs of 67,500 were incurred. In its income statement for the year ended 12/31, East should report warranty expense of: 1. 60k 2. 52.5k 3. 67.5k 4. 120k

4. 120k Sales 3m warranty cost est rate x 4% Warrant expense= 120k warranty cost incurred: (67,500) Liability for warrant cost: 52,500

Mega Inc was organized to consolidate the resources of Lone Co. and Small Co. in a business combination accounted for by the acquisition method. Mega issued 31k shares of its $10 par voting stock with a fair value of $15 per share. in exchange for all the outstanding capital stock of Lone and Small. The equity accounts of Lone and Small on the date of exchange were: L S Total Common stock, @ par 100k 200k 300k Add'l paid in capital 12.5k 17.5k 30k Retained earnings 60k 105k 165k total 172.5k 322.5k 495k What is the balance in Mega's add'l paid in capital account immediately after the business combination? 1. 12.5k 2. 17.5k 3. 30k 4. 155k

4. 155k The transaction is recorded at the fair market value of the stock issue. The journal entry would be: Dr. Investment in sub 465k Cr. common stock (par) 310k Cr. APIC 155k

Tomson Co. installed new assembly line production equipment at a cost of $175. Tomson had to rearrange the assembly line and remove a wall to install the equipment. The rearrangement cost 12k and the wall removal cost 3k. The rearrangement did not increase the life of the assembly line but it did make it more effecient. What amount of these costs should be capitalized by Tomson? 1. 178k 2. 175k 3. 187k 4. 190k

4. 190k The cost of equipment includes all expenditures related directly to the acquisition or construction including invoice price less cash discounts and other discounts, freight in, installation charges and sales and Federal Excise Taxes. Cost includes all cost necessary to get the asset to its proper place, at the intended time and in condition for its intended use. Cost of equipment 175k installation cost 15k (12k + 3k) capitalized cost= 190k

On 3/1/Y1, Cain Corp. issued at 103 plus accrued interest, two hundred of its 9%, $1k bonds. The bonds are dated 1/1/Y1 and mature on 1/1/Y11. Interest is payable semiannually on 1/1 and 7/1. Cain paid bond issuance costs of 10k. Under US GAAP, Cain should realize net cash rec'pts from the bond issuance of: 1. 216k 2. 209k 3. 206k 4. 199k

4. 199k 199k net cash rec'pts from the bond issuance.

At 12/31/Y1, Grey Inc owned 90% of Winn Corp., a consolidated subsidiary, and 20% of Carr Corp, an investee in which Grey cannot exercise significant influence. On the same date, Grey had receivables of 300k from Winn and 200k from Carr. In its 12/31/y1 consolidated balance sheet, Grey should report accounts receivable from affiliates of: 1. 500k 2. 340k 3. 230k 4. 200k

4. 200k The receivable from Winn will be eliminated in the consolidation. The receivable from Carr will not be eliminated (Carr is not a subsidiary). Grey reports AR from affiliates (Carr) of 200k in its consolidated balance sheet

Selected information from the separate and consolidated balance sheets and income stmts of Pard Inc, and its sub, Spin Co., as of 12/31/Y1 and for the year then ended is as follows: Bal Sht acct | Pard | Spin | Consol AR 26k 19k 39k Inventory 30k 25k 52k Invstmt in Spin 67k Goodwill 30k NonCntrl Inter 10k Stkhld equity 154k 50k 154k Inc stm acct | Pard | Spin | Consol Rev 200k 140k 308k COGS 150k 110k 231k GP 50k 30k 77k Equity in earnings 11k Net Inc 36k 20k 40k Add'l info: During Y1, Pard sold goods to Spin at the same markup on cost that Pard uses for all sales. At 12/31/Y1, Spin had not paid for all these goods and still held 37.5% of them in inventory. What was the amount of intercompany sales from Pard to Spin during Y1? 1. 3k 2. 6k 3. 29k 4. 32k

4. 32k 32k of intracompany sales from Pard to Spin during Y1. Rev-Pard 200k Rev-Spin 140k Total bf elim 340k Consol Rev (308k) IC Sales Elim 32k

Bee Corp. prepared the following reconciliation between book income and taxable income for the year ended 12/31/Y1: Pretax accounting inc 500k Taxable income 300k Difference 200k Differences: Interest on municipal bonds 50k Lower deprec per fin stmt 150k Total differences 200k Bee's effective income tax rate for Y1 is 30%. The depreciation difference will reverse equally over the next three years at enacted tax rates as follows: Yrs Tax rates Y2 21% Y3 25% Y4 25% In Bee's Y1 income statement, the deferred portion of its provision for income taxes should be: 1. 60k 2. 50k 3. 45k 4. 35.5k

4. 35.5k $35,500 deferred portion of provisions for income taxes

Big Sports inc. and its subsidiaries, Batter up, Slam Dunk and Touchdown, had the following defined benefit pension plans at 12/31: BS BU SL TD FV-plan assets 1m 1.275m 900k 200k PBO 1.6m 850k 700k 800k BPayable-nYR 425k 360k 150k 245k How would these pension plans be reported on Big Sports' 12/31 consolidated balance sheets under US GAAP? Noncurrent Ast/Current L/Noncurrent L 1. 0 0 575k 2. 0 45k 530k 3. 625k 0 1.2m 4. 625k 45k 1.155m

4. 625k 45k 1.155m U.S. GAAP requires that all overfunded (FV plan assets > PBO) pension plans be aggregated and reported as a noncurrent asset, and that all underfunded (FV plan assets < PBO) pension plans be aggregated and reported as a current liability (to the extent that the benefits payable in the next year exceed the fair value of the pension plan assets), a noncurrent liability, or both. Big Sports and subsidiaries would report their pension plans as follows: Big SportsBatter UpSlam DunkTouchdownTotal FV Plan Assets 1,000,000 1,275,000 900,000 200,000 Less: PBO 1,600,000 850,000 700,000 800,000 Funded Status (600,000) 425,000 200,000 (600,000) Noncurrent Asset - 425,000 200,000 - 625,000 Current liability - - - 45,000 45,000 Noncurrent liability 600,000 - - 555,000 1,155,000 Note that Touchdown's pension plan must be reported as a current and noncurrent liability because it is underfunded and the benefits payable in the next year exceed the fair value of the plan assets by $45,000 ($245,000 benefits payable − $200,000 plan assets). Choice "1" is incorrect. U.S. GAAP does not permit the netting of all pension plans. Overfunded pension plans must be aggregated separately from underfunded pension plans. Choice "2" is incorrect. This presentation is not supported by U.S. GAAP. Choice "3" is incorrect. U.S. GAAP requires that Touchdown's underfunded pension plan be reported as a current liability of $45,000 and noncurrent liability of $555,000 because it is underfunded and the benefits payable in the next year exceed the fair value of the plan assets by $45,000 ($245,000 benefits payable − $200,000 plan assets).

Which of the following must be disclosed for most financial instruments? Carrying Value Fair value 1. no no 2. no yes 3. yes no 4. yes yes

4. Carrying value-yes Fair value-yes Both carrying value (amount) and fair value must be disclosed for most financial instruments (when it is practicable to estimated fair value).

When a property dividend is declared and the market value of the property exceeds its book value, the excess 1. decreases net income for the period 2. Increases additional paid-in capital 3. decreases additional paid-in capital 4. Increases net income for the period

4. Increases net income for the period A property dividend is recorded at the fair value of the property to be distributed. The property has to be adjusted to fair value with the adjustment affecting earnings for the period. Additional paid-in capital is not affected

Goll Co. has a 25% interest in the common stock of Rose Co. and an 18% interest in the common stock of Jave Co. Neither investment gives Goll the ability to exercise significant influence over either company's operating and financial policies. Which of the two investments should Goll account for using the equity method? 1. Rose only 2. Both Rose and Jave 3. Jave only 4. Neither Rose nor Jave

4. Neither Rose nor Jave Although the general quantitative threshold for applying the equity method is between 20% and 50% ownership of the subsidiary by the parent company, the most important factor is the extent to which the parent has significant influence. Neither of the investments allow Goll to exercise significant influence and, as such, neither will be recorded using the equity method.

Watts Inc enters into an agreement to lease a printer/copier from Jennings Co. The lease is for thrr years and does not stipulate an ownership transfer or contain a written option to purchase. The printer/copier has a 5 year life and the equipment is standard equipment that Jennings can use for many projects and functions. The net present value of the lease payments is approximately half of the fair value of the equipment and there is no guaranteed residual value associated with the lease. Watts and Jennings will account for this lease as: Watts. Jennings 1. Finance. operating 2. finance. sales type 3. operating. sales type 4. Operating. operating

4. Watts-Operating. Jennings- Operating Both Watts (the lessee) and Jennings (the lessor) will account for the lease as an operating lease. None of the "OWNES" criteria are met: there is no ownership transfer; there is no written option to purchase; the net present value is far below the threshold needed to be considered equal to the fair value of the asset; the lease term is only 60% of the economic life of the asset; and the equipment is not specialized. As such, Watts must treat the lease as an operating lease. Jennings must also treat the lease as an operating lease. Jennings must also treat the lease as an operating lease because the "Sales-type" classification can only be used when at least one of the OWNES criteria are met. Note that although a lessor may also used a "direct financing" classification when the OWNES criteria are not met, in this case that would not be an option because of the relatively low net present value (and absence of guaranteed residual value) compared with the asset's fair value.

At Y/E, a company has defined a benefit pension plan with a projected benefit obligation of 350k; a net gain of 140k that was not previously recognized in net periodic pension cost; and prior service cost of 210k that was not previously recognized in net periodic pension cost. What amount should be reported in accumulated other comprehensive income related to the company's defined benefit pension plan at y/e? 1. a debit balance of 420k 2. a credit balance of 420k 3. a credit balance of 70k 4. a debit balance of 70k

4. a debit balance of 70k Gains and losses related to pensions can be recorded in the income statement, although the most common option is to record them in other comprehensive income and amortized the impact through net periodic pension cost over time. Unrecognized prior service cost increases the projected benefit obligation (PBO) and is recorded in other comprehensive income (OCI) as a decrease (debit to OCI). The gain is favorable for the company (an increase in OCI) as a decrease (debit to OCI). The gain is favorable for the company (an increase in OCI) and the unrecognized prior service cost is unfavorable for the company (a decrease in OCI). The net of these two amounts is 70k unfavorable, which will cause a decrease or debit to OCI.

Which of the following is the paramount objective of financial reporting by state and local governments? 1. consistency 2. reliability 3. comparability 4. accountability

4. accountability Governmental (and not for profit) organization reporting is designed to demonstrate the accountability of each organization for the stewardship of the resources in their care. Governments do not measure net income or increase in wealth as businesses do, but are focused on providing effecient and effective delivery of services with public resources. Both operational and fiscal accountability are important to the financial reporting

Which basis of accounting is required for a city's government-wide financial statements? 1. cash 2. modified cash 3. modified accrual 4. accrual

4. accrual The government wide financial statements (the statement of net position and the statement of activities) are reported using the economic resources measurement focus and the full accrual basis of accounting.

Central County rec'd proceeds from various towns and cities for capital projects financed by the county's long term debt. A special tax was assessed by each local government, and a proportion of the tax was properly restricted to repay the long term debt of the county's capital projects. Central County should account foe the restricted portion of the special tax in which of the following funds? 1. Enterprise fund 2. internal service fund 3. capital projects fund 4. debt service fund

4. debt service fund The debt service fund accounts for the accumulative of resources for, and the payment of, general long-term liability principal and interest. The restricted portion of the special tax is for the repayment of the long-term debt of the county's capital projects, which would be serviced from the debt service fund. The capital projects fund is a governmental fund for the acquisition or construction of capital assets.

When a property dividend is declared and the market value of the property exceeds its book value, the excess 1. decreases net income for the period 2. increases additional paid-in-capital 3. decreases additional paid-in-capital 4. increases net income for the period

4. increases net income for the period A property dividend is recorded at the fair value of the property to be distributed. The property has to be adjusted to fair value with the adjustment affecting earnings for the period. Additional paid-in capital is not affected.

Jordon Township's Water & Sewer fund rec'd interest earnings off its investment funds. What category would Jordon use to classify cash rec'pts from these earnings on its Water & Sewer enterprise fund statement of cash flows? 1. operating activities 2. noncapital financing activities 3. capital and related financing activities 4. investing activities

4. investing activities Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments including interest and dividend income

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: 1. income approach 2. market approach 3. cost approach 4. net realizable value approach

4. net realizable value approach Although net realizable value is used to measure many items on the balance sheet, the fair value of equipment cannot be measured using this approach

Novastar Corp issued 2k of its $1k, 10% ten year bonds dated 7/1/Y1 on 7/1/Y1, at a time when the market paid 9% for bonds of similar risk. Interest is payable annually. The bonds were property carried at $2,134,000 upon issue. On its 12/31/Y1 financial statements, Novastar Corp. would display the following balances: BP | Unamrt Prem | Accr IP | Int ex 1. 2m 130,030 100k 96,030 2. 2m 126,060 200k 192,060 3. 2m 141,940 200k 192,060 4. 2m 137,970 100k 96,030

BP | Unamrt Prem | Accr IP | Int ex 1. 2m 130,030 100k 96,030 Bonds payable is equal to the face value of the bonds, and the premium at the time of sale is equal to the difference between the issue price and the face value. Interest payable is computed as the stated rate of 10% times the face amount of the bonds for six months. Interest expense is equal to the carrying value times the market rate of 9% for six months. The computed amortization reduces the premium and carrying value. The following schedule organizes the date and displays computations by account.

Disclosures about the following kinds of risks are required for most financial instruments. Concentration of credit Mkt risk risk 1. yes yes 2. yes no 3. no yes 4. no no

Con of credit Mkt risk risk 2. yes no Concentration of credit risk-the risk that the other party to the instrument will not perform-must be disclosed. Disclosure of market risk-the risk of loss from changes in market prices-is encouraged, but not required