FAR Unit 2

Zinc Co.'s adjusted trial balance at December 31, Year 6, includes the following account balances: Common stock, $3 par $600,000 Additional paid-in-capital 800,000 Treasury stock, at cost 50,000 Net unrealized holding loss on available-for-sale securities 20,000 Retained earnings: Appropriated for uninsured earthquake losses 150,000 Retained earnings: Unappropriated 200,000 What amount should Zinc report as total equity in its December 31, Year 6, balance sheet? $1,680,000 $1,720,000 $1,780,000 $1,820,000

$1,680,000 Total credits to equity equal $1,750,000 ($600,000 common stock at par + $800,000 additional paid-in capital + $350,000 retained earnings). The treasury stock recorded at cost is subtracted from (debited to) total equity, and the unrealized holding loss on available-for-sale securities is debited to other comprehensive income, a component of equity. Because total debits equal $70,000 ($50,000 cost of treasury stock + $20,000 unrealized loss on available-for-sale securities), total equity equals $1,680,000 ($1,750,000 - $70,000).

A company reports the following information as of December 31: Sales revenue $800,000 Cost of goods sold 600,000 Operating expenses 90,000 Unrealized holding gain on available-for-sale debt securities, net of tax 30,000 What amount should the company report as comprehensive income as of December 31? $30,000 $110,000 $140,000 $200,000

$140,000 Comprehensive income includes net income and other comprehensive income. Net income equals $110,000 ($800,000 sales revenue - $600,000 COGS - $90,000 operating expenses). Unrealized holding gains on available-for-sale debt securities ($30,000) are included in other comprehensive income. Thus, comprehensive income is $140,000 ($110,000 net income + $30,000 unrealized holding gain on available-for-sale debt securities).

The following information pertains to Eagle Co.'s current year sales: Cash sales Gross $80,000 Returns and allowances 4,000 Credit sales Gross $120,000 Discounts 6,000 On January 1, customers owed Eagle $40,000. On December 31, customers owed Eagle $30,000. Eagle uses the direct write-off method for bad debts. No bad debts were recorded in the current year. Under the cash basis of accounting, what amount of net revenue should Eagle report for the current year? $170,000 $200,000 $76,000 $190,000

$200,000 Under the cash basis of accounting, revenue is recognized when cash is received. Eagle had $76,000 ($80,000 - $4,000) in net cash sales and $114,000 ($120,000 - $6,000) in net credit sales. Given that accounts receivable decreased, cash collections thereon must have exceeded net credit sales by $10,000 ($40,000 - $30,000). No adjustment for bad debts is needed because no bad debts were recorded. Accordingly, net revenue is $200,000 ($76,000 + $114,000 + $10,000).

The following is Gold Corp.'s June 30, Year 6, trial balance: Dr. Cr. Cash overdraft $ 10,000 Accounts receivable, net 35,000 Inventory 58,000 Prepaid expenses 12,000 Land held for resale 100,000 Property, plant, and equipment, net 95,000 Accounts payable and accrued expenses 32,000 Common stock 25,000 Additional paid-in capital 150,000 Retained earnings 83,000 $300,000 $300,000 Additional information: · Checks amounting to $30,000 were written to vendors and recorded on June 29, Year 6, resulting in a cash overdraft of $10,000. The checks were mailed on July 9, Year 6. · Land held for resale was sold for cash on July 15, Year 6. · Gold issued its financial statements on July 31, Year 6. In its June 30, Year 6 balance sheet, what amount should Gold report as current assets? $125,000 $205,000 $195,000 $225,000

$225,000 Current assets include, in descending order of liquidity, (1) cash and cash equivalents; (2) certain individual trading, available-for-sale, and held-to-maturity debt securities; (3) receivables; (4) inventories; (5) prepaid expenses; and (6) certain individual investments in equity securities. Current assets are reasonably expected to be realized in cash, sold, or consumed within 1 year or the normal operating cycle of the business, whichever is longer. Thus, Gold's current assets include $20,000 of cash ($30,000 of checks mailed in the next period but prematurely recorded - $10,000 overdraft), net accounts receivable ($35,000), inventory ($58,000), prepaid expenses ($12,000), and the land held for resale (treated as a $100,000 inventory item unless held for use in the business or as a long-term investment). The total is $225,000.

A company has the following accrual-basis balances at the end of its first year of operation: Unearned consulting fees $ 2,000 Consulting fees receivable 3,500 Consulting fee revenue 25,000 The company's cash-basis consulting revenue is what amount? $30,500 $19,500 $26,500 $23,500

$23,500 Under the accrual-basis of accounting, consulting fees receivable (earned but not received) are recognized as consulting fee revenue, and the liability for unearned consulting fees (received but not earned) is not. Thus, two adjustments are necessary to determine cash-basis consulting revenue. Consulting fee revenue $25,000 Consulting fees receivable (3,500) Unearned consulting fees 2,000 Cash-basis consulting revenue $23,500

The changes in account balances of the Vel Corporation during Year 6 are presented below: Increase Assets $356,000 Liabilities $108,000 Capital stock $240,000 Additional paid-in capital $24,000 Vel has no items of other comprehensive income (OCI), and the only charge to retained earnings was for a dividend payment of $52,000. Thus, the net income for Year 6 is $16,000 $36,000 $52,000 $68,000

$36,000 Net income is calculated by subtracting total expenses from total revenues. The dividend payment of $52,000 should be added to the increase in assets of $356,000 and then the liabilities, capital stock, and additional paid-in capital is deducted giving us the net income for Year 6 of $36,000 ($356,000 assets + $52,000 dividend payment - $108,000 liabilities - $240,000 capital stock - $24,000 additional paid-in capital).

A company reported the following information for Year 1: Net income $34,000 Owner contribution 9,000 Deferred gain on a highly effective cash-flow hedge 8,000 Foreign currency translation gain 2,000 Prior service cost not recognized in net periodic pension cost 5,000 What is the amount of other comprehensive income for Year 1? $14,000 $43,000 $5,000 $15,000

$5,000 Other comprehensive income (OCI) includes all items of comprehensive income not included in net income. Items of OCI include, among others, gains and losses on derivatives designated and qualifying as cash flow hedges; foreign currency translation gains and losses; and prior service costs not recognized in net periodic pension cost. The deferred gain on the effective cash-flow hedge and the foreign currency translation gain have a positive effect on other comprehensive income, but the prior service cost has a negative effect. The result is an amount of other comprehensive income for Year 1 equal to $5,000 ($8,000 + $2,000 - $5,000).

As of December 15, Year 4, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for Year 4 of $100,000 have not yet been declared. The board of directors plans to declare cash dividends on its preferred and common stock on January 16, Year 5. Aviator paid an annual bonus to its CEO based on the company's annual profits. The bonus for Year 4 was $50,000, and it will be paid on February 10, Year 5. What amount should Aviator report as current liabilities on its balance sheet at December 31, Year 4? $150,000 $200,000 $50,000 $350,00

$50,000 The $50,000 bonus payable to the CEO is an obligation incurred in Year 4 based on profits for that year. Moreover, it will be paid within 12 months, so it should be classified as a current liability. However, dividends do not become a legal obligation of the entity until declared. The entity incurs no liability in Year 4 because it has no obligation to declare dividends on common stock or preferred stock (whether or not cumulative).

Rock Co.'s financial statements had the following balances at December 31: Infrequently occurring gain $ 50,000 Foreign currency translation gain 100,000 Net income 400,000 Unrealized gain on available-for-sale 20,000 debt securities What amount should Rock report as comprehensive income for the year ended December 31? $400,000 $420,000 $520,000 $570,000

$520,000 Comprehensive income includes all changes in equity of a business entity except those changes resulting from investments by owners and distributions to owners. Comprehensive income includes two major categories: net income and other comprehensive income (OCI). Net income includes the results of continuing and discontinued opeations. Components of comprehensive income not included in the determination of net income are included in OCI, for example, unrealized gains and losses on available-for-sale debt securities and certain foreign currency items, such as a translation adjustment. The infrequently occurring gain of $50,000 has already been included in the determination of net income. Thus, comprehensive income equals $520,000 ($400,000 net income + $100,000 translation gain + $20,000 unrealized gain on available-for-sale securities).

The following data were available from Mith Co.'s records on December 31: Finished goods inventory, 1/1 $120,000 Finished goods inventory, 12/31 110,000 Cost of goods manufactured 520,000 Loss on sale of plant equipment 50,000 The cost of goods sold for the year was $510,000 $520,000 $530,000 $580,000

$530,000 Cost of goods sold equals cost of goods manufactured (or purchases for a retailer) adjusted for the change in finished goods inventory. The loss on sale of equipment is not an inventoriable cost. Thus, cost of goods sold is $530,000 ($520,000 COGM + $120,000 BI - $110,000 EI).

Insegrevious, Inc., is engaged in the business of manufacturing widgets. Insegrevious is unsure of how to classify certain transactions on its balance sheet. For the following transactions, determine the amount that needs to be included in the balance sheet for the period ending December 31, Year 4, as either current or noncurrent. Insegrevious paid $50,000 for rent on April 1, Year 1. Rent is $700 per month, due on the last day of the month. Insegrevious purchased new equipment for $10,000 on January 1, Year 2. The equipment has a useful life of 10 years and has no salvage value. Insegrevious depreciates its equipment using the straight-line method. Insegrevious took out a 10-year loan for $40,000 on July 1, Year 3. Insegrevious must pay a total of $12,000 in interest over the life of the loan in equal monthly installments due at the end of each month. The entire balance of the loan is due June 30, Year 13. On July 1, Year 4, Insegrevious prepaid $2,000 of interest. In Year 3, Insegrevious made the following investments: $4,000 in available-for-sale securities, all of which will be sold in Year 5 $2,000 in held-to-maturity securities Enter the appropriate amounts in the designated cells below of Current or Noncurrent or both. Enter all amounts as positive values. If no entry is necessary, enter a zero (0) or leave the cell blank. 1. Prepaid rent 2. Equipment (net of accumulated depreciation) 3. Prepaid interest Investments: 4. Available-for-sale securities 5. Held-to-maturity securities

1. Prepaid rent [$8,400; $10,100]. At December 31, Year 4, the balance in prepaid rent is $18,500 [$50,000 - ($700 × 45 months)]. Insegrevious can expect to pay $8,400 ($700 × 12 months) in Year 5. This amount will be classified as current since it will be paid during Year 5. The remaining balance of $10,100 ($18,500 - $8,400) will be classified as noncurrent. 2. Equipment [$0; $7,000]. Depreciation expense is $1,000 per year under the straight-line method ($10,000 cost ÷ 10 years). At December 31, Year 4, the equipment will have depreciated $3,000 ($1,000 × 3 years). Therefore, the value of the equipment net of accumulated depreciation is $7,000 ($10,000 - $3,000). The entire value of the equipment is reported as a noncurrent asset on Insegrevious's balance sheet. 3. Prepaid interest [$1,200; $200]. Monthly interest is $100 per month ($12,000 ÷ 120 months). Therefore, at December 31, Year 4, the balance in the prepaid account is $1,400 [$2,000 - ($100 × 6 months)]. Insegrevious will have to pay $1,200 of interest in Year 5; this amount is classified as a current asset. The remaining $200 of prepaid interest ($1,400 - $1,200) will be classified as noncurrent. 4. Available-for-sale securities [$4,000; $0]. Since Insegrevious expects to sell all of the available-for-sale securities in Year 5, the entire amount will be classified as a current asset. 5. Held-to-maturity securities [$0; $2,000]. Held-to-maturity securities are not expected to be sold in the near future. Thus, these securities are generally classified as noncurrent.

Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles? - Cash receipts and disbursements basis of accounting. - Basis of accounting used by an entity to file its income tax returns. - Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency. - Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution.

Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution. A comprehensive basis of accounting other than GAAP may be (1) a basis that the reporting entity uses to comply with the requirements or financial reporting provisions of a regulatory agency; (2) a basis used for tax purposes; (3) the cash basis, and modifications of the cash basis having substantial support, such as recording depreciation on fixed assets or accruing income taxes; or (4) a definite set of criteria having substantial support that is applied to all material items, for example, the price-level basis. However, a basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution does not qualify as governmentally mandated or as having substantial support.

On April 1, Julie began operating a service proprietorship with an initial cash investment of $1,000. The proprietorship provided $3,200 of services in April and received a payment of $2,500 in May. The proprietorship incurred expenses of $1,500 in April that were paid in June. During May, Julie drew $500 from her capital account. What was the proprietorship's income fro the 2 months ended May 31 under the following methods of accounting? Cash-Basis Accrual-Basis $500 $1,200 $1,000 $1,700 $2,000 $1,200 $2,500 $1,700

Cash Basis - $2,500 Accrual-Basis - $1,700 Under the cash basis, $2,500 is recognized for the payments received in May for the services rendered in April. The $1,500 of expenses is not recognized until June. Under the accrual basis, the $3,200 of income and the $1,500 of expenses incurred in April but not paid until June are recognized. The net income is $1,700 under the accrual basis ($3,200 - $1,700). The cash investment and capital withdrawal are ignored because they do not affect net income.

Balance Sheet Item Direct cost of issuing commons stock

Classification Additional paid-in capital Direct costs of issuing stock reduce both the net proceeds received and additional paid-in capital.

Balance Sheet Item Preferred stock

Classification Capital Stock Preferred stock's par or stated value for shares issued is classified as capital stock.

Asset Inventory

Classification Current assets These assets consist of "cash and other assets or resources commonly identified as reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business." Current assets include inventory.

Balance Sheet Item Note payable (due in 7 months)

Classification Current liabilities Obligations expected to be liquidated in the ordinary course of business during the longer of the next year or operating cycle are classified as current liabilities. A note payable due in 7 months is a current liability.

Balance Sheet Item Trade accounts payable

Classification Current liabilities Obligations expected to be liquidated in the ordinary course of business during the longer of the next year or operating cycle are classified as current liabilities. Trade accounts payable is one of the most common current liabilities.

Asset Goodwill

Classification Intangible assets These assets are nonfinancial assets without physical substance. Goodwill is an intangible asset that is recorded only in a business combination. It is the excess of (a) the sum of the fair values of (1) the consideration transferred, (2) any prior equity interest in the acquiree, and (3) any noncontrolling interest over (b) the fair value of the net identifiable assets acquired.

Asset Debt sinking fund

Classification Investments and funds These noncurrent assets include a variety of nonoperating items intended to be held beyond the longer of 1 year or the operating cycle, e.g., funds restricted to retirement of noncurrent debt.

Balance Sheet Item Bonds payable issue costs

Classification Noncurrent liabilities Costs to issue debt securities are reported in the balance sheet as a direct deduction from the face amount of the debt.

Balance Sheet Item Discount on bonds payable

Classification Noncurrent liabilities Discount on bonds payable is a direct subtraction from the face amount of the bonds payable in the balance sheet.

Balance Sheet Item Bonds payable (due in 15 years)

Classification Noncurrent liabilities Noncurrent liabilities are those obligations that a company does not expect to pay within the longer of the next year or operating cycle. Bonds payable due in 15 years meet this definition.

Balance Sheet Item Treasury stock (at cost)

Classification Other classification 1. Treasury stock recorded at cost is a reduction of total equity (a debit).

Balance Sheet Item Common stock subscriptions receivable

Classification Other classification A stock subscription is a contractual arrangement to sell a specified number of shares at a specified price at some future date. Stock subscriptions receivable must be reported as a contra equity account.

Asset Capital lease

Classification Property, plant, and equipment These noncurrent assets are tangible operating items recorded at cost and reported net of any accumulated depreciation. An example is a leased asset held under a capital lease.

Asset Land

Classification Property, plant, and equipment These noncurrent assets are tangible operating items recorded at cost and reported net of any accumulated depreciation. An example is land, a nondepreciable asset.

Balance Sheet Item Appropriation of contingencies

Classification Retained earnings Amounts may be appropriated (restricted) to disclose that earnings are to be used for purposes other than dividends.

Loss on a foreign subsidiary's operations due to significant currency devaluation by foreign government.

Component of other comprehensive income. Gains and losses on foreign currency devaluations are translation adjustments. They are items of OCI reported in the consolidated financial statements.

Increase in the fair value of available-for-sale securities.

Component of other comprehensive income. In the balance sheet, available-for-sale (AFS) securities are measured at fair value. Unrealized holding gains and losses resulting from the remeasurement to fair value of AFS securities are reported in other comprehensive income.

A statement of financial position provides a basis for all of the following except - Computing rates of return. - Evaluating capital structure. - Determining profitability and assessing past performance. - Assessing liquidity and financial flexibility.

Determining profitability and assessing past performance. The statement of financial position, also known as the balance sheet, reports an entity's financial position at a moment in time. It is therefore not useful for assessing past performance for a period of time. A balance sheet can be used to help users assess liquidity, financial flexibility, profitability, and risk.

When a full set of general-purpose financial statements is presented, comprehensive income and its components - Appear as part of discontinued operations. - Must be reported net of related income tax effects in total and individually. - Appear only in a supplemental schedule in the notes to the financial statements. - Must be reported in a presentation that includes the components of other comprehensive income and their total.

Must be reported in a presentation that includes the components of other comprehensive income and their total. One continuous statement has two sections: net income and OCI. It must include (1) a total of net income with its components, (2) a total of OCI with its components, and (3) a total of comprehensive income. In separate but consecutive statements, the first statement (the income statement) must present the components of net income and total net income. The second statement (the statement of OCI) must be presented immediately after the first. It presents (1) the components of OCI, (2) the total of OCI, and (3) a total for comprehensive income. The entity must begin the second statement with net income.

Which of the following items is included in accumulated other comprehensive income or loss? - Prior service costs not previously recognized as a component of net periodic pension costs. - A reduction of shareholders' equity related to employee stock ownership plans. - Unrealized holding gains or losses on securities classified as trading debt securities. - Unrealized gains and losses from a derivative properly designated as a fair value hedge.

Prior service costs not previously recognized as a component of net periodic pension costs. Accumulated other comprehensive income or loss is an equity account that accumulates the total other comprehensive income (OCI) for a period. OCI includes all items of comprehensive income not included in net income. Items of OCI include, among others, 1. Unrealized holding gains and losses on available-for-sale debt securities 2. Gains and losses on derivatives designated and qualifying as cash flow hedges 3. Certain amounts associated with recognition of the funded status of post retirement defined benefit plans 4. Certain foreign currency items Prior service costs not previously recognized as a component of net periodic pension costs are reported under other comprehensive income.

Unusual material gain on assets donated to a business entity.

Separate component of income from continuing operations. A material event or transaction that an entity considers to be unusual in nature, infrequent in occurrence, or both must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of income taxes.

Earthquake damage to real estate holdings in New York City.

Separate component of income from continuing operations. An earthquake in New York City is unusual in nature and infrequent in occurrence. A material event or transaction that is unusual in nature, infrequent in occurrence, or both must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of taxes

Loss on disposal of a discontinued component of an entity.

Separately reported component of income, net of tax. The loss from operations of a discontinued component of the entity, including the gain or loss on disposal, is reported after income from continuing operations in the discontinued operations component of the income statement, net of tax.

Operating losses of discontinued component of an entity from beginning of year to measurement date.

Separately reported component of income, net of tax. The loss from operations of a discontinued component of the entity, including the gain or loss on disposal, is reported after income from continuing operations in the discontinued operations component of the income statement, net of tax.

Accumulated other comprehensive income is reported in which of the following financial statements? - The statement of comprehensive income. - The income statement. - The statement of financial position. - The statement of cash flows.

The statement of financial position. Accumulated other comprehensive income is an equity account. All equity accounts are reported on the statement of financial position (balance sheet) of an entity.

Which of the following defines equity as it relates to a business entity? - Total assets and liabilities. - Total revenues less total expenses. - Total assets less total liabilities. - Net revenues.

Total assets less total liabilities. According to the basic accounting equation, assets equal liabilities plus equity. Thus, equity of a business entity equals total assets less total liabilities.

Hahn Co. prepared financial statements on the cash basis of accounting. The cash basis was modified so that an accrual of income taxes was reported. Are these financial statement in accordance with the modified cash basis of accounting? - Yes - No, because the modifications are illogical. - No, because there is no substantial support for recording income taxes. - No, because the modifications result in financial statements equivalent to those prepared under the accrual basis of accounting.

Yes. A comprehensive basis of accounting other than GAAP includes the cash basis. Modifications of the cash basis having substantial support, such as accruing income taxes or recording depreciation on fixed assets, may be made when preparing financial statements on the cash basis (AU-C 800).