ACCT 403 Exam 2

The Ames Corp. is going through a legal bankruptcy process. The company lost $3 million in the sale of a division that was made to help downsize the company. The company also incurred $2 million in professional fees as a result of this bankruptcy. How much should the company report on its income statement reorganization items?

$5 million the sale of the division and the professional fees are both a normal part of reorganization and are classified as reorganization items on the income statement

The Dylan Company is going through a bankruptcy reorganization. The company owns land with a cost of $300,000 and an expected net realizable value of $120,000. The company owns land with a cost of $800,000 a net book value of $600,000, and an expected net realizable value of $470,000. What is the amount of total assets in its balance sheet?

$900,000 during reorganization, a company's assets continue to be reported at net book values

Which of the following are primary goals of the bankruptcy laws in the United States? 1 - the fair distribution of assets to creditors 2 - the discharge of an honest debtor from debt

1 and 2

A company is in bankruptcy and will be liquidated. List the unsecured debts in order of their legal priority.

1. Claims for administrative expenses 2. Employee wages of $6000 (below a specified maximum) 3. Claims for the return of deposits of up to $1,000 per customer 4. government taxes

Goals that form the FASB standardization for not for profit entities

1. FInancial statements should focus on the industry as a whole 2. Reporting requirements for private not-for profit entities should be similar to those applied by for-profit businesses unless critical differences exist in the nature of the transactions or the informational needs of financial statement users

In preparing a statement of financial affairs, in what order are the liabilities listed?

1. Liabilities with priority 2. Fully secured liabiliites 3. partially secured liabiliities 4. unsecured liabilities

What are three critical differences between for profit and not for profit financial reporting?

1. Million dollar Donations have no counterparts in commercial business 2. Contributions often have donor imposed restrictions 3. No single figure can describe performance as effectively as reported net income for commercial entities

Works of art, historical treasures, and similar donations are handled differently from other donated property. Disclosure rather than formal recognition in the statement accounts can be selected if these items meet the following criteria:

1. added to a collection for public exhibition, education, or research 2. protected and preserved AND 3. covered by an organization policy whereby any proceeds generated from a future sale will be used to acquire other collection items so that these items do not function as a type of investment property

Order of priority:

1. expenses of administering the estate. Without this preferential treatment, the appointment of an acceptable executor and the hiring of lawyers, accountants, and/or appraisers could become a difficult task in estates with limited funds 2. Funeral expenses and medical expense of any final illness 3. debts and taxes given preference under federal and state laws 4. All other claims, such as unsecured obligations, credit card s and the like

What are the basic goals that have evolved to form the framework for the gaap used by private not for profit entities?

1. financial statements should focus on the entity as a whole 2. Reporting requirements for private not-for-profit entities should be similar to those applied by for-profit businesses unless critical differences exist in the nature of the transactions or the informational needs of financial statement users

A company is emerging from bankruptcy as reorganized entity. On that day, the company has one asset - a building - with a cost of 2.2 million, a net book value of 3 million, and a fair value of 3.6 million. The company as a whole has reorganization value of $4 million. If fresh start accounting is applied, what amount will be reported as good will?

400,000 When fresh start accounting is applied, the assets are reported at fair value with any difference between that total and the reorganization value shown as goodwill. The building is reported as 3.6 million which leaves 400000 of the 4 million reorganization value as goodwill

Tax-exempt entities are typically required to submit a Form:

990 (Return of organization exempt from income tax)

Bright Minds is a private not-for-profit school. This past week it paid its teachers a total salary of $130,000. How is this cost reported on the statement of activities?

A salary expense of $130,000 is reported within unrestricted net assets regardless of where the money originated Why? This is to arrive at an operating income figure, all operating expenses are reported as reductions in unrestricted net assets

family allowance

A small amount of money set aside from the estate of the deceased. Its purpose is to provide for the surviving family members during the administration of the estate.

What is required for acceptance of a reorganization plan by creditors and claims that cast votes?

Acceptance by each class of creditor requires approval by 2/3 in dollar amount and more than 1/2 in the number of claims that cast votes

Plan 9 is a theater company in Haynes, VA. It is a private not for profit entity. Square Marx is a much larger theater company that is affiliated with Plan 9. One of the employees for Square Marx is a makeup artist. When Plan 9 puts on a play, Square marx has its makeup artist provide those services to Plan 9 for free. What method will Plan 9 report these services?

An expense is recognized based on the amount earned by the employee during this time along with contributed revenue.

Tyrone Weatherly is a carpenter. He spent 50 hours building a small patio behind the office of a nfp entity. Weatherly normally changes $30 per hour but did this work for free. How should it be recorded?

As an asset and contribution revenue because it enhanced a non financial asset, so it is capitalized not expensed

Chapter 7 Bankruptcy

Chapter of the Bankruptcy Code providing for liquidation of the debtor's assets in order to repay the creditors; certain assets or aggregate value of assets of the debtor may be exempt based on state law.

A private NFP entity works with refugees and furnishes them with clothing and other necessities. James Clothing contributes 1,000 pairs of shoes. The shoes cost James $20 each but have FV of $30 each. How is the contribution recorded?

Contribution revenue of $30,000 in its unrestricted net assets

The Ridge Corp. donates $18,000 to UM, a private nfp entity. UM normally collects money for the Memphis Symphony but has the right to give the money to a different symphony if one is found with specific financial needs. When UM receives the money, what recording does it make?

Contribution revenue under restricted net assets

Who sets the standards for not-for-profit entities in the United States?

FASB

How is a donation held for another charity recorded?

First as a liability, then as an expense when control is relinquished If donor retains control, credit a liability "refundable advance from donor A" If the donor has the ability to redirect the use of the gift, debit refundable advance to NFP-M

Blue Bay Association is a private, not for profit entity that supports communities around a local bay. It receives $200,000 cash gift in year one to buy equipment for a local park. The money must be spent for that purpose. There is a time restriction stipulated by the donor that will be reflected in the financial statements. The equipment must be maintained and used for its entire five year life. The money is spent at the start of Year Two and has no expected residual value. What is reported on the year two statements of activities for this city?

First, unrestricted net assets go up $40,000 and restricted net assets go down $40,000. Second, depreciation reduces unrestricted net assets by $40,000

What two questions must be addressed if substantial doubt exists for the ability to continue as an ongoing concern?

Is it probably that these plans will be effectively implemented by the entity within the one-year period? Plans provide no benefit if the described actions cannot or will not be taken Is it probable that the plans will mitigate the conditions or events that have raised substantial doubts? The plans must provide a genuine likelihood of success

The Shenandoah Art Museum is a private not-for-profit organization. A donor conveys title to a painting by Picasso. It is worth $230,000. It will be exhibited by the museum and carefully guarded. If the painting is ever sold, the proceeds can be used to cover operating costs of the museum. Which of the following is true about the artwork?

It must be reported as an asset valued wt $230,000 because if it is sold, the proceeds can be used for operating costs

Bankruptcy Reform Act of 1978

Legislation that defines creditors' rights and provides relief to debtors who, with or without fault, have contracted debts beyond the ability to pay. Strives to achieve two goals in connection with insolvency cases: 1) the fair distribution of assets to creditors and 2) the discharge of an honest debtor from debt

What are the two broad categories of expense reporting?

Program services: the entity's activities related to its mission Supporting services: administrative costs and fund-raising expenses

Better Aging is a private not-for-profit entity that has received tax-exempt status as an advocacy group. What section of the IRC permits advocacy groups to be granted tax exempt status?

Section 501(c)(3)

Which tax code applies to not for profit entity exemption?

Section 501(c)(3)

Homestead Allowance

Several states have homestead laws designed to give the family residence or farm limited protection (or in several states very substantial protection) from creditors' claims. UPC grants a lump sum homestead allowance of $22,500, rather than a right to occupy the homestead. The allowance has priority over all claims against the estate, and is over and above the amount passing to the surviving spouse, minor children, or dependent adult children by intestate succession, elective share, or will (unless the will provides otherwise).

Which standards issued by the FASB standardized not-for-profit financial reporting?

Statement 116 - Accounting for Contributions Received and Contributions Made Statement 117 - Financial statements of not for profit organizations

What are the three statements reported for not for profit entities?

Statement of financial position statement of activities (revenues and expenses recognized using accrual basis; new rules require that expenses be reported by function) Statement of cash flows (still uses OIF) voluntary health and welfare entities also have to prepare a statement of functional expenses

Students at West Coast University receive considerable financial aid because tuition costs are so high. This past year, students were charged $50 million for student tuition and fees but were also given $40 million in financial aid. Which of the following is true bout the financial reporting? A direct reduction of $40 million is reported to the student tuition and fees revenue Student tuition and fees are reported as $10 million rather than $50 because that is the amount to be collected

a

The board of directors of Lansalott Corp. is in bankruptcy and has created a plan for reorganization. The plan is not accepted by a sufficient number of creditors. However, the bankruptcy court feels the plan is fair and has a good chance of success and accepts the plan despite the vote of the creditors. This process is known as

a cram down

How many states have adopted the uniform probate code?

about half

When a company is paying unsecured debts during bankruptcy, _______is always paid first

administrative expenses

If a specific person is named in the will to hold this position, the individual is referred to as the executor of the estate. If the will does not designate an executor or if the named person is unwilling or unable to serve, the court most select a representative known legally as an:

administrator of the estate

permanent earnings

arise from operations and are expected to continue

The Wallston Corp is currently moving through Chapter 7 bankruptcy. What does this mean?

assets are being liquidated so debts can be paid

Which of the following is a common characteristic of a not-for-profit entity? They are required to provide reasonable value for all donations collected Many, but not all, receive significant amounts of contributions They are substantially larger than most for profit entities They must pay all profits out to owners in the form of cash dividends

b

Which of the following is a primary purpose of the statement of realization and liquidation? to show the estimated cash amounts that each class of creditor can expect to receive to show the transactions as they occur in a liquidation and the remaining balances

b

How should stock donations near the end of the calendar year be treated by charities according to GAAP?

because most charities have a policy in place to sell the stock immediately in order to make the funds available for use, the cash inflow is an operating activity rather than an investing activity

The Warren Company is emerging from bankruptcy r eorganization. Its reorganization value is 3 million while allowed claims plus debts incurred during bankruptcy are 4 million. The previous owners continue to hold 42% of the company's capital stock as it emerges from bankruptcy. Which of the following is true? a. Fresh start accounting is not allowed because the previous owners still hold 42% of the outstanding stock b. Fresh start accounting is required because the reorganization value is less than the allowed claims plus the debts incurred since reorganization c. Fresh start accounting is required because the reorganization value is below the debt amount and the previous owners end up with less than 50% of the voting stock d. fresh start accounting is not allowed because the company has reorganization value of 4 milion

c

demonstrative legacy

cash gift made from a particular source

General Legacy

cash gift whose source is undesignated

During reorganization, a company reports is liabilities as those subject to __________________ or not subject to _______________________

compromise the first category includes all unsecured and partially secured debts that existed on thed ay that the order for relief was granted. The balance to be reported is the amount of allowed claims rather than the estimated amount of settlement. Liabilities not subject to to compromise are those debts fully secured or incurred following the granting of the order for relief

Not for profits recognize contributed services if the work being performed meets two criteria:

creates or enhances a nonfinancial asset requires a specialized skill possessed by the contributor that would typically need to be purchased if not donated

Which of the following is not a general characteristic of a not-for-profit entity? They have an operating mission different from simply providing goods and services for profit They often receive significant amounts of contributed resources They do not have ownership interests similar to a for-profit entity they must receive all funding through donations

d

The Shayung Company has filed a petition for bankruptcy. It has been accepted and an order for relief has been granted. Despite the insolvency of the company, the board of directors has been allowed to remain in charge of the company. In this situation, the board is known as the

debtor in possession

Substantial doubt

exists when an entity will probably (likely) be unable to meet its financial obligations as they come due during a period that extends one year from the date of the financial statements

Not for profit entities are exempt from tax, even on unrelated business income generated

false

The board of directors of BC has created a bankruptcy reorganization plan and presented it to its shareholders. For acceptance, at least fifty percent of the shares being voted must agree to the plan.

false 66.7%

The Healthy Heart Association is a private, not for profit entity. It spends $55,000 to send out a brochure to raise funds. The brochure contains other information. All $55,000 must be reported as supporting services cost.

false allocated between program service costs and supporting service costs

Conditional promises and pledges are the same from an accounting perspective

false; because a specific action must occur before the donation will be received, no funds are recorded until all conditions have been met

When insolvency occurs, only select, protected interested parties have the right to seek protection under the Bankruptcy Reform Act

false; every interested party

If a company looks like it may become insolvent, goodwill still only needs to be tested annually

false; tested more often if likely to have fallen below carrying amount

A statement of _________________________ can be prepared for an insolvent company to list the estimated net realizable value of all remaining assets and indicates any property pledged to specific creditors. The liabilities of the business are segregated and disclosed within four classifications: fully secured, partially secured, unsecured with priority, and unsecured.

financial affairs

A company emerges from bankruptcy reorganization and all assets and liability balances are shown at fair value. This type of reporting is known as:

fresh start reporting

Many companies that emerge from reorganization proceedings must apply _______________ accounting as a new entity. Such companies report all assets at _____________. Goodwill is recognized if the reorganization value is greater than the fair value of all identified assets. Liabilities (except for deferred income taxes) are reported at the present value of required cash flows. Any retained earnings balance or deficit must be eliminated. Additional paid in capital is adjusted to keep the balance at equilibrium

fresh start; fair value

Regardless of the locale, probate laws generally are designed to achieve three goals:

gather, preserve, and account for all of the decedent's property Administer an orderly and fair settlement of all debts Discover and implement the decedent's intent for the remaining property held at death

specific legacy

gift of identifiable piece of personal property

What is an important distinction between acquisition of an entity by a for profit and not for profit organization?

goodwill implies the existence of an ability to generate high future revenues, so for not for profit accounting, this anticipation is recorded as a reduction in unrestricted net assets on the statement of activities rather than as goodwill

An order for relief is granted to Rodbock CO. on Year 2. On that date, the company has a $5 million note payable paying 6% interest and a $10 million not receivable paying 5% interest/ At the end of year two, reorganization has not been complete. What is the impact on net income?

increase of $500,000 no interest expense is recognized

Creditors can also seek to force a debtor into bankruptcy through:

involuntary bankruptcy; if a company has 12 or more unsecured creditors, at least 3 must sign the petition, and they must have unsecured debts of at least $15,775. If fewer than 12 exist, only one signer is required, but the debt of $15,775 remains the same

Reorganization plans usually contain a number of provisions for:

modifying operations, generating new financing by equity or debt, and settling the liabilities existing when the order for relief was entered. TO be accepted, each class of shareholders and creditors must support the agreement.

In a merger, not for profit entities retain their: net book value net fair value

net book values

Ace Company has been having cash flow problems and has started waiting several weeks before making payments on its debts. In fact, the company has a policy whereby all debts are paid 24 days after they come do. Is Ace insolvent?

no

A plan for liquidation has been approved by the court. Does that make liquidation imminent according to the standard set by FASB?

no, the chance this plan will be blocked or that the entity will return from liquidation also has to be remote

transitory or temporary earnings

not likely to occur again in the foreseeable future

An income statement prepared during the reorganization period should disclose:

operating activities separately from reorganization items. Professional fees associated with the reorganization such as lawyer's fees are classified as reorganization items and recorded as expenses as incurred. Interest revenue earned during this period because of an increase in the company's cash reserve should also be reported as a reorganization item

The Dwayne Corp. is having severe financial difficulties and plans to file for bankruptcy protection. Before that action is taken, the board of directors and the creditors meet and a agree that certain assets will be sold so that 60 percent of all unsecured debts can be paid. This process is known as

prepackaged bankruptcy

The Jackson Corp. is in the process of emerging from bankruptcy reorganization. Other than deferred income taxes, the company's liabilities will be reported at

present value

Chapter 11 Bankruptcy

protects an insolvent firm from creditors during a period of reorganization to restore profitability

If a temporary restriction is fulfilled, that amount of net assets is reclassified as unrestricted. When an expense is incurred that meets donor stipulation, how is the expense and related contribution revenue recorded in the statement of activities?

recorded simultaneously

Conditions that could signal substantial doubt include:

recurring operating losses working capital deficiencies negative cash flows from operating activities loan default work stoppages or other labor difficulties legal proceedings loss of a key asset such as a patent or franchise

What is a contractual adjustment?

reduction in charges made by a third party payer so the amount is reasonable for that area

What was the biggest change introduced by the FASB in 2016 by the update 2016-14, Presentation of Financial Statements of Not-for-Profit entities?

reduction in the net asset classes to be reported changed from net assets being classified as unrestricted, temporarily restricted, and permanently restricted to assets with and without donor restriction

The court usually grants an order for ___________________ for both voluntary and involuntary bankruptcies if they are approved

relief

Liquidation is not the only outcome available to an insolvent business. The company may seek to survive by developing a __________________________, if creditors, shareholders, and the court accept the plan. The owners and management must preserve the company's estate as of the date on which the order of relief was granted. Although ownership has the initial opportunity for creating a proposal for action, any interested party has the right to file a ___________________ after a specified period of time

reorganization plan

Nelson Corp. is emerging from bankruptcy reorganization. The amount a willing buyer would pay for the company's assets after reorganization is known as the:

reorganization value

An estate administrator serves in a fiduciary position and is responsible for:

satisfying all applicable laws making certain that the decedent's wishes are achieved

Probate laws

state Laws that pertain to wills and the distribution of assets after a person's death

When a person dies intestate:

state laws control the administration of the estate

The executor is responsible for:

taking possession of all the assets and inventorying the property discovering all claims against the decedent and settling these obligations filing federal and state estate income tax returns, federal estate tax returns, and state inheritance or estate tax returns Distributing property according to the provisions of the will (according to state laws if a valid will is not available) or according to court order if necessary Making full accounting to the probate court to demonstrate that the executor has properly fulfilled the fiduciary responsibility

If liquidation is imminent, the company must switch to the liquidation basis of accounting if it wants to be in conformity with US GAAP. Assets are reported at ______________; Liabilities are reported at ________. A statement of changes in _______________________________ is prepared along with a statement of net assets in liquidation

the amount of estimated cash expected from the liquidation; continued to be reported at the amount due rather than speculate on settlement amounts; net assets in liquidation

What column are all expenses reported under in the statement of activities?

the first column, unrestricted net assets this column can be viewed as a reflection of operating activities

A private NFP entity has income from selling some of its material. The income is not unrelated business income. What is true?

the income is not taxable whether it is 501(c)(3) or a 501(c)(4)

A reorganization plan has been out forth for the SLC. All of stockholders have voted. 60% of the owners (holding 71% of the shares) accepted/

the plan was accepted

For a company emerging from the bankruptcy reorganization, which of the following is necessary fro a company to be required to use fresh start accounting?

the previous owners retain less than fifty percent of the voting stock

The term estate simply refers to the property (assets) owned by an individual. However, estate is more specifically defined as a separate legal entity holding title to the real and personal assets of a deceased person. Thus, estate accounting refers to:

the recording and reporting of financial events from the time of a person's death until the ultimate distribution of all property the estate holds

A basic assumption of accounting is that businesses are considered a going concern unless evidence to the contrary is discovered. This is why assets are reported based on historical cost rather than net realizable value.

true

A subtle difference exists between not-for-profit accounting for donated art and historical treasures and that utilized by state and local government units. The criteria for qualifying as a work of art or historical treasure are basically the same. However, the accounting choice for private not-for-profits is between recording both the contributed support and the asset versus no reporting, only disclosure. Governments face a different option. Under governmental accounting, contributed revenue must always be recorded for such gifts. The reporting entity then has the choice of recording either an asset or an expense when the donation is a qualifying work of art or historical treasure.

true

Analysts frequently calculate the ratio of program service expense to supporting service expense to determine how efficiently the charity is using donations to achieve its mission

true

Donation amounts must have a contra account for receivables in order to properly estimate actual money expected to be received

true

Internally restricted assets (restricted by board, not by donor) are identified as unrestricted assets for reporting purposes

true

Virtually all businesses undergo occasional financial difficulties, often due to economic downturns, poor product performance, intense competition, rapid technological changes, unwise acquisitions, and litigation losses can create cash flow difficulties for even the bests-managed organizations

true

The AHA is considered a voluntary health and welfare organization

true; a voluntary health and welfare organization gets most of its support from donations and promotes humanitarian activity

If the company is the initiator, the process is referred to as:

voluntary bankruptcy; petition must be accompanied by exhibits listing all assets and debts; company officials also must respond to questions concerning various aspects of the business's affairs

When is substantial doubt said to exist?

when it is viewed as probable that the company will fail to meet obligations within one year from the date of its balance sheet

Are pledges of support recognized when made or received?

when made