ALL FAR

AR Turnover

Credit Sales / AR

Under the lower of cost or market method, the replacement cost of an inventory item would be used as the designated market value

When it is below the net realizable value and above the net realizable value less the normal profit margin

Which of the following is a minimum required report for the basic financial statements of a government entity?

The minimum required basic financial statements includes the following: the two government-wide financial statements, fund-level financial statements, and notes to the financial statements.

A company issued rights to its existing shareholders to purchase for par unissued shares of common stock with a par value of $10 per share. When the market value of the common stock was $12 per share, the rights were exercised. Common stock should be credited at $10 per share and

This answer is correct because the stock rights entitle the holder to purchase stock at par value ($10), not market price ($12). Since only a memorandum entry was required when the rights were originally issued, the entry to record the exercise of the rights is Cash10 Common stock 10

In 2011, Blake City completed the construction of a new convention center. In 2011, the Blake City Capital Project Fund recorded a receivable for a $1,000,000 state grant and a $500,000 transfer from the General Fund. What amount should be reported as revenue by the Capital Projects Fund? $1,000,000

Correct. Under GASB Statement No. 33, the state grant is a Voluntary NonExchange Transaction for which revenues are recognized when the eligibility requirements are met. At that point, the revenue and the receivable are recorded. Other Financing Sources include proceeds from bonds and interfund transfers, neither of which are Revenues.

Which one of the following, incurred by an acquiring entity in carrying out a business combination, would not be included in the cost of an acquired entity?

Cost of legal fees (and other direct costs) to carry out the combination would not be included in the cost of an acquired business but would be expensed in the period incurred.

This answer is correct. General obligation bonds are accounted for in debt service funds, which use the modified accrual basis of accounting. Only the interest cost actually paid in the period is included in interest expense. Accordingly, this answer is correct. Since no interest was paid during the year, interest expense is $0.

DR Expenditures CR Vouchers Payable This answer is correct because per GASB Codification Section 1600, expenditures generally should be recognized in the accounting period in which the fund liability is incurred, if measurable. Thus, an expenditure and a corresponding liability are recorded at the time goods or services are received. Formal encumbrance accounting for expenditures such as salaries is unnecessary because these amounts are precisely measurable in advance and subject to additional alternative administrative and personnel controls, which effectively prevent over expenditure.

Charlie Company modified an existing contract with a buyer to add on additional goods. The original goods and the additional goods may be used independently and are considered distinct. Charlie intends to modify the existing contract in a manner that will result in a new separate contract. How should Charlie price the additional goods to ensure that a new separate contract is created?

The consideration for the additional goods should reflect appropriate standalone prices. Correct! For a contract modification to result in a new separate contract, the additional goods must be distinct and consideration must reflect appropriate standalone prices.

Percentage of Completion Method

A type of revenue recognition system where the firm books sales as they complete certain milestones of the service rendered. an example would be if profits were recognized in an earlier year and a loss the next you would have to recognize a loss in year two for the amount + the amount to offset the profit in the earlier year e.g., Yr 1 $42,000 proft Yr 2 ($100,000) loss Yr 2 would have to recognize ($142,000) loss.

Which of the following describes the appropriate accounting for intangible assets with finite useful lives?

ASC Topic 350 states that the costs of such assets should be amortized over their useful lives and they should also be tested periodically for impairment.

Basic EPS

(Net Income - Preferred Dividends) / (Weighted Average of Shares Outstanding)

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

Cash receipts for contributions restricted for long-term purposes are classified as financing activities.

MD&A is required supplementary information (RSI) that is included in the financial section of the CAFR along with independent auditor's report, basic financial statements, notes to the financial statements, and other RSI.

RSI - required supplementary information MD&A - Management discussion and analysis CAFR - Comprehensive Annual Financial Report

The Jones family lost its home in a fire. On December 25, 20X4, a philanthropist sent money to the Amer Benevolent Society to purchase furniture for the Jones family. During January 20X5, Amer purchased this furniture for the Jones family. How should Amer, a not-for-profit organization, report the receipt of the money in its 20X4 financial statements? As a(n):

The contribution received was a donation to be delivered to another beneficiary. Amer is the intermediary; therefore, the cash contribution is recorded as a liability at year-end.

Which of the following criteria must be met for bifurcation to occur?

The embedded derivative meets the definition of a derivative instrument. The hybrid instrument is not recorded at fair value. Economic characteristics and risks of the embedded instrument are not "clearly and closely" related to those of the host contract. The embedded derivative must meet the definition of a derivative instrument.

In Year 20x1 a local government levied $5,000,000 in special assessments. The assessments are due and payable in five equal installments at the beginning of each of the next five fiscal years, starting in Year 20x2. Assume that all installments are collected four months (120 days) into the year that they are due. At the end of Year 20x2, the Special Assessment Debt Service Fund would report the $4,000,000 remaining levy as:

The remaining levy is measureable and available in Year 20x3 through Year 20x6 and is a deferred inflow of resources in Year 20x2.

Non-Profit organization pledges

if unconditional, take amount pledged less estimated uncollectible pledges.

Which one of the following is not a characteristic of a cash flow hedge?

All differences between the change in value of the hedged item and the change in value of the hedging instrument is not recognized in current income but is recognized in comprehensive income.

On the statement of activities for a nongovernmental, not-for-profit organization, expenses should be deducted from Revenues without donor restriction and other additions.

All expenses are reported as decreases in net assets without donor restriction on the statement of activities. Thus, expenses are deducted only from revenues without donor restriction and other additions.

When the budget for the General Fund is recorded, the required journal entry will include

Appropriations are credited so that a schedule to compare Appropriations (credits) to Expenditures (debits) results in reporting whether appropriations are under or over spent.

Inventory Turnover

COGS/Average Inventory

Under IFRS, if a company uses the fair value method for accounting for an investment, any changes in fair value are recognized in

Gains or losses are recognized in profit and loss of the period.

If ending inventory for 20x5 is understated because certain items were missed in the count, then:

Net income for 20x5 will be understated and CGS for 20x6 will be understated. Use the equation BI + PUR = EI + CGS. When EI is understated, CGS must be overstated to maintain the equation. Net income, therefore, is understated (20x5). Then next year, BI is also understated because BI for 20x6 is EI for 20x5. Using the equation, if BI is understated, CGS is also understated to maintain the equation.

Choose the correct statement regarding the accounting treatment of troubled debt restructures (TDRs) under international accounting standards (IAS).

Settlements are treated the same way under US standards... Both sets of standards treat settlements as extinguishments with a gain to the debtor for the difference between debt book value and fair value of consideration paid.

Goodwill impairment

do not record gains on goodwill, only impairments, e.g. if goodwill on two different reporting units had a Carrying Value of: $100 and $200 and an FV of: $300 and $150 you would adjust the Goodwill for only the impairment e.g., EB would be $100 and $150

A lessor enters a sales-type lease with an unguaranteed residual. The lessor will record

A credit to sales revenue for the fair value of the asset less the present value of the unguaranteed residual value. The lessor will subtract the present value of the unguaranteed residual value from both the cost of goods sold (debit) and the sales revenue (credit).

Which of the following types of information would be included in total net assets in the statement of financial position for a nongovernmental not-for-profit organization?

ASC 958-201-45-1 requires three categories of net assets: (1) net assets with donor restrictions, (2) net assets without donor restrictions, and (3) total net assets (i.e., 1 plus 2). This is a major change found in ASU 2016-14, which replaced the three categories of net assets previously used (permanently, temporarily, and unrestricted net assets).

3. During the current year Debue sold $20,000 worth of gift cards entitling the holder to purchase goods from the firm's online warehouse. This is the first year of the program. During the year, $15,000 of gift cards was redeemed for merchandise. The average gross margin percentage on goods sold is 35%. The gift cards do not expire.

$9,750 cost of sales = (.65)$15,000)

Zahn Corp.'s comprehensive Balance Sheet at December 31, 2005 and 2004 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 2005. Depreciation charged to operations in 2005 was:

The accumulated depreciation on the property sold was $10,000 ($50,000 cost less $40,000 carrying value). The sale of property requires that the accumulated depreciation on the property be removed from the accounts. Thus, the $10,000 amount is a decrease in accumulated depreciation. With an overall increase of $200,000 in accumulated depreciation during the period ($800,000-$600,000), depreciation must have been $210,000 ($200,000 + $10,000).

On July 1, 2009, Lazer, Inc. acquired all of the assets, with a fair value of $400,000, and liabilities, with a fair value of $150,000, of Tipco, Inc. for $250,000 cash. In addition, Lazer paid $20,000 in legal and accounting fees for the combination and expects to pay $50,000 to close one of Tipco's plants and relocate its employees. Which one of the following is the total amount of consideration that Lazer paid for Tipco in the business combination?

The total consideration paid by Lazer to acquire Tipco is $250,000, the cash paid. The other cost of carrying out the business combination ($20,000) and the expected cost of closing one of Tipco's plants and relocating its employees ($50,000) would not be part of the cost of the acquisition. The $20,000 legal and accounting fees will be expensed as cost of carrying out the combination. The expected cost of closing one of Tipco's plants and relocating its employees will not be recognized until there is an actual liability.

In addition to the most recent quarter end, for which of the following periods is the company required to present Balance Sheets on Form 10-Q?

The end of preceding fiscal year. The Balance Sheet for the end of the preceding fiscal year would have been the last audited Balance Sheet. This Balance Sheet is presented along with the current fiscal quarter.

1. Data for Debue's most recent payroll: gross salaries, $40,000; FICA 8% on $30,000 of gross salaries (some employees' gross salary to date exceeds the annual maximum subject to tax); other payroll taxes 4% on $20,000 of gross salaries; income tax withholding, $6,000.

$3,200 payroll tax expense = .08($30,000) + .04($20,000) = $2,400 + $800 $4,800 FICA payable is twice that of the employee portion because employer pays the same amount $31,600 payroll cash take home pay = $40,000 - .08($30,000) - $6,000

Nongovernmental not-for-profit organizations are required to provide which of the following external financial statements?

The three required statements are the Statement of Financial Position, Statement of Activities, and Statement of Cash Flows. Note that not-for-profit organizations must also report expenses by nature and by function either in the face of the statement of activities, in the notes to the financial statements, or as a separate schedule.

On June 1 of the current year, Cross Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Cross report?

Without a discount or premium, interest expense is simply the fraction of the year the bonds were outstanding, multiplied by the interest rate and total face value outstanding. $14,000 = (7/12)(.08)($300,000). The fact that interest is paid April 1 and October 1 does not alter that fact. Under accrual accounting, the debtor firm must recognize the total interest cost in the year it was incurred. The payment dates are not relevant to the recognition of the expense. At December 31 of the current year, the firm will accrue three months of interest (Oct. 1 - Dec. 31, or $6,000) but that amount is included in the $14,000 amount.

Tulip Corporation, a publicly traded company, implemented a defined benefit pension plan for its employees on January 2, year 1. The following data are provided for year 3 and as of December 31, year 3: Projected benefit obligation. $700,000 Accumulated benefit obligation 550,000 Plan assets at fair value 520,000 Pension cost for year 3 180,000 Pension contribution for year 3 150,000 Assume that as of January 1, year 3, Tulip's pension plan was fully funded, and there were no recorded pension assets or liabilities on the balance sheet. Assuming a tax rate of 40%, what is the net effect of the required adjustment on accumulated other comprehensive income on December 31, year 3?

$90,000 decrease. The funded status of the plan is recognized in the balance sheet. The funding status is determined by comparing the fair value of plan assets to the projected benefit obligation. The pension plan for Rose is underfunded by a total of $180,000 ($520,000 − 700,000). As of December 31, year 3, Rose has recognized a pension liability of $30,000, which is the difference between pension cost for the period and the pension contribution for the period. This $30,000 liability has been recognized as an expense and reduces net income for the period. Because Rose must recognize a $180,000 liability in the balance sheet, an entry must be recorded for the $150,000 needed to increase the pension liability account to the underfunded amount of $180,000. Therefore, the entry to recognize the underfunded portion of the plan would be

GASB 34 (as amended) indicates that the basic financial statements include only the government-wide statements, the fund statements, and the notes to the financial statements.

Does not include statistical section

On February 1, year 1, Blake Corporation issued bonds with a fair value of $1,000,000. Blake prepares its financial statements in accordance with IFRS. What methods may Blake use to report the bonds on its December 31, year 1 statement of financial position? I.Amortized cost. II.Fair value method. III.Fair value through profit or loss.

I and III IFRS provides that financial liabilities may be reported at amortized cost or at the fair value through profit or loss (FVTPL). If FVTPL is elected, the resulting gain or loss is recognized in profit or loss for the period.

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

Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock. This security is dilutive. The numerator effect is $49 saving in interest ($1,000 x .07 x (1-.3)), and the denominator effect is 40 more shares outstanding. 49 / 40 = $1.225, which is less than the BEPS of $1.29, so the security is dilutive.

A company incurred costs to fulfill a contract that has a four-year life. The costs are a direct result of the contract and would not have been incurred had the contract not existed. How should the costs to fulfill the contract be accounted for?

The costs to fulfill the contract are a direct result of the contract so they are considered incremental. Because the contract is for four years, the company will benefit from the costs for a period exceeding one year. The costs should be recorded as an asset and amortized over the contract period of four years.

On 12/31/x1, DInc. owed CInc. the full face value of a 10%, $350,000 note that requires interest payments annually on Dec. 31. DInc. paid the interest due 12/31/x1, but is experiencing financial problems and requested that the loan agreement be restructured. Three years remain in the note term as of today. The two parties agree to the following restructuring agreement: DInc. will pay no more interest. DInc. will pay $196,270 one year from today, and that same amount again two years from today (total of two payments of $196,270). What amount of interest expense will DInc. recognize on 12/31/x2 when the firm makes the first of two payments of $196,270? Factor for PV Ordinary Annuity for 2 periods at 8%= 1.78326 Factor for PV Annuity Due for 2 periods at 8%= 1.92593 Factor for Single Sum for 2 periods at 8%= .85734

The sum of restructured flows (2 × $196,270) exceeds $350,000, which requires that a new interest rate (m) be computed, as follows: $350,000 = $196,270(pva, m, 2). $350,000/$196,270 = (pva, m, 2) = 1.78326. The new rate (m) corresponds to 8%. Interest expense at the end of 20x2 is computed as .08($350,000) = $28,000.

During year 1 Bradley Corporation issued for $110 per share, 5,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Bradley's $25 par value common stock at the option of the preferred shareholder. On December 31, year 2 all of the preferred stock was converted into common stock. The market value of the common stock at the conversion date was $40 per share. What amount should be credited to the common stock account on December 31, year 2?

This answer is correct. All 5,000 shares of the convertible preferred stock were converted to common stock at the rate of 3 to 1 (making 15,000 common shares issued). The common stock account is credited for the par value of these shares: 15,000 × $25 or $375,000. Although not necessary, the journal entry to record the conversion can be prepared

On January 2, City of Walton issued $500,000, 10-year, 7% general obligation bonds. Interest is payable annually, beginning January 2 of the following year. What amount of bond interest is Walton required to report in the statement of revenue, expenditures, and changes in fund balance of its governmental funds at the close of this fiscal year, September 30?

This answer is correct. General obligation bonds are accounted for in debt service funds, which use the modified accrual basis of accounting. Only the interest cost actually paid in the period is included in interest expense. Accordingly, this answer is correct. Since no interest was paid during the year, interest expense is $0.

On January 2, year 3, Morey Corp. granted Dean, its president, 20,000 stock appreciation rights for past services. Those rights are exercisable immediately and expire on January 1, year 4. On exercise, Dean is entitled to receive cash for the excess of the stock's market price on the exercise date over the market price on the grant date. Dean did not exercise any of the rights during year 3. The market price of Morey's stock was $30 on January 2, year 3, and $45 on December 31, year 3. Morey should recognize compensation expense under the stock appreciation rights plan for year 3 of

This answer is correct. The 20,000 stock appreciation rights (SAR) each entitle the holder to receive cash equal to the excess of the market price of the stock on the exercise date over the market price on the grant date ($30). Since these SAR are payment for past services and are exercisable immediately, there is no required service period. Therefore, the expense computed at 12/31/Y3 does not have to be allocated to more than one period. At 12/31/Y3, compensation expense is measured based on the excess of the 12/31/Y3 market price ($45) over the predetermined price ($30), resulting in compensation expense of $300,000 [20,000 ($45 − $30)]. Note that if Dean was required to work 3 years before the SAR could be exercised, the expense would be allocated over the 3 years of required service ($300,000 × 1/3 = $100,000).

Under IFRS, if a long-term debt becomes callable due to the violation of a loan covenant

reclassify the debt as current.

Completed Contract Method

recognition of revenue for a long-term contract when the project is complete.

On January 1, 20X1, Debue issued $100,000 of 7% debentures. The bonds will mature on December 31, 20X5. Interest on the bonds is paid each December 31. The yield rate of interest on January 1, 20X1 was 6%. A partial bond amortization schedule appears below. The single integers indicate cells pertaining to a question below the schedule. Answer ten questions about Debue's bond issue. The first eight questions are to determine the amounts that would appear in the eight numbered spreadsheet cells above. The last four questions appear below and use the same information from the table above. Enter your amounts in the second column of the spreadsheet below rounded to nearest dollar. Present value of $1 for 1 year: at 6%, 0.94340; at 7%, .93458. #9. Assume on 1/1/x2, Debue retires 30% of the bond issue at 100. The firm incurred $3,000 of bond issue costs when the bonds were issued and the SL method is used for amortization. Debue used a separate contra-bond liability account for the bond issue costs not shown in the spreadsheet. Compute the gain on retirement of the 30% of the bond issue assuming the bond issue costs are amortized on the straight-line method. #10. Compute the net bond liability on 1/1/x3 assuming Debue instead uses the straight-line method (assume the original data, that is no bond issue costs). #11. In the journal entry dated 12/31/x2, what is the amount of the debit to bond premium under the effective interest method (assume the original data, that is no bond issue costs)? #12. In the journal entry dated 12/31/x2, what is the amount of the debit to bond premium under the straight-line method (assume the original data, that is no bond issue costs)?

#1. $7,000 = .07($100,000) #2. $6,253 = .06($104,213) #3. $747 = $7,000 - $6,253 #4. $3,466 = $4,213 - $747 #5. $103,466 = $104,213 - $747 = $100,000 + $3,466 #6. $6,208 = .06($103,466) #7. $100,944 = $107,000(.9434) #8. $30,787 = $7,000(5) - $4,213 #9. The unamortized bond issue costs reduce the book value of bond issue. The book value of bonds retired = .30($100,000 + $3,466) - .30($3,000)(4/5 term remaining) = $30,320. The gain is the excess of the book value over the $30,000 cash paid to retired the bonds, or $320. #10. $100,000 + $4,213(3/5) = $102,528 #11. The amortization of the premium is the difference between the cash interest payment ($7,000) and the interest expense recognized on that date ($6,208), or $792. #12. The SL method amortizes the same amount of premium each year, which is $843 ($4,213/5).

2. Debue provides paid vacations for some of its employees. During the current year, employees earned $36,000 of paid vacation benefits to be taken in future years. The firm paid $22,000 in vacation pay benefits during the current year. For the accrual of benefits, Debue uses 95% as the proportion of earned benefits actually received by employees because some employees leave the firm without taking all their earned paid vacations, and others let some of their benefits lapse.

$34,200 compensated absence expense = .95($36,000)

2. The count of inventory at year-end for a firm using the periodic inventory system revealed that inventory had increased $40,000 compared with the beginning inventory. Gross purchases for the year totaled $670,000; purchases discounts taken were $12,000; purchases returns and allowances were $82,000; transportation in amounted to $33,000; and transportation out was $9,000. Provide the adjusting entry that establishes cost of goods sold for the period, updates the inventory account, and closes the other accounts related to inventory (only).

2. Transportation out is not a product cost it is a selling cost and it will be closed along with other expenses and revenues. The other inventory related accounts (purchases, purchase discounts, purchase R&A, and transportation in) are closed to calculate CGS. Even though we do not know the value of beginning inventory - we know that ending inventory is 40,000 higher than beginning inventory. You can assume a beginning inventory value of zero and proceed with the calculation. Beginning Inventory 0 Purchases 670,000 Less:Purchase discounts (12,000) Purchase R&A (82,000) (94,000) Net Purchases 576,000 Plus transportation in 33,000 Less Ending Inventory (40,000) = COGS 569,000 JE: DRs COGS 569 Purchases returns and allowances 82 Inv 40 Purchase discounts 12 CRs Purchases 670 Trans in 33

A Prior period adjustment is an adjustment to the beginning balance of retained earnings for a particular year, and reflects the effect of an error on income before that year. Therefore, only 2004 will show an adjustment. 2004 will have a debit Prior period adjustment (reduction in retained earnings) of $25,000, because 2003 income was overstated by that amount. 2005 will not have any adjustment, because 2004's income will have been restated to the correct amount, and the 2003 error is adjusted in the 2004 retained-earnings statement adjustment. Comparative income statements are adjusted to reflect the correct earnings amount. Therefore, net income in 2004 will be restated to $125,000 ($150,000 - $25,000). 2005 income is correctly reported at $180,000. It is not affected by the error.

2004: Prior Period Adjustment - ($25,000) NI - $125,000 2005: Prior Period Adjustment - 0 NI - $180,000

4. Inventory with a recorded cost of $550,000 was completely destroyed in an uninsured casualty deemed unusual and infrequent. The relevant tax rate is 35%. Record the journal entry for the loss.

4. The loss on the destruction of inventory is reported as a component of income from continuing operations.Inventory is reduced for the amount of the loss ($550,000).If the loss is material, the amount of the loss should be disclosed in the financial statements or footnotes. DR Inv. Loss 550 CR Inv 550

1. Products are sold with the following warranty: the product may be returned for service free of cost to the customer any time during the year of sale and for the succeeding three calendar years. Thus if a product is sold in 20x3, the warranty covers the product through the end of 20x6. The cost to service warranty claims is estimated to be 1% of sales in the year of sale, 2% in the year following sale, 3% in the second year after sale, and 4% in the third year after sale. During 20x3, sales under warranty totaled $600,000. Assume that warranty expense is recorded as an adjusting entry at year-end. Record that entry for 20x3.

=600*(0.01+0.02+0.03+0.04) = 60 DR warr exp $60k CR Warr liab $60k

On January 1, 2004, Kay Inc. issued its 10% bonds in the face amount of $400,000, which mature on January 1, 2014. The bonds were issued for $354,000 to yield 12%, resulting in a bond discount of $46,000. Kay uses the effective interest method of amortizing bond discount. Interest is payable semiannually on July 1 and January 1. At June 30, 2004, Kay's unamortized bond discount would be

As of June 30, 2004, the first six-month interest period has been completed. Therefore, amortization for six months must be recorded. The July 1, 2004 entry is: Interest expense .12(1/2)$354,00021,240Bond Discount1,240Cash .10(1/2) ($400,000)20,000 The unamortized bond discount after the first six-months therefore is $44,760 = $46,000 - $1,240. Although technically the above entry is not recorded until July 1, as of June 30 the bond discount has decreased due to the passage of time.

A firm began the construction of its new manufacturing facility in January of 20x2. The following expenditures were made on construction in that year: Jan. 1 $40,000 Mar. 1 120,000 Oct. 31 96,000 Debt outstanding the entire year: 6%, $60,000 construction loan4%, $90,000 note payable not related to construction6%, $90,000 note payable not related to construction Compute interest to be capitalized using the specific method (use the construction loan first).

Average accumulated expenditures is $156,000 = $40,000 + $120,000(10/12) + $96,000(2/12). This method uses the specific construction loan first, and then the remaining debt is applied. The nonspecific loans have the same principal balance. Therefore, the weighted average interest rate on those two loans is 5% (the midpoint between 4% and 6%). Capitalized interest = .06($60,000) + .05($156,000-$60,000) = $3,600 + $4,800 = $8,400. The weighted average rate on the two nonspecific loans can also be computed as: [.04($90,000) + .06($90,000)]/($90,000 + $90,000)] = 5%.

Parco owns 100% of its subsidiary, Subco, which it acquired at book value. It carries its investment in Subco on its books using the equity method of accounting. At the beginning of its 2009 fiscal year, the investment in Subco account was $552,000. During 2009, Subco reported the following: Net Income$42,000Dividends Declared/Paid12,000 There were no other transactions between the firms in 2009. In preparing its 2009 fiscal year consolidated statements, which one of the following is the amount of investment that Parco will have to reverse for 2009 as a result of its ownership of Subco? 30,000

During 2009 Parco would recognize Subco's reported net income of $42,000 as equity revenue; the entry would be: DR: Investment in Subco and CR: Equity Revenue. The $12,000 dividends would not be recognized as equity revenue but rather as a liquidation of part of Parco's investment in Subco; the entry would be: DR: Dividends Receivable/Cash and CR: Investment in Subco. Therefore, the net amount of investment to be reversed would be $30,000, computed as +$42,000 - $12,000 = $30,000.

Cost of goods sold $10,000 Year 1 Inventory 9000; AP 7000 Year 2 Inventory $11,000; AP 10000

Explanation for solution to situation 1: Analysis of Inventory Account: beginning balance + purchases - cost of goods sold = ending balance 9,000 + ? - 10,000 = 11,000 purchases = 12,000 Analysis of Accounts Payable Account: beginning balance + purchases - payments = ending balance 7,000 + 12,000 - ? = 10,000 payments = 9,000 The inventory increase reflects a payment not accounted for in cost of goods sold; therefore the increase is subtracted from income in the reconciliation. The accounts payable increase is an increase in purchases and therefore cost of goods sold, but it is not reflected in payments; therefore, the increase is added back to income in the reconciliation.

Chase City imposes a 2% tax on hotel charges. Revenues from this tax will be used to promote tourism in the city. Chase should record this tax as what type of NonExchange Transaction? Derived Tax Revenue.

GASB Stmt. #33 defines derived tax revenues as Nonexchange Revenues that are based on (or derived from) Exchange Transactions. Other examples of derived non-Exchange Transactions include sales taxes and income taxes. Incorrect. The 2% tax is derived from the underlying hotel room charges (an exchange transaction) and as such is a derived tax revenue. GASB Stmt. #33 defines Imposed Nonexchange Revenues as amounts that are assessed against and billed to taxpayers by the government entity. The most common example of an Imposed Nonexchange Revenue is Property Tax Revenue. Incorrect. The 2% tax is derived from the underlying hotel room charges (an exchange transaction) and as such is a derived tax revenue. GASB Stmt. #33 defines government mandated Nonexchange Transactions as legally mandated transfers of resources among governmental entities. Use of these resources is restricted to the purposes defined in the legislation. Revenue sharing monies and entitlements are examples of Government-Mandated Nonexchange Transactions. ncorrect. The 2% tax is derived from the underlying hotel room charges (an exchange transaction) and as such is a derived tax revenue. GASB Stmt. #33 defines voluntary NonExchange Transactions as transfers of resources resulting from a contractual agreement willingly entered into by two or more entities. These resources must be used for purposes specified in the contract. Grants are the primary examples of this type of transaction.

On July 1, 2004, York Co. purchased, as a held-to-maturity investment, $1,000,000 of Park, Inc.'s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2011 and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, 2004 Balance Sheet, what amount should York report as investment in bonds? $911,300

Initial investment cost: $946,000-$40,000 =$906,000 Interest revenue for 2004: $906,000(.10)(1/2 year) = $45,300 Less cash interest for 6 months: $1,000,000(.08)(1/2) = (40,000) Equals amortization of discount (increases investment) = 5,300 Investment in bonds balance at the end of 2004 = $911,300 The initial investment cost or balance excludes accrued interest. The bonds were purchased at the halfway point in the interest period. York must pay for 1/2 a year's interest, and will receive a full year's interest on January 1, 2005. The interest revenue for the year is based on the effective yield of 10%. The difference between interest revenue and the cash interest earned for the second half of 2004 is the growth in the value of the bond over time. The book value of the bond investment at maturity will be $1,000,000. Thus, the discount amortization increases the investment carrying value each year until it reaches $1,000,000.

3. The CEO's compensation contract includes a provision for a bonus of 15% of income before the bonus but after income taxes (30% rate). Income before bonus and income tax is $1.2 million for the current year. The bonus is computed and paid at year-end to obtain the tax deduction for the bonus in the current year. Prepare the journal entry to record the bonus only.

Let B = bonus and T = income tax B = .15(1.2 million - T) T = .30(1.2 million - B) B = .15(1.2 million - [.30(1.2 million - B)]) B = .15(1.2 million - [.30(1.2 million) - .30B]) B = .15(1.2 million - .36 million + .30B) B = .15(.84 million + .30B) B = .126 million + .045B .955B = .126 million B = .126 million/.955 = 131,937 DR salary exp CR Cash

Expected Value Method EX you would not use this method if there are only two possible outcomes. ONLY use when there are more than 2 possible outcomes. Gladwell Company enters into a contract to build specialized production equipment for Malcolm Manufacturing for $1,250,000. Malcolm would like the equipment delivered as soon as possible so it offers Gladwell a performance bonus for early delivery of the equipment. According to the contract, Malcolm will pay a performance bonus of $100,000 if Gladwell is able to complete the equipment by March 1, 20X6. The performance bonus is reduced by 20% for each of the first three weeks after March 1, 20X6. If the completion is delayed more than three weeks, then Gladwell forfeits the entire performance bonus. Gladwell's prior experience with performance bonuses on similar contracts indicates the following probabilities of completion outcomes: SEE IMAGE How much should Gladwell record as the transaction price of the contract?

SEE NEXT CARD

On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.'s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody's investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment?

Since Peabody has elected to report the investment in Newman using the fair value option, it should recognize its share of cash dividends received during the period (.30 x $20,000 = $6,000) and the increase in the fair value of the investment ($400,000 > $410,000 = $10,000), or $6,000 + $10,000 = $16,000.

Cobb, Inc., has current receivables from affiliated companies on December 31, 20x5, as follows: A $75,000 cash advance to Hill Corporation. Cobb owned 30% of the voting stock of Hill and accounts for the investment by the equity method. A receivable of $260,000 from Vick Corporation for administrative and selling services. Vick is 100% owned by Cobb and is included in Cobb's consolidated financial statements. A receivable of $200,000 from Ward Corporation for merchandise sales on credit. Ward is 40% owned by Cobb, which can exercise significant influence over Ward. In the current assets section of its December 31, 20x5, consolidated balance sheet, Cobb should report accounts receivable from investees in the total amount of:

The amount of accounts receivable reported by Cobb from investees is $275,000. The amount of receivable from Vick ($260,000) would be eliminated against the payable to Cobb as brought onto the consolidating worksheet from Vick's balance sheet. The amounts receivable from Hill ($75,000) and Ward ($200,000) would not be eliminated, because since Cobb does not have controlling interest in either firm, they would not be consolidated with Cobb. Both would be accounted for using the equity method of accounting, which does not eliminate intercompany receivables/payables. Since the amounts due from Hill ($75,000) and Ward ($200,000) would not be eliminated, they would show as accounts receivable in the consolidated balance sheet (total = $275,000).

On January 2, 2009, the beginning of its fiscal year, Zable, Inc. acquired all of the stock of Sideco, Inc. from its owners using the following forms and amounts of consideration to pay Sideco owners: Cash $50,000 An investment in Loco, Inc. bonds which Zable had designated as held-for-trading, and which had a cost of $100,000 and a carrying amount of $102,000. Land, with a cost of $50,000 and a fair value of $60,000. Which one of the following is the amount of gain or loss, if any, that Zable should recognize in connection with the transfer of these assets to Sideco owners? Which one of the following is the total amount of consideration Zable paid to acquire Sidco?

The amount of gain recognized in connection with the business combination would be $10,000. Generally, assets (and liabilities and equity) transferred as consideration in a business combination should be measured at fair value. When assets being transferred have a carrying value different than fair value, they should be adjusted to fair value before the transfer and a gain or loss recognized. In this case, since the assets are transferred to Sideco's former owners and not Sideco, the following would apply: Cash would be transferred at face amount, $50,000, with no gain or loss. The investment in Loco would be transferred at carrying value ($102,000), which is also fair value because the bonds are held-for-trading and would have been adjusted to fair value at December 31, 2008, with any gain or loss recognized at that time. So, no gain or loss would be recognized on January 2, 2009, in connection with the business combination. The land would be transferred at fair value, $60,000, and a $10,000 gain would be recognized in connection with the business combination. Generally, assets (and liabilities and equity) transferred as consideration in a business combination should be measured at fair value. When assets being transferred have a carrying value different than fair value, they should be adjusted to fair value before the transfer and a gain or loss recognized. Thus, the correct answer ($212,000) results from using the fair value of the bonds ($102,000) and the fair value of the land ($60,000), together with the cash ($50,000), or a total of $212,000 as the total consideration. In this case, since the assets are transferred to Sideco's former owners and not Sideco, the following would apply: Cash would be transferred at face amount, $50,000, with no gain or loss. The investment in Loco would be transferred at carrying value ($102,000), which is also fair value because the bonds are held-for-trading and would have been adjusted to fair value at December 31, 2008, with any gain or loss recognized at that time. The land would be transferred at fair value, $60,000, and a $10,000 gain would be recognized in connection with the business combination. Thus, the total consideration would be $212,000.

On August 21, 2003, Vann Corp.'s $500,000, one-year, noninterest-bearing note due July 31, 2004 was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing bond discounts. What amount should Vann report for notes payable in its December 31, 2003 balance sheet?

The period from August 21, 2003 to July 31, 2004 is 11 1/3 months. The correct calculation is: Maturity value (note is noninterest bearing)$500,000 Less discount to bank $500,000(.108)[(11 1/3 months)/12 months] ( 51,000) Equals book value at date of discounting = proceeds from bank 449,000 Plus amortization of discount to December 31, 2003 $51,000[(4 1/3 months)/(11 1/3 months)]19,500Equals book value at December 31, 2003 . $468,500 The bank's discount represents the total interest to be paid over the 11 1/3 month term. As the note is amortized, the note's book value increases and interest expense is recognized. At maturity, the note book value is $500,000 and the total interest of $51,000 is paid as part of the single payment of $500,000. Total interest is $51,000 because that is the difference between the maturity value of $500,000 less the $449,000 proceeds.

During year 1 Bradley Corporation issued for $110 per share, 5,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Bradley's $25 par value common stock at the option of the preferred shareholder. On December 31, year 2 all of the preferred stock was converted into common stock. The market value of the common stock at the conversion date was $40 per share. What amount should be credited to the common stock account on December 31, year 2?

This answer is correct. All 5,000 shares of the convertible preferred stock were converted to common stock at the rate of 3 to 1 (making 15,000 common shares issued). The common stock account is credited for the par value of these shares: 15,000 × $25 or $375,000. Although not necessary, the journal entry to record the conversion can be prepared DR Preferred stock 500,000 (5,000 × $100) DR Paid-in capital—PS 50,000 (5,000 × $10) CR Common stock 375,000 (15,000 × $25) CR Paid-in capital—CS 175,000 (plug)

A balance arising from the translation or remeasurement of a subsidiary's foreign currency financial statements is reported in the consolidated income statement when the subsidiary's functional currency is the: Foreign currency U.S. dollar No Yes

Two different methods can be used for converting the financial statements of a foreign subsidiary, either translation or remeasurement. Which method is used depends on the functional currency of the foreign subsidiary. If the local foreign currency is the functional currency, the statements are translated. If the U.S. dollar is the functional currency, the statements are remeasured. Remeasurement gains and losses affect the income statement, while translation gains or losses are carried directly to an equity account, bypassing the income statement entirely. This response is correct because a balance arising from remeasurement is reported in the income statement whenever the U.S. dollar is the functional currency (which requires that the financial statements be remeasured).

1. Net property, plant and equipment increased $40,000 during Year 2. Depreciation expense was $23,000 for Year 2. 3. A plant asset costing $12,000 (accumulated depreciation $5,000) was sold for $4,000 in Year 2.

columns go operating, investing, financing, reconciliation Analysis of net property, plant and equipment: beginning balance + purchases - book value of disposals - depreciation expense = ending balance purchases - book value of disposals - depreciation expense = ending balance - beginning balance purchases - 7,000 - 23,000 = 40,000 purchases = 70,000 The purchase is an investing cash outflow. The proceeds from sale is an investing cash inflow. Depreciation expense also is added to income because it is a noncash expense. The loss of $3,000 is the difference between the $7,000 book value of the item sold ($7,000 = $12,000 cost - $5,000 accumulated depreciation) and the $4,000 proceeds. The loss is added to income in the reconciliation because it does not represent a cash outflow yet income was reduced.