FAR 10

During Year 1, Haft Co. became involved in a tax dispute with the IRS. At December 31, Year 1, Haft's tax advisor believed that an unfavorable outcome was probable. A reasonable estimate of additional taxes was $200,000 but could be as much as $300,000. After the Year 1 financial statements were issued, Haft received and accepted an IRS settlement offer of $275,000. What amount of accrued liability should Haft have reported in its December 31, Year 1 balance sheet?

A contingent liability which is probable and estimable must be recognized. If all amounts within a range of values are equally likely, then the lowest amount in the range is the measurement amount. The final settlement was unknown prior to the issuance of the financial statements, so a contingent liability of $200,000 should have been recorded.

A company recorded a decommissioning liability and recognized the amount recorded as part of the cost of the related property. After the property was fully depreciated, the decommissioning liability was reviewed and adjusted. How should this change in the decommissioning liability be recognized under IFRS?

A decommissioning liability under IFRS is the same as an asset retirement obligation (ARO) under U.S. GAAP. Any change in the value of the liability after the property has been fully depreciated will be recognized in profit or loss.

Gold Co. purchased equipment from Marshall Co. on July 1. Gold paid Marshall $10,000 cash and signed a $100,000 noninterest-bearing note payable, due in three years. Gold recorded a $24,868 discount on notes payable related to this transaction. What is the acquired cost of the equipment on July 1?

A good approach to answering this question is through the use of a journal entry. We know the following from reading the question: Notes payable will be credited for $100,000, because that is the face value of the note. Cash will be credited for $10,000, because it was paid by Gold Co. to Marshall Co. Discount on notes payable will be debited, because the discount offsets the face value of the note. Because Gold Co. is purchasing equipment, the account for equipment will be debited.

A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position?

At the face amount minus a discount calculated at the imputed interest rate. The correct presentation of a note payable is to show the face amount, less a discount on the liability itself at the imputed interest rate.

Eagle Co. has cosigned the mortgage note on the home of its president, guaranteeing the indebtedness in the event that the president should default. Eagle considers the likelihood of default to be remote. How should the guarantee be treated in Eagle's financial statements?

Contingent liabilities which are remotely possible are neither accrued nor disclosed. However, related party transactions such as the one described must be disclosed.

On December 1, Year 1, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, Year 2. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its Year 1 income statement?

Face amount of loan $ 200,000 Nonrefundable loan origination fee (6,000) Net amount loaned 194,000 Effective interest rate (yield) 12.4% 24,056 Outstanding one month (12/1/Y1 - 12/31/Y1) × 1/12 Interest income for Year 1 $ 2,005

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, what amount should World report as interest expense?

In this question, World borrowed the $1,000,000 on September 30. That means 3 months of interest had accrued in the current year. The interest is $1,000,000 x .09 x 3/12 = $22,500. The payment of $264,200 will reduce the principal for the next quarterly interest payment due on March 31.

A company issued a short-term note payable with a stated 12% rate of interest to a bank. The bank charged a 0.5% loan origination fee and remitted the balance to the company. The effective interest rate paid by the company in this transaction would be:

More than 12.5%. Effective interest rate paid of more than 12.5%. The effective interest rate paid by the company would include all costs charged by the bank such as the 0.5% loan origination fee. Since the loan origination fee was taken out up front, the company's effective interest rate is more than 12.5% (12% interest rate + 0.5% loan origination fee) due to the loss to the company of the time value of the money involved. Illustration: 12.5%/99.5% = 12.563% The 99.5 is what you received minus the loan orig fees

After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by his branch. For year 4, income for Cone's branch was $160,000 before income taxes and Cone's bonus. Cone's bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone's bonus for year 4?

A $12,000 bonus will be paid to the branch manager. The bonus is calculated as follows: Bonus = ($160,000 − $100,000 − Bonus) × 25% Bonus = ($60,000 − Bonus) × 25% Bonus = $15,000 − 25% Bonus 125% Bonus = $15,000 Bonus = $12,000

A change from the cost approach to the market approach of measuring fair value is considered to be what type of accounting change?

A change in the valuation technique used to measure fair value is a change in accounting estimate.

Which of the following is not an example of a variable interest in an entity? a. An option to acquire a leased asset at fair value at the end of the lease term. b. An explicit guarantee of the entity's debt. c. A forward contract to sell assets owned by the entity. d. Accounts payable.

Most liabilities, excluding short-term trade payables (accounts payable), represent variable interests. Choice "a" is incorrect. An option to acquire a leased asset at fair value at the end of the lease term represents a variable interest. Choice "c" is incorrect. A forward contract to sell assets owned by the entity is a variable interest. Choice "b" is incorrect. An explicit guarantee of the entity's debt is a variable interest.

House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, Year 1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, Year 1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, Year 2. In its December 31, Year 1, balance sheet, what amount should House report as note payable-contest winner, net of current portion?

Noninterest bearing notes payable are reported at the present value of future cash flows. The present value of the noncurrent future cash flows totaling $950,000 equals $418,250 (creating a discount on notes payable of $531,750). The present value of the current portion ($50,000 due January 2, Year 2) of the liability is $50,000.

On December 31, Roth Co. issued a $10,000 face value note payable to Wake Co. in exchange for services rendered to Roth. The note, made at usual trade terms, is due in nine months and bears interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%. The compound interest factor of $1 due in nine months at 8% is .944. At what amount should the note payable be reported in Roth's December 31 balance sheet?

Normally interest is imputed when no (or an unreasonably low) rate is stated. An exception exists for receivables and payables arising from transactions with customers or suppliers in the normal course of business when the trade terms do not exceed one year. The note is recorded at $10,000.

When service contracts are sold, the entire proceeds are reported as deferred revenue.

Revenue is recognized, and deferral reduced as the service is performed.

On February 12, VIP Publishing, Inc. purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 during the year. In its year-end income statement, what amount should VIP report as royalty expense?

Royalty expense is the larger of minimum royalties of $60,000, or 10% of $800,000 sales, $80,000.

On January 2, Year 1, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 non-interest bearing note due January 2, Year 4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, Year 1, was 10%. The present value of 1 at 10% for three periods is 0.75. In Emme's Year 1 income statement, what amount should be reported as interest income?

Rule: A non-interest bearing note should be recorded at its present value calculated using the prevailing market interest rate. The market interest rate is then used to calculate interest on the note. Face amount of non-interest bearing note $ 600,000 Present value factor at 10% for 3 periods 0.75 Carrying amount at 1/2/Year 1 450,000 Interest rate 10% Interest income for Year 1 $ 45,000

Dana Co.'s officers' compensation expense account had a balance of $224,000 at December 31, before any appropriate year-end adjustment relating to the following: No salary accrual was made for December 30-31. Salaries for the two-day period totaled $3,500. Year-end officers' bonuses of $62,500 were paid on January 31. In its December 31 income statement, what amount should Dana report as officers' compensation expense?

Salaries should be accrued at year-end. Officers' bonuses should also be accrued at year-end, applying the matching principle. $224,000 + $62,500 + $3,500 = $290,000.

In December, Mill Co. began including one coupon in each package of candy that it sells and offering a toy in exchange for 50 cents and five coupons. The toys cost Mill 80 cents each. Eventually 60% of the coupons will be redeemed. During December, Mill sold 110,000 packages of candy and no coupons were redeemed. In its December 31 balance sheet, what amount should Mill report as estimated liability for coupons?

Sales of candy packages 110,000 Redemption rate × 60% Coupons expected to be redeemed 66,000 Less redemptions (0) Estimate of unredeemed coupons 12/31 66,000 Divide by 5 coupons per toy ÷ 5 Toys to be redeemed 13,200 Net cost of toy (cost 80¢ - 50¢ received) $ 0.30 Estimated liability for coupons $ 3,960

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 income approach is

an accepted method of fair value measurement in which future cash flows or earnings are discounted to determine fair value.

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.

Rule: Loan origination fees shall be deferred and recognized over the life of the loan

as an adjustment of interest income (similar to the treatment of bond discount amortization).

Under the liquidation basis of accounting

assets should be measured and presented at the amount of expected cash proceeds from liquidation. Because fair value may approximate the amount of cash proceeds expected, certain assets on the balance sheet which are carried at historical, net, or present value amounts may increase in value.

Fair value includes transportation costs

but not transaction costs.

Which of the following is reported as interest expense? a. Interest incurred to finance construction of machinery for own use. b. Pension cost interest. c. Postretirement healthcare benefits interest. d. Imputed interest on non-interest bearing note.

mputed interest on non-interest bearing note is reported as interest expense. Choice "b" is incorrect. Pension cost interest is a component of pension plan expense. Choice "c" is incorrect. Post retirement healthcare benefits interest is part of post retirement benefit expense. Choice "a" is incorrect. Interest incurred to finance construction of machinery for own use is capitalized as part of the cost of the machinery.

Fair value is a market-specific measure

not an entity-specific measure.

Fair value is an exit price (the price to sell an asset or transfer a liability),

not an entrance price.

When incorporating a partnership, assets and liabilities are recorded at their fair values

not the book values used by the partnership Common stock is recorded at par value with the excess going to additional paid-in capital

Level 1 inputs are

quoted prices in active markets for identical assets and liabilities on the measurement dates when no adjustments are required.

Level I measurements are

quoted prices in active markets for identical assets or liabilities only

A fair value measurement based on management assumptions only is a Level III measurement and is

acceptable when there are no Level I or Level II inputs or when undue cost or effort is required to obtain Level I or Level II inputs.

On August 15, Benet Co. sold goods for which it received a note bearing the market rate of interest on that date. The four-month note was dated July 15. Note principal, together with all interest, is due November 15. When the note was recorded on August 15, which of the following accounts increased?

"Interest receivable" increased on the date of sale of the goods, August 15. Example: Assume $1,000 note bearing interest at 12%. At 8/15 (one month after the note date of 7/15) the JE would be: Note receivable $ 1,000 Interest receivable (1,000 × 12% × 1/12) 10 Revenue ($ 1,010)

On November 10, Year 1, a Garry Corp. truck was in an accident with an auto driven by Dacey. On January 10, Year 2, Garry received notice of a lawsuit seeking $800,000 in damages for personal injuries suffered by Dacey. Garry Corp.'s counsel believes it is reasonably possible that Dacey will be awarded an estimated amount in the range between $250,000 and $500,000, and that $400,000 is a better estimate of potential liability than any other amount. Garry's accounting year ends on December 31, and the Year 1 financial statements were issued on March 6, Year 2. What amount of loss should Garry accrue at December 31, Year 1?

$0. Rule: Only footnote disclosure is required for a "reasonably possible" (not "probable") loss.

On July 1, Lee Co. sold goods in exchange for a $200,000, 8-month, noninterest-bearing note receivable. At the time of the sale, the note's market rate of interest was 12%. What amount did Lee receive when it discounted the note at 10% on September 1?

$190,000 cash received when the note was discounted at the bank on September 1. Face amount of note (noninterest-bearing) $ 200,000 Bank discount: 10% × 6/12 = 5% (10,000) Proceeds from bank $ 190,000

On November 1, Year 1, Davis Co. discounted with recourse at 10% a one-year, noninterest bearing, $20,500 note receivable maturing on January 31, Year 2. What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, Year 1?

$20,500 contingent liability must be disclosed in its financial statements at 12-31-Year 1. The note is not discounted for footnote liability purposes because Davis is contingently liable for the full amount because it was sold with recourse.

For the week ended June 30, Free Co. paid gross wages of $20,000, from which federal income taxes of $2,500 and FICA were withheld. All wages paid were subject to FICA tax rates of 7% each for employer and employee. Free makes all payroll-related disbursements from a special payroll checking account. What amount should Free have deposited in the payroll checking account to cover net payroll and related payroll taxes for the week ended June 30?

$21,400 is the net payroll and related employer FICA payroll taxes. The amount is calculated as follows: Gross wages $ 20,000 Employer FICA tax Wages $ 20,000 FICA rate × 7% Employer 1,400 Net payroll & employer FICA $ 21,400

On January 2, Smith purchased the net assets of Jones' Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy's cash-basis financial statements for the year ended December 31, Spiffy reported revenues in excess of expenses of $60,000. Smith's drawings during the year were $20,000. In Spiffy's financial statements, what amount should be reported as Capital-Smith?

$390,000 Capital-Smith at December 31. Balance, January 2 $ 350,000 Revenues in excess of expenses 60,000 Drawings (20,000) Balance, December 31 $ 390,000

Ace Corp. entered into a troubled debt restructuring agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in exchange for a note with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain in its income statement?

$50,000 is reported as a gain related to a troubled debt restructuring. The calculation is as follows: Cancellation of debt $ 150,000 Less: FMV asset exchanged (100,000) Gain on restructuring $ 50,000 FMV asset exchanged 100,000 NBV asset exchanged (75,000) Gain on disposal/exchange $ 25,000

In Year 1, May Corp. acquired land by paying $75,000 down and signing a note with a maturity value of $1,000,000. On the note's due date, December 31, Year 6, May owed $40,000 of accrued interest and $1,000,000 principal on the note. May was in financial difficulty and was unable to make any payments. This situation was unusual and infrequent for May Corp., and is considered material. May and the bank agreed to amend the note as follows: The $40,000 of interest due on December 31, Year 6, was forgiven. The principal of the note was reduced from $1,000,000 to $950,000 and the maturity date extended 1 year to December 31, Year 7. May would be required to make one interest payment totaling $30,000 on December 31, Year 7. As a result of the troubled debt restructuring, May should report a gain, before taxes, in its Year 6 income statement of:

$60,000 gain, before taxes.* Face value of note payable $ 1,000,000 Accrued interest at date of restructuring 40,000 1,040,000 Fair value of restructured debt: principal after reduction $ 950,000 Interest payment required 30,000 (980,000) Gain on debt restructuring $ 60,000

Nu Corp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machine's original cost was $140,000. The note's face amount was $110,000. On the date of the agreement: The note's carrying amount was $105,000, and its present value was $96,000. The machine's carrying amount was $109,000, and its fair value was $96,000. What amount of net gains (losses) should Nu recognize in its income statement?

$9,000 ordinary gain on the troubled-debt restructuring, and $(13,000) ordinary loss on disposal of machine, netting to an ordinary loss of $4,000.

When a loan receivable is impaired but foreclosure is not probable, which of the following may the creditor use to measure the impairment? I. The loan's observable market price. II. The fair value of the collateral if the loan is collateral dependent.

A loan is impaired when it is probable that a creditor will be unable to collect all amounts due (including both principal and interest) according to the contractual terms of the loan agreement. When a loan is impaired and foreclosure is not probable, the creditor should measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate. However, as a practical expedient, the creditor may measure impairment based on (1) a loan's observable market price, or (2) the fair value of the collateral if the loan is collateral dependent. If foreclosure of a loan is probable, impairment must be measured based on the fair value of the collateral.

At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?

Accretion expense is the increase in the ARO liability due to the passage of time. The credit adjusted interest rate is used to calculate the ARO, as follows: Beginning ARO × Risk-adjusted rate = $100,000 × 10% = $10,000

Under state law, Acme may pay 3% of eligible gross wages or it may reimburse the state directly for actual unemployment claims. Acme believes that actual unemployment claims will be 2% of eligible gross wages and has chosen to reimburse the state. Eligible gross wages are defined as the first $10,000 of gross wages paid to each employee. Acme had five employees each of whom earned $20,000 during the current year. In its December 31, balance sheet, what amount should Acme report as accrued liability for unemployment claims?

Acme elects to reimburse for actual unemployment claims which can be estimated. The estimate is 2% of the eligible wages of 5 persons x $10,000 eligible wages per person. Thus, the accrued liability for unemployment claims = 2% x $50,000 = $1,000.

The condensed balance sheet of Adams & Gray, a partnership, at December 31, Year 1, follows: Current assets $ 250,000 Equipment (net) 30,000 Total assets $ 280,000 Liabilities 20,000 Adams, capital 160,000 Gray, capital 100,000 Total liabilities and capital $ 280,000 On December 31, Year 1, the fair values of the assets and liabilities were appraised at $240,000 and $20,000, respectively, by an independent appraiser. On January 2, Year 2, the partnership was incorporated and 1,000 shares of $5 par value common stock were issued. Immediately after the incorporation, what amount should the new corporation report as additional paid-in capital?

Additional paid-in capital would be credited for the difference between the fair value of the net assets ($240,000 assets - $20,000 liabilities) and the par value of the common stock issued (1,000 shares x $5 par value), or $220,000 - $5,000 = $215,000. The journal entry would be: Debit (Dr) Credit (Cr) Assets (fair value) $ 240,000 Liabilities (fair value) $ (20,000) Common stock (1,000 x $5) (5,000) Additional paid-in capital (215,000)

Lime Co.'s payroll for the month ended January 31 is summarized as follows: Total wages $ 10,000 Federal income tax withheld 1,200 All wages paid were subject to FICA. FICA tax rates were 7% each for employee and employer. Lime remits payroll taxes on the 15th of the following month. In its financial statements for the month ended January 31, what amounts should Lime report as total payroll tax liability and as payroll tax expense?

Amounts withheld from employees are payable to the government and thus are liabilities. Federal income tax withheld $ 1,200 Employee FICA, 7% x $10,000 700 Employer matching FICA 700 Total payroll tax liability $ 2,600 Of this total payroll tax liability, only the employer matching FICA is a payroll tax expense for the employer.

Finch Co. reported a total asset retirement obligation of $257,000 in last year's financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year's balance sheet?

An asset retirement obligation (ARO) is on the books initially as both an asset and a liability at present values. Each period, depreciation expense is booked to decrease the asset and accretion expense is booked to increase the liability such that when the ARO must be satisfied, there is no asset on the books anymore and the liability is represented at current costs. The initial obligation of $257,000 is the starting point, and the following transactions are then recorded to derive the current year ARO: Subtract $87,000 for a settlement associated with the previous ARO, which will reduce the liability. The accretion expense of $26,000 is used to increase the ARO liability. The $68,000 present value of the new ARO is applied to the ARO liability as well. ARO are recorded at present value. Ending ARO = Beginning ARO + PV of new ARO + Accretion expense − ARO settled during the period Ending APO = $257,000 + $68,000 + $26,000 − $87,000 = $264,000

On January 1 ten years ago, Andrew Co. created a subsidiary for the purpose of buying an oil tanker depot at a cost of $1,500,000. Andrew expected to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove underground storage tanks. It was estimated that it would cost $150,000 to dismantle the depot and remove the tanks at the end of the depot's useful life. However, the actual cost to demolish and dismantle the depot and remove the tanks in the tenth year is $155,000. What amount of expense related to the demolition of the depot and the removal of the tanks should Andrew recognize in its financial statements in year 10?

An asset retirement obligation (ARO) must be recognized at the time the oil tanker is purchased to reflect Andrew's legal obligation to dismantle the depot and remove the underground storage tanks. The ARO would be recorded at the present value of the expected obligation by debiting the oil tanker depot asset and crediting asset retirement obligation liability. Over the 10 year life of the oil tanker depot, accretion expense would be recorded so that at the end of the 10 years, the ARO liability is equal to the undiscounted total expected cost of $150,000. When the actual demolition and removal costs are incurred in year 10, the following JE would be recorded: ARO liability $ 150,000 Demolition expense (5,000) Cash/AP ($ 155,000)

Which of the following circumstances would indicate that an entity has an insufficient level of equity investment at risk? a. The fair value of the equity investment at risk is greater than expected losses. b. The facts and circumstances indicate that there is sufficient equity at risk. c. The entity's equity investment at risk is less than the equity investment at risk of similar non-VIE entities. d. The entity can finance its own activities.

An entity has insufficient equity investment at risk if the entity's equity investment at risk is less than the equity investment at risk of similar non-VIE entities. An entity has sufficient equity investment at risk when the entity's equity investment at risk is at least as much as the equity investment of other non-VIE entities that hold similar assets of similar quality. Choice "d" is incorrect. An entity has sufficient equity investment at risk if the entity can finance its own activities. Choice "b" is incorrect. An entity has sufficient equity investment at risk if the facts and circumstances indicate that there is sufficient equity at risk. Choice "a" is incorrect. An entity has sufficient equity investment at risk if the fair value of the equity investment at risk is greater than expected losses.

On its financial statements, a company following the liquidation basis of accounting will show:

Anticipated income during the liquidation, along with costs associated with asset sales. The liquidation basis of accounting requires that a company accrue and present (non-discounted) costs it expects to incur (both during and at the end of the liquidation process) and income it expects to earn during the liquidation process.

During Year 1, Smith Co. filed suit against West, Inc. seeking damages for patent infringement. At December 31, Year 1, Smith's legal counsel believed that it was probable that Smith would be successful against West for an estimated amount in the range of $75,000 to $150,000, with all amounts in the range considered equally likely. In March Year 2, Smith was awarded $100,000 and received full payment thereof. In its Year 1 financial statements, issued in February Year 2, how should this award be reported?

As a disclosure of a contingent gain of an undetermined amount in the range of $75,000 to $150,000. Gain contingencies should be disclosed in the notes unless the likelihood of the gain being realized is remote. The full range of possible settlements should be disclosed. The actual settlement (subsequent event) did not occur until after the financial statements were issued.

On January 17, Year 2, an explosion occurred at a Sims Co. plant causing extensive property damage to area buildings. Although no claims had yet been asserted against Sims by March 10, Year 2, Sims' management and counsel concluded that it is likely that claims will be asserted and that it is reasonably possible Sims will be responsible for damages. Sims' management believed that $1,250,000 would be a reasonable estimate of its liability. Sims' $5,000,000 comprehensive public liability policy has a $250,000 deductible clause. In Sims' December 31, Year 1, financial statements, which were issued on March 25, Year 2, how should this item be reported?

As a footnote disclosure indicating the possible loss of $250,000. This is a nonrecognized subsequent event as it occurred after the December 31, Year 1 balance sheet date. Because there is a reasonably possible contingent loss of $250,000, footnote disclosure is required.

On December 31, Key Co. received two $10,000 non-interest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is .944. The present value of $1 due in two years at 8% is .857. At what amounts should these two notes receivable be reported in Key's December 31 balance sheet?

Because the term of the Alpha note does not exceed one year, it is recorded at its face amount of $10,000, while the two-year Omega note must be reported at the present value of the obligation calculated using the market interest rate of 8%: $10,000 × 0.857 = $8,570

In its Year 2 financial statements, Cris Co. reported interest expense of $85,000 in its income statement and cash paid for interest of $68,000 in its cash flow statement. There was no prepaid interest or interest capitalization either at the beginning or end of Year 2. Accrued interest at December 31, Year 1, was $15,000. What amount should Cris report as accrued interest payable in its December 31, Year 2 balance sheet?

Beg bal 12/31/Year 1 $ 15,000 Add: interest expense 85,000 Subtotal 100,000 Less: interest paid (68,000) Ending balance 12/31/Year 2 $ 32,000

Allen retired from the partnership of Allen, Beck and Chale. Allen's cash settlement from the partnership was based on new goodwill determined at the date of retirement plus the carrying amount of the other net assets. As a consequence of the settlement, the capital accounts of Beck and Chale were decreased. In accounting for Allen's withdrawal, the partnership could have used the: Bonus method Goodwill method

Bonus method - Yes Goodwill method - No In accounting for partnership withdrawal, dissolution or admission: The bonus method increases (or decreases) the individual partners accounts without changing total net assets of the partnership. Since the capital accounts of Beck and Chale decreased, goodwill was not recorded as an asset, but instead the bonus paid to Allen was charged against the capital accounts of the remaining partners. The goodwill method increases the individual partners accounts and also changes total net assets of the partnership.

Ace Co. settled litigation on February 1, Year 2 for an event that occurred during Year 1. An estimated liability was determined as of December 31, Year 1. This estimate was significantly less than the final settlement. The transaction is considered to be material. The financial statements for year-end Year 1 have not been issued. How should the settlement be reported in Ace's year-end Year 1 financial statements?

Both a disclosure and an accrual. As of February 1, Year 2, Ace Co.'s financial statements have not been issued and the actual amount of the final settlement is known. That amount should be included in Ace Co.'s December 31, Year 1 financial statements and disclosed as a "subsequent event." This is a recognized subsequent event because it relates to litigation that originated in Year 1.

Under IFRS, a sponsoring company must consolidate an SPE if it controls the SPE.

Control exists when the sponsoring company is benefitted by the SPE's activities, has decision making powers that allow it to benefit from the SPE, absorbs the risks and rewards of the SPE, and has a residual interest in the SPE.

The discount resulting from the determination of a note payable's present value should be reported on the balance sheet as a (an):

Direct reduction from the face amount of the note. Although the discount is a separate account from the note payable account, the note payable is reported on the balance sheet at the net of the note payable face value less the unamortized discount.

On March 21, year 2, a company with a calendar year end issued its year 1 financial statements. On February 28, year 2, the company's only manufacturing plant was severely damaged by a storm and had to be shut down. Total property losses were $10 million and determined to be material. The amount of business disruption losses is unknown. How should the impact of the storm be reflected in the company's year 1 financial statements?

Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements. Subsequent events that provide information about conditions that occurred after the balance sheet date and did not exist at the balance sheet date are nonrecognized subsequent events. This type of subsequent event is not recognized in the financial statements; but, is disclosed in the notes to the financial statements.

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable?

Each payment of $264,200 will consist of both interest and principal, with only principal reducing the liability owed. The interest portion ($22,500) of the initial payment is equal to $1,000,000 multiplied by the interest rate of 9%, and divided by 4 because the payment is quarterly. Payment of $264,200 − Interest of $22,500 = Principal of $241,700. The principal payment of $241,700 will reduce the liability from $1,000,000 to $758,300.

For $50 a month, Rawl Co. visits its customers' premises and performs insect control services. If customers experience problems between regularly scheduled visits, Rawl makes service calls at no additional charge. Instead of paying monthly, customers may pay an annual fee of $540 in advance. For a customer who pays the annual fee in advance, Rawl should recognize the related revenue:

Evenly over the contract year as the services are performed. Revenue is recognized as it is earned (when services are performed) and realized (cash collected) or realizable (accounts receivable).

Anchor Co. is experiencing financial difficulties. Anchor negotiated a settlement of $100,000 in debt owed to Bowden Inc. in exchange for Anchor's gross receivables of $100,000. The receivables have an allowance for uncollectible accounts of $25,000. The impact of this transaction on Anchor's net income is a $25,000:

Gain on restructuring of payables. Anchor has effectively paid off a $100,000 liability with an asset with a fair value of $75,000 ($100,000 gross receivable - $25,000 allowance for uncollectible accounts). The difference between the carrying amount of the payable ($100,000) and the fair value of the asset transferred ($75,000) is equal to a gain of $25,000 on the restructuring.

Delect Co. provides repair services for the AZ195 TV set. Customers prepay the fee on the standard one-year service contract. The Year 1 and Year 2 contracts were identical, and the number of contracts outstanding was substantially the same at the end of each year. However, Delect's December 31, Year 2, deferred revenues' balance on unperformed service contracts was significantly less than the balance at December 31, Year 1. Which of the following situations might account for this reduction in the deferred revenue balance?

If Year 2 contracts were signed earlier in the year than before, more warranty work would have been performed by year-end, thus reducing the deferred revenue balance more than in prior years.

Jole Co. lent $10,000 to a major supplier in exchange for a non interest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years. The market rate for a note of this type is 10%. On issuing the note, Jole should record: Discount on note receivable Deferred charge

In this transaction, $10,000 is exchanged for a non-interest bearing note receivable and a commitment to purchase merchandise at a 10% discount. In order to correctly account for the transaction, interest must be imputed on the non-interest bearing note, which will result in the recognition of a discount on the note receivable, and the purchase commitment must be recognized, which will result in the recognition of a deferred charge. It is important to note that no calculations or journal entries are necessary to answer this question. Despite the fact that the question does present numeric facts, it is a conceptual question. However, to clarify the transaction, the following journal entry is presented for illustrative purposes, assuming that the face value of the note receivable is $10,000, the present value of the note receivable is $7,500 (calculated using a PV factor of 0.7513 based on 3 periods at 10%) and the fair value of the purchase commitment is $2,500. Notes receivable $ 10,000 Deferred charge 2,500 Cash ($ 10,000) Discount on note receivablet (2,500) The note receivable will be reported on the balance sheet at its present value of $7,500 ($10,000 NR - 2,500 discount). The discount on notes receivable will be amortized to interest revenue over the next three years using the effective interest method. The deferred charge will reduce the amount paid for future purchases. Merchandise Inventory $ 25,000 (fair value) Cash ($ 22,500) Deferred charge (2,500)

Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?

Income The income approach converts future amounts, including cash flows or earnings to a single discounted amount to measure fair value.

Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability's fair value

Interest rates that are observable at commonly quoted intervals Quoted prices for identical assets and liabilities in markets that are not active. Quoted prices for similar assets and liabilities in markets that are active.

Hayes and Jenkins formed a partnership, each contributing assets to the business. Hayes contributed inventory with a current market value in excess of its carrying amount. Jenkins contributed real estate with a carrying amount in excess of its current market value. At what amount should the partnership record each of the following assets? Inventory Real Estate

Inventory - Market Value Real Estate - Market Value Rule: Upon the formation of a partnership, tangible assets (inventory and real estate) would be recorded at fair market value at the date of the investment.

On October 1, Year 1, Gold Co. borrowed $900,000 to be repaid in three equal, annual installments. The note payable bears interest at 5% annually. Gold paid the first installment of $300,000 plus interest on September 30, Year 2. What amount should Gold report as a current liability on December 31, Year 2?

On December 31, Year 2, Gold Co. should report a current liability related to the principal of the note which will be paid within the next year and the accrued interest at December 31st. Current liabilities associated with the note include the following: $300,000 note payable plus $7,500 of interest payable = $307,500. The interest is calculated as follows: Remaining note payable at December 31, Year 2 of $600,000 x 5% = $30,000 (this represents interest for 12 months). When $30,000 of interest is divided by 12 months, we get $2,500 per month. Interest is accrued for the months of October, November, and December. 3 x $2,500 = $7,500.

Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, the effective date of the policy. At March 31, Roro's unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro's financial statements for the three months ended March 31?

Prepaid Insurance - 7,000 Insurance Expense - 500 The prepaid insurance reflected in the unadjusted trial balance would be fully expensed and one month (March 1 through March 31) of the renewed policy cost would be expensed. Insurance expense equals $500 ($300 plus $7,200/36 months). Prepaid insurance equals $7,000 ($7,200 x 35/36).

An analysis of Thrift Corp.'s unadjusted prepaid expense account at December 31, Year 2, revealed the following: An opening balance of $1,500 for Thrift's comprehensive insurance policy. Thrift had paid an annual premium of $3,000 on July 1, Year 1. A $3,200 annual insurance premium payment made July 1, Year 2. A $2,000 advance rental payment for a warehouse Thrift leased for one year beginning January 1, Year 3. In its December 31, Year 2 balance sheet, what amount should Thrift report as prepaid expenses?

Prepayments as of December 31, Year 2 include: Insurance, $3,200 x 1/2 $ 1,600 Rental prepayment 2,000 $ 3,600

Level II inputs are

Quoted prices in active markets for similar assets or liabilities

When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill's interest exceeded Mill's capital balance. Under the bonus method, the excess:

Reduced the capital balances of Yale and Lear. Under the bonus method, any premium paid to the retiring partner is allocated to the remaining partners' accounts, based on the profit and loss ratios of the remaining partners.

A not-for-profit entity which determines that liquidation is imminent will not be exempt from applying the liquidation basis.

The Accounting Standards Update which covers the liquidation basis of accounting is applicable to public and nonpublic (private and not-for-profit) entities.

Barr Co. has total debt of $420,000 and stockholders' equity of $700,000. Barr is seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in common stock, and is negotiating with a bank to borrow additional funds. The bank is requiring a debt-to-equity ratio of .75. What is the maximum additional amount Barr will be able to borrow?

Total stockholders' equity will equal $1,000,000 after the issuance of the additional common stock [$700,000 + $300,000]. If the debt/equity ratio is restricted to .75 then debt could be as much as $750,000 [debt/$1,000,000 = .75]. Maximum additional borrowing would be $330,000 [$750,000 possible debt - $420,000 debt already recorded].

When an asset retirement obligation exists, the entity should record an asset retirement cost (ARC) which increases the carrying value of the long-lived asset as well as an asset retirement obligation (ARO), which is the liability recorded on the balance sheet related to the retirement.

The amount recorded to both the asset and liability will be equal to the fair value of the asset retirement obligation (which is determined by discounting the future cash flows required). The ARC will be depreciated over the useful life of the related asset while the ARO will be "accreted" based on the relevant accretion rate.

Zach Corp. pays commissions to its sales staff at the rate of 3% of net sales. Sales staff are not paid salaries but are given monthly advances of $15,000. Advances are charged to commission expense, and reconciliations against commissions are prepared quarterly. Net sales for the year ended March 31 were $15,000,000. The unadjusted balance in the commissions expense account on March 31 was $400,000. March advances were paid on April 3. In its income statement for the year ended March 31 what amount should Zach report as commission expense?

The commission expense is 3% of net sales of $15,000,000, or $450,000. An adjustment would be required on March 31 to bring the expense to this amount.

On September 1, Year 1, Brak Co. borrowed on a $1,350,000 note payable from Federal Bank. The note bears interest at 12% and is payable in three equal annual principal payments of $450,000. On this date, the bank's prime rate was 11%. The first annual payment for interest and principal was made on September 1, Year 2. At December 31, Year 2, what amount should Brak report as accrued interest payable?

The interest rate in the note, 12%, represents a fair and adequate compensation and should be used. Accrued interest payable on December 31, Year 2 is computed as follows for 4 months:

If there is no principal market, then the price in the most advantageous market is the fair value of the stock

The most advantageous market is the market with the best price after considering transaction costs.

Rule: Only footnote disclosure is required for a "reasonably possible" loss.

The nature of the contingency should be disclosed as well as the nature of the possible loss or range of loss.

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest. What is an installment note's receivable balance six months after the sale?

The present value of the remaining monthly payments discounted at 12% The present value of the remaining monthly payments discounted at 12% equals the installment note receivable balance at any time.

The fair value for an asset or liability is measured as:

The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

Under the VIE model, the primary beneficiary is not required to have greater than 50% ownership of the VIE.

The primary beneficiary is the entity that has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and absorbs the expected VIE losses and/or receives the expected VIE residual returns.

For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring?

The total future cash payments. Carrying amount - Total future cash payments = Gain

On July 1, Year 1, Ran County issued realty tax assessments for its fiscal year ended June 30, Year 2. On September 1, Year 1, Day Co. purchased a warehouse in Ran County. The purchase price was reduced by a credit for accrued realty taxes. Day did not record the entire year's real estate tax obligation, but instead records tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes payable, as appropriate. On November 1, Year 1, Day paid the first of two equal installments of $12,000 for realty taxes. What amount of this payment should Day record as a debit to real estate taxes payable?

The total real estate tax assessment is $24,000 (2 payments times $12,000 each). The monthly accrual equals $2,000. At the purchase date, September 1, $4,000 real estate taxes payable would be accrued (2 months since July 1) since the buyer is assuming the real estate tax liability. As of November 1, an additional $4,000 is accrued (2 months since September 1). When the payment is made, real estate taxes payable will be debited for $8,000 (4 months of accrual) and real estate tax expense (or prepaid real estate taxes) will be debited for $4,000.

artners' contributions to the partnership are valued at the fair market value at the date of contribution of the noncash property contributed.

Thus, the partner's capital account would be credited for the fair market value of the property at the date of contribution.

Rule: In a troubled debt restructuring, if the debtor achieves full settlement of the debt by transferring assets having a fair market value that is less than the amount of the debt,

a gain is recognized for the difference between the carrying value of the payable at the date of transfer and the fair market value of the asset at the date of the transfer.

As of December 15, Year 3, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for Year 3 of $100,000 have not yet been declared. The board of directors plan to declare cash dividends on its preferred and common stock on January 16, Year 4. Aviator paid an annual bonus to its CEO based on the company's annual profits. The bonus for Year 3 was $50,000, and it will be paid on February 10, Year 4. What amount should Aviator report as current liabilities on its balance sheet at December 31, Year 3?

Under the matching principle, expenses are recognized when an entity's economic benefits are used up. In the case of the CEO bonus of $50,000, that was clearly earned in Year 3 and should be accrued for accordingly. The dividends were not declared in Year 3 and as such should not be accrued for. Upon declaration, dividends become a debt of the corporation (credit to dividends payable) and are debited to retained earnings.

In June, Northan Retailers sold refundable merchandise coupons. Northan received $10 for each coupon redeemable from July 1 to December 31 for merchandise with a retail price of $11. At June 30, how should Northan report these coupon transactions?

Unearned revenue at the coupon sales price (the cash received amount). It is unearned because the revenue is earned when the coupons are redeemed and the cost of the merchandise is matched with the recognition of revenue. The transaction is recorded at the cash received amount (coupon sales price), because it is more objective than the retail price of the merchandise for which it can be exchanged.

Oak Co. offers a three-year warranty on its products. Oak previously estimated warranty costs to be 2% of sales. Due to a technological advance in production at the beginning of Year 3, Oak now believes 1% of sales to be a better estimate of warranty costs. Warranty costs of $80,000 and $96,000 were reported in Year 1 and Year 2, respectively. Sales for Year 3 were $5,000,000. What amount should be disclosed in Oak's Year 3 financial statements as warranty expense?

Warranty expense is calculated as a percentage of sales. Any change in the estimate of the percentage is recorded prospectively, from the current year forward. Thus, Year 3 warranty expense equals $50,000 [1% x $5,000,000].

The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob's liability to Mene: Carrying amount of liability liquidated $ 150,000 Carrying amount of real estate transferred 100,000 Fair value of real estate transferred 90,000 What amount should Knob report as a pretax gain (loss) on restructuring of payables under U.S. GAAP?

When assets are transferred in a troubled debt restructuring, the asset (real estate) is adjusted to fair value and an ordinary gain or loss recorded. Then, the gain or loss on restructuring is recorded as the difference between the debt and fair value of asset transferred. Liability $ 150,000 Fair value of real estate (90,000) Gain $ 60,000

Dunne Co. sells equipment service contracts that cover a two-year period. The sales price of each contract is $600. Dunne's past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout the current year. In its December 31, balance sheet, what amount should Dunne report as deferred service contract revenue?

When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Because repairs are made evenly (July 1 is average date), only ½ of the 40% of repairs will be in the current year. Current year deferral ($600 × 1,000) $ 600,000 Earned in current year (600,000 × 40% × 1/2) (120,000) Deferral at year-end $ 480,000

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. At the date of sale, the warranty costs are probable and estimable and must be recognized.

Under the liquidation basis of accounting, all of the following disclosures will be shown in the presentation of the financial statements except: a. Types of costs and income accrued. b. An estimate of how long the liquidation process is expected to last. c. Assumptions used to value the assets and liabilities on the Statement of Equity in Liquidation. d. The overall plan for how the company will be liquidated.

While significant assumptions used to value assets and liabilities do need to be disclosed, it will be for the "Statement of Net Assets in Liquidation" rather than the "Statement of Equity in Liquidation."

Rule: A troubled debt restructuring exists when

a creditor grants a concession to a debtor that it would not otherwise consider for economic or legal reasons (bankruptcy chapter 11 reorganization). Gain is recognized by debtor if the face amount of the payable exceeds the FMV of assets and/or equity transferred.

When assets are transferred in a troubled debt restructuring, the asset (real estate) is adjusted to

fair value and an ordinary gain or loss is recorded.

Unlike GAAP, IFRS does not provide guidance on

how (or when) to apply the liquidation basis.

Interim reports, as well as annual reports,

should reflect the liquidation basis.

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.

The price in the principal market for an asset or liability will be

the fair value measurement.

The level in the fair value hierarchy of a fair value measurement is determined by

the level of the lowest level significant input.

Rule: Assets contributed by partners to a partnership are

valued at fair market value of the assets, net of any related liabilities.