FAR FINAL REVIEW
Macklin Co. entered into a franchise agreement with Health Co. for an initial fee of $50,000. Macklin received $10,000 when the agreement was signed. The balance was to be paid at a rate of $10,000 per year, starting the next year. All services were performed by Macklin and the refund period had expired. Operations started n the current year. What amount should Macklin recognize as revenue in the current year? $10,000 $0 $20,000 $50,000
$50,000. The franchisor should report revenue from initial franchise fees when all performance obligations of the sale have been satisfied.
Measurement attributes for Assets and Liabilities (just review)
PP&E - Historical Cost Inventory - Current Cost Accounts Receivable- Net realizable value Market security TS & AFS - Current Market value Bonds, Notes - Present value of future cash flows
Which of the following is not a valuation technique that can be used to measure the fair value of an asset or liability? The impairment approach The income approach The market approach The cost approach
Choice "1" is correct. The impairment approach is not used to measure the fair value of an asset or liability. Instead, when an entity is determining whether an asset has been impaired, the entity will use the market approach, the income approach or the cost approach to determine the fair value of the asset. Choice "2" is incorrect. The income approach is an accepted method of fair value measurement in which future cash flows or earnings are discounted to determine fair value. Choice "3" is incorrect. The market approach is an accepted method of fair value measurement in which price and other market information from identical or comparable assets or liabilities is used to measure fair value. Choice "4" is incorrect. The cost approach is an accepted method of fair value measurement in which current replacement cost is used to determine the fair value of an asset.
The replacement cost of an inventory item is below the net realizable value and above the net realizable value less a normal profit margin. The inventory item's original cost is above the net realizable value. Under the lower of cost or market method, the inventory item should be valued at: Replacement cost Original cost Net realizable value Net realizable value less normal profit margin
Choice "1" is correct. The market value of the inventory is the middle value of the replacement cost, the market ceiling (net realizable value) and the market floor (net realizable value - normal profit margin). Because replacement cost falls between the market ceiling and the market floor, it is considered to be the market value of the inventory. Under the lower of cost or market, because the cost is above the replacement cost (market value), the inventory is reported at replacement cost. Choice "2" is incorrect. The inventory is not reported at original cost because the original cost exceeds the market value (replacement cost). Choice "3" is incorrect. The inventory is not reported at net realizable value because the net realizable value exceeds the replacement cost and the replacement cost exceeds net realizable value less normal profit margin. Therefore, the replacement cost is the market value of the inventory and is the amount used to determine lower of cost or market. Choice "4" is incorrect. The inventory is not reported at net realizable value less normal profit margin because this amount is less than the replacement cost and the replacement cost is less than net realizable value. Therefore, the replacement cost is the market value of the inventory and is the amount used to determine lower of cost or market.
On December 31, an entity analyzed equipment with a net carrying value of $250,000 for impairment. The entity determined the following: Fair Value : $215,000 Undiscounted future cash flows $240,000 What is the impairment loss that will be reported on the December 31 income statement under U.S. GAAP $35,000 $10,000 $25,000 $0
Choice "1" is correct. Under U.S. GAAP, impairment analysis begins with a test for recoverability in which the net carrying value of the asset is compared to the undiscounted cash flows expected from the asset. If the net carrying value exceeds the undiscounted cash flows, then an impairment loss is recorded equal to the difference between the carrying value and fair value of the asset. In this problem, the carrying value of $250,000 is greater than the undiscounted future cash flows of $240,000, so an impairment loss must be recorded. The impairment loss is calculated as follows: Impairment loss = Fair value − Carrying value = $215,000 − $250,000 = $(35,000) Choice "2" is incorrect. The impairment loss is not equal to the difference between the undiscounted future cash flows and the carrying value of the equipment. The impairment loss is equal to the difference between the fair value and carrying value of the asset. Choice "3" is incorrect. The impairment loss is not equal to the difference between the undiscounted future cash flows and the fair value of the equipment. The impairment loss is equal to the difference between the fair value and carrying value of the asset. Choice "4" is incorrect. An impairment loss must be recorded because the carrying value of $250,000 is greater than the undiscounted future cash flows of $240,000.
Vadis Co. sells appliances that include a three-year warranty. Service calls under the warranty are performed by an independent mechanic under a contract with Vadis. Based on experience, warranty costs are estimated at $30 for each machine sold. When should Vadis recognize these warranty costs? When the machines are sold When payments are made to the mechanic When the service calls are performed Evenly over the life of the warranty
Choice "1" is correct. Warranty costs should be recognized when the machines are sold. The concept is that of matching revenues and the related expenses in the period of benefit. Choice "2" is incorrect. The warranty costs would not be recognized when the payments are made to the mechanic. They would be recognized when the machines are sold. Choice "3" is incorrect. The warranty costs would not be recognized when the service calls are performed. They would be recognized when the machines are sold. Choice "4" is incorrect. The warranty costs would not be recognized evenly over the life of the warranty. They would be recognized when the machines are sold.
Foff Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after the goods were received at Fogg's warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg's favor. The resulting gain should be included in Fogg's financial statements as (an): Separate component of other comprehensive income. Component of income from continuing operations Deferred credit Asset valuation allowance
Choice "2" is correct, component of income from continuing operations. Rule: Gains and losses resulting from foreign exchange transactions that are an "extension" of the parent's domestic operations are included as a component of "income from continuing operations" in the period in which they occur.
What is the primary objective of financial reporting? A. To provide economic information that is comprehensible to all users B. To provide management with an accurate evaluation of their financial performance C. To provide forecasts for future cash flows and financial performance D. To provide information that is useful for economic decision making.
D. is correct
Lizzy Co. traded an old machine to Chang Co. for a similar new machine. The exchange is assumed to lack commercial substance. Lizzy also received $10,000 in cash. The following information relates to the machines on the date of the exchange: Old machine CV : $70,000 FV: $100,000 New machine CV: $45,000 FV: $90,000 What amount of gain should Lizzy record from this exchange under U.S. GAAP? $0 $3,000 $30,000 $10,000
Choice "2" is correct. $3,000. The question specifically states that the nonmonetary exchange lacks commercial substance. Under U.S. GAAP, when there is no boot, no gain is recognized in nonmonetary exchanges that lack commercial substance. However, in this question, boot/cash is received so a proportional part of the gain is recognized. If we looked into this question more closely, we would find that we could have also determined that the exchange lacked commercial substance, even if that information had not been provided in the question. First, the assets are similar productive assets (i.e., both assets are machines), which is often an indication that the risk, timing, or amount of the expected future cash flows from the assets received will not differ significantly from the risk, timing, or amount of expected future cash flows from the assets transferred, especially if the cash received in the same transaction is insignificant. In this question, the amount of cash that changes hands is insignificant (10% of the fair value of the asset relinquished and 10% of the total fair value of the assets received). Based on these facts, a conclusion that the exchange lacks commercial substance appears to be warranted. To determine the gain to be recognized, a gain of $30,000 ($100,000 fair value − $70,000 carrying value) is realized on the exchange. The total consideration received is $100,000 ($90,000 + $10,000). The cash received is $10,000, which is less than 25% of the total consideration received. A gain of $3,000 (1/10th) is recognized. The journal entry is as follows: Debit (Dr) Credit (Cr) Cash $ 10,000 New machine 63,000 Gain on exchange $ 3,000 Old machine (net) 70,000 Note that the question did not really ask for the initial carrying value (cost) of the new machine, but it certainly could have. The initial carrying value of the new machine could also be calculated as the fair value of the new machine less the realized gain not recognized ($90,000 − $27,000 = $63,000). It is not a bad idea to calculate the initial carrying value using both methods as a quick check. On these transactions, it is really easy to get the numbers mixed up.
Garr Co. received a $60,000, 6-month, 10% interest-bearing note from a customer. After holding the note for two months, Garr was in need of cash and discounted the note at the United Local Bank at 12%. The amount of cash Garr received from the bank was: $60,630 $60,480 $62,520 $61,740
Choice "2" is correct. $60,480 cash proceeds received from bank. Net proceeds at discount: Face of note - $60,000 Int Rt on note 10% * 1/2 yr - 5% Maturity value of note - $63,000 Disc by bank 12% x 4/12 - 4% Amount to subtract from face of note - 2520 PROCEEDS FROM BANK 60,480
In accounting for its merchandise inventory, Ingewald International, a company that uses U.S. GAAP, changed from LIFO to FIFO. Assuming the change in beginning inventory was $400,000 and that the change at the end of the year was $300,000 and that the tax rate was 30 percent, what was the amount of the cumulative effect of an accounting change that should have been displayed in Inglewald's retained earnings statement? $210,000 $280,000 $70,000 $0
Choice "2" is correct. A change from LIFO to another inventory cost flow assumption requires a cumulative catch-up adjustment as of the beginning of the year of change. The beginning balance of retained earnings is adjusted, net of tax. 400,000 × (1 − .30) = 280,000. A change from LIFO to another method is reported by restating prior period financial statements in a manner similar to a prior period adjustment. Choice "1" is incorrect. Adjustments are made as of the beginning, not the end of the period. Choice "3" is incorrect. Taking the difference between the beginning and ending inventory, net of tax, results in this incorrect amount. Choice "4" is incorrect. An adjustment must be made when switching from LIFO.
On December 31, Year 1, the end of its fiscal year, Smarti Company held a derivative instrument which it had acquired for speculative purposes during November, Year 1. Since its acquisition the fair value of the derivative had increased materially. On December 31, how should the increase in fair value of the derivative instrument be reported by Smarti in its financial statements? Recognized as a component of other comprehensive income for Year 1 Recognized in current net income for Year 1 Recognized as a deferred credit until the instrument is settled Disregarded until the instrument is settled
Choice "2" is correct. Gains (and losses) resulting from the change in fair value of derivatives not held (or issued) for hedging purposes should be recognized in net income in the period during which the fair value changes. To accomplish that, the derivative would be adjusted to its new fair value and a gain or loss recognized in current net income. Choice "1" is incorrect, because derivatives not held (or issued) for hedging purposes are speculative in nature with changes in fair value and the related gain or loss recognized in current net income. Choice "3" is incorrect, because changes in the fair value of derivatives are never recognized as deferred credits (or deferred debits) on the balance sheet. Choice "4" is incorrect, because changes in the fair value of derivatives not held (or issued) for hedging purposes must be recognized in the period in which the fair value changes, not deferred until a later period of settlement.
On January 1, Year 3, Starlight Construction Co. began a construction project qualifying for capitalization of interest. The total amount spent on the is project during Year 3 was $250,000, spent uniformly during the year. To help pay for construction, $200,000 was borrowed at 10% on January 1, Year 3, and funds not needed for construction were temporarily invested in short-term securities, yielding $3,000 in interest reenue. Other than the contruction funds borrowed, the only other debt outstanding during the year was a $150,000, 10-year 7% note payable dated January 1, Year 1. How much interest should be capitalized by Starlight during Year 3? $9,500 $12,500 $25,000 $22,000
Choice "2" is correct. The calculations are: 250,000 / 2 = 125,000 *.1 = 12,500
Which of the following is not a disclosure requirement related to risks and uncertainties under U.S. GAAP? Estimates of the effects of changes in significant estimates A statement that actual results could differ from the estimates included in the financial statements Disclosure of vulnerability due to all identified concentrations Disclosure of the relative importance of each business when an entity operates multiple businesses
Choice "3" is correct. Identified concentrations only need to be disclosed if all of the following criteria are met: 1 The concentration exists at the financial statement date. 2 The concentration makes the entity vulnerable to the risk of a near-term severe impact. 3 It is at least reasonably possible that the events that could cause the severe impact will occur in the near-term.
In January, Stitch, Inc. adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch's inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet? $80,000 $88,000 $83,000 $85,000
Choice "3" is correct. Since inventory increased $30,000 using base-year prices, under dollar value LIFO we must restate this increase by the appropriate price-level index, in this case 10%. $30,000 times 10% equals $3,000, so this increase actually becomes $33,000 using current-year prices. Therefore, the amount of inventory Stitch should report in its year-end balance sheet is the $50,000 at adoption plus the $33,000 increase, so $83,000 in total since they are utilizing dollar-value LIFO for inventory valuation. Choice "1" is incorrect. $80,000 would only be correct if we were not utilizing dollar-value LIFO. Choice "2" is incorrect. $88,000 is incorrect since we only have to adjust the $30,000 increase. Choice "4" is incorrect. $85,000 Is incorrect since we do not have to adjust the original $50,000.
Merry Co. purchased a machine costing $125,000 for its manufacturing operations and paid shipping costs of $20,000. Merry spent an additional $10,000 for testing and preparing the machine for use. What amount should Merry record as the cost of the machine? $125,000 $135,000 $155,000 $145000
Choice "3" is correct. The cost of the machine should include all costs that are reasonable and necessary to get the asset in the condition or location for its intended use.
Derby Co. incurred costs to modify its building and to rearrange its production line. As a result, an overall reduction in production costs is expected. However, the modifications did not increase the building's market value, and the rearrangement did not extend the production line's life. Should the building modification costs and the production line rearrangement costs be capitalized? Building Production No;No Yes;No Yes;Yes No;Yes
Choice "3" is correct. Yes - Yes. Rule: Expense ordinary repairs but capitalize expenditures, which are "additions" or "benefit several periods" or "improve efficiency" as is the case in this question.
Bentley Company leased equipment from Babson Company for a six-year term beginning July 1, Year 1. The rent for the first lease year is $8,000, and the rental charge for each of the remaining five years is $10,600. However, as an incentive to lease its equipment, Babson provided the first six months of the lease rent free. In its December 31, Year 1 income statement, what was Bentley's rental expense? $9,500 $4,000 $8,000 $4,750
Choice "4" is correct. Annual (years 2 − 6) $ 10,600 Term (years 2 − 6) × 5 yrs Expense (years 2 − 6) $ 53,000 Expense (1st year) 8,000 Free rent (4,000) Total rent to be paid $ 57,000 Total years ÷ 6 yrs Annual rental expense $ 9,500 Period (July − Dec.) × 1/2 yr Period rental expense $ 4,750 Choice "1" is incorrect. $9,500 is calculated by using the calculated annual rental expense and ignoring the fact that the lease was signed on July 1. For any question where dates are important, such as a question where lease payments are calculated, watch the dates. Choice "2" is incorrect. $4,000 is calculated by using one half of the cash paid out during the first lease year as the rental expense for Year 1. The accrual basis of accounting requires that the total rent to be paid be expensed evenly over the lease term. Choice "3" is incorrect. $8,000 is calculated by using the cash paid out during the first lease year as the rental expense for Year 1. The accrual basis of accounting requires that the total rent to be paid be expensed evenly over the lease term.
Under Regulation S-X an entity's interim financial statements filed with the SEC should include all of the following, except: An income statement for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter A balance sheet as of the end of the proceeding fiscal year An income statement for the cumulative 12 month period ending during the most recent fiscal quarter. A statement of cash flows for th emost recent fiscal quarter
Choice "4" is correct. Interim financial statements filed with the SEC would not include a statement of cash flows for the most recent fiscal quarter, but should include statements of cash flows for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the corresponding period for the preceding fiscal year. The financial statements may also present statements of cash flows for the cumulative 12 month period ended during the most recent fiscal quarter and for the corresponding preceding period. Choice "1" is incorrect. Interim financial statements filed with the SEC should contain income statements for the most recent fiscal quarter, for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the corresponding periods of the preceding fiscal year. The financial statements may also include income statements for the cumulative 12 month period ended during the most recent fiscal quarter and for the corresponding preceding period. Choice "2" is incorrect. Interim financial statements filed with the SEC should contain balance sheets as of the end of the most recent fiscal quarter and as of the end of the preceding fiscal year. A balance sheet for the corresponding fiscal quarter for the preceding fiscal year is not required unless necessary to understand the impact of seasonal fluctuations. Choice "3" is incorrect. Interim financial statements filed with the SEC should contain income statements for the most recent fiscal quarter, for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the corresponding periods of the preceding fiscal year. The financial statements may also include income statements for the cumulative 12 month period ended during the most recent fiscal quarter and for the corresponding preceding period.
On July 1, Year 1, Black & Associates issued 2,000 of its 8% $1,000 bonds for $1,752,000. The bonds were issued to yield 10%. The bonds are dated July 1, Year 1 and mature on July 1, Year 11. Interest is payable semiannually on January 1st and July 1st. Using the effective interest method, how much of the bond discount should be amortized for the siz months ended December 31, Year 1? $9,920 $15,200 $12,400 $7,600
Choice "4" is correct. The computations are: Effective interest = $1,752,000 × .10 = $ 175,200 − Cash interest = 2,000,000 × .08 = 160,000 15,200 ÷ 2 = Disc. Amortization for the 6 months ended Dec. 31, Year 1 $ 7,600 Choices "2", "1", and "3" are incorrect, per the above calculations.
Pinellas Company owns 30% of the voting common stock of Sanibel Company. Pinellas will probably use the equity method of accounting to account for this investment because: Pinellas will be able to appoint 30% of the directors of Sanibel Co No other shareholder holds more than a 29% interest in Sanibel Co Pinellas receives 30% of the dividends paid by Sanibel Co. Pinellas is assumed to be able to exercise signiciant influence over the affairs of Sanibel Co.
Choice "4" is correct. The equity method of accounting should be used when the investor is able to exercise significant influence over the affairs of the investee. Significant influence is generally assumed if the investor owns 20% or more of the voting stock of the investee company. Choice "1" is incorrect. The number of directors that the investor can appoint is not the deciding factor. Choice "2" is incorrect. Other owners' percentage interest is irrelevant. Choice "3" is incorrect. Although this is a true statement, it does not explain the use of the equity method.
Cott, Inc. prepared an interest amortization table for a five-year lease payable with a bargain purchase option of $2,000, exercisable at the end of the lease. At the end of the five years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error? a. The beginning present value of the lease did not include the present value of the bargain purchase option. b. Cott subtracted the annual interest amount from the lease payable balance instead of adding it. c. The present value of the bargain purchase option was subtracted from the present value of the annual payments. d. Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period. Explanation
Choice "A" is correct. Cott, Inc. made the error of not including the present value of the written purchase option in the beginning present value of the lease that it used on the schedule. A written purchase option payment is included as part of the minimum lease payments to be discounted to the date of inception of the lease because it is a future cash flow that is considered certain. When the spreadsheet showed zero at the bottom, Cott, Inc. still was required to make the written purchase option payment of $2,000, yet there was no liability left on the books to pay. The $2,000 should have been capitalized as part of the cost of the equipment (or whatever was purchased under the finance lease).
Two years ago, Industry Products Co, purchased a box-packaging machine for $480,000 that had an expected useful life of 20 years and must be inspected every four years at a cost of $6,000. The machine's engine cylinder, valued at $60,000 requires replacement every 10 years and its detachable tape-box dispenser valued at $25,000, requires replacement every five years. If the company decides to staple the packed boxes and de recognizes its tape-box dispenser after one year, what is the depreciation amount recognized by the company in the current year under the component depreciation method? $28,200 $25,750 $31,950 $26,950
Choice 4 is correct. Make sure to de recognize the tape dispenser portion
At December 31, High Horse Company has the following pension plan information: Fair value of plan assets, beginning of year : $1,100,000 Fair value of plan assets, ending of year: $1,135,000 Contributions: $275,000 Benefits paid: $340,000 Expected rate of return on plan assets 7% The expected return on plan assets was used to calculate net periodic pension cost. No actuarial gains or losses were incurred during the year. What is the net gain to be reported in other comprehensive income under U.S. GAAP? $23,000 $0 $77,000 $100,000
Choice A $23,000 is correct
Carter Components is computing the components of its net periodic pension cost for the current year ended December 31. Carter has calculated that its service cost is $60,000 and has computed interest cost as $42,000. The average remaining service life of its employees is 8 years. The return on $500,000 in plan assets was anticipated to be 8 percent but was actually 8.5 percent. The pension benefit obligation at the beginning of the year was $560,000 and, at the end of the year, $602,000. The company has an unrecognized gain of $60,000. To what extent will the unrecognized gain reduce current-year net periodic pension cost under U.S. GAAP? $500 $750 $25 $1,250
Choice A is correct. $500
Interim finanical reporting should be viewed primarily in which of the following ways? A. As if the interim period were an annual accounting period B. As reporting for an integral part of an annual period C. As useful only if activity is spread evenly throughout the year. D. As reporting under a comprehensive basis of accounting other than GAAP/IFRS
Choice B is correct
What is "Faithful Representation" and components of faithfully represented financial information
Complete - Includes all info necessary for the user to understand the reported economic event Neutral - free from bias COMPLETELY NEUTRAL IS FREE FROM ERROR Free from Material error - does not require perfect accuracy.
Days sales in A/R
Ending accounts receivable / (Sales/365)
What is "Relevance" and components of relevant financial information
Information is relevant if it is capable of making a difference in the decisions made by users. Predictive value - predict future outcomes Confirmatory Value - Provides feedback about evaluations previously made by users Materaility - Info is material if an omission or misstatement of the info. could affect the decisions made by users.
Drexler Corp. has a June 30 fiscal year-end and plans to issue its annual (Year 3) financial statements by September 30, Year 3. On August 15, a warehouse fire destroys an estimated $250,000 of inventory. As a result of the fire, in its Year 3 financial statements Drexler should: Record a journal entry with no associated disclosure Disclose the nature of the event with no estimated financial impact Record a journal entry with a disclosure Disclose the nature of the event along with the estimated financial impact
The last choice is correct