FAR - Simulated Exam 1

M7 - Lessee Accounting Marvin Corporation signed a five-year lease agreement on January 1, Year 1, in a transaction properly classified as a finance lease. The present value of the $125,000 minimum lease payments discounted at 10 percent at the date of signing was $600,000. Marvin owed $125,000 at the date of signing and five installments of $125,000 due on December 31 of each year, starting on December 31, Year 1. What should Marvin record as the current maturity on the lease at December 31, Year 2?

Answer = 93,775 PV: 600,000 - Initial payment 125,000 = Remaining balance 475,000 -----------Payment - 10%Interest - Amortization - Principal----- Beginning balance --------------------------- 475,000 12/31/Year 1 -- 125,000 -- 47,500 -- 77,500 -- 397,500 12/31/Year 2 --125,000 -- 39,750 -- 85,250 -- 312,250 12/31/Year 3 -- 125,000 -- 31,225 -- 93,775 -- 218,475 (Current maturity means the principle payment in the next year.)

F4 M1 - Payables and Accrued Liabilities - Correct At the end of a five-year accretion period, the accumulated depreciation (straight-line) associated with an asset retirement obligation (ARO) on a company's books is equal to $510,437. Given an accretion rate of 8 percent, which of the following statements is most accurate? A. At the beginning of the five years, the estimated future liability was $750,000. B. Annual depreciation expense is equal to $150,000. C. Cumulative accretion expense after five years is equal to $510,437. D. Accretion expense decreases every year.

Answer = At the beginning of the five years, the estimated future liability was $750,000. $510,437 x 1.08^5 = $750,000

F4 M7 - Lessee Accounting Which of the following items will increase the value of the lease payments payable by the lessee under a finance lease? A. The unguaranteed residual value at the end of the lease term. B. Lease incentives payable to the lessee. C. Variable payments that represent "in-substance" fixed payments. D. An exercise option to buy the leased asset that the lessee is not reasonably certain to exercise.

Answer = C. Variable payments that represent "in-substance" fixed payments. A. The unguaranteed residual value at the end of the lease term. (will not be included because it is unguaranteed) B. Lease incentives payable to the lessee. (will reduce the lease payment) D. An exercise option to buy the leased asset that the lessee is not reasonably certain to exercise. (will not be included because it is not reasonably certain)

M1 - Payables and Accrued Liabilities Which of the following is not a cost associated with exit and disposal activities? A. Costs associated with the retirement of a fixed asset. B. Costs to terminate contract that is not a direct finance lease. C. Benefits related to involuntary employee termination. D. Costs to relocate employees.

Answer = Costs associated with the retirement of a fixed asset. exit and disposal costs (textbook) - involuntary employee termination costs - Costs to terminate contract that is not a direct finance lease - other costs associated with the exit or disposal ativities, including costs to consolidate facilities and costs to relocate empolyees

F3 M3 - Inventory Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements? A. Ratably over the second, third, and fourth quarters. B. Ratably over the third and fourth quarters. C. In the second quarter only. D. In the fourth quarter only.

Answer = D. In the fourth quarter only. Losses should be recognized when: - loss is probable - loss is reasonably estimated

M2 - EPS and Public Company Reporting Topics Which of the following will not have a separate earnings per share calculation and disclosure under U.S. GAAP? I. Extraordinary items of the period II. Discontinued operations III. Unrealized gains/losses on available-for-sale securities

Answer= I and III (Only discontinued operations have separate earnings per share calculations and disclosures.) (You knew this you just read the question wrong)

TBS: M6 - Governmental Fund Structure and Fund Accounting

Because police and law enforcement is a general requirment for goverments it will use the general fund, not a special revenue. special revenue is for other tasks that are not general. Special revenue for the gas tax makes sense because it is a special tax for a specific purpose.

F1 M3 - Stockholders' Equity: Part 1 Classic Cars Corp. has 50,000 shares of $10 par common stock and 20,000 shares of $15 par fully participating 10% cumulative preferred stock. If the company declares cash dividends of $100,000 during the current year and there are no dividends in arrears, what will be the total dividend payment to preferred shareholders?

Answer = $37,500 20,000 × $15 × 300,000 × 10% = $30,000 Preferred 50,000 × $10 = 500,000 × 10% = $50,000 Common $100,000 - $30,000 - $50,000 = $20,000 (dividend left to alocate) 300,000 + 500,000 = 800,000 300,000 / 800,000 = .375 x $20,000 = $7,500 Preferred $30,000 + $7,500 = $37,500 (short cut: 300,000 / 800,000 = .375 x $1,000,000 = $37,500)

F4 M7 - Lessee Accounting Merlin Enterprises sold the following debt investment on September 30, Year 2: Market Value ---------------- Cost ------ 12/31/Y1 --------- 9/30/Y2 Beard Inc. ---- 67,000 ----- 59,000 -----------71,000 What is the amount of the realized gain or loss on Merlin's Year 2 income statement, assuming that the investment in Beard Inc. is classified as an available-for-sale debt security?

Answer = $4,000 Selling price - Original cost = Gain 71,000 - 67,000 = $4,000 (because it is an available for sale security you use the original cost (not the carrying cost to figure out the gain) Dr. Cash 71,000 Cr. Unrealized loss - OCI 8,000 Cr. Available-for-sale security 59,000 Cr. Realized gain 4,000

F1 M4 - Stockholders' Equity: Part 2 The following stock dividends were declared and distributed by Sol Corp.: Percentage of common shares outstanding at declaration date: ---------- Fair value ------ Par value 10% -------- $15,000 -------- $10,000 28% ------- $40,000 ------- $30,800 What aggregate amount should be debited to retained earnings for these stock dividends?

Answer = $45,800 $15,000 + $30,800 Rule: 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. Rule: 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).

F4 M3 - Long-Term Liabilities (PV of an annuity question) House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, Year 1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, Year 1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, Year 2. In its Year 1 income statement, what should House report as contest prize expense?

Answer = $468,250 $418,250 + $50,000 = $468,250 (i guess in this question they are assuming that House will recognize the full expense imediatly and then recognize a liability for the same amount)

On July 1, Year 1, Plato Inc. sold $500,000, 10% ten-year bonds at 103. On July 5, Year 1, Socrates Inc., a wholly owned subsidiary, purchased half of Plato Inc.'s bonds at 101. What amount of gain (loss) related to this transaction should Plato recognize on its consolidated income statement at December 31, Year 1?

Answer = $5,000 $500,000 x 1.03 / 2 = 257,500 $500,000 x 1.01 / 2 = 252,500 257,500 - 252,500 = $5,000 carrying amount - cash paid = gain/loss (look at it from the buyers prospective. he bought something worth 257,500 for 252,500 that would be a $5,000 gain) Dr. Bonds payable 250,000 Dr. Bond premium 7,500 Cr. Investment in bonds 252,500 Cr. Gain on extinguishment 5,000

M3 - Not-for-Profit Revenue Recognition Potterville Charities is staging its annual fund raising appeal. The organization views this as a major ongoing activity that serves to fund the mission of the organization. In exchange for a $500 donation, contributors receive a hand embossed flowerpot valued at $15. Potterville Charities will recognize contributions for each such donation in the amount of:

Answer = $500 (Because the fund raiser is a "major ongoing activity that serves to fund the mission of the organization", it will be recorded at gross amount: $500 and $15 will be recognized as fund raising expense)

F3 M3 - Inventory On January 2 of the current year, LTTI Co. entered into a three-year, noncancelable contract to buy up to 1 million units of a product each 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?

Answer = $52,000 200,000 x 3 Years = 600,000 600,000 - 80,000 = 520,000 520,000 x $0.10 = 52,000

M3 - Consolidated Financial Statements Burgess Co. purchase 35% of Egg Co's outstanding common stock on December 31 for $300,000. On that date, Egg's stockholders' equity was $600,000, and the fair value of its identifiable assets was $700,000. On December 31, what amount of goodwill should Burgess attribute to this acquisition?

Answer = $55,000 $700,000 FV - $600,000 NBV = $100,000 Adjustment $100,000 x 35% = $35,000 $600,000 x 35% = $210,000 + $35,000 = $245,000 $300,000 (investment) - $245,000 (equity and FV adj) = $55,000 (short cut: subtract $300,000 - ($700,000 x 35%)

F2 M1 - Revenue Recognition Introduction - Correct Toddler Care Co. offers three payment plans on its 12-month contracts. Information on the three plans and the number of children enrolled in each plan for the September 1, Year 1, through August 31, Year 2, contract year follows (per child): Initial payment----------- Monthly fees ----------- # of children #1 $500 ------------------ $0 ------------------------15 #2 $200 ------------------- $30 ---------------------- 12 #3 $0 ---------------------- $50 ---------------------- 9 Toddler received $9,900 of initial payments on September 1, Year 1, and $3,240 of monthly fees during the period September 1 through December 31, Year 1. In its December 31, Year 1, balance sheet, what amount should Toddler report as deferred revenues?

Answer = $6,600 $9,900 x (8/12 of the year) = $6,600 (dont include the future monthly paymnets because they are not unearned revenue. Only part of the $9,900 initial payment is unearned revenue.)

F5 M5 - Statement of Cash Flows - Correct Big Dollars Corporation's comparative financial statements included the following amounts for the current year: Net income 650,000 Depreciation expense 93,000 Equity in earnings of unconsolidated affiliate 61,000 Gain on sale of fixed assets 4,000 Increase in accounts receivable 25,000 Decrease in inventory (57,000) Decrease in fixed assets 38,000 Increase in accounts payable 42,000 Decrease in notes payable (75,000) On its current year statement of cash flows, what is Big Dollars' net cash provided by operating activities?

Answer = $752,000 650,000 Net income + 93,000 Depreciation expense - 61,000 Equity in earnings of unconsolidated affiliate - 4,000 Gain on sale of fixed assets - 25,000 Increase in accounts receivable + (57,000) Decrease in inventory + 42,000 Increase in accounts payable (subtract equity in earnings of consolidated affiliate because although it is income, it did not result in any cash coming into the company)

M7 - Lessee Accounting On January 1, Billy Co. signed a three-year lease for office space. The lease required monthly rent of $8,000 for the first year, $8,100 for the second year, and $8,200 for the third year. Billy has the option to renew the lease for a fourth year at $8,300 per month. How much rent expense should Billy Co. charge for January?

Answer = $8,100 ($8,000 + $8,100 + $8,200) / 3 years = $8,100 (the reason you don't include the 4th year of $8,300 is because there is no indication that they will accept the purchase option) (you dont recognize a 4 year lease because the question didn't make it clear if Billy was likely to renew the lease or not, so assume not)

M7 - Income Taxes: Part 2 - Correct Panda Corporation's income statement for the current year ended December 31 shows pretax income of $300,000. The following items are treated differently on the tax return and on the accounting records: --------------------------Tax return - Accounting records Depreciation -----------------95,000 70,000 Royalty income --------------80,000 50,000 Premiums on life insurance --None 5,000 Bad debt expense -----------7,000 12,000 Life insurance proceeds -----None 20,000 Assume that Panda's current year tax rate is 30% and Panda made estimated tax payments during the year of $15,000. What is the current portion of Panda's income tax expense?

Answer = $88,500 $300,000 Pretax income - 25,000 Depreciation + 30,000 Royalty income + 5,000 Premiums on life insurance + 5,000 Bad debt expense - 20,000 Life insurance proceeds = $295,000 x 30% = $88,500

F4 M7 - Lessee Accounting Star Co. leases a building to be used for office space to support its expanding business. The six-year nonrenewable lease will expire on December 31, Year 8. In January Year 5, Star made leasehold improvements of $72,000. The estimated useful life of the improvements is 10 years. Star uses the straight-line method of amortization. What amount of amortization should Star report on its June 30, Year 5, income statement?

Answer = $9,000 $72,000 / 4 years remaining = $18,000 x 6/12 = $9,000 (Lease improvements are amortized over the lesser of the useful life or the term left on the lease remember it is half the year so amortize only half the cost)

M1 - Cash and Cash Equivalents At June 30, Almond Co.'s cash balance was $10,012 before adjustments, while its ending bank statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but was erroneously recorded in Almond's general ledger balance as $59. The check was correctly listed in the bank statement at $95. The bank statement also included a credit memo for interest earned in the amount of $35, and a debit memo for monthly service charges in the amount of $50. What was Almond's adjusted cash balance at June 30?

Answer = $9,961 $10,012 - $36 ($95 - $59)* + $35 - $50 *because 59 was recorded as cash paid by check in the books when the real amount should have been 95. this would reduce book cash balance.

F5 M3 - Consolidated Financial Statements Tulip Co. owns 100% of Daisy Co.'s outstanding common stock. Tulip's cost of goods sold for the year totals $600,000 and Daisy's cost of goods sold totals $400,000. During the year, Tulip sold invedntory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income?

Answer = $900,000 $600,000 + $400,000 = $1,000,000 $1,000,000 - $60,000 (Tulip's COGS) - $40,000 (Daisy's Profit)* = $900,000 *(because daisy sold all of the inventory the Intercompany profit of $40,000 needs to be reduced from the COGS)

F1 M2 - EPS and Public Company Reporting Topics Based on the stock transactions below, what is the weighted average number of shares outstanding as of December 31, Year 1, which should be used in the calculation of basic earnings per share in financial statements issued on March 1, Year 2? Date Transactions: January 1, Year 1: Beginning balance 100,000 April 1, Year 1: Issued 30,000 shares for cash June 1, Year 1: 50% stock dividend February 15, Year 2: 2-for-1 stock split March 15, Year 2: Issued 40,000 shares for cash

Answer = 367,500 100,000 + 22,500 (30,000 x 9 / 12) x 1.5 stock dividend x 2 stock dividend* = 367,500 (Even though the stock dividend occured in year 2 it is counted retrospectively in year 1 because it happended before the financial statement date.)

Douglas Co. leased machinery with an economic useful life of six years. For tax purposes, the depreciable life is seven years. The lease is for five years, and Douglas can purchase the machinery at fair value at the end of the lease. What is the depreciable life of the leased machinery for financial reporting?

Answer = 5 years (Because the assets term life is more than 75% of the economic life it will be the shorter of the lease term or the economic life) (also even though he as the option to purchase the leased machine, the question doesn't say if he is reasonably likely to do so, so assume not)

TBS: M5 - PP&E: Depreciation, Disposal, and Impairment

Include all costs in carrying value - Machine initial carrying value (amount to be depreciated) include All costs related to the acquisition of the machineryThis includes the full invoice price ($36,000) as well as tax ($1,800) and shipping ($200). Accumulated depreciation is same as depreciation expense - Accumulated depreciation is going to be debited for current depreciation expense. this question is not asking for the amount in the total balance sheet. Loss on disposal - If there is still carrying amount on the machine left when desposed, it is recorded as loss on disposal.

TBS: M7 - Lessee Accounting

Lease Cash flow - for a finance lease principle payments are Financing outflows - for perating lease preparing for intended use is investing outflow - everything else is an operting outflow Bond Market rate changes - Changes in market rates have no impact on the book value of bonds or interest expense - instead it will decrease the Market value of the bond

TBS: F2 M8 - Ratio and Variance Analysis

Pay attention to the factors causing the decrease and increase of the ratio (look for dramatic changes in IS or BS items between years) (remember that coupon rate plays a role in bond interest, because coupon rate helps determine the PV value that determines interest expense)

M3 - Stockholders' Equity: Part 1 Cross Corp. had outstanding 2,000 shares of 11% preferred stock, $50 par. On August 8, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross' additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:

Preferred stock = $25,000 Additional paid-in capital = ($2,500) Retained earnings = $0 Rule: If the reacquisition price is: a) Less than original issue price, the "gain" is credited to APIC; b) More than original issue price, the "loss" is debited to retained earnings. DR. Preferred stock $25,000 CR. APIC $2,500 CR. Cash $22,500 because you bought it back at a gain because you paid less than it was worth, You will increase APIC)

F3 M6 - Intangibles With Finite Lives - correct Hy Corp. bought Patent A for $40,000 and Patent B for $60,000. Hy also paid acquisition costs of $5,000 for Patent A and $7,000 for Patent B. Both patents were challenged in legal actions. Hy paid $20,000 in legal fees for a successful defense of Patent A and $30,000 in legal fees for an unsuccessful defense of Patent B. What amount should Hy capitalize for patents?

$65,000 40,000 + 5,000 + 25,000 only capitalize legal fees for a successful defense of a patent the other patent was not successful so it is no longer a patent and the whole thing is expensed

TBS M1 - Cash and Cash Equivalents (bank reconciliation) - Correct

Acrynm - BINS DO - with interest revenue, NSF Checks, and Bad checks, look throughout the whole bank statement not just towards the end.

F4 M1 - Payables and Accrued Liabilities - correct Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes for National's mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee's account and used to reduce future escrow payments. Additional information from the current year follows: - Escrow accounts liability, January 1 $700,000 - Escrow payments received $1,580,000 - Real estate taxes paid $1,720,000 - Interest on escrow funds $50,000 What amount should Kent report as escrow accounts liability in its December 31 balance sheet?

Answer $605,000 $700,000 (Beginning liability) + $1,580,000 (will increase liability) + $45,000 [$50,000 x (1 - 10%)] - $1,720,000 (will decrease liability) = $605,000 BASE: Beg Add Subract End (escrow collects money from customers to pay taxes, so money collected increase his liability and taxes paid decreases it. the interest increase the liability (minus the 10% fee he takes on the intereset)

M3 - Not-for-Profit Revenue Recognition SOME Quentin University is organized as a not-for-profit organization. The university reaches out to its alumni each year in a mass telephonic fund raising appeal that includes scripted dinner hour calls appealing for ongoing support. In Year 1, the university used untrained student volunteers to make the calls. In Year 2, an alumnus who owns a successful telemarketing company offers to perform the task. The university accepts the offer andprovides the alumnus with the script along with appropriate phone numbers and contribution accounting forms. Based on the usual and customary charges used in his business, the alumnus anticipates that the value of these services is $10,000. For each year, contributed revenue associated with this transaction would be:

Answer = Year 1 = $0 Year 2 = $0 (Remember the skill has to be specialized. In this senario they were able to have students do the same job and they weren't planning to pay anyone for it so it is not specialized)

M3 - Consolidated Financial Statements (retained earnings) ---------------------Potter--Spuire------ Retained earnings 740,000 400,000 In the December 31 consolidated financial statements of Potter and Squire, total retained earnings should be:

Answer = $ 740,000 CAR is eliminated (Common stock, APIC, RE). Only the parents company's RE is in the consolidated FS.

F4 M7 - Lessee Accounting On January 1, Year 1, LaGuardia Company signed a five-year noncancelable lease for a new machine with a fair value of $80,000, requiring $8,000 annual payments at the beginning of each year. The machine had a useful life of 10 years, with no salvage value. Title did not pass to LaGuardia, nor was there any written purchase option that LaGuardia was reasonably certain to exercise. LaGuardia uses straight-line depreciation for all of its plant assets. Aggregate lease payments had a present value on January 1, Year 1, of $40,000 based on an appropriate interest rate. For Year 1, LaGuardia should record depreciation (amortization) expense for the leased machine under U.S. GAAP at:

Answer = $0 (This lease does not meet any of the OWNES requirments, therefore it is an Operating lease and will not be on the lessees books and they will not recorde depreciation) (Financing leases do recognize depreciation because the asset is put on their books)

M2 - Accounting Changes and Error Corrections - Correct At December 31, Year 2, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31, Year 1, $300,000 of which were to be written off in Year 2 and the remainder in Year 3. Off-Line's income tax rate is 30%. In its Year 3 financial statements, what amount should Off-Line report as cumulative effect of change in accounting principle?

Answer = $0 A change in method of accounting for demo costs is a change in accounting principle inseparable from a change in estimate. this means there is no cumulative change. only prospective change. Also includes: Change to LIFO Change in Depreciation method

F6 M4 - Not-for-Profit Transfers of Assets and Other Accounting Issues Thayer Healthcare Foundation was formed to raise money for the Thayer Healthcare System, a group of three otherwise unrelated entities: a hospital, nursing home and walk-in clinic. The nursing home and walk in clinic have nearly equal net assets while the hospital's net assets are nearly three times the size of the combined net assets of all other system members. None of the entities that benefit from the foundation's activities have an agreement regarding the distribution of foundation earnings. During the year ended December 31, Year 1, AB Corporation donated $600,000 to the foundation. Relative to this transaction, entities that comprise the health care system would record an interest in the net assets of the foundation as follows:

Answer = $0 for all three Because there is not agreement between the clinics and the NFP recipienct to how much each should recieve. the NFP has variance power and the clinics shouldn't recognize any contribution

M6 - Intangibles With Finite Lives On January 1, Year 1, Billy Co. signed a three-year lease for office space. The lease required monthly rent of $8,000 for the first year, $8,100 for the second year and $8,200 for the third year. Billy has the option to renew the lease for a fourth year at $8,300 per month. On January 1, Year 2, Billy permanently installed new overhead lighting fixtures at a cost of $2,000. How much amortization expense on this leasehold improvement should Billy record for Year 2?

Answer = $1,000 $2,000 / 2 years = $1,000 $2,000 leasehold improvement should be amortized over the period of expected benefit (remaining Useful life). (you dont recognize a 4 year lease because the question didn't make it clear if Billy was likely to renew the lease or not, so assume not)

M1 - Balance Sheet, Income Statement, and Comprehensive Income - Correct The following trial balance of Trey Co. at December 31 has been adjusted except for income tax expense. - Retained earnings: 630,000 - Revenues: 3,600,000 - Expenses: 2,600,000 - During the current year, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between financial statement and 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 payment in equal semiannual installments of $125,000 every April 1 and October 1. In Trey's December 31 balance sheet, what amount should be reported as total retained earnings?

Answer = $1,330,000 Beg Retained earnings: 630,000 + Income: 700,000 [(3,600,000 - 2,600,000) x (1 - 30%)] - $0 = End RE $1,330,000 Beg RE + Earnings - Dividend = End RE

F4 M2 - Contingencies and Commitments - Correct Brite Corp. had the following liabilities at December 31, Year 1: Accounts payable 55,000 Unsecured notes, 8%, due July 1, Year 2 400,000 Accrued expenses 35,000 Contingent liability 450,000 Deferred income tax liability 25,000 Senior bonds, 7%, due March 31, Year 2 1,000,000 The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against Brite. Brite's legal counsel expects the suit to be settled in Year 3, and has estimated that Brite will be liable for damages in the range of $450,000 to $750,000. The deferred income tax liability is not related to an asset or liability for financial reporting and is expected to reverse in Year 3. What amount should Brite report in its December 31, Year 1, balance sheet for current liabilities?

Answer = $1,490,000 55,000 + 400,000 + 35,000 + 1,000,000 (do not include deferred income taxes they are always non current) Do not include contigent liability because it will be paid in year 3. it is a noncurrent liability)

M1 - Balance Sheet, Income Statement, and Comprehensive Income In Vane's Year 1 multiple-step income statement, what amount should Vane report as income from continuing operations?

Answer = $126,000 everything is included in continuing operations net of tax (including tax expense)

M3 - Not-for-Profit Revenue Recognition (Split-Interest) -correct Balfour Charities, a not-for-profit organization, received a $200,000 cash donation from Emily Balfour under a charitable remainder annuity trust agreement designating the Balfour Charities as both trustee and remainder beneficiary. The trust agreement specifies that Balfour Charities must both invest the $200,000 and pay $10,000 per year to Roscoe Balfour, Emily's cousin, until his death. Any funds remaining after Roscoe's death will be retained by Balfour Charities and used in a manner consistent with their vision. The present value of the annuity payable to Roscoe is $65,000. As a result of this transaction, Balfour would recognize contributions of:

Answer = $135,000 $200,000 - $65,000 = $135,000 (because it is a split-interest you will give the required amount to the beneficiary and the remainder is recognized as a contribution to the charity)

F4 M5 - Bonds: Part 2 On November 1, Year 1, Dixon Corporation issued $800,000 of its 10-year, 8% term bonds dated October 1, Year 1. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Dixon report for interest payable in its December 31, Year 1 balance sheet?

Answer = $16,000 $800,000 x 8% x 3/12 = 16,000 Remember the interest payable is = to the coupon payment. it is not the same as the interest expense which is the coupon plus any amortization)

F1 M1 - Balance Sheet, Income Statement, and Comprehensive Income Mission Flowers Company had the following transactions for the year ended December 31: - Sales revenues of $775,000. - Operating expenses of $550,000. - Losses due to employee strike of $200,000. This was the first employee strike in the history of the company. - Operating income of $100,000 from a subsidiary sold on November 1. The decision to dispose of the subsidiary was made on February 28. The income was earned evenly over the ten months ended October 31. The company's effective tax rate is 35%. What amount should Mission Flowers report as income from continuing operations for the year ended December 31?

Answer = $16,250 $775,000. - $550,000. - $200,000. = $25,000 x (1 - 35%) = $16,250 (Losses on disposed of subsidiary is retrospective included in discountiued income. the income for the whole year is considered discontinued because its retrospective)

M3 - Consolidated Financial Statements (net income) - Correct ---------------Potter --- Spuire------ Net Income $240,000 $75,000 Equity in the earnings of Squire: $60,000 (80%) In the December 31 consolidated financial statements of Potter and Squire, total consolidated net income should be:

Answer = $240,000 $75,000 x 80% = $60,000 Squire income $240,000 Net income - $60,000 investment in Squire + $60,000 80% of Squire income = $240,000 Net income

F4 M1 - Payables and Accrued Liabilities 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?

Answer = $264,000 $257,000 + $26,000 + $68,000 - $87,000 = $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

M1 - Payables and Accrued Liabilities On January 1, Year 1, an entity recorded an asset retirement obligation of $162,120. The asset retirement obligation is expected to be paid at the end of ten years. The entity uses straight-line depreciation and an accretion rate of 8%. What is the total Year 1 expense related to the asset retirement obligation?

Answer = $29,182 $162,120 x 8% = $12,970 accretion expense $162,120 / 10 = $16,212 depreciation expense $12,970 + $16,212 = $29,182 accretion expense is the interest on a liability related to the asset. thats why you multiply the PV by the accretion (interest) rate by the related liability

F4 M1 - Payables and Accrued Liabilities Rabb Co. records its purchases at gross amounts but wishes to change to recording purchases net of purchase discounts. Discounts available on purchases recorded from October 1, Year 1, to September 30, Year 2, totaled $2,000. Of this amount, $200 is still available in the accounts payable balance. The balances in Rabb's accounts as of and for the year ended September 30, Year 2, before conversion are: Purchases 100,000 Purchase discounts taken 800 Accounts payable 30,000 What is Rabb's accounts payable balance as of September 30, Year 2, after the conversion?

Answer = $29,800 $30,000 - #200 = $29,800 (Net method assumes all discounts are gonna be taken) ($200 is available and $800 has already been taken. so gross method would record $30,000 as accounts payable. net method would include the $200 available.)

M5 - Subsequent Events 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 = Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements. (The reason is because it did not occur prior to the Balance Sheet date.)

F5 M1 - Financial Instruments Which of the following statements regarding the accounting for held-to-maturity securities is incorrect? I. To classify an investment as held-to-maturity, the company must have either the intent or the ability to hold the security until maturity. II. If a debt security is purchased at par value, it will be valued and reported at the purchase price until it matures. III. A held-to-maturity security can be reported as either a current or a non-current liability. A. I and III. B. III only. C. I, II, and III. D. I only.

Answer = I and III. *I (must have both the intent AND the ability to hold the security until maturity) *III (a Held to maturity security is reported as an asset, not a liability

M3 - NFP The Bygone Historical Society, a not-for-profit organization, received a donation of fifteen Daguerre-type (metal) photos of Bygone's riverfront from a family estate. The photos were not suitable for display but were accepted by the historical society for their potential value to researchers and historians. The photos have no alternative use. The Bygone Historical Society adopted a policy of capitalizing its contributed works of art and historical treasures. Under these circumstances, Bygone Historical Society would: A.Not recognize the contributed photos as assets and contribution revenue. B.Recognize the photos as assets (historical treasures) and contribution revenue in the amount of their fair value. C.Recognize the photos as assets (historical treasures) and contribution revenue in the amount of the value of the metal. D.Disclose the receipt of historical treasures not eligible for display.

Answer = Not recognize the contributed photos as assets and contribution revenue. (Because there is major uncertainties with regard to their value and have no alternative use.) critera for including donated items as contribution 1. the item is part of a collection that is held for public viewing 2. item is cared for and well preserved 3. organization has a policy that any proceeds from sale of donated items will be reinvested back into the collection

M2 - EPS and Public Company Reporting Topics The Lester Corporation prepares its second-quarter interim report under U.S. GAAP. In preparing the reports, Lester will most likely: A. Prepare the interim report with less due diligence than it would use for the annual report in order to issue it faster. B. Book revenue based on when cash is received, with a reconciliation to accrual numbers at year-end. C. Book expenses based on when the company pays its vendors. D. Have its auditors review and "sign off" on the report.

Answer = Prepare the interim report with less due diligence than it would use for the annual report in order to issue it faster. (For interim reports, timeliness is emphasized over reliability. Therefore, the company will make more of an effort to get the reports out faster even if it sacrifices some of the reliability of the data presented.) (Choice "D" is incorrect because Auditors will not typically review and "sign off" on interim reports.)

Wright Co. reissued treasury stock it had acquired for $10 per share in a variety of different circumstances. The shares have a par value of $5 and were originally sold for $15 per share. Wright Co. accounts for its treasury stock transactions using the cost method. For the situations below, record the appropriate journal entries. 3. Retire 1,000 shares on November 5, Year 3.

Answer: Dr. Common stock $5,000 Dr. APIC $10,000 Cr. Treasurey Stock $10,000 Cr. APIC -Treasurey Stock $5,000 Common stock = 1,000 shares x $5 par APIC = ($15SP - $5Par) x 1,000 shares Treasurey Stock = $10 repurcahse x 1,000 shares APIC - Trasurey stock = Plug (the reason it is APIC - treasurey stock is because retirement is similar to reissue in that you have to recognize the gain to APIC - treasurey stock)

TBS: F6 M3 - Not-for-Profit Revenue Recognition 1. Funds donated for the building expansion are used to purchase a building in a manner that satisfies the benefactor in the fiscal period following the period the funds were received. 2. An accounting firm prepares Goodworks' annual financial statements without charge to Goodworks. 3. Goodworks received investments subject to the donor's requirement that investment income be used to pay for services consistent with the mission.

Answer: *1. contribution without donor restriction *2. contribution without donor restriction *3. contribution with donor restriction *1. (the funds are being used to satisfy there purpose. this would be a net asset reclassification and an increase in contributions without donor restriction) *2. (accounting services is specialize and fits the SOME numoni. contributed services are recorded as without donor restriction) *3. (the investment is to be kept intact and is restricted even though the income is without restriction

F2 M2 - Accounting Changes and Error Corrections Which of the following should be reported as a prior period adjustment? - Change in estimated lives of depreciable assets - Change from unaccepted principle to accepted principle

Answer: Change in estimated lives of depreciable assets - No Change from unaccepted principle to accepted principle - YES Change from unaccepted principle to accepted principle is an Error (Errors are corrected in the year it occured if that FS is presented but if not we will make a correction to Retained earnings in the earliest period presented)

Purple Corp. acquired treasury shares at an amount greater than their par value, but less than their original issue price. Compared to the cost method of accounting for treasury stock, does the par value method report a greater amount for additional paid-in capital and a greater amount for retained earnings?

Answer: RE = No APIC = No assumption: Par = 10 Original issue price = 30 Repurchase price = 20 Par value method: DR. Treasurey 10 DR. APIC - common 20 CR. APIC - treasurey 10 CR. Cash 20 Cost Method: DR. Treasurey 20 CR. Cash 20 (APIC is debited so it is lower in the par method And RE is not touch in either method, so it is not greater)

M3 - Not-for-Profit Revenue Recognition Applebee Farms, a not-for-profit organization, has received the following support during its fiscal year ended June 30, Year 1: - A contribution of $300,000 stipulating that the gift is to be used for research. - A pledge from a long-time benefactor for $250,000 intended for the support of the mission of Applebee Farms. The pledge was collected August 13, Year 1. - A contribution of $50,000 along with a pledge for an additional $150,000 to be used for programming consistent with the organization's mission only upon completion of a new research facility. The research facility was 80 percent complete at fiscal year end. In its June 30, Year 1 financial statements, Applebee Farms would report:

Answer: Revenue Without Donor Restrictions = $0 Revenue With Donor Restrictions = $550,000 $300,000 is With Restrictions: obviously $250,000 is With Restrictions: Time restriction $50,000 along with a pledge for an additional $150,000 - both are conditional and the $50,000 is just a refundable advance liability.

TBS F5 M2 - Equity Method Barnes Electric Inc. acquired an interest in Rhodes Wire & Cable Inc. on January 1, Year 1. Calculate the effect of this investment Barnes purchased a 30% interest in Rhodes on January 1, Year 1 for $330,000 and properly uses the equity method of accounting. The carrying value of Rhodes net assets at the purchase date was $1,000,000. Fair values equaled carrying amounts for all items except equipment, where fair value exceeded the carrying amount by $100,000. The equipment had a remaining useful life of 5 years on January 1, Year 1. Rhodes reports income of $150,000 for the year. Barnes received a 10% stock dividend from Rhodes on February 1, Year 2. Rhodes also paid a cash dividend of $8,000 to its shareholders on May 31, Year 2. Barnes paid a dividend of $30,000 to its shareholders on October 30, Year 2. Earnings for the year for Barnes and Rhodes was $125,000 and $50,000, respectively.

Answer: Year 1: Investment change = $369,000 Income from investment change = $39,000 Year 2: Investment change = $6,600 Income from investment change = $9,000 Year 1: $100,000 / 5 = $20,000 x 30% = $6,000 depreciation $150,000 x 30% = $45,000 income $330,000 + $45,000 - $6,000 = $369,000 investment change $45,000 -$6,000 = $39,000 income change Year 2: $8,000 x 30% = $2,400 dividend $50,000 x 30% = $15,000 income $15,000 - $6,000 - $2,400 = $6,600 investment change $15,000 - $6,000 = $9,000 income change

The Felix Nursing Home, Inc. is a health care provider organized as a not-for-profit organization whose activities are regulated by state licensure rules. The financial information that the Felix Nursing Home, Inc. is required to produce are: - Statement of Financial Position - Statement ofActivity - Statement of Cash Flows - Disclosure Functional Expenses

Answer: - Statement of Financial Position = YES - Statement ofActivity = YES - Statement of Cash Flows = YES - Disclosure Functional Expenses = YES (They must provide disclosure of functional expenses NOT a statement of functional expenses)

M1 - Not-for-Profit Financial Reporting: Part 1 Top Notch Golf & Country Club is organized as a not-for-profit organization. The club has experienced rapidly declining membership in recent years and its board of directors has made increased membership a major objective. The club incurred the following outlays at the end of the current fiscal year: - $250,000 in renovations to locker rooms - $180,000 for new assistant golf professionals - $220,000 for upgrades to pro shop inventory - $65,000 for upscale linens and restaurant supplies - $35,000 for staff dedicated to membership development - $55,000 for promotional and fund raising brochures The outlays listed above should appear in which expense classifications:

Answer: Program Services = $245,000 Support Services = $90,000 Program services: - $180,000 for new assistant golf professionals - $65,000 for upscale linens and restaurant supplies Support Services: - $35,000 for staff dedicated to membership development - $55,000 for promotional and fund raising brochures Capitalized costs (NOT EXPENSES): - $250,000 in renovations to locker rooms - $220,000 for upgrades to pro shop inventory (Program services are expenses related to the goals the organization Support services are expenses for anything else - fund raising - membership develpment - administrative costs)

M1 - Not-for-Profit part 1 The Appleton Museum was established in the current year as a not-for-profit organization. It operates as a privately-funded museum and curator of the historical and artistic treasures of the Town of Appleton. The museum received a $500,000 donation of securities from Uri Appleton with the stipulation that the donation would be kept intact but that earnings from the principal could be used for the museum's art acquisition program. During the year, the museum received $50,000 in contributions without donor restrictions to fund operations. The donation of Mr. Appleton yielded $30,000 in dividends and the fair market value of the donation was $525,000 at year-end. The museum purchased local treasures for display in the museum valued at $38,000 during the year. The museum qualifies and elects not to capitalize its collection. What were the values of the net asset classes at the end of the year?

Answer: Withoutdonor restrictions = $50,000 Withdonor restrictions = $517,000 Withoutdonor restrictions: + $50,000 - $38,000 + $38,000 Withdonor restrictions: + $500,000 + $30,000 + $25,000 - $38,000 (First they receive $500,000 restricted and any earnings are restricted to purchasing art $30,000. the investment goes up by $25,000 adding to restricted. they also purchase art for $38,000 adds an expense to without donor restriction first and then reclassifies $38,000, taking it out from the investment earnings and adding it to without restriction (zero change in without restriction).

Albright University, a not-for-profit institution of higher learning, conducts clinical trials for pharmaceutical companies and receives payment from the pharmaceutical company to compensate for the value of the trials. Faith Church is notified by Joe Parishioner that it will receive 10% of Joe's estate under the terms of his last will and testament.

Clinical trials represent a service with a commercial value to the pharmaceutical company provided by Albright. The transaction is recognized as an exchange transaction (revenues) and is classified as without donor restrictions (all exchange transactions are without donor restrictions). Joe Parishioner's will is subject to change and is thus not recognized. As a result, Faith Church does not record a pledge receivable or any classified revenue. (just because it says its his last will doesn't mean he can't change his mind, so don't recognize the revenue)

TBS: F5 M3 - Consolidated Financial Statements

Consolidation happened at beginning of the year and the Eliminating entry is made at the balance sheet date Use acronym: CAR IN BIG - Common stock (sub) = same - APIC (sub)= Same - RE (sub)= Changes by net income and dividends paid by (sub) - Investment = Changes by net income and dividends paid by (sub) - Non controling interest = None - BS adj = use final Fair value NOT provisional Fair value - Intangible adj = use final Fair value NOT provisional Fair value - Goodwill = plug figure (cash paid for investment - Fair value of net assets aquired)

TBS: M5 - Subsequent Events

Disclosure? - If there is a Subsequent Event than a disclosure is required - If there is no Subsequent Event than disclosure is not required but may be given if significant Write-off - For a write off: - Debit allowance for doubtful accounts - Credit Accounts Receivable

TBS: F2 M2 - Accounting Changes and Error Corrections

Errors and Principle changes are treated the same If error is in one of the financial statements presented, - merely correct the error in those prior FS If error happened in prior years of statements we are not presenting - Adjust retained earnings of the earlies year presented (Subsequent events would be recorded in the notes but not the actual financials for year 4. this is like the probable gain it should only be disclosed) (Pension Amortization is adjusted retrospectively so in each of the FS years presented and the beginning RE of the earliest year presented) (remember that errors and principle changes are adjusted in FS presented and in the RE of earliest FS presented.)

M6 - Governmental Fund Structure and Fund Accounting

GRaSPP - General : Ordinary operation of the government - Special Revenue : revenues from specific taxes or other earmarked sources that are restricted or committed to finance particular activities (fully expendable) - Debt Service :Payment of all general debt (exception: enterprise funds) - Capital Project : resources used for the acquisition or construction of major capital assets (exception: enterprise funds) - Permanent : resources that are legally restricted to the extent that income, and not principal, may be used (expenditures are limited to earnings) SE-CIPPOE - Internal Service : goods and services provided by designated departments on a fee basis to other parts of the Government - Enterprise : acquisition and operation of governmental facilities and services that are intended to be primarily self- supported by user charges (public transportation or utilites) - Custodial : resources in the temporary custody of a governmental unit Investment : external investment pools - Private Purpose : Assets are dedicated to providing recipiencet benefits in accourdance with terms of trust and assets are leagaly protected - Pention (and other employee benefit) - Resources of defined benefit plans, defined contribution plans, post employment benefit plans etc.

TBS: F2 M3 - Adjusting Journal Entries

adjust Allowance for doubtful accounts to the amount it must be at the end of the year by debiting bad debt expense and crediting allowance and just add the additional amount of tax needed