Final: Stuff to know 2
On January 1, Year 1, Stopaz Co. issued 8%, 5-year bonds with a face value of $200,000. The bonds pay interest semiannually on June 30 and December 31 of each year. The bonds were issued when the market interest rate was 4% and the bond proceeds were $235,931. 1. JE to record issuance of bonds 2. JE to record the payment of interest on June 30, X1
1. DR: Cash 235,931 CR: BP 200,000 CR: Premium on BP 35,931 2. DR: Bond Interest Exp. 4,719 DR: Premium on BP 3,281 CR: Cash 8,000 INTEREST EXPENSE = 235,931 x .04 x 1/2 CASH PAYMENT = 200,000 x .08 x 1/2
Camp Co. wishes to purchase a 5-year, 12% bond with a face value of $100,000 and interest payable semiannually on January 2 and July 1. The market rate on similar bonds is 10%. Camp Co. purchases the bond at a premium for $107,720. Camp Co. has a calendar-year reporting period. 1. purchase of the bond 2. first interest payment on July 1, XI
1. DR: Inv. in HTM securities 107,720 CR: Cash 107,720 -------------------------------------- 2. DR: Cash 6,000 CR: Interest Revenue 5,386 CR: Investment in HTM securities 614 -------------------------------------- 1. purchase of the bond 2. first interest payment on July 1, XI
operating segments may be combined in order to meet these criteria if they have the following similar characteristics - 5
1.Nature of products and services 2.Nature of the production processes 3.Type or class of customer 4.Distribution methods for products or services 5.Nature of regulatory environment (if appropriate)
Under the deferred method of accounting for deferred income taxes, a credit balance in the deferred income taxes account that appears on the balance sheet (statement of financial position):
A credit balance indicates that either (a) the revenue to-date for financial reporting purposes exceeds the income to-date included in taxable income or (b) the expense to-date for financial reporting purposes is less than the amount of expense to-date included in taxable income. The credit balance in the deferred income taxes account represents the tax expense recognized to-date for financial reporting purposes that is expected to be included in taxable income in future years. However, it does not represent an amount "owed" to the federal government at the balance sheet date.
At December 31, 20X2, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31, 20X1, $300,000 of which were to be written off in 20X2 and the remainder in 20X3. Off-Line's income tax rate is 30%. In its 20X2 income statement, what amount should Off-Line report as cumulative effect of change in accounting principle?
FASB ASC 250-10-45-5 mandates that voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented. Thus, the cumulative effect of Off-Line's change in accounting principle would not be included in its 20X2 income statement.
Brand Co. incurred the following research and development project costs at the beginning of the current year: Equipment purchased for current and future projects $100,000 Equipment purchased for current projects only 200,000 Research and development salaries for current project 400,000 Equipment has a 5-year life and is depreciated using the straight-line method. What amount should Brand record as depreciation for research and development projects at December 31?
Only the equipment that has an alternative use is capitalized and depreciated. The depreciation is $100,000 ÷ 5 = $20,000. The other expenditures should be expensed immediately.
If Big City had received a grant (the principal of which could not be used, but the interest was required to be used to benefit Big City's residents), which type of fund would contain its financial information?
Permanent fund "Permanent funds are used to report resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government's programs—that is, for the benefit of the government or its citizenry" (GASB 1300.108). Permanent funds are a type of governmental fund.
What is the purpose of SFAC 4 as stated in that concepts statement? A. To provide the methods for preparing financial statements for nonbusiness entities B. To provide a basis for establishing detailed accounting and reporting standards for nonbusiness entities C. To provide detailed accounting and reporting standards for nonbusiness entities D. All of the answer choices are correct.
SFAC 4, Objectives of Financial Reporting by Nonbusiness Organizations, represents the most recent expression of the overall purposes and related objectives of financial reporting by nonbusiness organizations. The purposes and related accounting and reporting objectives set forth in SFAC 4 are concepts—not standards—and are designed to provide a basis for establishing detailed accounting and reporting standards.
Lake County received the following proceeds that are legally restricted to expenditure for specified purposes: Levies on affected property owners to install sidewalks: $500,000 Gasoline taxes to finance road repairs: $900,000 What amount should be accounted for in Lake's special revenue funds?
Special revenue funds are used to account for resources raised from revenues that are either restricted or committed for expenditure for specific general government purposes other than capital outlay or debt service. Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays. The sidewalks are capital in nature and would not be part of a special revenue fund but of a capital fund, whereas the road repairs are not capital but maintenance.
Fireworks, Inc., had an explosion in its plant that destroyed most of its inventory. Its records show that beginning inventory was $40,000. Fireworks made purchases of $480,000 and sales of $620,000 during the year. Its normal gross profit percentage is 25%. It can sell some of its damaged inventory for $5,000. The insurance company will reimburse Fireworks for 70% of its loss. What amount should Fireworks report as loss from the explosion?
This problem must be solved using the gross profit method: Goods available for sale = $40,000 + $480,000 = $520,000 Gross profit = $620,000 × 0.25 = $155,000 Cost of goods sold = $620,000 - $155,000 = $465,000 Ending inventory = $520,000 - $465,000 = $55,000 Reimbursement = ($55,000 - $5,000) × 0.70 = $35,000 Loss = $55,000 - $5,000 - $35,000 = $15,000
Camp Co. wishes to purchase a 5-year, 12% bond with a face value of $100,000 and interest payable semiannually on January 1 and July 1. The market rate on similar bonds is 10%.
To calculate the price Camp Co. should pay: Present value of principal Maturity value of bonds after 5 years $100,000 Present value factor, 10 periods (5 years - twice a year), 5% semiannual market rate (full year is 10%) - use Table I .6139 Present value of $100,000 discounted at 5% for 10 periods $61,390 Present value of interest payments Semiannual payment, 6% of $100,000 $6,000 Present value annuity factor, 10 periods, 5% (use Table II) 7.7217 Present value of 10 payments of $6,000 discounted at 5% $46,330 Total present value (market price) of the bonds (rounded) $107,720
Perk, Inc., issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk calculate the net proceeds to be received from the issuance?
To determine the issue price for a bond, the cash flows from the bond should be discounted at the yield, or market, rate. The cash flows include the principal repayment and interest payments calculated at the stated rate. The net proceeds are the issue price less the cost to issue the bonds. Note Be aware that ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts; the recognition and measurement guidance for debt issuance costs were not affected by the amendments. Amortization of debt issuance costs also shall be reported as interest expense; issue costs will no longer be reported in the balance sheet as deferred charges.
Under IFRS, which of the following measurements is allowed to estimate and report the liability for the cost of settling a lawsuit?
When a range of amounts that may be lost in a lawsuit are established, the best number in the range must be chosen to accrue. AND The chosen amount must always be discounted to present value.
correction of an error---such as insurance premium paid and entirely expensed in 20X1 for the period of 20x1 through 20x3
always a restatement!! whenever there is a correction of error---restatement approach...seems to be pretty much the ONLY time you use the restatement approach as well
what will interest expense always be with bonds? -------------------------------------- what will cash payment always be? -------------------------------------- premium will always be paying higher or lower amount of cash vs interest rate -------------------------------------- discount will always be paying higher or lower amount of cash vs interest rate
net carrying value x effective interest rate!!! -------------------------------------- face of bond times coupon or stated rate!!! -------------------------------------- premium - lower interest rate---higher cash -------------------------------------- discount - higher interest rate---lower cash
A not-for-profit voluntary health and welfare entity received a $500,000 contribution at the start of 20X2 with donor instructions to maintain the principal as a permanent endowment and use all income for a mental health program; the donor stipulated that investment gains remain part of the endowment. The endowment principal was invested in a number of equity securities and mutual funds using an investment management firm. The investment manager remits the proceeds of the investment quarterly. At the end of 20X2, the investment value had increased to $530,000. Dividends for the year totaled $20,000 and custodial and transaction fees were $375. The increase in the investment value would be reported as an increase to permanently restricted net assets and:
the dividends may be reported as a $19,625 increase in temporarily restricted net assets. --------------------------------------------------FASB ASC 958-320-45-4 indicates that investment revenues may be reported net of related expenses provided that there is disclosure of the expenses elsewhere in the financial statements. In this case, the dividend revenues are subject to specific use by the donor and should be considered an increase to temporarily restricted net assets. No expenses are reported in the temporarily restricted net assets category. If the investment expenses are to be reported separately, the expense would be a decrease in unrestricted net assets accompanied by a reclassification from the temporarily restricted net assets category, leaving a net increase of $19,625 to temporarily restricted net assets ($20,000 - $375).
purchased a put option. option gave roberts right to sell 10,000 shares of stock at 75$/share. Roberts paid a premium of $2/share to enter into the option. Roberts exercised the option when Buy Big stock was selling for 69$/share. underlying? notional amount? initial net investment? settlement amount?
underlying? 75 notional amount? 10,000 initial net investment? 2 x 10,000 = 20,000 settlement amount? 75 x 10,000 = 750,000
A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. Assuming that the transaction has commercial substance, what is the gain on the exchange?
Nonmonetary exchanges are generally recorded at fair value. Value of property exchanged $50,000 Original cost 20,000 ------- Gain on exchange $30,000
At its date of incorporation, Glean, Inc., issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Glean acquired 30,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?
A decrease in retained earnings and no effect on additional paid-in capital ------------------------------------------------- Using the cost method of accounting, additional paid in capital from treasury stock is credited when treasury stock is reissued at excess. The sale of the treasury stock resulted in a $120,000 loss $12 selling price - $16 cost to purchase = $4 30,000 shares x $4 = $120,000 The journal entry for reissuance of the treasury stock is as follows: Cash ($12 x 30,000) $360,000 Retained Earnings $120,000 Treasury Stock ($16 x 30,000) $480,000 There was only one treasury stock reissuance so there is no additional paid in capital transaction to be made. Therefore, under the cost method Glean would record the loss (decrease or debit) to retained earnings and there would be no effect on additional paid-in capital.
what kind of feature must be reported as a liability on stock?
An unconditional redemption feature on stock must be reported as a liability. Cumulative or convertible preferred stock does not create a liability. Neither does common stock issued at a discount.
Wood Co. owns 2,000 shares of Arlo, Inc.'s, 20,000 shares of $100 par, 6% cumulative, nonparticipating preferred stock and 1,000 shares (2%) of Arlo's common stock. During 20X2, Arlo declared and paid dividends of $240,000 on preferred stock. No dividends had been declared or paid during 20X1. In addition, Wood received a 5% common stock dividend from Arlo when the quoted market price of Arlo's common stock was $10 per share. What amount should Wood report as dividend income in its 20X2 income statement?
Annual dividend requirement on preferred = $100 × .06 = $6/share × 20,000 shares = $120,000. Preferred dividends paid in 20X2: 20X1 cumulative dividends $120,000 20X2 regular preferred dividends 120,000 -------- Total dividends paid for 20X2 $240,000* x 2,000 sh / 20,000 shares, Wood Co. x 0.10 -------- $ 24,000 * The preferred stock dividend pays all required dividends in full.
Wilk Co. reported the following liabilities at December 31, 20X1: Accounts payable-trade $ 750,000 Short-term borrowings 400,000 Bank loan (current portion $100,000) 3,500,000 Other bank loan, matures June 30, 20X2 1,000,000 The bank loan of $3,500,000 was in violation of the loan agreement. The creditor had not waived the rights for the loan. What amount should Wilk report as current liabilities at December 31, 20X1?
Current liabilities represent obligations whose liquidation is expected to require the use of current assets or the creation of other current liabilities. Current liabilities also include long-term obligations that are or will be callable by the creditor because the debtor has violated a covenant in the debt agreement. The "other bank loan" matures in 6 months from the balance sheet date and is a current liability.
Salesback leases----look them up On December 31, 20X1, Dirk Corp. sold Smith Co. two airplanes and simultaneously leased them back. Additional information pertaining to the sale-leasebacks follows: Plane 1 Plane 2 -------- ---------- Sales price $600,000 $1,000,000 Carrying amount, December 31, 20X1 $100,000 $ 550,000 Remaining useful life, December 31, 20X1 10 years 35 years Lease term 8 years 3 years Annual lease payments $100,000 $ 200,000 In its December 31, 20X1, balance sheet, what amount should Dirk report as deferred gain on these transactions?
FASB ASC 840-40-55-49 provides that a sale/leaseback is to be treated as an operating or capital lease, depending on whether the capital lease criteria in FASB ASC 840-10 are met. Further: "Any profit or loss on the sale shall be deferred and amortized in proportion to the amortization of the leased asset if a capital lease..." Applying this: The lease term of Plane 1 is 80% (8/10) of its remaining useful life. Since this exceeds the 75% criterion, Plane 1 involves a capital lease. Plane 2 is not a capital lease because it is leased for only 8.6% (3/35) of its useful life. (And by observation the present value, for 3 years, of the $200,000 annual payment is not 90% of the $1,000,000 fair value.) The deferred gain reported for Plane 1 is $500,000 ($600,000 sales price less $100,000 carrying value). As the cited FASB ASC sections state, there are circumstances when operating lease gain also can be deferred. Since a discount rate is not specified in the problem, the needed present values cannot be ascertained, so $500,000 is the best answer choice.
if artwork is not capitalized then what?
If the collection is not capitalized, there is no amount included in equities or net assets. -However, the existence of the collection, including the donated painting, cannot be disregarded and a note describing the collection must be referenced on a line on the face of the financial statement.
If a premium on a bonds payable transaction is not amortized, what are the effects on interest expense and total stockholders' equity?
Interest expense: overstated; Total stockholders' equity: understated -------------------------------------------------- When a bond is issued for a premium, then the issuer receives more than the face amount of the debt upon issuance. Thus, the issuer will pay back (the face amount) less than the amount received. The additional receipts lower the interest expense over the course of the repayment, since the overall net repaid amount is less. As the bonds are repaid, the premium is amortized and lowers the interest expense taken over the term of the bond. If the amortization is not taken, then the interest expense is overstated, and the net income understated. (Thus, retained earnings and stockholder's equity are also too low.)
Costs to develop computer software for internal use in Brill's general management information system. Costs of market research activities. Which of these would be R+D?
NEITHER - internal use is excluded from R+D expense
A. A. Corporation has a loading dock that is situated next to a local highway. Recently, a new major highway was completed nearby, which bypasses the loading dock, and has thus made the installation of questionable future value to the corporation. The carrying amount of the loading dock is $400,000. The undiscounted present value of the future cash flows related to the loading dock is $410,000. The discounted present value of the future cash flows related to the loading dock is $380,000. The loading dock could be sold for $401,000 right now, less a broker's commission of $6,000. If A. A. Corporation applies IFRS, does it need to recognize an impairment loss?
The answer choice, "No, since the undiscounted cash flows are larger than the carrying value," is wrong, but would be the rule under U.S. GAAP today, IFRS does not use undiscounted future cash flows. The answer choice, "No, because the dock can be sold for its carrying value," is wrong because IFRS uses net realizable value, not gross sale proceeds, for impairment tests. An asset is tested under IFRS for impairment, when there is reason to suspect loss in value. The test is to determine if the carrying value is recoverable. The recoverable amount is the greater of value in use (present value of discounted future cash flows) or net realizable value (sales proceeds less cost to sell). Here, that is $401,000 less the broker commission of $6,000, or $395,000. Since this is greater than the value in use ($380,000), the recoverable amount is $395,000, which is $5,000 below the carrying value, and thus A. A. recognizes an impairment loss of $5,000.
The following information is relevant to the computation of Chan Co.'s earnings per share to be disclosed on Chan's income statement for the year ending December 31: Net income for the year is $600,000. $5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued four years ago at a discount that is being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9%, and the bonds were issued to yield 10%. Each $1,000 bond is convertible into 20 shares of Chan's common stock. Chan's corporate income tax rate is 25%. Chan has no preferred stock outstanding and no other convertible securities. What amount should be used as the numerator in the fraction used to compute Chan's diluted earnings per share assuming that the bonds are dilutive securities? A. $130,000 B. $247,500 Correct C. $952,500 D. $1,070,000
The numerator will be Net income + Interest (net of tax). Net income $600,000 Interest: Cash ($5,000,000 x .09) $450,000 Discount amortization 20,000 Tax ($470,000 x .25) (117,500) 352,500 -------- Numerator $952,500
