SIM 3 - MCQ missed
On December 1, East Co. purchased a tract of land as a factory site for $300,000. The old building on the property was razed, and salvaged materials resulting from demolition were sold. Additional costs incurred and salvage proceeds realized during December were as follows: Cost to raze old building = $25,000 Legal feed for purchase contract and to record ownership = $5,000 Title guarantee insurance = $6,000 Proceed from sale of salvaged materials = $4,000 In Easts December 31 balance sheet, what amount should be reported as land? A. $311,000 B. $336,000 C. $332,000 D. $321,000
$332,000 should be reported as land on 12-31 BS. Cost of land includes all costs necessary to put it in the place and condition for construction of the building as follows: Purchase price 300,000 Cost to raze old building + 25,000 Legal fees for purchase contract and to record ownership + 5,000 Title guaranty insurance + 6,000 Sub Total 336,000 Less proceeds from sales of salvaged materials (4,000) Total cost of land 332,000
Finch Co. reported a total asset retirement obligation of $257,000 in last year's financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year's balance sheet? A. $264,000 B. $306,000 C. $238,000 D. $280,000
ANSWER: A. $264,000 An asset retirement obligation (ARO) is on the books initially as both an asset and a liability at present values. Each period, depreciation expense is booked to decrease the asset and accretion expense is booked to increase the liability such that when the ARO must be satisfied, there is no asset on the books anymore and the liability is represented at current costs. The initial obligation of $257,000 is the starting point, and the following transactions are then recorded to derive the current year ARO: Subtract $87,000 for a settlement associated with the previous ARO, which will reduce the liability. The accretion expense of $26,000 is used to increase the ARO liability. The $68,000 present value of the new ARO is applied to the ARO liability as well. ARO are recorded at present value. Ending ARO = Beginning ARO + PV of new ARO + Accretion expense − ARO settled during the period Ending APO = $257,000 + $68,000 + $26,000 − $87,000 = $264,000
The following stock dividends were declared and distributed by Sol Corp.: % of CS outstanding at declaration date FV Par 10% $15,000 $10,000 28% $40,000 $30,800 What aggregate amount should be debited to RE for these stock dividends? A. $45,800 B. $50,000 C. $55,000 D. $40,800
ANSWER: A. $45,800 $45,800. SMALL STOCK DIVIDEND = FV LARGE STOCK DIVIDEND = PAR For a small stock dividend (less than 20-25% of the shares outstanding previously) the fair value of the shares is capitalized from retained earnings. For a large stock dividend (more than 20-25% of the shares outstanding previously), only the amount legally required to be capitalized is transferred from retained earnings (typically the par value of the stock).
Douglas Co. leased machinery with an economic useful life of 6 years. For tax purposes, the depreciable life is 7 years. The lease is for 5 years, and Douglas can purchase the machinery at fair market value at the end of the lease. What is the depreciable life of the leased machinery for financial reporting purposes? A. 0 B. 5 years C. 6 years D. 7 years
ANSWER: B. 5 years This lease will be accounted for as a finance lease because the lease term of five years is 75% of the economic life of six years. Assets acquired under finance leases are depreciated using the same theory as purchased assets. The purchase option is for "fair value," which means it cannot be assumed without further information that Douglas will be reasonably certain to exercise. As a result, the machinery should be depreciated over the five-year lease term.
Which of the following accounts of a governmental unit is credited when taxpayers are billed for property taxes? A. Appropriations B. Revenues C. Estimated Revenues D. Taxes recievable
ANSWER: B. Revenues Revenues are credited and Property Taxes Receivable are debited when taxpayers are billed for property taxes. Note that the revenues are recorded net of estimated uncollectibles. Choice "1" is incorrect. Appropriations are credited when the budget is recorded at the beginning of the budget year. Choice "3" is incorrect. Estimated revenues are credited at fiscal year-end when the estimated revenues and appropriations are closed. Choice "4" is incorrect. Taxes receivable-current are credited when cash is received.
A company acquires another company for $3,000,000 in cash, $10,000,000 in stock, and the following contingent consideration : $1,000,000 after Year 1, 1,000,000 after Year 2, and $500,000 after Year 3, if earnings of the subsidiary exceed $10,000,000 in each of the three years. The fair value of the contingent-based consideration portion is $2,100,000. What is the total consideration transferred for this business combination? A. $5,100,000 B. $13,000,000 C. $15,100,000 D. $15,000,000
ANSWER: C. $15,100,000 In a business combination, the investment is valued at the fair value of the consideration given. The $15,100,000 acquisition value includes the cash of $3 million, the common stock of $10 million, and the fair value of the contingencies, which total $2.1 million.
On November 2, Yeay 1, Platt Co. entered into a 90-day futures contract to purchase 50,000 Swiss francs when the contract quote was $.70. The purchase was for speculation in price movement. The following exchange rates existed during the contract period: 30-day Futures Spot Rate November 2, YR1 .62 .63 December 31, YR2 .65 .64 January 30, YR2 .65 .68 What amount should Platt report as foreign currency exchange loss in its income statement for the year ended December 31, Year 1.? A. $4,000 B. $3,500 C. $2,500 D. $3,000
ANSWER: C. $2,500 it is a futures contract therefore you use the 30 day futures rate. Any gain or loss on futures contracts not designated as a hedge is recognized in current income. The loss as of December 31, Year 1 is: Contract rate $.70 30-day futures rate on 12/31/Year 1 .65 .05 x 50,000 SF = $2,500 loss The December 31, Year 1 30-day futures rate is used since, as of December 31, Year 1, 30 days remain in the contract period. If the futures contract were purchased at year-end instead of on November 2, Year 1, 5¢ per Swiss franc would have been saved. It would have only cost us 65¢ per Swiss franc instead of our contract rate of 70¢; therefore, 5¢ per Swiss franc was recorded as a loss.
On January 2 of the current year, LTTI Co. entered into a three-year, non cancelable contract to buy up to 1 million unites of a product year at $0.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year-end, LTTI had purchased only 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year? A. $12,000 B. $0 C. $52,000 D. $8,000
ANSWER: C. $52,000 3 Year NON CANCELABLE LEASE 200,000 x 3 = 600,0000 600,000 - 80,000 = 520,000 X .1 The contract overall has a minimum total guarantee of 600,000 units over the three-year contract, and only 80,000 units will be purchased. At $0.10 per unit, the company is responsible for 520,000 units at $0.10 per unit. The loss as a result will be $52,000 (520,000 × $0.10).
On January 2, Year 1, Marx Co. as lessee signed a five-year noncancelable equipment lease with annual payments of $200,000 beginning December 31, Year 1. Marx treated this transaction as a finance lease. The five lease payments have a PV of $758,000 at January 2, Year 1, based on interest of 10%. What amount should Marx report as interest expense for the year ended December 31, Year 1? A. $0 B. $48,400 C. $75,800 D. $55,800
ANSWER: C. $75,800 The lease term began January 2, Year 1, on a lease valued at $758,000. The first payment of $200,000 was made on December 31, Year 1. Since the interest rate is 10% and one year has expired, Marx Co.'s interest expense is computed as 10% of $758,000 or $75,800. The remainder of the $200,000 payment reduces the obligation under the lease.
For which of the following methods of determining FV would an entity's discount rate be most important? A. Highest and best value approach B. Cost Approach C. Income Approach D. Market Approach
ANSWER: C. Income Approach The income approach determines fair value by converting future amounts, including cash flows or earnings, to a single discounted amount. This would require the use of a discount rate. Choice "1" is incorrect. Although the fair value of nonfinancial assets is the value of the assets at their highest and best use, this is not actually a method for determining value. Value is determined in one of three ways: the market approach, the income approach, or the cost approach. Choice "2" is incorrect. The cost approach determines fair value by using current replacement cost. A discount rate is not used in this approach. Choice "4" is incorrect. The market approach determines fair value by using prices and other relevant information from market transactions involving identical or comparable assets or liabilities to determine fair value. A discount rate is not used in this approach.
A company has a total revenue of $1,00,000, profits of $90,000, total assets of $10,000,000 and total liabilities of $5,000,000. Operating segment Sun has revenues of $95,000, profit of $10,000, assets of $900,000, and liabilities of $550,000. Which of the following test makes Sun a reportable segement? A. Liability test B. Asset Test C. Profit Test D. Revenue Test
ANSWER: C. Profit Test Liability test not used Asset = 900,000/ 10,000,000 = 9% Profits = 10,000/90,000= 11.1% Revenue = 95,000/ 1,000,000 = 9.5%
An asset group is being evaluated for an impairment loss. The following financial information loss. The following financial information is available for the asset group: CV: 100,000 Sum of the undercounted cash flows: 95,000 FV: 80,000 What amount of impairment loss, if any, should be recognized? A. $5,000 B. $0 C. $15,000 D. $20,000
ANSWER: D Impairment step 1: Sum of the undercounted cash flows = 95,000 (CV) = (100,000) Negative = there is impairment loss = 5,000 STEP 2 : Calculated impairment loss FV = 80,000 CV = (100,000) (20,000) = Impairment Loss
Tulip Co. owns 100% of Daisy Co's outstanding common stock. Tulip's COGS for the year totals $600,000 and Daisy's COGS totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to 3rd parties. What amount should be reported as COGS in the consolidated statement of income? A. $940,000 B. $1,000,000 C. $960,000 D. $900,000
ANSWER: D. $900,000 tercompany sales and cost of goods sold must be eliminated before consolidated financial statements are prepared (which will be prepared since Tulip Co. owns more than 50% of Daisy Co.). In addition, the profit that results from intercompany sales (if any) must be eliminated from ending inventory (if the inventory bought from the related company is still on hand at the end of the year) or the cost of goods sold of the purchasing entity (if the inventory bought from the related company has been sold to third parties by the end of the year). The following journal entries explain the transactions. Debit (Dr)Credit (Cr) Accounts Receivable 100,000 Intercompany sales—Tulip 100,000 * Intercompany profit = $40,000 Intercompany cost of goods sold—Tulip 60,000 Inventory 60,000 Inventory—Daisy 100,000 Accounts payable 100,000 * Intercompany profit = Intercompany sales - Intercompany cost of good sold The intercompany sales, cost of goods sold and profit must be eliminated. The profit is eliminated by allocating it to Daisy Co.'s cost of goods sold (to the extent the inventory bought from Tulip has been sold to third parties, which it has) and ending inventory (if the inventory bought from Tulip was still on hand at the end of the year, which it is not). As all transferred inventory was sold by Daisy to third parties and none remains on hand at year-end, the elimination entry will just affect Daisy Co.'s cost of goods sold. Debit (Dr)Credit (Cr) Intercompany sales—Tulip 100,000 Intercompany cost of goods sold—Tulip 60,000 Cost of goods sold—Daisy 40,000* *to eliminate intercompany profit from Daisy's cost of goods sold Total cost of goods sold = 600,000 Tulip's CGS 400,000 Daisy's CGS (60,000) Elimination of Tulip's CGS (40,000) Elimination of profit in Daisy's CGS 900,000
On December 31, Spacer Inc. amended its overfunded pension plan and recorded prior service cost of $250,000. On that date, its employees had an average future service period of 25 years. What effect will the plan amendment have on Spacer's December 31 financial statements? A. Decrease in RE B. Increase in Net periodic pension cost C. Increase pension benefit asset D. Decrease accumulated OCI
ANSWER: D. Decrease in AOCI Changes in the funded status of a pension plan due to plan amendment must be reported in other comprehensive income in the period incurred. Therefore, at December 31, Spacer will record prior service cost as a debit to other comprehensive income, which will decrease Spacer's accumulated other comprehensive income balance at December 31: Debit (Dr)Credit (Cr)Other comprehensive income 250,000 Pension benefit asset
How are discounted operations that occur at midyear initially reported? A. Disclosed only in the noted to interim statements B. Included in Net Income and disclosed in the notes to the year-end financial statements C. Disclosed only in the notes to the year-end financial statements D. Included in net income and disclosed in the notes to interim financial statements
ANSWER: D. Included in net income and disclosed in the notes to interim financial statements To adequately capture the impact of discontinued operations, it should be included in net income and disclosed in the interim financial statement notes.
A large NFP organization's statement of activities should report the net change for net assets that are: Without Donor With Donor Restrictions Restrictions A. No Yes B. No No C. Yes No D. Yes Yes
ANSWER: D. Yes, Yes A not-for-profit organization prepares a Statement of Activities that presents changes in net assets without donor restrictions and net assets with donor restrictions.
On Janurary 1, Year 1, Jaffe Co. leased a machine to Pender Co. for 10 years, with $10,000 payments due at the beginning of each year effective at the inception of the lease. The machine cost Jaffee $55,000. The lease is appropriately accounted for as a sales-type (finance) lease by Jaffe. The PV of the 10 rent payments over the lease term discounted appropriately at 10% was $67,600. The estimated salvage value of the machine at the end of 10 years is equal to the disposal costs. How much interest revenue should Jaffe record from the lease for the year ended December 31, Year 1? A. $6,760 B. $5,760 C. $5,500 D. $7,020
Present value at inception of future minimum lease payments 67,600 Less first payment on 1/1/Year 1 (10,000) Balance during Year 1 $ 57,600 Discount rate x 10% Total
