NEW FAR 1

According to the FASB, fair value is A. An entry price. B. Based on an actual transaction. C. An exit price. D. An entity-specific measurement.

Answer (C) is correct. "Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." Thus, fair value is an exit price.

A *stock dividend* is *not* reported as dividend revenue under which of the following: (1) the fair value method, or (2) the equity method

both

Which criteria qualifies as a reportable operating segment?

reports to the COO, (1) Reported revenue is at least 10% of the combined revenue of all operating segments; (2) reported profit or loss is at least 10% of the greater (in absolute amount) of the combined reported profit of all operating segments that did not incur a loss, or the combined reported loss of all operating segments that did report a loss; or (3) its assets are at least 10% of the combined assets of all operating segments.

Where in its financial statements should a company disclose information about its concentration of credit risks? A. Management's report to shareholders. B. Supplementary information to the financial statements. C. No disclosure is required. D. The notes to the financial statements.

Answer (D) is correct. An entity must disclose significant concentrations of risk arising from most instruments. These disclosures should be made in the basic financial statements, either in the body of the statements or in the notes.

Cox Co. accounts for its inventory using the LIFO cost method. An inventory loss from a permanent market decline of $360,000 occurred in May. Cox appropriately recorded this loss in May after its March 31 quarterly report was issued. What amount of inventory loss should be reported in Cox's quarterly income statement for the 3 months ended June 30? A. $0 B. $90,000 C. $180,000 D. $360,000

Answer (D) is correct. An inventory loss from market decline must not be deferred beyond the interim period in which it occurs, unless it is expected to be recovered within the fiscal year. The $360,000 market decline occurring in the quarter ended 6/30 is not considered temporary. Thus, it should be recognized in full in that quarter.

Under the measurement alternative for an investment in equity securities, the investment is measured at A. Fair value minus subsequent impairment. B. Amortized cost. C. Lower of cost or net realizable value. D. Cost minus subsequent impairment, plus or minus changes resulting from observable price changes for the identical or a similar investment of the same issuer.

Answer (D) is correct. An investment in equity securities that does not result in control or significant influence over the investee is measured at fair value through net income. However, an entity may elect the measurement alternative for an investment in equity securities without a readily determinable fair value. This alternative is cost minus impairment (if any), plus or minus changes resulting from observable price changes for the identical or a similar investment of the same issuer.

Investments classified as held-to-maturity are measured at A. Fair value, with unrealized gains and losses reported in net income. B. Fair value, with unrealized gains and losses reported in other comprehensive income (OCI). C. Replacement cost, with no unrealized gains or losses reported. D. Amortized cost, with no unrealized gains or losses reported.

Answer (D) is correct. Assuming the fair value option has not been elected, held-to-maturity securities are reported at amortized cost, with no unrealized gains or losses reported.

Which of the following is correct concerning financial statement disclosure of accounting policies? A. Disclosures should be limited to principles and methods peculiar to the industry in which the company operates. B. The format and location of accounting policy disclosures are fixed by generally accepted accounting principles. C. Disclosures should duplicate details disclosed elsewhere in the financial statements. D. Disclosure of accounting policies is an integral part of the financial statements.

Answer (D) is correct. Businesses and not-for-profit entities should disclose all significant accounting policies as an integral part of the financial statements. A summary of accounting policies preferably should be included in a separate section preceding the notes or in the initial note.

The effect of a material transaction that is infrequent in occurrence and unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a: a. gain b. loss

c. both

Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment balance if it uses the: -Fair Value Method -Equity Method

neither. . Under the *equity method*, the investor recognizes its equity in the undistributed earnings of the investee. Consequently, *cash dividends decrease the investment balance* because the dividend is considered to be a return of investment.

The equity method of accounting is used when the investor has significant influence over the investee (investment is at least ____ but not more than ____ of the voting interests) and the FVO was not elected.

20%; 50%

COGM

COGM = COS - BEG + END

Gross Profit

GP = SALES - COGS

what are freight-out and freight-in categorized as?

freight-out is a selling expense freight-in is part of cost of inventory

The net realizable value of the accounts receivable is

gross AR minus amounts deemed uncollectible. do nothing with allowance. its an unadjusted account.

The recovery of accounts written off is accounted for first by reversing the write-off (debit accounts receivable, credit the allowance for doubtful accounts) and second by recording the receipt of cash (debit cash, credit accounts receivable). Thus, collection of written off accounts do not affect ____________.

revenues

When a component (e.g., an operating segment) has been disposed of or is classified as held for sale, and the criteria for reporting a discontinued operation have been met, which income statements report gains/losses from discontinued operations?

the current periods and prior

risk of accounting loss is measured by

the net receivables balance ($250,000 accounts receivable - $20,000 allowance for uncollectible accounts = $230,000). Accounting loss is the loss that may have to be recognized due to credit and market risk as a direct result of the rights and obligations of a financial instrument.

how do you record trading securities, available-for-sale securities, and held-to-maturity securities?

trading- fair value AFS- fair value HTM- amortized cost

Assuming that disclosure is practicable, it is required by publicly held companies regarding the following items only if 10% or more of total revenues are derived from which: 1. Sales to a Single External customer 2. Sales to Foeign Countrie

1. Information about a major external customer must be disclosed if sales to that customer are 10% or more of total revenue. However, no percentage threshold is established for practicable disclosures of geographic information. Instead, an entity must disclose revenues attributable to all foreign countries in total. Separate disclosure of revenues from external customers attributed to a single foreign country is also required if those revenues are material. These disclosures are intended to provide information about reliance on particular markets or customers.

A *cash dividend* is *not* reported as dividend revenue under which of the following: (1) the fair value method, or (2) the equity method

2. the equity method. cash dividends decrease the carry value of the investment.

According to the FASB's conceptual framework, recognition is the process of formally incorporating an element into the financial statements of an entity. Recognition criteria include all of the following except A. Decision usefulness. B. Measurability with sufficient reliability. C. Relevance. D. Definitions of elements of financial statements.

Answer (A) is correct. An item and information about the item should be recognized when the following four fundamental recognition criteria are met: (1) The item meets the definition of an element of financial statements; (2) it has a relevant attribute measurable with sufficient reliability; (3) the information about the item is capable of making a difference in user decisions; and (4) the information is representationally faithful, verifiable, and neutral. Decision usefulness is the objective of general-purpose financial reporting.

Election of the fair value option (FVO) for financial assets A. Results in recognition of unrealized gains and losses in earnings of a business entity. B. Requires deferral of related upfront costs. C. Results in recognition of unrealized gains and losses in other comprehensive income of a business entity. D. Permits only for-profit entities to measure eligible items at fair value.

Answer (A) is correct. A business measures at fair value the eligible items for which the FVO election was made at a specified election date. The unrealized gains and losses on financial assets are reported in earnings at each subsequent reporting date.

Which of the following is a level three input to valuation techniques used to measure the fair value of an asset? A. Unobservable inputs for the asset. B. Inputs other than quoted prices that are observable for the asset. C. Quoted prices in active markets for identical assets. D. Quoted prices for similar assets in active markets.

Answer (A) is correct. Level 3 inputs for valuation techniques to measure the fair value of an asset are unobservable inputs that are used given no observable inputs. They should be based on the best available information in the circumstances. An example of a Level 3 input is the reporting entity's own data. Thus, unobservable inputs for the asset are level 3 inputs.

Subsequent events for reporting purposes are defined as events that occur subsequent to the A. Balance sheet date but before the issuance (or availability for issuance) of the financial statements. B. Date of the auditor's report and concern contingencies that are not reflected in the financial statements. C. Date of the auditor's report. D. Balance sheet date.

Answer (A) is correct. Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance (or availability for issuance) of the financial statements. Certain subsequent events or transactions provide evidence about conditions at the date of the balance sheet, including the estimates inherent in statement preparation. Other subsequent events or transactions provide evidence about conditions that did not exist at the date of the balance sheet.

On March 15, Year 2, a calendar-year company issued its Year 1 financial statements. On March 1, Year 2, a fire destroyed the company's only manufacturing plant. Which of the following statements is correct regarding the treatment of the loss in the December 31, Year 1, financial statements? A. The loss should be disclosed and not recognized in the Year 1 financial statements. B. Any probable insurance recoveries should be recognized in the Year 1 financial statements. C. The loss should not be recognized or disclosed in the Year 1 financial statements. D. The loss should be recognized in the Year 1 financial statements.

Answer (A) is correct. Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance of the financial statements. A recognized subsequent event provides additional evidence about conditions that existed on the balance sheet date. A subsequent event that provides evidence about conditions that did not exist on the balance sheet date does not require recognition, but it may require disclosure. A fire that destroyed the company's only manufacturing plant on March 1, Year 2, is an event that provides evidence about conditions that did not exist on December 31, Year 1. Thus, the loss should be disclosed, not recognized, in the Year 1 financial statements.

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? A. Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements. B. Provide no information related to the storm losses in the financial statements until losses and expenses become fully known. C. Accrue and disclose the property loss with no accrual or disclosure of the business disruption loss. D. Accrue and disclose the property loss and additional business disruption losses in the financial statements.

Answer (A) is correct. Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance or availability of the financial statements. Subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet are not required to be recognized, but some require disclosure. Because the storm occurred after the balance sheet date but before the financial statements were issued, the losses should be disclosed in the notes to the financial statements.

A major customer of an audit client suffers a fire after the balance sheet date but prior to the date of the auditor's report. The audit client believes that this event could have a significant direct effect on the financial statements. The auditor should A. Advise management to disclose the event in notes to the financial statements. B. Advise management to adjust the financial statements. C. Disclose the event in the auditor's report. D. Withhold submission of the auditor's report until the extent of the direct effect on the financial statements is known.

Answer (A) is correct. Subsequent events, such as a fire or other casualty, that provide evidence with respect to conditions that did not exist at the balance sheet date should not result in adjustment of the financial statements, but such events should ordinarily be disclosed in the notes if necessary to keep the statements from being misleading.

On January 2, Year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod's equity was $500,000. The carrying amounts of Pod's identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for Year 1, and paid no dividends. Kean accounts for this investment using the equity method. In its December 31, Year 1, balance sheet, what amount should Kean report as investment in Pod Co.? A. $280,000 B. $220,000 C. $276,000 D. $210,000

Answer (A) is correct. The purchase price is allocated to the fair value of the net assets acquired, with the remainder allocated to goodwill. The fair value of Kean's 30% interest in Pod's net assets is $210,000 [($500,000 + $200,000) × 30%]. Goodwill is $40,000 ($250,000 - $210,000). The equity method requires the investor's share of subsequent net income reported by the investee to be adjusted for the difference at acquisition between the fair value and the carrying amount of the investee's net assets when the net assets are sold or consumed in operations. The land is assumed not to be sold, and the equity method goodwill is not amortized or separately reviewed for impairment. Thus, Kean's share of Pod's net income is $30,000 ($100,000 declared income × 30%), and the investment account at year-end is $280,000 ($250,000 acquisition balance + $30,000 investment income).

The entity's manufacturing division, whose assets constituted 75% of its total assets at September 30, Year 5 (end of year), was sold on November 1, Year 5. The new owner assumed the bonded indebtedness associated with this property. How should this event be presented in the financial statements? A. Disclosure by means of supplemental, pro forma financial data. B. No financial statement disclosure. C. Disclosure in a note to the financial statements. D. Adjustment of the financial statements for the year ended September 30, Year 5.

Answer (A) is correct. The sale of a major division in the subsequent events period provides evidence of conditions not existing at the balance sheet date and thus does not require adjustment of the statements. Disclosure must be made, however, because the event is of such a nature that nondisclosure causes the statements not to be fairly presented. The form of the disclosure depends upon the significance of the event. In this case, many accounts are affected, and pro forma financial statements are the best method.

A hotel enters into a contract with a customer to provide 10 rooms for 10 nights for $200 per room per night. In addition to the room price per night, the hotel collects a city occupancy tax of $7 per room per night. According to the hotel's promotion, each customer that purchases in total more than 50 room nights is entitled to a credit of $3,000 on the entire purchase. What is the total transaction price of the contract? A. $17,000 B. $17,700 C. $20,700 D. $20,000

Answer (A) is correct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. It excludes amounts collected on behalf of third parties. Thus, the amount collected for city occupancy taxes must not be included in the transaction price. In addition, any consideration payable to the customer, such as coupons, credit, or vouchers, reduces the transaction price. Accordingly, the total transaction price of the contract is $17,000 [(10 × 10 × $200) - $3,000].

Under ASC 606, adjustment of the transaction price to reflect the time value of money results in A. Interest income or expense that is presented in the income statement separately from revenue. B. An unusual item in the income statement. C. Revenue from contracts with customers in the income statement. D. An item of other comprehensive income.

Answer (A) is correct. The transaction price should be adjusted for the effect of the time value of money when the contract includes a significant financing component. The interest income or expense is recognized using the effective interest method. Interest income or expense must be presented in the income statement separately from revenue from contracts with customers.

Which of the following is not a similarity between interim reporting under U.S. GAAP and under IFRS? A. Interim partial liquidation of a LIFO layer need not be reported if it is expected to be recovered by year end. B. Revenue from long-term construction contracts should be recognized as earned during an interim period on the same basis as followed for the full year. C. Ordinarily, the results for an interim period should be based on the same accounting principles the entity uses in preparing annual statements. D. Material seasonal fluctuations may not be smoothed in interim information.

Answer (A) is correct. Under IFRS, LIFO liquidation is not an issue in interim (or annual) periods because LIFO is not a permitted accounting policy.

During Year 3, Gilman Co. purchased 5,000 shares of the 500,000 outstanding shares of Meteor Corp.'s common stock for $35,000. During Year 3, Gilman received $1,800 of dividends from its investment in Meteor's stock. The fair value of Gilman's investment on December 31, Year 3, is $32,000. Gilman has elected the fair value option for this investment. What amount of income or loss that is attributable to the Meteor stock investment should be reflected in Gilman's earnings for Year 3? A. Loss of $1,200. B. Income of $4,800. C. Income of $1,800. D. Loss of $3,000.

Answer (A) is correct. Under the fair value option, dividends received and unrealized gains and losses on remeasurement of financial assets to fair value are reported in earnings. Thus, the $1,800 of dividend income received and the $3,000 ($35,000 - $32,000) of unrealized loss are reflected in Gilman's earnings for Year 3. This results in a total loss of $1,200 ($1,800 - $3,000) attributable to the Meteor stock investment.

A transaction that is unusual in nature or infrequent in occurrence should be reported as a(n) A. Discontinued operations, net of applicable income tax. B. Component of income from continuing operations, but not net of applicable income taxes. C. Item of other comprehensive income. D. Component of income from continuing operations, net of applicable income taxes.

Answer (B) is correct. A material event or transaction that is unusual in nature or infrequent in occurrence must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of income taxes.

When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on which of the following criteria? A. Type-by-type basis. B. Instrument-by-instrument basis. C. A portion of an asset or liability. D. At the entity level.

Answer (B) is correct. An entity may elect the fair value option (FVO) for most recognized financial assets and liabilities. The decision whether to elect the FVO is made irrevocably at the election date. The decision is made instrument by instrument and only for an entire instrument.

Nancarrow Corp. released its financial statements for the year ended December 31, Year 7, on March 15, Year 8. On February 1, Year 8, Nancarrow settled a long-standing lawsuit that resulted in a material loss. No liability for this circumstance had been accrued in the financial statements. How should this event be disclosed or recognized? A. No disclosure or recognition is required. B. The event must be recognized in the financial statements. C. The event should be disclosed, but the financial statements themselves need not be adjusted. D. The existing liability should be adjusted.

Answer (B) is correct. An entity recognizes in the financial statements adjusting events occurring after the end of the reporting period but before the statements are authorized for issue. These events provide evidence about conditions existing at the end of the reporting period. Settlement of the court case established that the entity had a present obligation at the end of the period. The adjustment is to restate the related liability (if any) or to recognize a new liability. Settlement of a lawsuit is indicative of conditions existing at the end of the reporting period and requires adjustment of the statements.

For interim financial reporting, a company's income tax provision for the second quarter should be determined using the A. Effective tax rate expected to be applicable for the full year as estimated at the end of the first quarter. B. Effective tax rate expected to be applicable for the full year as estimated at the end of the second quarter. C. Statutory tax rate for the year. D. Effective tax rate expected to be applicable for the second quarter.

Answer (B) is correct. At the end of each interim period, the entity should estimate the annual effective tax rate. This rate is used in providing for income taxes on a current year-to-date basis.

Disclosures about the fair value of financial instruments of public business entities A. Must be made for all instruments. B. Are required if it is practicable to estimate fair values. C. Must include the level of the fair value hierarchy in which the instruments are categorized. D. Must be made only for financial instruments recognized in the balance sheet.

Answer (C) is correct. Public business entities must disclose, either in the body of the financial statements or in the notes, the (1) fair value of financial instruments, regardless of whether they are recognized in the balance sheet, and (2) level of the fair value hierarchy (Level 1, 2, or 3) in which the fair value measurements of the financial instruments are categorized.

During the first quarter of Year 4, Tech Co. had income before taxes of $200,000, and its effective income tax rate was 15%. Tech's Year 3 effective annual income tax rate was 30%, but Tech expects its Year 4 effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of income tax expense should Tech report? A. $0 B. $50,000 C. $30,000 D. $60,000

Answer (B) is correct. At the end of each interim period, the entity should estimate the annual effective tax rate. This rate is used in providing for income taxes on a current year-to-date basis. Tech's income before taxes for the first quarter is $200,000, and the estimated annual effective tax rate for Year 4 is 25%. The provision for income taxes for the first interim period is therefore $50,000 ($200,000 × 25%).

On July 2, Year 4, Wynn, Inc., purchased as a short-term investment a $1 million face-value Kean Co. 8% bond for $910,000 plus accrued interest to yield 10%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 4, the bonds had a fair value of $945,000. On February 13, Year 5, Wynn sold the bonds for $920,000. In its December 31, Year 4, balance sheet, what amount should Wynn report for the bond if it is classified as an available-for-sale security? A. $950,000 B. $945,000 C. $920,000 D. $910,000

Answer (B) is correct. Available-for-sale debt securities should be measured at fair value in the balance sheet. Thus, the bond should be reported at its fair value of $945,000 to reflect the unrealized holding gain (change in fair value).

The following are held by Smite Co.: -Cash in checking account $20,000 -Cash in bond sinking fund account 30,000 -Post-dated check from customer dated one month from balance sheet date 250 -Petty cash 200 -Commercial paper (matures in two months) 7,000 -Certificate of deposit (matures in six months) 5,000 What amount should be reported as cash and cash equivalents on Smite's balance sheet?

Answer (B) is correct. Cash consists of (1) coin and currency on hand, (2) demand deposits (checking accounts), (3) time deposits (savings accounts), and (4) near-cash assets (e.g., deposits in transit or commercial paper, also known as negotiable instruments). Thus, the cash in checking and petty cash are included in cash and cash equivalents. Cash that is restricted to use for other than current operations, designated for the acquisition or construction of noncurrent assets, or segregated for the liquidation of long-term debts (e.g., a sinking fund) is noncurrent. Undeposited checks from customers are near-cash items, but they are excluded if they are undepositable (e.g., postdated or unsigned). Cash equivalents are short-term, highly liquid investments. Normally, only investments with original maturities of 3 months or less qualify. Hence, the CD is not included. However, commercial paper with an original maturity of two months is a cash equivalent. The balance reported is therefore $27,200 ($20,000 checking + $200 petty cash + $7,000 commercial paper).

On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share but did not elect the fair value option. On December 15, Year 1, Eagle paid $40,000 in dividends to its common shareholders. Eagle's net income for the year ended December 31, Year 1, was $120,000, earned evenly throughout the year. In its Year 1 income statement, what amount of income from this investment should Denver report? A. $36,000 B. $18,000 C. $12,000 D. $6,000

Answer (B) is correct. Denver Corp.'s purchase of 30% of Eagle presumably allows it to exercise significant influence. Thus, it should apply the equity method. The investor's share of the investee's income is a function of the percentage of ownership and the length of time the investment was held. The income from this investment was therefore $18,000 [$120,000 × 30% × (6 months ÷ 12 months)].

Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, the sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset? A. $80 B. $81 C. $76 D. $82

Answer (B) is correct. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The transaction is assumed to occur in the reporting entity's principal market for the asset or liability. In the absence of such a market, it is assumed to occur in the most advantageous market. This market is the one in which the specific reporting entity can maximize the amount received for selling the asset. However, given a principal (or most advantageous) market, the FMV is the price in that market without adjustment for transaction costs. Here, there is not a principal market; instead, there are two non-principal markets. The second market is the most advantageous because Crossroads would maximize the net proceeds from selling the asset ($80 compared to $76 in the first market). Therefore, fair value should be measured using the second market. Crossroads should report $81 as the fair value of the asset because the FMV is the price without adjustments for transaction costs.

For the purpose of a fair value measurement (FVM) of an asset or liability, a transaction is assumed to occur in the A. Market in which the result is optimized. B. Principal market if one exists. C. Principal market or most advantageous market at the election of the reporting entity. D. Most advantageous market.

Answer (B) is correct. For FVM purposes, a transaction is assumed to occur in the principal market for an asset or liability if one exists. The principal market has the greatest volume or level of activity. If no such market exists, the transaction is assumed to occur in the most advantageous market.

In financial reporting for operating segments of a public business entity, the revenue of a reportable segment must include A. Intersegment billings for the cost of shared facilities. B. Revenue from intersegment transactions. C. Other comprehensive income items. D. Equity in income from unconsolidated subsidiaries.

Answer (B) is correct. GAAP do not specifically define the reported revenue of an operating segment. However, the information reported includes (1) revenues from external customers, (2) revenues from transactions with other operating segments of the same entity, and (3) interest revenue. The amount of a reported segment item, such as revenue, is the measure reported to the chief operating decision maker for purposes of making resource allocation and performance evaluation decisions regarding the segment. Disclosures are required about measurements of segment profit or loss (including revenue) and segment assets, but GAAP do not stipulate how those measurements are to be made.

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? A. Accrue and disclose the property loss and additional business disruption losses in the financial statements. B. Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements. C. Accrue and disclose the property loss with no accrual or disclosure of the business disruption loss. D. Provide no information related to the storm losses in the financial statements until losses and expenses become fully known.

Answer (B) is correct. Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance or availability of the financial statements. Subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet are not required to be recognized, but some require disclosure. Because the storm occurred after the balance sheet date but before the financial statements were issued, the losses should be disclosed in the notes to the financial statements.

On January 15, Year 2, before the Mapleview Co. released its financial statements for the year ended December 31, Year 1, it settled a long-standing lawsuit. A material loss resulted and no prior liability had been recorded. How should this loss be disclosed or recognized in the Year 1 financial statements? A. The loss should be disclosed in an explanatory paragraph in the auditor's report. B. The loss must be recognized in the financial statements. C. The loss should be disclosed, but the financial statements themselves need not be adjusted. D. No disclosure or recognition is required.

Answer (B) is correct. Subsequent events that provide additional evidence with the respect to conditions that existed at the balance sheet date, including the estimates inherent in preparing the financial statements, must be recognized in the financial statements of the year affected by the subsequent event. Settlement of a lawsuit is indicative of conditions existing at year end and calls for recognition in the statements.

Which of the following bodies has the original authority to set accounting standards for publicly traded companies in the U.S.? A. The International Accounting Standards Board (IASB). B. The Securities and Exchange Commission (SEC). C. The Financial Accounting Standards Board (FASB). D. The American Institute of Certified Public Accountants (AICPA).

Answer (B) is correct. The SEC establishes rules for financial reporting by publicly traded companies (called issuers) in the United States. But the SEC has delegated the authority for detailed rule making to the Financial Accounting Standards Board (FASB).

Beach Co. determined that the decline in the fair value (FV) of an investment in debt securities was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach's books. The controller would properly record the decrease in FV by including it in which of the following? A. Other comprehensive income section of the income statement, and writing down the cost basis to FV. B. Earnings section of the income statement and writing down the cost basis to FV. C. Other comprehensive income section of the income statement only. D. Discontinued operations section of the income statement, net of tax, and writing down the cost basis to FV.

Answer (B) is correct. The amortized cost basis is used to calculate the amount of any impairment. The amortized cost basis should be distinguished from fair value, which equals the cost basis plus or minus the net unrealized holding gain or loss. If a decline in fair value of an individual available-for-sale debt security below its amortized cost basis is other than temporary, the amortized cost basis is written down to fair value as a new cost basis. The write-down is deemed to be a realized loss and is included in earnings.

Financial statements must disclose significant risks and uncertainties. The required disclosures include A. Risk-reduction techniques that have successfully mitigated losses. B. Vulnerability due to a concentration if a near-term severe impact is at least reasonably possible. C. Information about a significant estimate used to value an asset only if it is probable that the financial statement effect of a condition existing at the balance sheet date will change materially in the near term. D. Quantified comparisons of the relative importance of the different businesses in which the entity operates.

Answer (B) is correct. The current vulnerability due to concentrations must be disclosed if certain conditions are met. Disclosure is necessary if management knows prior to issuance of the statements that the concentration exists at the balance sheet date; it makes the entity vulnerable to a near-term severe impact; and such impact is at least reasonably possible in the near term. A severe impact may result from loss of all or a part of a business relationship, price or demand changes, loss of a patent, changes in the availability of a resource or right, or the disruption of operations in a market or geographic area.

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? A. Cost. B. Income. C. Observable inputs. D. Market.

Answer (B) is correct. The income approach uses valuation methods based on current market expectations about future amounts, e.g., earnings or cash flows. It converts future amounts to one present discounted amount. Examples are present value methods and option-pricing models.

The Tax Court ruled in favor of the entity on October 25, Year 5. Litigation involved deductions claimed on the Year 1 and Year 2 tax returns. The entity had provided in accrued taxes payable for the full amount of the potential disallowances. The Internal Revenue Service will not appeal the Tax Court's ruling. How should this event be presented in the financial statements? A. No financial statement disclosure necessary. B. Adjustment of the financial statements for the year ended September 30, Year 5. C. Disclosure by means of supplemental, pro forma financial data. D. Disclosure in a note to the financial statements.

Answer (B) is correct. The ruling of the Tax Court provides additional evidence with respect to conditions that existed at the date of the financial statements and affects the estimates used in their preparation. Consequently, the settlement in the subsequent events period for an amount different from that recorded requires the client to adjust the statements.

The entity's manufacturing division, whose assets constituted 75% of its total assets at September 30, Year 5 (end of year), was sold on November 1, Year 5. The new owner assumed the bonded indebtedness associated with this property. How should this event be presented in the financial statements? A. Adjustment of the financial statements for the year ended September 30, Year 5. B. Disclosure by means of supplemental, pro forma financial data. C. Disclosure in a note to the financial statements. D. No financial statement disclosure.

Answer (B) is correct. The sale of a major division in the subsequent events period provides evidence of conditions not existing at the balance sheet date and thus does not require adjustment of the statements. Disclosure must be made, however, because the event is of such a nature that nondisclosure causes the statements not to be fairly presented. The form of the disclosure depends upon the significance of the event. In this case, many accounts are affected, and pro forma financial statements are the best method.

Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, Year 1? A. Settlement of litigation in Year 2 over an event that occurred in Year 2. B. Loss on an uncollectible trade receivable recorded in Year 1 from a customer that declared bankruptcy in Year 2. C. Proceeds from a capital stock issuance in Year 2 which was being approved by the board of directors in Year 1. D. Uninsured loss of inventories purchased in Year 1 as a result of a flood in Year 2.

Answer (B) is correct. This event provides additional evidence about conditions that existed at the balance sheet date and that affect the financial statements.

Which of the following is true regarding interim financial reporting? A. Both IFRS and U.S. GAAP view each interim period as a discrete reporting period. B. Each interim period is viewed as a discrete reporting period under IFRS and as an integral part of an annual period under U.S. GAAP. C. Each interim period is viewed as a discrete reporting period under U.S. GAAP and as an integral part of an annual period under IFRS. D. Both IFRS and U.S. GAAP view each interim period as an integral part of the annual period to which it relates.

Answer (B) is correct. Under U.S. GAAP, each interim period is viewed as an integral part of an annual period to which it relates. Thus, an inventory loss from a market decline may be deferred if no loss for the year is reasonably anticipated. Under IFRS, each interim period is viewed as a discrete reporting period. Accordingly, an inventory loss from a market decline must be recognized in the interim period even if no loss for the year is reasonably anticipated.

Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In Year 1, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations and uses the equity method to account for the investment in the common stock. What amount of dividend revenue should Green report in its income statement for the year ended December 31, Year 1? A. $0 B. $60,000 C. $90,000 D. $30,000

Answer (B) is correct. Under the equity method, the receipt of a cash dividend from the investee should be credited to the investment account. It is a return of, not a return on, the investment. However, the equity method is not applicable to preferred stock. Thus, Green should report $60,000 of revenue when the preferred dividends are declared.

On January 31, Year 3, Pack, Inc., split its common stock 2 for 1, and Young, Inc., issued a 5% stock dividend. Both companies issued their December 31, Year 2, financial statements on March 1, Year 3. Should Pack's Year 2 basic earnings per share (BEPS) take into consideration the stock split, and should Young's Year 2 BEPS take into consideration the stock dividend?

Answer (B) is correct. When a stock dividend, stock split, or reverse split occurs at any time before issuance of the financial statements, restatement of BEPS or DEPS is required for all periods presented. The purpose is to promote comparability of EPS data among reporting periods.

The fair value for an asset or liability is measured as A. The appraised value of the asset or liability. B. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants. C. The price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants. D. The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.

Answer (B) is correct. EXIT PRICE The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

YIV, Inc., is a multidivisional corporation that makes both intersegment sales and sales to external customers. If each division qualifies as an operating segment, YIV should report segment financial information for each division when it meets which of the following criteria? A. Segment revenue is 10% or more of consolidated revenue. B. Segment profit or loss is 10% or more of combined profit or loss of all operating segments. C. Segment revenue is 10% or more of combined revenue of all the operating segments. D. Segment profit or loss is 10% or more of consolidated profit or loss.

Answer (C) is correct. An entity separately reports information about an operating segment if it satisfies one of three tests: (1) Its revenue (including sales to external customers and intersegment sales or transfers) is equal to at least 10% of the combined revenue, internal and external, of all the entity's operating segments; (2) its assets are equal to at least 10% of the combined assets of all operating segments; and (3) the absolute amount of its reported profit or loss is equal to at least 10% of the greater, in absolute amount, of the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss.

A measurement alternative may be elected for an investment in equity securities if the A. Listed prices of the investment are available and the investment does not result in control or significant influence over the investee. B. Listed prices of the investment are not available and the investment allows control over the investee. C. Fair value of the investment is not readily determinable and the investment does not result in control or significant influence over the investee. D. Investment allows significant influence over the investee.

Answer (C) is correct. An investment in equity securities that does not result in control or significant influence over the investee is measured at fair value through net income. However, an entity may elect the measurement alternative for an investment in equity securities without a readily determinable fair value. This alternative is cost minus impairment (if any), plus or minus changes resulting from observable price changes for the identical or a similar investment of the same issuer.

Deck Co. had 120,000 shares of common stock outstanding at January 1. On July 1, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to calculate basic earnings per share? A. 170,000 B. 160,000 C. 140,000 D. 150,000

Answer (C) is correct. Basic earnings per share (BEPS) is used to measure earnings performance based on common stock outstanding during the period. BEPS equals income available to common shareholders divided by the weighted-average number of common shares outstanding. The weighted-average number of common shares outstanding relates the portion of the period that the shares were outstanding to the total time in the period. Consequently, the number of shares used to calculate BEPS is 140,000 {120,000 shares outstanding throughout the period + [40,000 shares × (6 months ÷ 12 months)]}.

At October 31, Dingo, Inc., had cash accounts at three different banks. One account balance is segregated solely for a November 15 payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance. How should these accounts be reported in Dingo's October 31 classified balance sheet? A. The segregated and regular accounts should be reported as current assets net of the overdraft. B. The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability. C. The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability. D. The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft.

Answer (C) is correct. Current assets include cash available for current operations and items that are the equivalent of cash. Hence, the account used for regular operations is current. Cash that is restricted to use for other than current operations is designated for the acquisition or construction of noncurrent assets or segregated for the liquidation of noncurrent debt. Amounts that are clearly to be used in the near term (1) to liquidate noncurrent debt, (2) to make payments to a sinking fund, or (3) for similar purposes also should be classified as noncurrent. Moreover, they need not be recorded in a special account. The overdraft should be treated as a current liability and not netted against the other cash balances. If the company had another account in the same bank with a positive balance, netting would be appropriate because the bank would have a right of offset.

In general, an enterprise preparing interim financial statements should A. Defer recognition of seasonal revenue. B. Allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred. C. Use the same accounting principles followed in preparing its latest annual financial statements. D. Disregard permanent decreases in the market value of its inventory.

Answer (C) is correct. Each interim period is an integral part of an annual period. Ordinarily, interim results are based on the same principles applied in annual statements. Certain principles and practices used for annual reporting, however, may require modification so that interim reports may relate more closely to the results of operations for the annual period.

On January 1, Year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.'s outstanding voting stock. For Year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody's investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for Year 1 attributable to the investment? A. $18,000 B. $6,000 C. $16,000 D. $10,000

Answer (C) is correct. Financial assets measured using the FVO are reported at their fair values, and unrealized gains and losses are recognized in the income statement at subsequent reporting dates. The investor selected the FVO. Thus, it does not apply the equity method even though its 30% interest is presumed to give it significant influence over the investee. Under the FVO, dividends received are accounted for as dividend income, not a reduction of the investment. Accordingly, the investor recognizes an unrealized gain of $10,000 ($410,000 - $400,000) and dividend income of $6,000 ($20,000 × 30%), a total of $16,000.

Opto Co. is a publicly traded, consolidated entity reporting segment information. Which of the following items is a required entity-wide disclosure regarding external customers? A. The identity of any external customer considered to be "major" by management. B. The identity of any external customer providing 10% or more of a particular operating segment's revenue. C. The fact that transactions with a particular external customer constitute more than 10% of the total entity revenues. D. Information on major customers is not required in segment reporting.

Answer (C) is correct. Information about products and services and geographical areas is reported if it is feasible to do so. If 10% or more of revenues is derived from one external customer, (1) that fact, (2) the amount from each such customer, and (3) the segment(s) reporting the revenues must be disclosed.

On July 1, Year 4, Pell Co. purchased Green Corp. 10-year, 8% bonds with a face amount of $500,000 for $420,000. The bonds are classified as held-to-maturity, mature on June 30, Year 14, and pay interest semiannually on June 30 and December 31. Using the interest method, Pell recorded bond discount amortization of $1,800 for the 6 months ended December 31, Year 4. From this long-term investment, Pell should report Year 4 revenue of A. $16,800 B. $18,200 C. $21,800 D. $20,000

Answer (C) is correct. Interest income for a bond issued at a discount is equal to the sum of the periodic cash flows and the amount of bond discount amortized during the interest period. The periodic cash flows are equal to $20,000 ($500,000 face amount × 8% coupon rate × 1/2 year). The discount amortization is given as $1,800. Thus, revenue for the 6-month period from July 1 to December 31, Year 4, is $21,800 ($20,000 + $1,800).

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 *except* A. Interest rates that are observable at commonly quoted intervals. B. Quoted prices for similar assets and liabilities in markets that are active. C. Internally generated cash flow projections for a related asset or liability. D. Quoted prices for identical assets and liabilities in markets that are not active.

Answer (C) is correct. Internally generated cash flow projections are not observable and would be considered a Level 3 input. Level 3 inputs are unobservable inputs that are used in the absence of observable inputs. They should be based on the best available information in the circumstances.

Subsequent events include which of the following? Events or transactions that provide evidence about conditions at the date of the balance sheet, including the estimates inherent in statement preparation. Events or transactions that provide evidence about conditions that did not exist at the date of the balance sheet. A. Neither I nor II. B. II only. C. Both I and II. D. I only.

Answer (C) is correct. Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance (or availability for issuance) of the financial statements. Certain subsequent events or transactions provide evidence about conditions at the date of the balance sheet, including the estimates inherent in statement preparation. Other subsequent events or transactions provide evidence about conditions that did not exist at the date of the balance sheet.

Birk Co. purchased 30% of Sled Co.'s outstanding common stock on December 31 for $200,000. On that date, Sled's equity was $500,000, and the fair value of its net assets was $600,000. On December 31, what amount of equity method goodwill results from this acquisition? A. $0 B. $30,000 C. $20,000 D. $50,000

Answer (C) is correct. The equity method of accounting is used when the investor has significant influence over the investee (investment is at least 20% but not more than 50% of the voting interests) and the FVO was not elected. Equity method goodwill is the difference between the cost of the $200,000 investment and the investor's equity in the fair value of the investee's net assets of $180,000 (30% × $600,000). Accordingly, equity method goodwill equals $20,000 ($200,000 - $180,000).

Debt securities held primarily for sale in the near term to generate income on short-term price differences are known as A. Held-to-maturity securities. B. Discontinued operations. C. Trading securities. D. Available-for-sale securities.

Answer (C) is correct. Trading debt securities are bought and held primarily for sale in the near term. They are purchased and sold frequently. They are initially recorded at cost but are remeasured at fair value at each balance sheet date, with the unrealized holding gains or losses recognized in earnings.

Company A holds 25% of Company B's voting interests. Which of the following statements is true? A. Under IFRS, Company A may account for its investment in Company B using the revaluation model or the equity method. B. Under U.S. GAAP, Company A must account for its investment in Company B at fair value. C. Under U.S. GAAP, Company A may account for its investment in Company B at fair value or according to the equity method. D. Under IFRS, Company A may account for its investment in Company B at fair value or according to the equity method.

Answer (C) is correct. Under U.S. GAAP, an entity that is presumed to have significant influence over an investee may elect to adopt the fair value option or the equity method.

Anchor Co. owns 40% of Main Co.'s common stock outstanding and 75% of Main's noncumulative preferred stock outstanding. Anchor exercises significant influence over Main's operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main? A. $80,000 B. $120,000 C. $75,000 D. $225,000

Answer (C) is correct. Under the equity method, the receipt of a cash dividend from the investee should be credited to the investment account. It is a return of, not a return on, the investment. However, the equity method is not applicable to preferred stock. Thus, Anchor should report $75,000 ($100,000 × 75%) of revenue when the preferred dividends are declared.

An entity should report an investment in marketable equity securities that does not result in significant influence or control over the investee at A. Lower of cost or market, with holding gains and losses included in earnings. B. Lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses. C. Fair value, with holding gains and losses included in earnings. D. Fair value, with holding gains included in earnings only to the extent of previously recognized holding losses.

Answer (C) is correct. Unrealized holding gains and losses on an investment in equity securities that do not result in significant influence or control over the investee are reported in earnings. On a statement of financial position, these securities are reported at fair value.

An entity recognizes revenue from a long-term contract over time. However, early in the performance of the contract, it cannot reasonably measure the outcome, but it expects to recover the costs incurred. Revenue should be recognized based on A. The output method. B. A straight-line calculation. C. A zero profit margin. D. The completed-contract method.

Answer (C) is correct. When the outcome of the contract is not reasonably measurable but the costs incurred in satisfying the performance obligation are expected to be recovered, revenue must be recognized only to the extent of the costs incurred. Revenue recognized is based on a zero profit margin until the entity can reasonably measure the outcome of the performance obligation.

Because of a decline in market price in the second quarter, Petal Co. incurred an inventory loss, but the market price was expected to return to previous levels by the end of the year. At the end of the year, the decline had not reversed. Petal accounts for its inventory using the LIFO method. When should the loss be reported in Petal's interim income statements? A. Ratably over the third and fourth quarters. B. In the second quarter only. C. Ratably over the second, third, and fourth quarters. D. In the fourth quarter only.

Answer (D) is correct. A decline below cost reasonably expected to be restored within the fiscal year may be deferred at an interim reporting date because no loss is anticipated for the year. (Inventory losses from nontemporary market declines must be recognized at the interim reporting date.) Consequently, Petal would not have reported the market decline until it determined at the end of the fourth quarter that the expected reversal would not occur.

During Year 6, Wall Co. purchased 2,000 shares of Hemp Corp. common stock for $31,500. They represent 2% of ownership in Hemp Corp. The fair value of this investment was $29,500 at December 31, Year 6. Wall sold all of the Hemp common stock for $14 per share on December 15, Year 7, incurring $1,400 in brokerage commissions and taxes. In its income statement for the year ended December 31, Year 7, Wall should report a recognized loss of A. $1,500 B. $4,900 C. $3,500 D. $2,900

Answer (D) is correct. A realized loss or gain is recognized when an individual equity security is sold or otherwise disposed of. Wall would have included the $2,000 ($31,500 - $29,500) decline in the fair value of the equity securities (an unrealized holding loss) in earnings at 12/31/Yr 6. Consequently, the realized loss on disposal at 12/15/Yr 7 is $2,900 {$29,500 carrying amount - [(2,000 shares × $14) - $1,400]}.

Vilo Corp. has estimated that total depreciation expense for the year ending December 31 will amount to $60,000, and that year-end bonuses to employees will total $120,000. In Vilo's interim income statement for the 6 months ended June 30, what is the total amount of expense relating to these two items that should be reported? A. $30,000 B. $0 C. $180,000 D. $90,000

Answer (D) is correct. Costs and expenses other than product costs should be either charged to income in interim periods as incurred or allocated among interim periods based on the benefits received. The depreciation and the bonuses to employees clearly provide benefits throughout the year, and they should be allocated ratably to all interim periods. In the interim income statement for the 6 months ended June 30, the total amount of expense that should be recorded is $90,000 [($180,000 ÷ 12 months) × 6 months].

For interim financial reporting, a gain on disposal of property occurring in the second quarter should be A. Disclosed in the notes only in the second quarter. B. Recognized ratably over the last three quarters. C. Recognized ratably over all four quarters, with the first quarter being restated. D. Recognized in the second quarter.

Answer (D) is correct. Gains and losses similar to those that would not be deferred at year end should not be deferred to later interim periods of the same year. Accordingly, a gain on disposal of an asset should not be prorated. It is recognized in full in the quarter in which it occurs.

Grum Corp. is a publicly owned corporation subject to the requirements for segment reporting. In its income statement for the year ended December 31, Grum reported revenues of $50 million, operating expenses of $47 million, and net income of $3 million. Operating expenses include payroll costs of $15 million. Grum's combined assets of all operating segments at December 31 were $40 million. In its financial statements for the current year, Grum should disclose major customer data if sales to any single customer amount to at least A. $300,000 B. $4,000,000 C. $1,500,000 D. $5,000,000

Answer (D) is correct. If 10% or more of revenue is derived from sales to any single customer, the entity must disclose that information and the amount of revenue from each such customer (without disclosing the identity of the customer). The identity of the operating segment or segments making the sales must also be disclosed. Hence, sales to a single customer of $5,000,000 ($50,000,000 total revenue × 10%) will necessitate disclosure of major customer data.

Which of the following are acceptable formats for reporting comprehensive income? I. In one continuous financial statement II. In a statement of changes in equity III. In a separate statement of net income IV. In two separate but consecutive financial statements A. III and IV only. B. I, II, and III only. C. I and II only. D. I and IV only.

Answer (D) is correct. If an entity that presents a full set of financial statements has items of other comprehensive income (OCI), it must present comprehensive income either (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive statements (an income statement and a statement of OCI).

A presentation of financial assets and financial liabilities is required to be disaggregated only by A. Form of financial assets and liabilities in the balance sheet. B. Form of financial liabilities and measurement category in the notes to the financial statements. C. Level of the fair value hierarchy in which the financial instruments are categorized. D. Form of financial asset and measurement category in the balance sheet or the notes to the financial statements.

Answer (D) is correct. On the balance sheet or in the notes to the financial statements, financial assets and financial liabilities are separately presented (disaggregated) by (1) measurement category (i.e., amortized cost, fair value through net income, and fair value through OCI) and (2) form of financial asset (i.e., loans, securities, and receivables).

In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, Year 4, Pulham has a receivable from Angles. How should the receivable be reported in Pulham's Year 4 financial statements? A. None of the receivable should be reported, but the entire receivable should be offset against Angles's payment to Pulham. B. The total receivable should be included as part of the investment in Angles, without separate disclosure. C. 70% of the receivable should be separately reported, with the balance offset against 30% of Angles's payment to Pulham. D. The total receivable should be disclosed separately.

Answer (D) is correct. Related parties include an entity and its equity-based investees. A receivable from a related party should be separately and fully disclosed. Indeed, nontrade receivables generally are subject to separate treatment.

The decision to elect the fair value option (FVO) A. Must be applied only to classes of financial instruments. B. May be applied to a portion of a financial instrument. C. Must be applied to all instruments issued in a single transaction. D. Is irrevocable until the next election date, if any.

Answer (D) is correct. The decision to elect the FVO is final and cannot be revoked unless a new election date occurs. For example, an election date occurs when an entity recognizes an investment in equity securities with readily determinable fair values issued by another entity. A second election date occurs if the accounting changes because the investment later becomes subject to equity-method accounting.

On January 2, Well Co. purchased 10% of Rea, Inc.'s outstanding common shares for $400,000, which equaled the carrying amount and the fair value of the interest purchased in Rea's net assets. Well did not elect the fair value option. Because Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors, Well exercises significant influence over Rea. Rea reported net income of $500,000 for the year and paid dividends of $150,000. In its December 31 balance sheet, what amount should Well report as investment in Rea? A. $450,000 B. $385,000 C. $400,000 D. $435,000

Answer (D) is correct. The equity method should be used because Well Co. exercises significant influence over Rea. The investment in Rea equals $435,000 [$400,000 investment + ($500,000 net income × 10%) - ($150,000 of dividends × 10%)].

What is the primary objective of financial reporting? A. To provide management with an accurate evaluation of their financial performance. B. To provide economic information that is comprehensible to all users. C. To provide forecasts for future cash flows and financial performance. D. To provide information that is useful for economic decision making.

Answer (D) is correct. The overall objective is to report financial information that is useful to current and potential investors and creditors in making decisions about providing resources to an individual reporting entity.

The Tax Court ruled in favor of the entity on October 25, Year 5. Litigation involved deductions claimed on the Year 1 and Year 2 tax returns. The entity had provided in accrued taxes payable for the full amount of the potential disallowances. The Internal Revenue Service will not appeal the Tax Court's ruling. How should this event be presented in the financial statements? A. No financial statement disclosure necessary. B. Disclosure by means of supplemental, pro forma financial data. C. Disclosure in a note to the financial statements. D. Adjustment of the financial statements for the year ended September 30, Year 5.

Answer (D) is correct. The ruling of the Tax Court provides additional evidence with respect to conditions that existed at the date of the financial statements and affects the estimates used in their preparation. Consequently, the settlement in the subsequent events period for an amount different from that recorded requires the client to adjust the statements.

The best evidence of a standalone selling price of a promised good or service to a customer is A. Expected cost. B. Competitor's selling price. C. Expected cost plus an appropriate margin. D. An observable price.

Answer (D) is correct. The standalone selling price is the price at which an entity would sell a promised good or service separately to a customer. The best evidence of a standalone selling price is the observable price of a good or service when it is sold separately in similar circumstances and to similar customers (e.g., a contractually stated price or list price of a good or service).

A reclassification of available-for-sale debt securities to the held-to-maturity category results in A. The reversal of any unrealized gain or loss previously recognized in other comprehensive income. B. The recognition in earnings on the transfer date of an unrealized gain or loss. C. The reversal of any unrealized gain or loss previously recognized in earnings. D. The amortization of an unrealized gain or loss existing at the transfer date.

Answer (D) is correct. The unrealized holding gain or loss on the date of transfer for available-for-sale debt securities transferred to the held-to-maturity category continues to be reported in OCI. However, it is amortized as an adjustment of yield in the same manner as the amortization of any discount or premium. This amortization offsets or mitigates the effect on interest income of the amortization of the premium or discount. Fair value accounting may result in a premium or discount when a debt security is transferred to the held-to-maturity category.

At the beginning of the fiscal year, End Corp. purchased 25% of Turf Co. for $550,000. At the end of the fiscal year, Turf reported net income of $65,000 and declared and paid cash dividends of $30,000. End uses the equity method of accounting. At year end, what amount should End report in its balance sheet for the investment in Turf? A. $566,250 B. $573,750 C. $550,000 D. $558,750

Answer (D) is correct. Under the equity method, the investor recognizes in income its share of the investee's earnings or losses in the periods for which they are reported by the investee. Therefore, the investment in Turf account is increased by the investor's share of the investee's income of $16,250 ($65,000 × 25%). Dividends from the investee are treated as a return of an investment. Thus, the investment account is decreased by the dividends received of $7,500 ($30,000 × 25%). The year-end carrying amount of investment in Turf is therefore $558,750 ($550,000 + $16,250 - $7,500).

When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes A. A cash dividend received from the investee. B. Depreciation related to the excess of fair value over the carrying amount of the investee's depreciable assets at the date of purchase by the investor. C. Periodic amortization of the goodwill related to the purchase. D. A proportionate interest in the net income of the investee.

Answer (D) is correct. Under the equity method, the investor's share of the investee's net income is accounted for as an addition to the carrying amount of the investment on the investor's books. Losses and dividends are reflected as reductions of the carrying amount.

On both December 31, Year 1, and December 31, Year 2, Kopp Co.'s only available-for-sale debt security had the same fair value, which was below amortized cost. Kopp considered the decline in value to be temporary in Year 1 but other than temporary in Year 2. At the end of both years the security was classified as a noncurrent asset. What should be the effects of the determination that the decline was other than temporary on Kopp's Year 2 net noncurrent assets and net income? A. Decrease in net noncurrent assets and no effect on net income. B. No effect on both net noncurrent assets and net income. C. Decrease in both net noncurrent assets and net income. D. No effect on net noncurrent assets and decrease in net income.

Answer (D) is correct. Unrealized holding gains and losses on available-for-sale debt securities, including those classified as current assets, are not included in earnings but are reported in other comprehensive income until realized, net of tax effect. Thus, the unrealized holding loss would have been reflected in the measurement of the asset at the end of Year 1 but not in Year 1 earnings. The other-than-temporary decline identified in Year 2 should be included in earnings. Given that the decline in fair value below amortized cost judged to be temporary in Year 1 equaled the impairment recognized in Year 2, the measurement of the asset and of net noncurrent assets does not change.

A doubt about newly formed Nev Company's ability to continue as a going concern was disclosed in its annual financial statements for December 31, 20X6. In March 20X7, management solved the problem that caused the going concern disclosure. Which of the following must the management of Nev disclose in the first quarter financial statements of 20X7? A. Evaluation of the significance of the conditions or events that raised the substantial doubt. B. The principal conditions or events that raised the substantial doubt. C. The plans that alleviated the substantial doubt about the entity's ability to continue as a going concern. D. All of the answers are correct.

Answer (D) is correct. When substantial doubt about an entity's ability to continue as a going concern was alleviated as a result of management's plans, the entity must disclose the following: Principal conditions or events that raised the substantial doubt Management's evaluation of the significance of those conditions or events Management's plans that alleviated the substantial doub

The transaction price from contracts with customers generally should not be adjusted for the effect of the time value of money when A. The transfer of goods is at the discretion of the seller. B. The transfer of goods is at the discretion of the buyer/customer.

B. The transaction price should not be adjusted for the effect of the time value of money if The time between the payment and the delivery of the promised good or service to the customer is 1 year or less. The transfer of goods or services is at the discretion of the customer (e.g., a bill-and-hold contract in which the seller provides storage services for goods it sold to the buyer). A substantial amount of the consideration promised is variable, and its amount or timing varies on the basis of future circumstances that are not within the control of the entity or the customer. An example is a sales-based royalty contract in which the amount of consideration depends on sales by the customer to third parties.

Fair value hierarchy:

Level 1- Unadjusted quoted prices in active markets for identical assets or liabilities Level 2- quotes prices for similar items in active markets, nonactive markets, and observable inputs Level 2- unobservable inputs and the reporting entity's own data like internally generated cash flow projections

Wilson Corp. experienced a $50,000 decline in the market value of its LIFO inventory in the first quarter of its fiscal year. Wilson had expected this decline to reverse in the third quarter, and the third quarter recovery exceeded the previous decline by $10,000. Wilson's inventory did not experience any other declines in market value during the fiscal year. What amounts of loss or gain should Wilson report in its interim financial statements for the first and third quarters?

None in either. A market decline reasonably expected to be restored within the fiscal year may be deferred at an interim reporting date because no loss is anticipated for the year. Because Wilson expected the first quarter loss to be temporary, it did not recognize the loss in the interim statements. *Recoveries of market value may only be recognized to the extent of previous losses, so no gain was recognized in the third quarter.*

Study Unit 5: Cash and Investments | Subunit 4: Equity Method- How do you treat *income* and *dividends* when you exercise significant control of the entity and therefor record the investment under the equity method? How do you calculate the *carrying amount*?

The NI is recorded on you income statement The dividends they paid you is recorded as a decrease in your investment. to find the carrying amount of your investment, you add the income and subtract the dividends.

Under ASC 606, which two methods are acceptable for estimating the amount of variable consideration in contracts with customers?

The amount of variable consideration must be estimated by applying consistently throughout the contract period one of two methods: (1) expected value or (2) most likely amount. The expected value method may provide an appropriate estimate if an entity has a large number of contracts with similar characteristics. The expected value is the sum of probability-weighted amounts in the range of possible consideration amounts. The most likely amount method may provide an appropriate estimate if the contract has only two possible outcomes. The most likely amount is the single most likely amount in a range of possible consideration amounts.

Credit risk is the risk of

accounting loss from a financial instrument because of the possible failure of another party to perform. An entity must disclose most significant concentrations of credit risk arising from instruments. Group concentrations arise when multiple counterparties have similar characteristics that cause their ability to meet obligations to be similarly affected by change in conditions. An example of such a group is an industry.

For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect which: -Foreign Tax Rates -Available Tax Planning Alternatives

both. The estimated annual effective tax rate should be based upon the statutory rate adjusted for the current year's expected conditions. These conditions include anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other tax planning alternatives. The rate should also include "the effect of any valuation allowance expected to be necessary at year end for deferred tax assets related to originating deductible temporary differences and carryforwards during the year."