FAR 2 questions
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$72,000 unearned franchise fee liability at 12/31/Year 1. Nonrefundable down payment represents a fair measure of the services already performed Present value of 3 annual payments require substantial future services Full JE would be: Cash 60,000 Note receivable 90,000 Revenue 60,000 Discount on note receivable 18,000 Unearned franchise revenue 72,000
Class Corp. maintains its accounting records on the cash basis but restates its financial statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax income for Year 2. The following information pertains to Class's operations for the years ended December 31 , Year 2 and Year 1: yr 2 yr1 a/r 40000 20000 a/p 15000 30000 Under the accrual method, what amount of income before taxes should Class report in its December 31, Yea 2, income statement?
$95,000 accrual income before taxes in the December 31, Year 2, income statement. Cash-basis pretax income for Year 2 Increase in accts rec. ($40,000 - $20,000) (Cash not received for amounts "receivable") Reduction in accts pay. ($30,000 - $15,000) (Cash used to pay down prior payables) Accrual-basis pretax income for Year 2 $60,000 20,000 15,000 $95,000
A balance arising from the translation or remeasurement of a subsidiary's foreign currency Financial statements is reported in the consolidated income statement when the subsidiary's functional currency is the: Foreign currency Reporting currency
A subsidiary's financial statements are usually maintained in its local currency. If the subsidiary's functional currency is its local currency, the subsidiary's financial statements are simply "translated" to the reporting currency. The resulting adjustment is reported as other comprehensive income. If the subsidiary's functional currency is not the same as its local currency (the functional currency may be the reporting currency or another currency), the subsidiary's financial statements must be "remeasured" into the functional currency. The resulting gain or loss on remeasurement is reported in the consolidated income statement.
Fogg Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after the goods were received at Fogg's warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg's favor. The resulting gain should be included in Fogg's financial statements as a(an): a. Component of income from continuing operations. b. Extraordinary item. c. Deferred credit. d. Separate component of other comprehensive income. Explanation
Choice "a" is correct, component of income from continuing operations. Rule: Gains and losses resulting from foreign exchange transactions that are an "extension" of the parent's domestic operations are included as a component of "income from continuing operations" in the period in which they occur. They are not extraordinary items.
When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using historical exchange rates? a. Inventories carried at cost. b. Marketable equity securities reported at market values. c. Bonds payable. d. Accrued liabilities. Explanation
Choice "a" is correct, inventories carried at cost. Rule: Balance sheet accounts are generally included at the current exchange rate, except for: 1. A self contained subsidiary with a 3 year inflation rate of 1 OOo/o or more (hyperinflationary economy). 2. A foreign entity which does not maintain its accounts in a foreign functional currency. In these circumstances, the remeasurement method is used and the historical rates should be used only for those balance sheet accounts carried at "cost" (most non-monetary items). Otherwise follow the general rule and use the "current" rate.
A foreign subsidiary's functional currency is its local currency, which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating: 1. Salaries expense 2. Sales to external customers
Choice "a" is correct. If a foreign subsidiary's local currency is the functional currency and the economy of the foreign entity is not highly inflationary, then the translation (current) method is used to convert the financial statements of the foreign subsidiary from the local/functional currency to the reporting currency. Under the translation (current) method, all income statement items, including salaries expense and sales to external customers, are translated using the weighted-average exchange rate for the current year.
Scott Co. exchanged similar nonmonetary assets with Dale Co. and no cash was exchanged. The carrying amount of the asset surrendered by Scott exceeded both the fair value of the asset received and Dale's carrying amount of that asset. Scott should: a. Recognize the difference between the carrying amount of the asset it surrendered and the fair value of the asset it surrendered as a loss. b. Recognize the difference between the carrying amount of the asset it surrendered and the fair value of the asset it received as a gain. c. Recognize the difference between the carrying amount of the asset it surrendered and the carrying amount of the asset it received as a loss. d. Recognize no gain or loss.
Choice "a" is correct. In all nonmonetary transactions, the fair value given is equal to the fair value received. Therefore, the carrying amount of the asset surrendered must exceed the fair value of the asset surrendered, which means Scott has a loss on the transaction. Losses on nonmonetary transactions must be recognized in full.
During a period of rising prices, a company that uses current cost/constant dollar accounting and holds both monetary and non-monetary assets likely experiences: 1.Purchasing Power Gain/Loss 2.Appreciation
Choice "a" is correct. Purchasing power measures the impact of inflation through index adjusted constant dollar accounting. As the monetary unit decreases in value constant dollar accounting will measure purchasing power gains and losses. Monetary assets, assets fixed in monetary value, will experience a purchasing power loss. Appreciation is measured by evaluating replacement costs using current dollar accounting. In a period of rising prices, we would anticipate that non-monetary assets would appreciate in value.
On January 1 of the current year, Jambon purchased equipment for use in developing a new product. Jambon uses the straight-line depreciation method. The equipment could provide benefits over a 10-year period. However, the new product development is expected to take five years, and the equipment can be used only for this project. Jambon's current year expense equals: a. The total cost of the equipment. b. One-fifth of the cost of the equipment. c. One-tenth of the cost of the equipment. d. Zero.
Choice "a" is correct. Since the equipment can be used only for this project it should be expensed immediately, even though the project is expected to take 5 years. It would be capitalized over its useful life, only if the equipment had an alternative use.
Lano Corp.'s forestland was condemned for use as a national park. Compensation for the condemnation exceeded the forestland's carrying amount. Lano purchased similar, but larger, replacement forest land for an amount greater than the condemnation award. As a result of the condemnation and replacement, what is the net effect on the carrying amount of forestland reported in Lana's balance sheet? a. The amount is increased by the excess of the replacement forestland's cost over the condemned forestland's carrying amount. b. The amount is increased by the excess of the replacement forestland's cost over the condemnation award. c. The amount is increased by the excess of the condemnation award over the condemned forestland's carrying amount. d. No effect, because the condemned forestland's carrying amount is used as the replacement forestland's carrying amount. Explanation
Choice "a" is correct. The net effect on the carrying amount of forestland would be equal to the excess of the replacement forestland's cost over the condemned forestland's carrying amount. Rule: When a fixed asset is sold (voluntarily or involuntarily) gain or loss is recognized (proceeds vs. carrying amount) as part of income from continuing operations.
After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct under U.S. GAAP? a. It is prohibited. b. It is required when the reversal is considered permanent. c. It must be disclosed in the notes to the financial statements. d. It is encouraged, but not required.
Choice "a" is correct. Under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.
Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets? a. A loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price. b. A loss is deferred so that the asset received in the exchange is properly valued. c. A loss, if any, which is unrelated to the determination of the amount of the asset received should be recorded. d. A loss can occur only when assets are sold or disposed of in a monetary transaction. Explanation
Choice "a" is correct. Under the rule of conservatism, losses are recognized in all nonmonetary exchanges when the book value exceeds the fair value of the asset given up. An asset's cash equivalent price is the asset's fair value. Assets should not be valued at more than fair value, so when book value exceeds fair value, the asset should be recorded at the lower fair value. When a loss is recorded , the asset received is recorded at the book value of the asset given up plus any cash paid minus any cash received minus the loss recognized.
Gordon Ltd., a 100°/o owned British subsidiary of a U.S. parent company, reports its financial statements in local currency, the British pound. A local newspaper published the following U.S. exchange rates to the British pound at year end: Current rate $1.50 Historical rate (acquisition) 1.70 Average rate 1.55 Inventory (FIFO) 1.60 Which currency rate should Gordon use to convert its income statement to U.S. dollars at year end?.
Choice "b" is correct. Absent any information to the contrary, the functional currency of the British subsidiary must be the British pound. To convert from the British pound to the U.S. dollar (the reporting currency), the translation (current) method is used and all income statement items are translated using the average exchange rate. Choice "a" is incorrect. Under the translation (current) method, the assets and liabilities on the balance sheet are translated using the current exchange rate and the income statement is translated using the average exchange rate.
. During a period of inflation in which a liability account balance remains constant, which of the following occurs? a. A purchasing power gain, if the item is a nonmonetary liability. b. A purchasing power gain, if the item is a monetary liability. c. A purchasing power loss, if the item is a nonmonetary liability . d. A purchasing power loss, if the item is a monetary liability. Explanation
Choice "b" is correct. Purchasing power gains and losses are associated with monetary assets and liabilities . During periods of inflation, current dollars purchase less so any liability would then be settled with dollars with lower purchasing power. Thus, a purchasing power gain is recognized.
Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts in An exchange that lacks commercial substance under U.S. GAAP. In addition, Bensol paid Sable to Compensate for the difference in truck values. As a consequence of the exchange, Sable recognizes: a. A gain equal to the difference between the fair value and carrying amount of the truck given up. b. A gain determined by the proportion of cash received to the total consideration. c. A loss determined by the proportion of cash received to the total consideration. d. Neither a gain nor a loss.
Choice "b" is correct. This transaction is a nonmonetary exchange that lacks commercial substance Under U.S. GAAP. As such, the transaction is an exception to the general rule of basing the measurement value of the exchange on fair value. In the question, as in many such questions on the CPA exam, cash (boot) is received. Since the cash appears to be a minor part of the total consideration (there is no way to be sure since that information was not provided in the question) , a proportional amount of the gain is recognized. This question does not ask that the gain actually be calculated.
For accounting (GAAP) purposes, costs to develop computer software for ultimate sale: a. Should all be expensed as incurred. b. Should be capitalized if they are relevant design costs incurred before technological feasibility is established. c. Should be expensed if they are relevant design costs incurred before technological feasibility is established. d. Should be capitalized. Explanation
Choice "c" is correct. All relevant costs incurred before technological feasibility is established should be expensed as research and development expenditures. After technological feasibility is established, all relevant costs are capitalized until the product is released for sale. At that point all relevant costs are included in "Inventory" (normal product costs) and charged to "Cost of Goods Sold" when sold.
Macklin Co. entered into a franchise agreement with Heath Co. for an initial fee of $50,000. Macklin received $10,000 when the agreement was signed. The balance was to be paid at a rate of $10,000 per year, starting the next year. All services were performed by Macklin and the refund period had expired. Operations started in the current year. What amount should Macklin recognize as revenue in the current year? a. $0 b. $10,000 c. $20,000 d. $50,000
Explanation Choice "d" is correct. The franchisor should report revenue from initial franchise fees when all material conditions of the sale have been "substantially performed." Macklin Co. will recognize the entire initial fee in the current year.
For accounting (GAAP) purposes, costs to develop computer software for ultimate sale: a. Should all be expensed as incurred. b. Should be capitalized if they are relevant design costs incurred before technological feasibility is established. c. Should be expensed if they are relevant design costs incurred before technological feasibility is established. d. Should be capitalized.
Choice "c" is correct. All relevant costs incurred before technological feasibility is established should be expensed as research and development expenditures. After technological feasibility is established, all relevant costs are capitalized until the product is released for sale. At that point all relevant costs are included in "Inventory" (normal product costs) and charged to "Cost of Goods Sold" when sold.
Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared to the accrual-basis method of accounting, Sanni's cash-basis pretax income is: a. Higher by $4,000. b. Lower by $4,000. c. Higher by $36 ,000. d. Lower by $36,000.
Choice "c" is correct. Cash basis pretax income would be $36 ,000 higher than accrual basis income because: • The $20 ,000 decrease in accounts receivable represents cash paid in the current period on accounts receivable from prior periods. Under the cash basis, this $20,000 would be recorded as current period income but under the accrual basis the revenue would have been recorded in the prior periods. Therefore cash basis income in the current period is $20,000 higher than accrual basis income . • The $16,000 increase in accounts payable represents expenses incurred but not yet paid. Under the cash basis, no expense would be recorded for the $16,000 increase because cash has not been paid. Under the accrual basis, expenses totaling $16,000 are recorded when the payables are recorded. As a result, cash basis income is $16 ,000 higher than accrual basis income
Which of the following should be reported in a stockholders' equity contra account? a. Discount on convertible bonds that are common stock equivalents. b. Premium on convertible bonds that are common stock equivalents. c. Cumulative foreign exchange translation loss. d. Organization costs. Explanation
Choice "c" is correct. Cumulative foreign exchange translation loss should be reported as a component of accumulated other comprehensive income. A cumulative foreign exchange translation loss would be a debit to accumulated other comprehensive income; therefore, contra to shareholders' equity. Rule: "Translation" adjustments are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until sale or until liquidation of the investment takes place
Personal financial statements usually consist of: a. A statement of net worth and a statement of changes in net worth. b. A statement of net worth, an income statement, and a statement of changes in net worth. c. A statement of financial condition and a statement of changes in net worth. d. A statement of financial condition, a statement of changes in net worth, and a statement of cash flows. Expl anation
Choice "c" is correct. Personal financial statements usually include a statement of financial condition (similar to a balance sheet) and a statement of changes in net worth (similar to an income statement).
When computing purchasing power gain or loss on net monetary items, which of the following accounts is classified as nonmonetary? a. Advances to unconsolidated subsidiaries. b. Allowance for uncollectible accounts. c. Unamortized premium on bonds payable. d. Accumulated depreciation of equipment. Explanation
Choice "d" is correct. Property, plant, and equipment the related accumulated depreciation are nonmonetary
Wren Co. sells equipment on installment contracts. Which of the following statements best justifies Wren's use of the cost recovery method of revenue recognition to account for these installment sales? a. The sales contract provides that title to the equipment only passes to the purchaser when all payments have been made. b. No cash payments are due until one year from the date of sale. c. Sales are subject to a high rate of return. d. There is no reasonable basis for estimating collectability. Explanation
Choice "d" is correct. The cost recovery method is appropriate when there is no reasonable basis For estimating collectability.
Green, a calendar-year taxpayer, is preparing a personal statement of financial condition as of April 30, Year 2. Green's Year 1 income tax liability was paid in full on April 15, Year 2. Green's tax on income earned between January and April Year 2 is estimated at $20,000. In addition, $40,000 is estimated for income tax on the differences between the estimated current values and current amounts of Green's assets and liabilities and their tax bases at April 30, Year 2. No withholdings or payments have been made towards the Year 2 income tax liability. In Green's April 30, Year 2, statement of financial condition, what amount should be reported , between liabilities and net worth , as estimated income taxes?
Explanation 40k . On a personal statement of financial condition , estimated income taxes equals the difference between fair values and tax bases of assets and liabilities.
On July 1, Year 1, Bait Co. exchanged a truck for 25 shares of Ace Corp.'s common stock. On that date , the truck's carrying amount was $2,500, and its fair value was $3,000. Also, the book value of Ace's stock was $60 per share. On December 31, Year 1, Ace had 250 shares of common stock outstanding and its book value per share was $50. What amount should Bait report in its December 31, Year 1 balance sheet as investment in Ace assuming the transaction had commercial substance? a. $3,000 b. $2,500 c. $1,500 d. $1,250
Explanation Choice "a" is correct. $3 ,000 (fair value of the truck surrendered). If a nonmonetary exchange has commercial substance , the transaction is accounted for using the fair value of the asset surrendered or received, whichever is more evident. In this question, it appears that the exchange has commercial substance, as it appears to culminate the earnings process (i.e., a truck is exchanged for stock, which would appear in a business sense to have affected the expected configuration of cash). Therefore , the accounting uses the fair value of the asset surrendered or the fair value of the asset received, whichever is more evident, as the value for the exchange. The question indicates that the fair value of the truck is $3,000 on the date of the exchange, and it does not provide the fair value of the stock (don't use the book value of the stock as an "approximation" of the fair value); therefore, the $3,000 fair value of the truck is used for measuring the transaction.
In financial statements prepared on the income-tax basis, how should the nondeductible portion of expenses such as meals and entertainment be reported? a. Included in the expense category in the determination of income. b. Included in a separate category in the determination of income. c. Excluded from the determination of income but included in the determination of retained earnings. d. Excluded from
Explanation Choice "a" is correct. In financial statements prepared on the income-tax basis, the nondeductible portion of expenses (such as meals and entertainment) should be included in the expense category in the determination of income.
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? a. Most Year 2 contracts were signed later in the calendar year than were the Year 1 contracts. b. Most Year 2 contracts were signed earlier in the calendar year than were the Year 1 contracts. c. The Year 2 contract contribution margin was greater than the Year 1 contract contribution margin. d. The Year 2 contribution margin was less than the Year 1 contract contribution margin.
Explanation Choice "b" is correct. 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.
On December 31, Year 1, an entity adopted the IFRS revaluation model for reporting its long-term assets and revalued a patent with a carrying value of $85,000 and a 10 year life to its fair value of $75,000. On December 31, Year 2, before recording any amortization, the entity determined that the patent had a fair value of $90,000. In its December 31, Year 2 financial statements , the entity will report a revaluation gain of: a. $5,000 on the income statement and $10,000 in other comprehensive income. b. $10,000 on the income statement and $5,000 in other comprehensive income. c. $15,000 in other comprehensive income. d. $15,000 on the income statement.
Explanation Choice "b" is correct. The total Year 2 revaluation gain is $15,000 ($90,000 fair value on 12/31/Y2 - $75,000 fair value on 12/31/Y1). $10,000 of the revaluation gain will be recognized on the income statement to reverse the revaluation loss of $10,000 ($75,000 fair value - $85,000 carrying value) reported on the income statement in Year 1. The remaining $5,000 will be recognized as a revaluation surplus in Year 2 other comprehensive income.
On October 1, Velec Co., a U.S. company, contracted to purchase foreign goods requiring payment in Francs one month after their receipt at Velec's factory. Title to the goods passed on December 15. The goods were still in transit on December 31. Exchange rates were one dollar to 22 francs , 20 francs, and 21 francs on October 1, December 15, and December 31, respectively. Velec should account for the exchange rate fluctuation as: a. A loss included in net income before extraordinary items. b. A gain included in net income before extraordinary items. c. An extraordinary gain. d. An extraordinary loss.
Explanation Choice "b" is correct. The transaction would first be journalized when title transfers to the buyer on December15. At fiscal year-end, the exchange rate has increased from one dollar to 20 francs on 12/15 to one dollar to21 francs on 12/31, so a foreign exchange gain would be recognized.
On December 31, an entity tested its goodwill for impairment and determined the following for one of its cash generating units: Carrying value $1,015 ,000 Fair value less costs to sell $955 ,000 The entity also determined that the present value of the future cash flows expected from the cash generating unit is $940,000. The cash generating unit reports goodwill of $130,000. What is the goodwill impairment loss that will be reported on the December 31 income statement under IFRS? a. $0 b. $60,000 c. $70,000 d. $75,000
Explanation Choice "b" is correct. Under IFRS, the goodwill impairment test is a one-step test in which the carrying value of a cash-generating unit ( CGU) is compared to the CGU's recoverable amount, which is the greater of the CGU's fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU). For this CGU, the fair value less costs to sell of $955 ,000 is the recoverable amount because it exceeds the value in use of $940,000. The impairment loss is: Impairment loss = Recoverable amount - Carrying value Impairment loss= $955 ,000 - $1,015,000 = $(60,000) Under IFRS, the CGU impairment loss is applied first to the goodwill of the CGU.
On December 31, an entity had a reporting unit that had a book value of $3,450,000 , including goodwill of $225,000. As part of its annual review of goodwill impairment, the entity determined that the fair value of the reporting unit was $3,310,000. Star assigned $3, 170,000 of the reporting units fair value to its assets and liabilities other than goodwill. What is the goodwill impairment loss to be reported on December 31 under U.S. GAAP? a. $0 b. $85,000 c. $140,000 d. $225,000
Explanation Choice "b" is correct. Under U.S. GAAP, goodwill impairment exists because the $3,310,000 fair value of the reporting unit is less than its $3,450,000 carrying value of the reporting unit. After allocating $3 ,170,000 of the fair value of the reporting unit to its assets and liabilities other than goodwill, the $140,000 ($3,310,000 - $3, 170,000) unallocated fair value is the implied fair value of the goodwill and the goodwill impairment loss is: Impairment loss = Goodwill implied fair value - Goodwill book value Impairment loss= $140,000 - $225,000 = $85,000
On January 2, Yardley Co. sold a plant to Ivory, Inc. for $1,500,000. On that date, the plant's carrying cost was $1,000,000. Ivory gave Yardley $300,000 cash and a $1,200,000 note, payable in 4 annual installments of $300,000 plus 12o/o interest. Ivory made the first principal and interest payment of $444,000 on December 31. Yardley uses the installment method of revenue recognition. In its year-end income statement, what amount of realized gross profit should Yardley report?
Explanation Choice "b" is correct. Yardley has collected $300,000 on January 2 and $300,000 from the note (interest is recorded separately). $600,000 x 1/3 profit rate ($500,000 profit on $1,500,000 sale) is $200,000.
A company reported $6 million of goodwill in last year's statement of financial position. How should the company account for the reported goodwill in the current year? a. Determine the current year's amortizable amount and report the current-year's amortization expense. b. Determine whether the fair value of the reporting unit is greater than the carrying amount and report a gain on goodwill in the income statement. c. Determine whether the fair value of the reporting unit is less than the carrying amount and report an impairment loss on goodwill in the income statement. d. Determine whether the fair value of the reporting unit is greater than the carrying amount and report the recovery of any previous impairment in the income statement.
Explanation Choice "c" is correct. At a reporting unit level, when the fair value is less than the carrying amount , a loss on impairment is booked on the income statement (a debit) and a reduction in goodwill (credit) is booked to the balance sheet.
Young & Jamison's modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?
Explanation Choice "c" is correct. During the year, prepaid expenses increased $5,000 from $10,000 to $15,000. Prepaid expenses represent assets where no benefit has been received yet. In accrual accounting, they are not officially expenses until there is associated benefit. Therefore , the $5 ,000 needs to be subtracted from $150,000 . Also during the year, accrued liabilities increased from $5,000 to $25,000. This represents benefit received but no cash paid out yet. The expense of $20,000 (representing the increase) should be booked now (which creates the liability), and when cash payment is made, the liability will be removed. Given the starting point of $150,000, subtracting $5,000 and adding $20,000 will bring accrued expenses to $165,000.
Deb Co. records all sales using the installment method of accounting. Installment sales contracts call for 36 equal monthly cash payments. According to the FASB's conceptual framework, the amount of deferred gross profit relating to collections 12 months beyond the balance sheet date should be reported in the: a. Current liability section as a deferred revenue. b. Noncurrent liability section as a deferred revenue. c. Current asset section as a contra account. d. Noncurrent asset section as a contra account In the Adel-Brick partnership, Adel and Brick had a capital ratio of 3: 1 and a profit and loss ratio of 2: 1, respectively. The bonus method was used to record Colter's admittance as a new partner. What ratio would be used to allocate, to Adel and Brick, the excess of Colter's contribution over the amount credited to Colter's capital account? a. Adel and Brick's new relative capital ratio. b. Adel and Brick's new relative profit and loss ratio. c. Adel and Brick's old capital ratio. d. Adel and Brick's old profit and loss ratio.
Explanation Choice "c" is correct. The amount of deferred gross profit relating to installment AR collections 12 months beyond the balance sheet date should be reported in the current asset section as a contra account. Choice "d" is correct. Adel and Brick's old profit and loss ratio would be used to allocate the excess of Colter's contribution over the amount credited to Colter's capital account.
On December 31, an entity analyzed a patent with a net carrying value of $500,000 for impairment. The entity determined the following: Fair value $480,000 Estimated costs to sell 15,000 Value in use $475,000 What is the impairment loss that will be reported on the December 31 income statement under IFRS? a. $0 b. $20,000 c. $25,000 d. $35,000
Explanation Choice "c" is correct. Under IFRS, an impairment loss is recorded for the excess of the carrying value of an intangible asset over its recoverable amount. The recoverable amount is the greater of the asset's fair value less costs to sell and the asset's value in use. In this problem, the value in use of $475 ,000 exceeds the fair value less costs to sell of $465,000 ($480,000 - $15,000) and an impairment loss of $25,000 must be reported on the income statement: Impairment loss = $475 ,000 recoverable amount - $500,000 carrying value= $(25,000)
Goodwill should be tested for impairment at which of the following levels under IFRS? a. Each reporting unit. b. Each acquisition unit. c. Each cash-generating unit. d. Entire business as a whole.
Explanation Choice "c" is correct. Under IFRS, goodwill impairment is analyzed at the cash-generating unit level.
Deecee Co. adjusted its historical cost income statement by applying specific price indexes to its depreciation expense and cost of goods sold. Deecee's adjusted income statement is prepared according to: a. Fair value accounting. b. General purchasing power accounting. c. Current cost accounting. d. Current cost/general purchasing power accounting. Explanation
Explanation Choice "c" is correct. Under current cost accounting, specific price indexes may be used to restate financial statements items
Falton Co. had the following first-year amounts related to its $9,000,000 construction contract: Actual costs incurred and paid Estimated costs to complete Progress billings Cash collected $2,000,000 6,000,000 1,800,000 1,500,000 What amount should Falton recognize as a current liability at year end, using the percentage-of-completion method?
The excess of accumulated costs ($2,000,000) over related billings ($1,800,000) will represent a current asset. A liability only exists when project billings exceed costs
Kern and Pate are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at $15,000 for a 20% capital interest in the new partnership. Grant's cost of the land was $12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant's capital account should be credited for:
Under the bonus method, Grant's capital account is calculated as follows: Existing capital balances ($60,000 + $20,000)$80,000 Grant's land investment (fair value)15,000 New partnership's capital balances95,000 Grant's capital interest 20% Grant's capital balance $19,000
In Year 5, an entity which uses IFRS, revalued an indefinite life intangible to its fair value of $150,000 and recorded a revaluation surplus of $30,000. On December 31, Year 6, the intangible asset had a fair value of $130,000. In its December 31, Year 6 financial statements , the entity will report: a. A $20,000 revaluation loss on the income statement b. A $20,000 revaluation loss in other comprehensive income c. A $10,000 revaluation loss in accumulated other comprehensive income d. A $30,000 revaluation surplus in accumulated other comprehensive income Explanation
\Choice "b" is correct. The entity has a revaluation loss of $20,000 ($150,000 revalued amount from Year 5 - $130,000 fair value on 12/31/Y6). The revaluation loss will be recorded in Year 6 other comprehensive income and will offset the $30,000 revaluation surplus in accumulated other comprehensive income (AOCI), for a net revaluation surplus of $10,000 reported in AOCI on December 31, Year 6. Choice "a" is incorrect. The $20 ,000 revaluation loss will be reported in other comprehensive Income because it reverses a portion of the $30,000 revaluation surplus reported in the prior year
