FAR Practice-Part I

Magazine subscriptions collected in advance are reported as A contra account to magazine subscriptions receivable in the asset section of the balance sheet. Deferred revenue in the liability section of the balance sheet. Deferred revenue in the stockholders' equity section of the balance sheet. Magazine subscription revenue in the income statement in the period collected.

Deferred revenue in the liability section of the balance sheet.

According to the FASB conceptual framework, earnings Are the same as comprehensive income. Exclude certain gains and losses that are included in comprehensive income. Include certain gains and losses that are excluded from comprehensive income. Include certain losses that are excluded from comprehensive income.

Exclude certain gains and losses that are included in comprehensive income.

Rogo Corp.'s trial balance reflected the following account balances at December 31, year 1: Accounts receivable (net) $16,000 Short-term investments 5,000 Accumulated depreciation on equipment and furniture 15,000 Cash 11,000 Inventory of merchandise 30,000 Equipment and furniture 25,000 Patent 4,000 Prepaid expenses 1,000 Land held for future business site 18,000 In Rogo Corp.'s December 31, year 1 balance sheet, the current assets total is $81,000 $73,000 $67,000 $63,000

$63,000 This answer is correct. Current assets are cash and other assets that are expected to be converted into cash, sold, or consumed either in 1 year or in the operating cycle, whichever is longer. Included in this category are cash, temporary investments in marketable securities, short-term receivables, inventories, and prepaid expenses. In this case, total current assets are $63,000. Accounts receivable (net) $16,000 Short-term investments 5,000 Cash 11,000 Inventory of merchandise 30,000 Prepaid expenses 1,000 Total $63,000 Equipment and furniture ($25,000) and accumulated depreciation ($15,000) are reported in the property, plant, and equipment section. Patent ($4,000) is reported as an intangible asset, (always long-term), and land held for future business site ($18,000) is reported as a long-term investment.

Gar, Inc.'s trial balance reflected the following liability account balances at December 31, year 1: Accounts payable $19,000 Bonds payable, due year 2 34,000 Deferred income tax liability 4,000 Discount on bonds payable 2,000 Dividends payable on 2/15/Y2 5,000 Income tax payable 9,000 Notes payable, due 1/19/Y3 6,000 The deferred income tax liability is based on temporary differences stemming from different depreciation methods for financial reporting and income taxes. In Gar's December 31, year 1 balance sheet, the current liabilities total was $71,000 $69,000 $67,000 $65,000

$65,000 This answer is correct. ASC 210-10-20 Glossary states that current liabilities are obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities. This means that generally, current liabilities are liabilities due within 1 year of the balance sheet date. Clearly, accounts payable ($19,000), dividends payable ($5,000) and income tax payable ($9,000) are current liabilities. Generally bonds payable are a long-term liability; however, since these bonds are due in year 2, they must be reported as a current liability at 12/31/Y1 ($34,000 face less $2,000 discount, or $32,000). Therefore, total current liabilities are $65,000 ($19,000 + $5,000 + $9,000 + $32,000). The deferred income tax payable ($4,000) is classified as a long-term liability because it is related to the noncurrent asset, property, plant, and equipment. Similarly, the notes payable ($6,000) are classified as long-term because they are due in year 3.

Under Gerber Company's accounting system, all insurance premiums paid are debited to prepaid insurance. For interim financial statements, Gerber makes monthly estimated charges to insurance expense with an offset to prepaid insurance. Additional information for the year ended December 31, year 2, is as follows: Prepaid insurance at December 31, year 1 $150,000 Charges to insurance expense during year 2 (including a year-end adjustment of $25,000) 625,000 Unexpired insurance premiums at December 31, year 2 175,000 What was the total amount of insurance premiums paid by Gerber during year 2? $475,000 $600,000 $625,000 $650,000

$650,000 This answer is correct. The total amount of insurance premiums paid can be found by setting up a T-account. The diagram shows a table for the account of prepaid insurance, where it shows 12/31/Y1 = 150,000, premiums paid = ?, and 12/31/Y2 = 175,000 on the left-hand side and the insurance expense 625,000 on the right-hand side. The amount of premiums paid and debited to prepaid insurance, therefore, must be $650,000.

According to ASC Topic 820, the market that has the greatest volume and level of activity is the Most advantageous market. The most relevant market. The independent market. The principal market.

The principal market.

On January 2, year 1, Smith purchased the net assets of Jones' Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy's cash-basis financial statements for the year ended December 31, year 1, Spiffy reported revenues in excess of expenses of $60,000. Smith's drawings during year 1 were $20,000. In Spiffy's financial statements, what amount should be reported as Capital-Smith? $390,000 $400,000 $410,000 $415,000

This answer is correct. The ending balance in Smith's capital account on either the accrual or cash basis is computed as follows: Beginning capital + Investments + Income - Drawings = Ending capital Smith's beginning capital balance is measured as the cost of the assets purchased to establish the business ($350,000). The previously recorded value ($375,000) and estimated market value ($360,000) are irrelevant and do not affect beginning capital. No additional investments were made; cash basis income was $60,000 and drawings were $20,000. Therefore, the ending capital balance is $390,000 ($350,000 + $60,000 − $20,000).

The accrued balance in a revenue account represents an amount that is Earned Collected Yes Yes Yes No No Yes No No

Yes No This answer is correct because items of income that have been earned during a fiscal period but have not yet been collected are called accrued revenue. Adjusting entries are made to record these revenues and the corresponding receivables.

Winn Co. sells subscriptions to a specialized directory that is published semiannually and shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cutoff dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred subscription revenue. Data relating to year 2 are as follows: Deferred subscription revenue, 1/1/Y2 $ 750,000 Cash receipts from subscribers 3,600,000 In its December 31, year 2 balance sheet, Winn should report deferred subscription revenue of $2,700,000 $1,800,000 $1,650,000 $ 900,000

$ 900,000 This answer is correct. The 12/31/Y2 balance of deferred subscription revenue should reflect the liability for subscriptions still outstanding at that time. The 12/31/Y1 deferred revenue ($750,000) would have been earned when the April 15 directory was mailed, and therefore is no longer a liability. The cash collected through the September 30 cutoff date (9/12 × $3,600,000 = $2,700,000) would also have been earned when the April 15 and October 15 directories were mailed (note that the cash was received evenly throughout the year). However, the cash collected after September 30 (3/12 × $3,600,000 = $900,000) will not be earned until the 4/15/Y3 directory is mailed, and therefore is deferred revenue at 12/31/Y2.

Wright Company sells for cash major household appliance service contracts agreeing to service customers' appliances for a 1-year, 2-year, or 3-year period. Cash receipts from contracts are credited to unearned service contract revenues and this account had a balance of $1,440,000 at December 31, year 1, before year-end adjustment. Service contract costs are charged to service contract expense as incurred and this account had a balance of $360,000 at December 31, year 1. Outstanding service contracts at December 31, year 1, expire as follows: During year 2 $300,000 During year 3 450,000 During year 4 200,000 What amount should Wright report as unearned service contract revenues at December 31, year 1? $ 490,000 $ 712,500 $ 950,000 $1,080,000

$ 950,000 This answer is correct. The amount reported in this liability account should be the total amount of outstanding service contracts at 12/31/Y1, or $950,000 ($300,000 + $450,000 + $200,000). Wright's 12/31/Y1 adjusting entry would reduce the liability account from $1,440,000 to $950,000. Unearned service contracts revenue 490,000 Service contracts revenue 490,000

The following trial balance of Trey Co. at December 31, 20X5 has been adjusted except for income tax expense. Dr. Cr. Cash $550,000 Accounts Receivable, net 1,650,000 Prepaid taxes 300,000 Accounts payable $ 120,000 Common stock 500,000 Additional paid-in capital 680,000 Retained earnings 630,000 Foreign currency translation adjustment 430,000 Revenues 3,600,000 Expenses 2,600,000 __________ $5,530,000 $5,530,000 Additional information: During 20X5, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between the financial statement and the income tax income, and Trey's tax rate is 30%. Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer require payments in equal, semiannual installments of $125,000 every April 1 and October 1. In Trey's December 31, 20X5 Balance Sheet, what amount should be reported as total current assets? $1,950,000 $2,200,000 $2,250,000 $2,500,000

$1,950,000 Current assets are assets that are collectible within one year. The sum of the stated current assets is $2,500,000 ($550,000 + $1,650,000+$300,000). However, once the current tax bill is calculated, the prepaid taxes of $300,000 are transferred into a tax expense account to cover the $300,000 in current year tax expense. In addition, $250,000 of the special accounts receivable is not due for over one year and is, therefore, noncurrent. Therefore, current assets should be $1,950,000 ($2,500,000-$300,000-$250,000).

The following information pertains to Spee Co.'s 20X4 sales: Cash sales Gross $40,000 Returns and allowances 2,000 Credit sales Gross 60,000 Discounts 3,000 On January 1, 20X4, customers owed Spee $20,000. On December 31, 20X4, customers owed Spee $15,000. Spee uses the direct write-off method for bad debts. No bad debts were recorded in 20X4. Under the cash basis of accounting, what amount of revenue should Spee report for 20X4? $100,000 $95,000 $85,000 $38,000

$100,000 Revenue under the cash basis equals the amount of cash collected. The decrease in accounts receivable is $5,000 ($20,000 − $15,000). Gross cash sales $40,000 Less returns and allowances (2,000) Plus gross credit sales 60,000 Less discounts (3,000) Plus decrease in accounts receivable (More cash was collected than was recorded as sales when accounts receivable decreases) 5,000 Equals cash collected $ 100,000

Based on 2000 sales of compact discs recorded by an artist under a contract with Bain Co., the artist earned $100,000 after an adjustment of $8,000 for anticipated returns. In addition, Bain paid the artist $75,000 in 2000 as a reasonable estimate of the amount recoverable from future royalties to be earned by the artist. What amount should Bain report in its 2000 Income Statement for royalty expense? $100,000 $108,000 $175,000 $183,000

$100,000-The net amount earned by the artist is also the royalty expense to the firm. Royalty expense is recognized on the basis of the sales of the CD. Adjustments to the final amount earned for 2000, after all return information is known, will be treated as an adjustment to royalty expense in 2001. New information in 2001 will require a change in estimate, not retroactive application. The $100,000 amount is the best estimate of the royalty cost to Bain in 2000 that will ultimately be paid on 2000 sales.

James Lee, M.D., keeps his accounting records on a cash basis. During year 2, Dr. Lee collected $100,000 in fees from his patients. At December 31, year 1, Dr. Lee had accounts receivable of $20,000. At December 31, year 2, Dr. Lee had accounts receivable of $30,000, and unearned fees of $1,000. On an accrual basis, how much was Dr. Lee's patient service revenue for year 2? $111,000 $109,000 $ 90,000 $ 89,000

$109,000 This answer is correct. The following formula is used to adjust service revenue from the cash basis to the accrual basis: Accrual basis Service Cash fees End. Beg. Beg. End. revenue = collected + AR - AR + unearned fees - unearned fees Therefore, Dr. Lee's patient service revenue for year 2 is $109,000 ($100,000 + $30,000 - $20,000 + $0 − $1,000). As an alternative, T-accounts can be used. The diagram shows three tables: one for the "service revenue," where the first column on the left has 1,000, on the right has 110,000, the first row is indicated as 1/1/Y2. The second row on the right-hand column has 109,000 and this row is indicated as is 12/31/Y2. The second table is for the "Account receivable," where the first column on the left has 20,000 and 110,000 and on the right has 100,000, and this row is indicated as Cash received. The second row on the left has 30,000 and the right column is blank. The third table is for the "Unearned revenue," where the first column on the left is blank and on the right column has 0 and 1,000, and this row is indicated as 1/1/Y2. The second row on the left has 1,000 and the right column is blank, and this row is indicated as 12/31/Y2.

Clark Co.'s advertising expense account had a balance of $146,000 at December 31, 20X3, before any necessary year-end adjustment relating to the following: Included in the $146,000 is the $15,000 cost of printing catalogs for a sales promotional campaign in January 20X4. Radio advertisements broadcast during December 20X3 were billed to Clark on January 2, 20X4. Clark paid the $9,000 invoice on January 11, 20X4. What amount should Clark report as advertising expense in its Income Statement for the year ended December 31, 20X3? $122,000 $131,000 $140,000 $155,000

$140,000 The correct advertising expense amount is $146,000 − $15,000 + $9,000 = $140,000. The catalog printing is subtracted because the cost relates to 20X4, not to 20X3. The benefit of this cost will be received in 20X4. The radio advertisements are added because they benefit 20X3, but they were not included in the $146,000 because they were paid in 20X4. Clark was apparently unaware of the cost before 12/31/X3 because the firm was not billed until 20X4.

Reid Partners, Ltd., which began operations on January 1, 20X3, has elected to use cash-basis accounting for tax purposes and accrual-basis accounting for its financial statements. Reid reported sales of $175,000 and $80,000 in its tax returns for the years ended December 31, 20X4 and 20X3, respectively. Reid reported accounts receivable of $30,000 and $50,000 in its Balance Sheets as of December 31, 20X4 and 20X3, respectively. What amount should Reid report as sales in its Income Statement for the year ended December 31, 20X4? $145,000 $155,000 $195,000 $205,000

$155,000 When converting from cash-basis sales to accrual-basis sales, sales must be adjusted for the net change in accounts receivable. There has been a net decrease in receivables of $20,000 over the course of the year from $50,000 to $30,000. Thus, accrual sales would decline by $20,000 as compared to cash sales (which included the additional receivables collected). Therefore, this response of $155,000 ($175,000-$20,000) is correct.

Young & Jamison's modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses? $125,000 $135,000 $165,000 $175,000

$165,000 This answer is correct because it subtracts the yearly change in prepaid expenses from and adds the yearly change in accrued liabilities to the cash operating expenses to arrive at accrual-basis operating expenses. The cash paid for operating expenses is $150,000. Because prepaid expenses increased by $5,000 (end of year of $15,000 less beginning of year $10,000), this amount is not included in accrual-basis expenses. The accrued liabilities increased from $5,000 at beginning of the year to $25,000 at the end of the year, indicating that an additional $20,000 of liabilities were incurred and not yet paid. To convert to accrual-basis operating expenses, the cash paid of $150,000 is adjusted by subtracting the increase in the prepaid expense account, and adding the increase in accrued liabilities. ($150,000 - 5,000 + 20,000 = $165,000).

Adam Co. reported sales revenue of $2,300,000 in its income statement for the year ended December 31, year 2. Additional information was as follows: 12/31/Y1 12/31/Y2 Accounts receivable $500,000 $650,000 Allowance for uncollectible accounts (30,000) (55,000) Uncollectible accounts totaling $10,000 were written off during year 2. Under the cash basis of accounting, Adam would have reported year 2 sales of $2,140,000 $2,150,000 $2,175,000 $2,450,000

$2,140,000 This answer is correct. To determine cash basis revenue, the solutions approach is to prepare a T-account for accounts receivable. The diagram shows a table for the Accounts Receivable, where the first column, first row has 12/31/Y1: 500,000, the second row has Sales: 2,300,000, and the third row has 12/31/Y2: 650,000 and the second column has 10,000 write-offs and no value (?) for collections. An increase in receivables ($150,000) means that the amount of cash collected was less than sales, and this amount should be subtracted from accrual basis sales revenue to arrive at the cash basis sales revenue. Also, the $10,000 written off during year 2 means that the 12/31/Y2 receivable balance is $10,000 less than it would have been had no write-offs been made. In other words, this $10,000 represents recognized sales that will not result in the collection of cash and should be subtracted from accrual basis sales to determine cash basis sales revenue. Therefore, Adam should report $2,140,000 ($2,300,000 - $150,000 - $10,000) for year 2 cash basis sales.

Weaver Company sells magazine subscriptions for a 1-year, 2-year, or 3-year period. Cash receipts from subscribers are credited to magazine subscriptions collected in advance, and this account had a balance of $1,700,000 at December 31, year 1. Information for the year ended December 31, year 2, is as follows: Cash receipts from subscribers $2,100,000 Magazine subscriptions revenue (credited at 12/31/Y2) 1,500,000 In its December 31, year 2 balance sheet, what amount should Weaver report as the balance for magazine subscriptions collected in advance? $1,400,000 $1,900,000 $2,100,000 $2,300,000

$2,300,000 his answer is correct. The solutions approach is to set up a T- account for the liability. The diagram shows a table for the account of "Subscriptions collected in advance," where revenue earned: 1,500,000 appears on the left side and 12/31/Y2 balance: 1,700,000, cash receipts: $2,100,000, and 12/31/Y2 balance: 2,300,000 appears on the right side of the second column. As receipts are collected, the liability is credited to record the additional subscriptions owed to customers. In addition, the liability is decreased as revenue from the subscriptions is earned. Based upon the information given, Weaver should report $2,300,000 of subscriptions collected in advance at December 31, year 2.

Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, year 2. Additional information is as follows: Rents receivable - November 30, year 2 $ 1,060,000 Rents receivable - November 30, year 1 800,000 Uncollectible rents written off during the fiscal year 30,000 Under the accrual basis, Marr should report rental revenue of $1,920,000 $1,980,000 $2,440,000 $2,500,000

$2,500,000 This answer is correct. To determine rental revenue, prepare a T-account for rents receivable The diagram shows a table for the account of rents receivable, where the first column and the first row has 11/30/Y1: 800,000, second row has revenue XXX, and the third row has 11/30/Y2: 1,060,000, and the second column has 2,210,000 as cash collections and 30,000 as Write-offs. Revenue can be calculated by solving for the unknown amount in the T-account, ($800,000 + XXX − $2,210,000 − $30,000 = $1,060,000). Revenues would be equal to $2,500,000. The above analysis assumes all revenues were initially recorded as receivables.

The following information pertains to Eagle Co.'s Year 5 sales: Cash Sales Gross $ 80,000 Returns and allowances 4,000 Credit sales Gross 120,000 Discounts 6,000 On January 1, Year 5, customers owed Eagle $40,000. On December 31, Year 5, customers owed Eagle $30,000. Eagle uses the direct write-off method for bad debts. No bad debts were recorded in Year 5. Under the cash basis of accounting, what amount of net revenue should Eagle report for Year 5? $76,000 $170,000 $190,000 $200,000

$200,000 Net cash sales collected $80,000 − $4,000 $76,000 Plus cash collections from credit sales: Beginning accounts receivable $40,000 Plus net credit sales $120,000 − $6,000 114,000 Less ending accounts receivable (30,000) equals cash collections from credit sales 124,000 Equals revenue recognized under the cash basis of accounting $200,000

A company has the following accrual-basis balances at the end of the its first year of operation: Unearned consulting fees $ 2,000 Consulting fees receivable 3,500 Consulting fee revenue 25,000 The company's cash-basis consulting revenue is what amount? $19,500 $23,500 $26,500 $30,500

$23,500 This answer is correct. Cash-basis consulting revenue is the consulting fee revenue of $25,000, plus the cash received from unearned consulting fees of $2,000, less the consulting fees receivable of $3,500. Cash-basis consulting revenue is equal to $23,500 ($25,000 + $2,000 - $3,500).

On the December 31, year 1 balance sheet of the Stat Company, the current assets were comprised of the following items: Cash $ 70,000 Accounts receivable 120,000 Inventories 60,000 An examination of the accounts revealed that the accounts receivable were composed of the following items: Trade accounts $ 93,000 Allowance for uncollectible accounts (2,000) Claim against shipper for goods lost in transit (11/Y1) 3,000 Selling price of unsold goods sent by Stat on consignment at 130% of cost (and not included in Stat's ending inventory) 26,000 $120,000 What is the correct amount of current assets as of 12/31/Y1? $221,000 $224,000 $244,000 $250,000

$244,000 This answer is correct. The additional detail of accounts receivable indicates that goods out on consignment are included in accounts receivable at their selling price. Consignment goods should be included in inventory at their cost. Since the selling price of the consigned goods is 130% of cost, the cost of the $26,000 of goods at retail is $20,000 ($26,000/130%). Accounts receivable should be reduced to $94,000 ($120,000 − $26,000), and inventory should be increased to $80,000 ($60,000 + $20,000). Therefore, total current assets are $244,000 ($70,000 + $94,000 + $80,000).

A company provides the following information: Year 1 Year 2 Year 3 Cash receipts from customers: From year 1 sales $95,000 $120,000 From year 2 sales 200,000 $ 75,000 From year 3 sales 50,000 225,000 What is the accrual-based revenue for year 2? $200,000 $275,000 $320,000 $370,000

$275,000 This answer is correct because accrual-based revenues would include all sales made during year 2. The cash received of $200,000 from year 2 sales and the cash received during year 3 of $75,000 for the year 2 sales are included in sales for year 2 ($200,000 + $75,000 = $275,000). Collection of year 1 sales would decrease the accounts receivable account. Collection of year 3 sales during year 2 would be recorded as unearned revenue.

Kent Co.'s advertising expense account had a balance of $292,500 at December 31, 20X3, before any necessary year-end adjustment relating to the following: Included in the $292,500 is the $30,000 cost of printing catalogs for a sales promotional campaign in January 20X4. Radio advertising spots broadcast during December 20X3 were billed to Kent on January 2, 20X4. Kent paid the $17,500 invoice on January 11, 20X4. What amount should Kent report as advertising expense in its Income Statement for the year ended December 31, 20X3? $310,000 $280,000 $262,500 $245,000

$280,000 The correct advertising expense amount is $292,500 − $30,000 + $17,500 = $280,000. The catalog printing is subtracted because the cost relates to 20X4, not to 20X3. The benefit of this cost will be received in 20X4. The radio advertisements are added because they benefit 20X3, but they were not included in the $292,500 because they were paid in 20X4. Kent was apparently unaware of the cost before 12/31/X3 because the firm was not billed until 2004.

On November 1, year 2, Key Co. paid $3,600 to renew its insurance policy for 3 years and used an income statement account to record this transaction. At December 31, year 2, Key's unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Key's December 31, year 2 financial statements? Prepaid insurance Insurance expense $3,300 $1,200 $3,400 $1,200 $3,400 $1,100 $3,490 $1,010

$3,400 $1,100 This answer is correct. Based on the information given, Key has only one prepaid insurance policy at 12/31/Y2. The 3-year policy acquired on 11/1/Y2 has been in force for 2 months, so 34 months remain unexpired. Therefore, 12/31/Y2 prepaid insurance is $3,400 ($3,600 × 34/36). Key must make an adjusting entry to transfer $3,310 ($3,400 - $90) from insurance expense to prepaid insurance. This will leave the account balances at $3,400 for prepaid insurance ($90 + $3,310) and $1,100 for insurance expense ($4,410 - $3,310). (Apparently, Key Co. records policy payments as charges to insurance expense during the year and adjusts the prepaid insurance account at the end of the year.)

On November 1, 20X5, Key Co. paid $3,600 to renew its insurance policy for three years. At December 31, 20X5, Key's unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Key's December 31, 20X5, financial statements? Prepaid Insurance Insurance expense $3,300 $1,200 $3,400 $1,200 $3,400 $1,100 $3,490 $1,010

$3,400 $1,100 Prepaid insurance at year end is $3,400, which is the portion of the prepayment on November 1 that continues to the next three years. Of the 36 months of coverage purchased, 34 months remain at December 31: $3,400 = (34/36)($3,600). Insurance expense includes three items: (1) the $90 of prepaid insurance remaining in the trial balance that has expired, (2) the $200 of insurance expense related to the November 1 purchase above ($3,600−$3,400 remaining prepaid), and (3) the expense portion of the $4,410 insurance expense amount in the unadjusted trial balance ($4,410−$3,600) = $810. This firm must have expensed the entire $3,600 November 1 purchase because it was not reflected in prepaid insurance. The difference of $810 reflects actual expense. Therefore, total insurance expense equals $1,100 = $90 + $200 + $810.

Lane Company acquires copyrights from authors, paying advance royalties in some cases, and in others, paying royalties within 30 days of year-end. Lane reported royalty expense of $375,000 for the year ended December 31, year 3. The following data are included in Lane's December 31 balance sheets: Year 2 Year 3 Prepaid royalties $60,000 $50,000 Royalties payable 75,000 90,000 During year 3 Lane made royalty payments totaling $350,000 $370,000 $380,000 $400,000

$350,000 This answer is correct. Royalty expense in year 3 totaled $375,000. However, this amount must be adjusted for changes in the related accounts to determine how much cash was paid for royalties. Year 3 royalty expense $375,000 Royalties payable, 12/31/Y2 75,000 Royalties payable, 12/31/Y3 (90,000) Prepaid royalties, 12/31/Y2 (60,000) Prepaid royalties, 12/31/Y3 50,000 Year 3 royalty payments $350,000 The beginning payable balance ($75,000) is added because this amount was paid in year 3, but not included in year 3 expense (it was accrued as an expense in year 2). The ending payable balance ($90,000) is subtracted because this amount was included in year 2 expense, but was not paid in year 3 (it will be paid in year 4). The beginning balance of prepaid royalties ($60,000) is subtracted because this amount was included in year 3 expense as the prepayments expired, but it was not paid in year 3 (it was paid in year 2). Finally, the ending balance of prepaid royalties ($50,000) is added because this amount was paid in year 3, but not included in year 3 expense.

Zeta Co. reported sales revenue of $4,600,000 in its Income Statement for the year ended December 31, 20X1. Additional information is as follows: 12/31/X0 12/31/X1 Accounts receivable $1,000,000 $1,300,000 Allowance for uncollectible accounts (60,000) (110,000) Zeta wrote off uncollectible accounts totaling $20,000 during 20X1. Under the cash basis of accounting, Zeta would have reported 20X1 sales of: $4,900,000. $4,350,000. $4,300,000. $4,280,000.

$4,280,000. The question requires a solution for cash collected on accounts receivable. Using the information for accounts receivable, the collections amount can be found: Beginning balance + sales − collections − write-offs = ending balance $1,000,000 + $4,600,000 − collections − $20,000 = $1,300,000 collections = $4,280,000 Under the cash basis of accounting, sales equals cash collections.

Zach Corp. pays commissions to its sales staff at the rate of 3% of net sales. Sales staff are not paid salaries but are given monthly advances of $15,000. Advances are charged to commission expense, and reconciliations against commissions are prepared quarterly. Net sales for the year ended March 31, 20X2, were $15,000,000. The unadjusted balance in the commissions expense account on March 31, 20X2, was $400,000. March advances were paid on April 3, 20X2. In its Income Statement for the year ended March 31, 20X2, what amount should Zach report as commission expense? $465,000 $450,000 $415,000 $400,000

$450,000 Commission expense is 3% of sales or $450,000 (.03 × $15,000,000). The information about advances is irrelevant because it pertains to how commissions are paid, not recognized.

Bixby Company is in its first year of operations. Bixby estimates its annual warranty expense at 2% of net annual sales. Bixby provides its customers with a three-year warranty plan. Expected warranty expense is shown below: Year Expected warranty expense Present value discounted at 8% Year 1 $40,000 $37,037 Year 2 10,000 8,573 Year 3 10,000 7,938 Total $60,000 $53,548 The current borrowing rate for Bixby is 8%. Bixby can contract with a third party to provide the warranty work. The cost for a contract to settle the warranties is $57,000. If Bixby elects the fair value option to report warranty obligations, at what amount will the warranty liability be recorded on the balance sheet? $0 $53,548 $57,000 $60,000

$57,000- This answer is correct. ASC Topic 825 provides that a company can elect the fair value option to record its warranties if the warranty liability can be satisfied by contracting with a third party. ASC Topic 820 provides that the fair value is the exchange price in an orderly transaction between market participants to sell the asset or transfer the liability in the principal or most advantageous market. Therefore, if the fair value option is elected, the fair value of the warranty liability is the cost to settle or transfer the liability in the market.

At December 31, year 2, Cobb Company had a $695,000 balance in its advertising expense account before any yearend adjustments relating to the following: Included in the $695,000 is $80,000 for printing sales catalogs for a January year 3 sales promotional campaign. Television advertising spots telecast during December year 2 were billed to Cobb on January 2, year 3. The invoice cost of $45,000 was paid on January 11, year 3. Cobb's advertising expense for the year ended December 31, year 2, should be $740,000 $660,000 $615,000 $570,000

$660,000 This answer is correct. The balance in the advertising expense account before adjustment is $695,000. This amount should be reduced by the $80,000 cost of printing sales catalogs for the year 3 sales campaign. The $80,000 is a prepaid expense at 12/31/Y2, and is properly matched against year 3 revenues. Advertising expense should be increased for December's television advertising of $45,000 which was not billed until 1/2/Y3. This $45,000 must be accrued as an expense and a liability at 12/31/Y2. Therefore, the year 2 advertising expense should be $660,000 ($695,000 - $80,000 + $45,000).

Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, Year 5, the effective date of the policy. At March 31, Year 5, Roro's unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro's financial statements for the three months ended March 31, Year 5? Prepaid insurance Insurance expense $7,000 $300 $7,000 $500 $7,200 $300 $7,300 $200

$7,000 $500 The $300 of prepaid insurance on March 31 before adjustment represents the remaining unexpired portion of the insurance policy before renewal. This amount must have expired by March 31 because there is only one insurance policy, and that policy was renewed March 1. The $300 is included in insurance expense for the three months ended March 31. In addition, one month of coverage has been used on the renewed policy as of March 31. Therefore $7,200/36 months or $200 is included in insurance expense for the three months ended March 31. In total, $500 of insurance expense is recognized. Prepaid insurance remaining at March 31 is $7,200 - $200 = $7,000.

A company's cash-basis net income for the year ended December 31 was $75,000. The following information is from the company's accounting records: January 1 December 31 Accounts receivable $15,000 $20,000 Prepaid expenses 7,000 4,000 Accrued liabilities 2,500 2,000 What is the accrual-basis net income? $72,500 $75,000 $77,500 $83,500

$77,500 CORRECT! Reconciling from cash basis to accrual basis net income can be done using the accounting equation and solving for the change in equity: ŁE = ŁA - ŁL. Insert into this formula the increase/decrease in assets or liabilities. The result is added/subtracted to/from cash-based income to obtain accrual-based income. Cash-based Net Income 75,000 + increase Accounts Receivable 5,000 - decrease Prepaid Expenses (3,000) + decrease Accounts Payable 500 Accrual-based Net Income 77,500

When preparing a draft of its year 2 balance sheet, Mont, Inc. reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following: Treasury stock of Mont, Inc. at cost $24,000 Idle machinery 11,200 Cash surrender value of life insurance on corporate executives 13,700 At what amount should Mont's net assets be reported in the December 31, year 2 balance sheet? $851,000 $850,100 $842,600 $834,500

$851,000 This answer is correct. Idle machinery ($11,200) and cash surrender value of life insurance ($13,700) are both assets. The only item listed which should not be included in the asset section of the balance sheet is the treasury stock ($24,000). Although the treasury stock account has a debit balance, it is not an asset; instead, it is reported as a contra equity account. Therefore, the $24,000 must be excluded from the asset section, reducing the net asset amount to $851,000 ($875,000 − $24,000).

Ott Company acquired rights to a patent from Grey under a licensing agreement that required an advance royalty payment when the agreement was signed. Ott remits royalties earned and due under the agreement on October 31 each year. Additionally, on the same date, Ott pays, in advance, estimated royalties for the next year. Ott adjusts prepaid royalties at year-end. Information for the year ended December 31, year 2, is as follows: Date Amount 01/01/Y2 Prepaid royalties $ 65,000 10/31/Y2 Royalty payment (charged to royalty expense) 110,000 12/31/Y2 Year-end credit adjustment to royalty expense 25,000 In its December 31, year 2 balance sheet, Ott should report prepaid royalties of $25,000 $40,000 $85,000 $90,000

$90,000 This answer is correct. On 1/1/Y2, the balance of prepaid royalties was $65,000. Ott makes no entries to this account until year-end, so the 12/31/Y2 balance before adjustment was still $65,000. On 10/31/Y2, Ott made a $110,000 royalty payment which included payment in advance for year 3 royalties. However, under Ott's system, all such payments are debited to royalty expense when paid, and any necessary adjustments to prepaid royalties are made at year-end. At 12/31/Y2, Ott made a credit adjustment to royalty expense: Prepaid royalties 25,000 Royalty expense 25,000 Therefore, the 12/31/Y2 balance of prepaid royalties is $90,000 ($65,000 + $25,000).

Class Corp. maintains its accounting records on the cash basis, but it restates its financial statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax income for 20X2. The following information pertains to Class operations for the years ended December 31, 20X2 and 20X1: 20X2 20X1 Accounts receivable $40,000 $20,000 Accounts payable 15,000 30,000 Under the accrual method, what amount of income before taxes should Class report in its December 31, 20X2, Income Statement? $25,000 $55,000 $65,000 $95,000

$95,000 Cash basis net income, pretax $60,000 Plus increase in accounts receivable (this represents sales that were not collected and thus are included in accrual income but not in cash-basis income) 20,000 Plus decrease in accounts payable (this represents payments in excess of expenses and thus causes accrual income to exceed cash-basis income) 15,000 Equals accrual basis net income, pretax $95,000

Pak Co.'s professional fees expense account had a balance of $82,000 on December 31, 20X1, before considering year-end adjustments relating to the following: Consultants were hired for a special project at a total fee not to exceed $65,000. Pak has recorded $55,000 of this fee based on billings for work performed in 20X1. The attorney's letter requested by the auditors dated January 28, 20X2, indicated that legal fees of $6,000 were billed on January 15, 20X2, for work performed in November 20X1, and unbilled fees for December 20X1 were $7000. What amount should Pak report for professional fees expense for the year ended December 31, 20X1? $105,000 $95,000 $88,000 $82,000

$95,000 The two amounts listed in the attorney's letter should be added to the preadjusted amount of expense, but the appropriate amount of the consultant expense has been included in the preadjusted amount. The ending expense balance therefore is $95,000 ($82,000 + $6,000 + $7,000). report an error

On January 1, 20X1, Sip Co. signed a five-year contract enabling it to use a patented manufacturing process beginning in 20X1. A royalty is payable for each product produced, subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually. On the contract date, Sip prepaid a sum equal to two years' minimum annual fees. In 20X1, only the minimum fees were incurred. The royalty prepayment should be reported in Sip's December 31, 20X1, financial statements as: An expense only. A current asset and an expense. A current asset and noncurrent asset. A noncurrent asset.

A current asset and an expense. At the end of 20X1, 1/2 of the prepayment is recognized as an expense. The minimum fee was incurred in 20X1 equaling 1/2 of the prepayment amount. Sip has received the benefit of 1/2 of prepayment amount. The other 1/2 is applied to 20X2 and allows Sip to use the patent in that year. This amount had future value as of 12/31/X1. That future value is expected to expire at the end of 20X2 and, thus, is classified as a current asset at the end of 20X1. Additional use in 20X2 beyond the minimum will be paid in that year.

Rent revenue collected 1 month in advance should be accounted for as Revenue in the month collected. A current liability. A separate item in stockholders' equity. An accrued liability.

A current liability. This answer is correct because revenue collected 1 month in advance is unearned and, therefore, should be accounted for as a current liability. Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets or the creation of other current liabilities. This includes collections received in advance of delivery of goods or services.

Which of the following items is eligible for the fair value election under ASC Topic 825? Pension liability Available-for-sale investments Leases Share-based payments

Available-for-sale investments-The fair value option may be elected on an instrument-by-instrument basis for available-for-sale securities.

Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than Generally Accepted Accounting Principles? I. Basis of accounting used by an entity to file its income tax return; II. Cash receipts and disbursements basis of accounting. I only. II only. Both I and II. Neither I nor II.

Both I and II. This question is not asking whether other comprehensive bases of accounting are acceptable under GAAP. Rather, it is simply asking which statements describe a comprehensive basis other than GAAP. Both I and II are found in various situations of accounting practice.

The premium on a 3-year insurance policy expiring on December 31, year 3, was paid in total on January 1, year 1. Assuming that the original payment was recorded as a prepaid asset, how would total assets and stockholders' equity be affected during year 3? Total assets would decrease and stockholders' equity would increase. Both total assets and stockholders' equity would decrease. Both total assets and stockholders' equity would increase. Neither total assets nor stockholders' equity would change.

Both total assets and stockholders' equity would decrease. This answer is correct because when the premium on the 3-year insurance policy was paid in total on January 1, year 1, a prepaid asset was recorded. At the end of each of the next 3 years, one-third of the premium must be amortized to expense using the following journal entry: Insurance expense xxx Prepaid insurance (asset) xxx The effect of this amortization is to increase expenses (a decrease in stockholders' equity) and decrease prepaid assets.

A retail store received cash and issued gift certificates that are redeemable in merchandise. The gift certificates lapse 1 year after they are issued. How would the deferred revenue account be affected by each of the following transactions? Redemption of certificates Lapse of certificates No effect Decrease Decrease Decrease Decrease No effect No effect No effect

Decrease Decrease This answer is correct. At the time the gift certificates were issued, the following entry was made: Cash xx Deferred revenue xx Upon redemption of the certificates, the obligation becomes satisfied and the revenue is earned. Similarly, as the certificates expire, the store is no longer under any obligation to honor the certificates and the deferred revenue should be taken into income. In both instances, the deferred revenue account must be reduced (debited) to reflect the earning of revenue. This is done through the following entry: Deferred revenue xx Revenue xx

Compared to its 20X4 cash-basis net income, Potoma Co.'s 20X4 accrual-basis net income increased when it: Declared a cash dividend in 20X3 that it paid in 20X4. Wrote off more accounts receivable balances than it reported as uncollectible accounts expense in 2004. Had lower accrued expenses on December 31, 20X4, than on January 1, 2004. Sold used equipment for cash at a gain in 20X4.

Had lower accrued expenses on December 31, 20X4, than on January 1, 2004. If the accrued expenses account (a current liability, often called accrued expenses payable) decreased during 20X4, then a greater amount of cash was paid for those expenses in 20X4 than were accrued in 20X4. This would cause cash-basis net income to be less than accrual-basis net income. Cash-basis net income reflects expenses paid; accrual-basis net income reflects expenses recognized (accrued).

Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year-end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared to the accrual-basis method of accounting, Sanni's cash-basis pretax income is Higher by $4,000 Lower by $4,000 Higher by $36,000 Lower by $36,000

Higher by $36,000 This answer is correct. Because accounts receivable decreased by $20,000, the cash received was $20,000 more than the accrual-basis sales. Since accounts payable increased by $16,000 during the year, accrual-basis expenses were $16,000 more than cash payments. Therefore, accrual-basis net income is equal to $114,000 ($150,000 - 20,000 - $16,000), and therefore, cash-basis pretax income is $36,000 ($150,000 - $114,000) higher than accrual-basis income.

Under what circumstances may the obligation for warranties be recorded at fair value? If the warranty obligation is satisfied within 24 months. If the warranty obligation can be settled by contracting with a third party. If the cost to provide the warranty work is less than the fair value. If the fair value of the warranty work can be estimated by using a cost-plus approach.

If the warranty obligation can be settled by contracting with a third party.

Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as an expense: In the period paid. In the period incurred. At the date the royalty agreement began. At the date the royalty agreement expired.

In the period incurred. Under accrual accounting, expenses are recognized when incurred. This is the point in time when obligations come into existence. The period to which specific royalty amounts relate is the period for expense recognition. Often, royalty payments occur at specified intervals that do not correspond to the period in which the royalties were earned.

Which of the following statements is true regarding developing fair value measurements for financial statement purposes? It assumes the most conservative use of the asset. It assumes the asset is held for sale in the normal course of business. It assumes an appraisal by a licensed appraiser. It assumes the highest and best use of the asset.

It assumes the highest and best use of the asset.

ASC Topic 825 for the fair value option election applies to all of the following items except for Firm commitments that involve financial instruments. Warranties that can be settled by paying a third party. Held-to-maturity investments. Leases.

Leases.

According to ASC Topic 820, a stock market quotation from the New York Stock Exchange is considered what level of valuation input for determining fair value measurement? Level 1. Level 2. Level 3. Level 4.

Level 1.

According to ASC Topic 820, which level has the lowest priority for valuation purposes? Level 1 Level 2 Level 3 Level 4

Level 3

Savor Co. had $100,000 in cash-basis pretax income for year 2. At December 31, year 2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, year 1 balances. Compared to the accrual basis method of accounting, Savor's cash pretax income is Higher by $4,000 Lower by $4,000 Higher by $16,000 Lower by $16,000

Lower by $16,000 This answer is correct. This question requires the calculation of accrual-based income, as shown below. Cash-basis pre-tax income $100,000 Increase in accounts receivable + 10,000 Decrease in accounts payable + 6,000 Accrual-basis income $116,000 This cash pretax income is $16,000 ($116,000 - $100,000) lower than the accrual-basis income.

According to ASC 820, the market that maximizes the price received for the asset is the Most advantageous market. Most relevant market. Independent market. Principal market.

Most advantageous market.

Before year 2, Droit Co. used the cash basis of accounting. As of December 31, year 2, Droit changed to the accrual basis. Droit cannot determine the beginning balance of supplies inventory. What is the effect of Droit's inability to determine beginning supplies inventory on its year 2 accrual basis net income and December 31, year 2 accrual-basis owners' equity? Year 2 Net income 12/31/Y2 Owners' equity Understated No effect Understated Understated Overstated No effect Overstated Overstated

Overstated No effect This answer is correct. Inability to determine beginning supplies inventory would cause supplies expense to be understated and year 2 net income to be overstated. Cumulative supplies expense would be properly stated so there would be no effect on December 31, year 2 retained earnings.

Before 20X1, Droit Co. used the cash basis of accounting. As of December 31, 20X1, Droit changed to the accrual basis. Droit cannot determine the beginning balance of supplies inventory. What is the effect of Droit's inability to determine beginning supplies inventory on its 20X1 accrual basis net income and December 31, 20X1, accrual basis owners' equity? 20X1 net income 12/31/X1 owner's equity No effect No effect No effect Overstated Overstated No effect Overstated Overstated

Overstated No effect Supplies expense for 20X1 under the accrual method is: supplies expense = beginning supplies + purchases—ending supplies. If beginning supplies cannot be determined, then it is assumed to be zero and supplies expense is understated, causing 20X1 income to be overstated. However, total supplies expense for the entire life of the business is unaffected by the inability to determine beginning supplies for 20X1. Total supplies expense for the life of the business is total purchases less ending inventory in 20X1. These two amounts are determinable, and thus, owners' equity at the end of 20X1 can be determined.

The fair value option election applies to all of the following items except for Pensions. Long-term notes payable. Warranties that can be settled by paying a third party. Held-to-maturity investments.

Pensions.

Which of the following is a deferred cost that should be amortized over the periods estimated to be benefited? Prepayment of 3-year insurance premiums on machinery. Security deposit representing 2-months' rent on leased office space. Advance from customer to be returned when sale completed. Property tax for this year payable next year.

Prepayment of 3-year insurance premiums on machinery.

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept? Replacement cost. Current market value. Historical cost. Net realizable value.

Replacement cost. This answer is correct because accounting standards define current replacement cost, as the amount of cash, or its equivalent, that would have to be paid if the same or an equivalent asset were acquired currently.

Which of the following is an example of the expense recognition principle of associating cause and effect? Allocation of insurance cost. Sales commissions. Depreciation of fixed assets. Officers' salaries.

Sales commissions.

Which of the following is an accepted valuation technique for fair value estimates? The conservative approach The residual value approach The cost approach The consistent approach

The cost approach. This answer is correct. The accepted valuation approaches in ASC Topic 820 are the cost approach, the market approach, and the income approach.

Which of the following statements is true regarding the fair value option for valuing financial assets and liabilities? The fair value option must be applied to all instruments in that classification. The fair value option must be applied to all interests in the same entity. The fair value option cannot be revoked until the next balance sheet date. The fair value option can be applied to a portion of a financial instrument.

The fair value option must be applied to all interests in the same entity.

According to ASC Topic 820, the fair value of an asset should be based upon The price that would be paid to acquire the asset. The price that would be paid to replace the asset. The price that would be received to sell the asset. The price that the item is appraised at balance sheet date.

The price that would be received to sell the asset.

Which of the following is not a reason to prepare prospective financial information? To aid in considering a change in accounting or operations. To aid in preparation of the budget. To obtain external financing. To meet the requirements of GAAP.

To meet the requirements of GAAP.

How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the seller's financial statements before the performance? Revenue for the entire proceeds. Revenue to the extent of related costs expended. Unearned revenue to the extent of related costs expended. Unearned revenue for the entire proceeds.

Unearned revenue for the entire proceeds. This answer is correct because per SFAC 5, revenue should not be recognized until earned. Revenues are generally earned when the product is delivered or services are rendered to customers. When a sale or cash receipt (or both) takes place prior to the delivery of the product or performance of the service, as in this case, the revenues should be earned as delivery/performance takes place. Since the entire proceeds in this problem are for the advance sale of tickets, they should be reported as unearned revenue in the seller's financial statements before the performance.

Which of the following is an appropriate income approach for developing fair value measurements? Using the relevant information from recent transactions Using present value techniques to discount cash flows Using the current replacement cost of the asset Using the undiscounted cash flows from the asset

Using present value techniques to discount cash flows

Which of the following is an appropriate market approach for determining fair value measurements? Using relevant information from recent transactions Using present value techniques to discount cash flows Using the current replacement cost of the asset Using the undiscounted cash flows from the asset

Using relevant information from recent transactions

Which of the following is an appropriate cost approach for determining fair value measurements? Using relevant information from recent transactions Using present value techniques to discount cash flows Using the current replacement cost of the asset Using the undiscounted cash flows from the asset

Using the current replacement cost of the asset

According to the FASB's conceptual framework, comprehensive income includes which of the following? Operating income Investments by owners Yes No Yes Yes No Yes No No

Yes No This answer is correct. Per SFAC 6, comprehensive income consists not only of its basic components (revenues, expenses, gains, and losses) but also the various intermediate components or measures that result from combining the basic components (e.g., income from continuing operations). SFAC 6 further states that over the life of an entity comprehensive income equals the net of its cash receipts and cash outlays, excluding cash invested by owners or distributed to owners. Note that under ASC Topic 220 this statement would not hold because corrections of errors and certain changes in accounting principles are still reported in retained earnings. Thus, ASC Topic 220 does not fully implement comprehensive income as defined in SFAC 6.