ACCOUNTING 2

Settlement of prior year's litigation against the company for $150,000 more than the estimated and recorded litigation accrual.

Adjust

4. Durdil Company has a current ratio of 2:1. If current assets and current liabilities are both increased by $10,000, the current ratio will: a. increase. b. decrease. c. remain unchanged. d. either increase or decrease based on the total amount of current assets and current liabilities before the increase took place.

B

3. Which of the following best characterizes the difference between a financial forecast and a financial projection? a. Forecasts include a complete set of financial statements while projections include only summary financial data. b. A forecast is normally for a full year or more and a projection presents data for less than a year. c. A forecast attempts to provide information on what is expected to happen whereas a projection may provide information on what is not necessarily expected to happen. d. A forecast includes data which can be verified about future expectations while the data in a projection is not susceptible to verification.

C

4. On January 1, 2016, Mediterranean Cruise Line purchases a new ship, with an estimated useful life of 25 years, for €18,200,000. The components of the airplane and their useful lives are as follows: Component Cost Useful life Engine € 5,000,000 20 years Navigation System 2,500,000 10 years Other 10,700,000 25 years Mediterranean Cruise Line uses the straight-line method of depreciation. The asset is assumed to have no salvage value and will need to be replaced at the end of its 25-year service life. Under IFRS, the entry to record depreciation expense on the asset at December 31, 2017 will include a credit to accumulated depreciation of:

C. €928,000

Equipment C was purchased January 5, 2013. The asset's original cost was $160,000, and this amount was entirely expensed in 2013. This particular asset has a 10-year useful life and no residual value. The straight-line method was chosen for depreciation purposes. depr. for 2017

16

A statement prepared by foreign companies for the SEC similar to the 10-K

20-F

The inventory on December 31, 2017, was understated by $8,640.

2017: +8640; 2018: -8640

The bookkeeper in recording interest expense for both 2017 and 2018 on bonds payable made the following entry on an annual basis. Interest Expense 15,000 Cash 15,000 The bonds have a face value of $250,000 and pay a stated interest rate of 6%. They were issued at a discount of $15,000 on January 1, 2017, to yield an effective-interest rate of 7%. (Assume that the effective-yield method should be used.)

2017: -1450; 2018: -1551.5

Sales for 2017 included amounts of $38,200 which had been received in cash during 2017, but for which the related products were delivered in 2018. Title did not pass to the purchaser until 2018.

2017: -38200; 2018: +38200

Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2017 and 2018. Repairs in the amount of $8,500 in 2017 and $9,400 in 2018 were so charged. The company applies a rate of 10% to the balance in the Equipment account at the end of the year in its determination of depreciation charges.

2017: -7650; 2018: -7610

Equipment B was purchased January 3, 2013. It originally cost $180,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15 years and have a zero residual value. In 2017, the decision was made to shorten the total life of this asset to 9 years and to estimate the residual value at $3,000. depr. for 2017

25.8

Heartland Company's budgeted sales and budgeted cost of goods sold for the coming year are $144,000,000 and $99,000,000, respectively. Short-term interest rates are expected to average 10%. If Heartland can increase inventory turnover from its present level of 9 times a year to a level of 12 times per year, compute its expected cost savings for the coming year.

250000 savings

E22-6. (Change in Principle—Long-Term Contracts) (LO 1) Cullen Construction Company, which began operations in 2017, changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2018. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. The appropriate information related to this change is as follows. Pretax Income Percentage-of-Completion Completed-Contract Difference 2017 $880,000 $590,000 $290,000 2018 900,000 480,000 420,000 a) Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2018? (b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

540 174

Equipment A was purchased January 2, 2014. It originally cost $540,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2017, the decision was made to change the depreciation method from straight-line to sum-of-the-years'-digits, and the estimates relating to useful life and salvage value remained unchanged. depr. for 2017

94.5

An industry segment is regarded as significant and therefore identified as a reportable segment if it satisfies one or more quantitative tests that deal with segment revenues, income, or assets. In addition to these quantitative tests the FASB believes entities should not report too many segments so as to overwhelm users with detailed information that may not be useful. The FASB also requires that: a. segment results equal or exceed 75% of the combined sales to unaffiliated customers for the entire enterprise. b. a separate set of financial statements be shown for each identified segment. c. any segment reporting a net loss for two consecutive years be eliminated. d. the entity disclose in the notes to the financial statements each segment considered but not reported.

A

Depreciation of $3,200 for 2017 on delivery vehicles was not recorded.

Depreciation Expense. .................................................... 3,200 Accumulated Depreciation—Equipment. .............. 3,200

Acquisition of another company with sales of approximately one-half of the company.

Disclose

Filing for protection under Chapter 11 of the Bankruptcy Code.

Disclose

Issuance of a significant number of shares of preferred stock.

Disclose

Loss of an overseas plant due to expropriation.

Disclose

Sale of a 10% of the company's assets.

Disclose

An initial offering document prepared by a foreign corporation for the SEC

F-1

The United States standard-setting organization

FASB

The only source of authoritative U.S. GAAP

FASB Codification

Allows for the method of inventory measurement that best reflects income

GAAP

Can classify as leveraged lease

GAAP

Carries inventory at lower of cost or market

GAAP

Specific requirements related to leases (opposite is substantive)

GAAP

The international standard setting organization

IASB

Allows for revaluation of assets

IFRS

Allows for the reversal of write downs

IFRS

Broadly defines leases and may include intangibles

IFRS

Carries inventory at lower of cost or realizable value

IFRS

Componentization of assets

IFRS

Development costs can be capitalized

IFRS

International accounting standards which are used to prepare financial statements

IFRS

Must separately determine which kind of lease land and building are under, (opposite can group)

IFRS

Not allowed to use LIFO

IFRS

Which of the following are prohibited when accounting for inventory under IFRS GAAP?

LIFO

During November 2017, a competitor company filed a patent-infringement suit against Zarle claiming damages of $220,000. The company's legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court's award to the competitor is $125,000. The company has not reflected or disclosed this situation in the financial statements.

Litigation Loss 125 Litigation Liab 125

Charges of fraud filed against a vice-president

Nothing

Dismissal of the company president.

Nothing

Gain a significant customer

Nothing

Prolonged employee strike.

Nothing

Under IFRS accounting for research and development costs (when the product is technologically and economically feasible) indicates that:

Research costs - expensed Development costs - capitalized

A large piece of equipment was purchased on January 3, 2017, for $40,000 and was charged to Maintenance and Repairs Expense. The equipment is estimated to have a service life of 8 years and no residual value. Zarle normally uses the straight-line depreciation method for this type of equipment.

equip 40000 mr exp 40000 dep exp 5000 accum depre 5000

A $12,000 insurance premium paid on July 1, 2016, for a policy that expires on June 30, 2019, was charged to insurance expense.

prep ins poilicy 10000 re 10000

A trademark was acquired at the beginning of 2016 for $50,000. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years.

re 5000 accum amort 5000

Which of the following is something permitted when accounting for PP&E under IFRS GAAP but NOT permitted under U.S. GAAP?

revaluation of carrying value to fair value

At December 31, 2017, an analysis of payroll information shows accrued salaries of $12,200. The Salaries and Wages Payable account had a balance of $16,000 at December 31, 2017, which was unchanged from its balance at December 31, 2016.

sw payable 3800 sw exp 3800

Zarle has a portfolio of trading investments. No entry has been made to adjust to market. Information on cost and fair value is as follows. 2,000 DROP

unreal loss 2000 fair value adj 2000

In 2017, the company sold for $3,700 fully depreciated equipment that originally cost $25,000. The company credited the proceeds from the sale to the Equipment account.

accum depr 25000 eq 21300 gain on sale 3700

On March 1, Madrasah determined after negotiations with the Internal Revenue Service that income taxes payable for 2017 should be $1,270,000. At December 31, 2017, income taxes payable were recorded at $1,100,000.

adjust NI 170000 down

5. Kielty Company purchased machinery that cost $300,000 on January 1, 2012. The entire cost was recorded as an expense. The machinery has a nine-year life and a $12,000 residual value. Kielty uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2014. Ignore income tax considerations. Before the correction was made and before the books were closed on December 31, 2014, retained earnings was understated by: a. $300,000. b. $236,000. c. $224,000. d. $221,333.

b. $236,000

2. According to the FASB, which approach is required for reporting changes in an accounting principle? a. Currently b. Retrospectively c. Prospectively d. Futuristically

b. Retrospectively

1. Which of the following is not a change in accounting principle? a. A change from completed-contracts to percentage-of-completion. b. A change from FIFO to average cost. c. Using a different method of depreciation for new plant assets. d. A change from LIFO to FIFO for inventory valuation.

c. Using a different method of depreciation for new plant assets

4. Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/14 and 12/31/15 contained the following errors: 2014 2015 Ending inventory $5,000 overstatement, $8,000 understatement Depreciation expense $2,000 understatement, $4,000 overstatement Assume that no correcting entries were made at 12/31/14, or 12/31/15. Ignoring income taxes, by how much will retained earnings at 12/31/15 be overstated or understated? a. $7,000 overstatement. b. $8,000 overstatement. c. $3,000 understatement. d. $10,000 understatement.

d. $10,000 understatement.

3. Weaver Company changes from the LIFO method to the FIFO method in 2014. The increase in pre-tax income as a result of the difference in the two methods prior to 2013 is $ 100,000 and for the year 2013 is $40,000 and for the year 2014 is $30,000. The estimated tax effect is 40%. The entry to record the change at the beginning of 2014 should include. a. Debit to Deferred Tax Liability of $68,000. b. Credit to Deferred Tax Liability of $68,000. c. Debit to Deferred Tax Liability of $56,000. d. Credit to Deferred Tax Liability of $56,000.

d. Credit to Deferred Tax Liability of $56,000.

On January 10, 10,000 shares of $5 par value common stock were issued at $66 per share.

disclose

A collection of $5,600 on account from a customer received on December 31, 2017, was not recorded until January 2, 2018.

Cash. ................................................................................ 5,600 Accounts Receivable. ............................................ 5,600

5. Ratio analysis provides only a single snapshot, the analysis being for one given point or period in time. When an investment analyst wishes to concentrate on a given item to determine whether it appears to be growing or diminishing year by year and the proportion of such change to related items, they should use:

Comparative Analysis

The physical inventory count on December 31, 2016, improperly excluded merchandise costing $19,000 that had been temporarily stored in a public warehouse. Zarle uses a periodic inventory system.

Cost of Goods Sold (2014). ............................................ 19,000 Retained Earnings (2014 Beginning balance). ..... 19,000

1. The full disclosure principle, as adopted by the accounting profession, is best described by which of the following? a. All information related to an entity's business and operating objectives is required to be disclosed in the financial statements. b. Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements. c. Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision. d. Disclosure of any financial facts significant enough to influence the judgment of an informed reader.

D