FAR Testlet 1
The beginning PC of the lease did not include the PV of the WPO. A written purchase option payment is included as part of the minimum lease payments to be discounted to the date of inception of the lease because it is a future cash flow that is considered certain. When the spreadsheet showed zero at the bottom, Cott, Inc. still was required to make the WPO payment, yet there was no liability left on the books to pay. The $2,000 should have been capitalized as part of the cost of the finance lease.
Cott, Inc. prepared an interest amortization table for a five-year lease payable with a written purchase option of $2,000 which the lessee is reasonable certain to exercise. At the end of the five years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA , to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error?
$4,750 4,000 "free rent" $10,600 * 5 years = 53,000 + 8,000 - 4,000 = 57,000 / 6 years = 9,500 (annual rent expense) 9,500 * (6/12) = 4,750
Bentley Company leased equipment from Babson Company for a six-year term beginning July 1, Year 1. The lease was appropriately accounted for as an operating lease. The rent for the first lease year is $8,000, and the rental charge for each of the remaining five years is $10,000. However, as an incentive to lease its equipment, Babson provided the first six months of the lease rent free. In its December 31, Year 1 income statement, what was Bentley's rental expense?
Decrease in accounts receivable and current year sales
Cash flows will report "cash receipts from customers" as:
$50,000 Total expenditures: $2,000,000 / 2 years = $1,000,000 Average accumulated expenditures: $1,000,000 * 5% = $50,000 avoidable interest Compared avoidable interest (potential amount to be capitalized) to total actual interest cost incurred ($40,000 + 30,000) and capitalize the lower amount.
Emma Construction Company started building a new administrative headquarters on January 1, Year 1. Emma intends to occupy the building at the project completion date of January 1, Year 3. At December 31, Year 1, Emma had incurred $2,000,000 of construction costs, evenly spread during that first year. Projected remaining costs are $2,500,000. During Year 1, Emma incurred interest cost on specific construction debt in the amount of $40,000 and interest on other unrelated loans in the amount of $30,000. All loans carry 5% interest. How much interest should Emma capitalize for Year 1?
Investors and creditors and their advisors (external financial reporting focuses on the needs of external users).
General purpose external financial reporting of a corporation focuses primarily on the needs of which users?
$40,000 in revenue without donor restrictions - The Foundation would record the services of the veterinarian since these services meet the recognition criteria of being a specialized skill that would have to be purchased and can be measured easily at the veterinarian's usual and customary fee. Rule: The value of services rendered are only recognized SOME of the time time. Services must meet three criteria: Specialized skill that is Otherwise needed that can be Measures Easily
Give the World a Puppy Foundation is organized as a not-for-profit organization with the mission of ensuring that everyone on the planet owns a puppy. A local veterinarian has volunteered her time to provide medical care to the puppies in the care of the foundation. The Foundation estimates that it would pay $40,000 per year for this service if it were not donated. The Foundation also enjoys the services of 20 volunteers who walk and otherwise attend to the animals. The Foundation estimates the value of the services provided at $25,000 per year that would be handled by current salaried staff without these donated hours. As a result of these donations Give the World a Puppy would record:
Summary of Significant Accounting Policies
Liquid Industries defines cash and cash equivalents as cash and time certificates of deposit whose original maturity date is less than ninety days. When preparing their financial statements, Liquid would most likely present this policy in the:
$9,000 ordinary gain on the troubled-debt restructuring, and $(13,000) ordinary loss on disposal of machine, netting to an ordinary loss of $4,000. Note: CV: $105,000 - PV 96,000 = 9,000 Machine: CV: 109,000 - FV 96,000 = 13,000
Nu Corp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machines original cost was $140,000. The note's face amount was $110,000. On the date of the agreement: a. The note's CV was $105,000, and its PV was $96,000. b. The machines CV was $109,000, and its FV was $96,000. What amount of net gains (losses) should NU recognize in its income statement?
$200,000 Under IFRS: Partial goodwill = Purchase price - FV net assets acquired Partial goodwill = (100,000 shares * $8/share) - (80% * ($700,000+50,000))
On December 31, Planet Company acquired 80% of the voting common stock of Star Company by issuing 100,000 shares of its own common stock (fair value $8/share). In the acquisition, Planet paid legal fees in the amount of $15,000 and paid SEC registration fees of $10,000. The book value of Star on December 31 was $700,000. Star's only balance sheet item with a fair value different from book value was a building. The building had a book value of $100,000 and a fair value of $150,000. Goodwill to be shown on Planet's December 31, consolidated balance sheet under IFRS partial goodwill method is:
$50,000 = 150,000 - 100,000 Under the acquisition method, all balance sheet accounts must be adjusted to FV on the date of acquisition. Therefore, the book value of the building will be increased by $50,000.
On December 31, Planet Company acquired 80% of the voting common stock of Star Company by issuing 100,000 shares of its own common stock (fair value $8/share). In the acquisition, Planet paid legal fees in the amount of $15,000 and paid SEC registration fees of $10,000. The book value of Star on December 31 was $700,000. Star's only balance sheet item with a fair value different from book value was a building. The building had a book value of $100,000 and a fair value of $150,000. In Planet's December 31 consolidating work paper elimination entry, "Building:" is debited for:
$72,000 Full JE: Dr: Cash 60,000 Note receivable 90,000 Cr: Revenue 60,000 Discount on note receivable 18,000 Unearned franchise revenue 72,000
On December 31, Year 1, Rice, Inc. authorized Grad to operate as a franchisee for an initial franchise fee of $150,000. Of this amount, $60,000 was received upon signing the agreement and the balance, represented by a note, is due in three annual payments of $30,000 each beginning December 31, Year 2. The present value on December 31, Year 1, of the three annual payments appropriately discounted is $72,000. According to the agreement, the nonrefundable down payment represents a fair measure of the services already performed by Rice; however, substantial future services are required of Rice. Collectibility of the note is reasonably certain. In Rice's December 31, Year 1, balance sheet, unearned franchise fees from Graf's franchise should be reported as:
Recognized in current net income for Year 1. Gains and losses resulting from the change in fair value of derivative not held or issued for hedging purposes should be recognized in net income in the period during which the FV changes.
On December 31, Year 1, the end of its fiscal year, Smarti Company held a derivative instrument which it had acquired for speculative purposes during November, Year 1. Since its acquisition the FV of the derivative had increased materially. On December 31, how should the increase in fair value of the deriviative instrument be reported by Smarti in its financial statements?
$215,000 - $250,000 = (35,000) Step 1: Recoverability Test Net CV > undiscounted FCF = impairment loss Step 2: Amount of loss FV - CV
On December 31, an entity analyzed equipment with a net carrying value of $250,000 for impairment. The entity determined the following: FV = 215,000 and undiscounted FCF = 240,000. What is the impairment loss that will be reported on the December 31 income statement under U.S. GAAP?
$47,500 Bond face 1,000,000 Issued at 94 940,000 Issue cost (50,000) NCV (890,000) Issued at a discount of 60,000 Bond issue costs of 50,000 Amortization: 60,000+50,000 = 110,000/10 years = 11,000 Amort. per year 11,000 Jan Y1 - July Y8 *7.5 years Total amort. 82,500 Original NCV 890,000 Current NCV (890+82.5) 972,500 Call price @ 102 (1,020,000) Loss on call of bonds (47,500)
On January 1, Year 1, David Corp. issued 1,000 of its $1,000 bonds at 94. David Corp. uses U.S. GAAP. The bonds mature in 10 years but are callable at 102 any time after issuance. On January 1, Year 1, David incurred bond issue costs of $50,000. On July 1, Year 8, David called all of the bonds and retired them. Assuming that bond discount and issue costs were amortized using the straight-line method, what amount of pretax loss would David report from this extinguishment of debt?
$7,600 = (175,200-160,000)*(6/12) Amortization of discount = interest expense - interest payment Effective interest expense = CV * effective market rate 1,752,000 * 10% = 175,200 Coupon Interest Payment = Face * coupon 2,000,000 * 8% = 160,000
On July 1, Year 1, Black & Associates issued 2,000 of its 8%, $1,000 bonds for $1,752,000. The bonds were issued to yield 10%. The bonds are dated July 1, Year 1 and mature on July 1, Year 11. Interest payable semiannually on January 1st and July 1st. Using the effective interest method, how much of the bond discount should be amortized for the six months ended December 31, Year 1?
Pinellas is assumed to be able to exercise significant influence over the affairs of Sanibel Co. 0-20% = FV 20-50% =Equity (significant influence) 50-100% = Consolidating
Pinellas Company owns 30% of the voting common stock of Sanibel Company. Pinellas will probably use the equity method of accounting to account for this investment because:
Days sales in accounts receivable = (ending accounts receivable, net)/(sales, net/365) 100,000/(1,400,000/365) = 26.1 days
TGR Enterprises provided the following information from its statement of financial position for the year ended December 31, Year 1: Accounts receivable: Jan 1: 120,000 December 31: 100,000 TGR's sales and cost of sales for Year 1 were $1,400,000 and $840,000, respectively. What is TGR's days sales in accounts receivable?
Fiscal: No Operational: Yes Governmental-wide financial statements focus on operations accountability, and funds focus on fiscal accountability.
The financial statements of governments have focused on two forms of accountability. Government-wide financial statements focus the reader on accountability in which way(s): Fiscal accountability: yes/no Operational accountability: yes/no
Accounting and legal (25,000), officers salaries (150,000), and insurance (85,000) = 260,000 Freight-in is part of cost of sales, freight-out is a selling expense, and sales salaries are selling expenses.
The following costs were incurred by Griff Co., a manufacturer, during the current year: Accounting and legal fees: 25,000 Freight-in: 175,000 Freight-out: 160,000 Officers salaries: 150,000 Insurance: 85,000 Sales rep salaries: 215,000 What amount of these costs should be reported as general and administrative expenses for the current year?
$55,000 unrealized holding gain on trading securities is reported in Year 2 income statement (155,000-100,000). Rule: Trading securities report unrealized gains and losses directly to earnings. AFS report unrealized gains and losses to OCI
The following data pertains to Tyne Co,'s investment in marketable debt securities: Trading: Cost = 150,000 FV 12/31/Y2 = 155,000 FV 12/31/Y1 = 100,000 AFS: Cost = 150,000 FV 12/31/Y2 = 130,000 FV 12/31/Y1 = 120,000 What amount should Tyne report as unrealized holding gain in its Year 2 income statement?
0 The $8,000 is to be used for advances to private purpose trust funds and would be accounted for in private purpose trust funds. The $90,000 is for a major capital project, which would be accounted for in a capital projects fund.
The following information pertains to certain monies held by Blair County at December 31, Year 1, that are legally limited to expenditures for specific purposes: Proceeds of short-term notes to be used for advances to private purposed trust funds = $8,000 Proceeds of long-term debt to be used for a major capital project = $90,000 What amount of these monies should Blair account for as restricted or committed in special revenue funds?
Government-wide statements of net position
The portion of special assessment debt maturing in 5 years, to be repaid from general resources of the government, should be reported in the
Warranty costs should be recognized when the machines are sold. The concept is that of matching revenues and the related expenses in the period of benefit.
Vadis Co. sells appliances that include a three-year warranty. Service calls under the warranty are performed by an independent mechanic under a contract with Vadis. Based on experience, warranty costs are estimated at $30 for each machine sold. When should Vadis recognize these warranty costs?
$6,000 Under accrual accounting, the entire warranty liability must be accrued in the year of the sale to match the warranty cost to the related revenue. $300,000 * 2% = 6,000
Wall Co. sells a product under a two-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall's first two years in business, it made the following sales and incurred the following warranty repair costs: Year 1: total sales = 250,000 and total repair costs incurred = 4,500 Year 2: total sales = 300,000 and total repair costs incurred = 5,000 What amount should Wall report as warranty expense for Year 2?
Proprietary funds (internal service and enterprise funds) must use the direct method when preparing their statements of cash flows.
Which format must an enterprise fund use to report cash flow operating activities in the statement of cash flows?
4. Identified concentrations only need to be disclosed if all of the following are met: a. The concentration exist at the financial statement date. b. The concentration makes the entity vulnerable to the risk of a near-term severe impact. c. It is at least reasonably possible that the events that could cause the severe impact will occur in the near-term.
Which of the following is not a disclosure requirement related to risks and uncertainties under U.S. GAAP? 1. Disclosure of the relative importance of each business when an entity operates multiple businesses. 2. A statement that actual results could differ from the estimates included in the financial statements. 3. Estimates of the effects of changes in significant estimates. 4. Disclosure of vulnerability due to all identified concentrations.
None. Revenues are recognized when measurable and available (during the CY + 60 days).
Which of the following revenues should generally be recorded in the accounting period in which they become susceptible to accrual (regardless of timing of collection) by a state or local governmental body? Property tax revenues, Public parking revenues, Income tax revenues, Sales tax revenues
