FAR wrong questions
A company's local currency is the Mexican Peso, but its functional currency and its reporting currency is the U.S. dollar. In preparing its financial statements in U.S. dollars, the company will: A. Remeasure from the Mexican Peso to the U.S. dollar. B. Remeasure from the local currency to the functional currency and translate to U.S. dollars. C. Translate from the Mexican Peso to the U.S. dollar. [ D. Translate from the local currency to the functional currency and remeasure to U.S. dollars
Choices A (Correct) and B, C, D (Incorrect): Since the U.S. dollar is both the functional currency and the reporting currency, the company will remeasure transactions that occur in the local currency into the functional currency and no further action is required. As a result, the company will remeasure from the Mexican Peso to the U.S. Dollar.
Three companies are doing business with a German entity and, as a result, each has entered into a forward exchange contract on December 18, 20X2, under which each will purchase 300,000 Euros on February 18, 20X3. Relevant exchange rates are as follows: Spot rate Forward rate (for 2/18/X3) November 18, 20X2 $1.27 $1.30 December 18, 20X2 $1.32 $1.25 December 31, 20X2 $1.35 $1.31 February 18, 20X3 $1.37 On December 18, 20X2, Company A entered into a contract to purchase a printing press for 300,000 Euros. The press will be ready, and the company is expected to pay for it, when it is completed on February 18, 20X3. The company entered into the forward exchange contract to avoid having to pay more for the printing press if the exchange rate should increase and is recognized as a cash flow hedge. What amount of foreign currency gain should be recognized in income on December 31, 20X2? A. $0 B. $18,000 gain C. $18,000 loss D. $6,000 loss
Choices A (Correct) and B, C, D (Incorrect): Since the forward exchange contract is recognized as a cash flow hedge, no gain or loss will be recognized on the hedge until such time as it affects the hedged transaction. On December 18, 20X2, Company A enters into a contract to purchase 300,000 Euros at $1.25 on February 18, 20X3. As of December 31, it is expected that those Euros will be worth $1.31 each and, as a result, Company A will gain $.06 per Euro or a total of $18,000. Since it is a cash flow hedge, however, the gain is reported in other comprehensive income, not in earnings.
Seagull's Seashells business manager is seeking information on revenue recognition. Identify the location in the professional standards that provides the assumptions to be made regarding the possibility of contract modification for purposes of determining the transaction price in a contract with a customer.
FASB ASC 606-10-32-4 reads: "For the purpose of determining the transaction price, an entity shall assume that the goods or services will be transferred to the customer as promised in accordance with the existing contract and that the contract will not be cancelled, renewed, or modified."
On day 1, Clothes Co., sells clothing to Link Corp. for $40,000. Clothes ships the clothing on day 1 and Link is obligated to pay Clothes within six months. Link is given 12 months to return any of the clothing for a refund if they experience low demand. Link is also given 18 months to exchange any clothing due to low demand. At the time of sale, Clothes cannot reasonably estimate returns, but estimates $5,000 in exchanged goods. Clothes should recognize revenue for the aforementioned transaction A. 12 months after the date of sale. B. 18 months after the date of sale. C. On the day of the sale. D. Six months after the date of sale
Choices A (Correct) and B, C, D (Incorrect): When a buyer has a right to return goods it is unable to sell, it is referred to as a sale with a right of return. If the amount of returns can be reasonably estimated, the sale is recorded when it is originally made with an allowance for estimated returns. When returns cannot be estimated, however, the sale is not recorded until the buyer's right to return the goods has expired. In this case, that would be 12 months after the date of the original sale. The right to exchange goods is not a consideration because an exchange simply replaces certain items from inventory for other items without affecting the amount of the sale.
On December 31, 20X0, Ott Co. had investments in marketable equity securities as follows: Cost Market value Lower of cost or market Man Co. $10,000 $8,000 $8,000 Kemo, Inc. $9,000 $11,000 $9,000 Fenn Corp. $11,000 $9,000 $9,000 $30,000 $28,000 $26,000 Ott's December 31, 20X0, balance sheet should report the marketable equity securities as A. 26,000 B. 28,000 C. 29,000 D. 30,000
Choices B (Correct) and A, C, D (Incorrect): An investment in marketable equity securities is reported at market value. The amount to be reported would be $28,000.
Toigo Co. purchased merchandise from a vendor in England on November 20 for 500,000 British pounds. Payment was due in British pounds on January 20. The spot rates to purchase one pound were as follows: November 20 $1.25 December 31 $1.20 January 20 $1.17 How should the foreign currency transaction gain be reported on Toigo's financial statements at December 31? A. A gain of $25,000 as a separate component of stockholders' equity. B. A gain of $25,000 in the income statement. C. A gain of $40,000 as a separate component of stockholders' equity. D. A gain of $40,000 in the income statement.
Choices B (Correct) and A, C, D (Incorrect): Gains and losses resulting from foreign currency transactions are included in the income statement in the period on which the exchange rate changes. Toigo Co. recorded a liability for 500,000 British Pounds on November 20 at a spot rate of $1.25, which would be $625,000. At year end, the spot rate was $1.20, and the liability would be reported at $600,000. The resulting decrease of $25,000 would be recognized as a foreign currency transaction gain in the income statement.
On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 2,000 pounds (exchange rate, 1 pound = $1.43). At the company's December 31 fiscal year end, the exchange rate was 1 pound = $1.45. The exchange rate was 1 pound = $1.50 on collection in January of the subsequent year. What amount would the company recognize as a gain(loss) from the foreign currency transaction when the receivable is collected? A. $0 B. $100 C. $140 D. ($140)
Choices B (Correct) and A, C, D (Incorrect): The company sold merchandise and booked a receivable for $2,860 US dollars ($1.43*2,000) on October 1. At the end of the fiscal year, December 31 the company revalued the receivable to $2,900 ($1.45*2,000) and recognized a gain of $40 . When the receivable is collected in January, the amount received was $3,000 ($1.50*2,000) resulting in an additional foreign currency gain of $100 .
Which of the following statements regarding foreign exchange gains and losses is correct? A. An exchange gain occurs when the exchange rate increases between the date a payable is recorded and the date of cash payment. [ B. An exchange gain occurs when the exchange rate increases between the date a receivable is recorded and the date of cash receipt. [ C. An exchange loss occurs when the exchange rate decreases between the date a payable is recorded and the date of the cash payment. [ D. An exchange loss occurs when the exchange rate increases between the date a receivable is recorded and the date of the cash receipt. [
Choices B (Correct) and A, C, D (Incorrect): Transaction gains or losses result from a change in exchange rate between the functional currency and the currency in which the transaction took place. Holders of receivables achieve a gain from an increase in the exchange rate as they will be receiving more of the functional currency when the receivable is settled, but debtors also repay liabilities with more of the functional currency, causing a loss. The reverse is also true, a creditor (receivable) incurs a loss when there is a decrease in the rate and a debtor experiences a gain when there is a decrease.
The following data pertains to Tyne Co's investments in marketable debt securities: Market value Cost 12/31/X2 12/31/X1 Trading $150,000 $155,000 $100,000 Available for sale $150,000 $130,000 $120,000 What total amount should Tyne report as an unrealized gain in its 20X2 income statement? A. $50,000 B. $55,000 C. $60,000 D. $65,000
Choices B (Correct) and A, C, D (Incorrect): Unrealized gains and losses on trading securities are recognized in income in the period of the change. As a result, Tyne will recognize the increase in market value from $100,000 to $155,000 as a $55,000 gain included in net income. The $10,000 increase in the value of the available for sale securities will be reported in other comprehensive income, not net income.
Dover Corporation has a receivable with a carrying value of $150,000 bearing interest at the fixed rate of 4%. Dover has not elected the fair value option and accounts for the receivable using the amortized cost method. In anticipation, of an increase in interest rates, Dover has entered into an interest rate swap in the notional amount of $150,000, which is being accounted for as a cash flow hedge. Under the arrangements of the swap, Dover will pay the counterparty at the rate of 4% and the counterparty will pay Dover at the rate of prime + ½%, which at the time was also 4%. The prime rate has increased and, as a result, Dover is now receiving interest at the rate of 5 ½% on the interest rate swap. As of the balance sheet date, the receivable has a fair value of $135,000 and the interest rate swap has a fair value of $15,000. How will Dover recognize the interest rate swap and the change in value of the receivable on its financial statements? A. Dover will recognize the swap as an asset of $15,000 and report an unrealized gain in other comprehensive income. The change in the value of the receivable will also be recognized as an unrealized loss in other comprehensive income. B. Dover will recognize the swap as an asset of $15,000 and report an unrealized gain in other comprehensive income. The change in value of the receivable will not be recognized. C. Dover will recognize the swap as an asset of $15,000 and report an unrealized gain in the income statement. The change in the value of the receivable will be recognized as an unrealized loss in the income statement, offsetting the unrealized gain on the hedge. D. Dover will recognize the swap as an asset of $15,000 and report an unrealized gain in the income statement. The change in the value of the receivable will not be recognize
Choices B (Correct) and A, C, D (Incorrect): When a derivative is accounted for as a cash flow hedge, it is reported at its fair value on the balance sheet and any increases or decreases are recognized as unrealized gains or losses in other comprehensive income. The hedged item is accounted for in the same manner as if it were not being hedged. When changes in the hedged item are reported in income, under its normal accounting procedures, the corresponding amounts will be reclassified from other comprehensive income and recognized in income.
On December 12, year 11, Imp Co. entered into three forward exchange contracts, each to purchase 100,000 LCU's in 90 days. The relevant exchange rates are as follows: Spot rate Forward rate (for March 12, year 12) December 12, year 11 $0.88 $0.90 December 31, year 11 $0.98 $0.93 Imp entered into the third forward contract for speculation. At December 31, year 11, what amount of foreign currency transaction gain should Imp include in income from this forward contract? A. $0 B. $10,000 C. $3,000 D. $5,000
Choices C (Correct) and A, B, D (Incorrect): A derivative acquired for speculation is reported at fair value on the balance sheet with increases or decreases recognized as gains or losses in income. The forward contract would have no value at December 12, year 11, when acquired, since it involved the purchase on March 12, year 12, of 100,000 LCUs for $.90 per LCU when that was the expected exchange rate. At December 31, year 11, the forward rate at March 12, year 12 increased to $.93 per LCU, indicating that Imp would be paying $90,000 for LCUs worth $93,000. As a result, Imp would record the forward contract at a value of $3,000 and recognize a gain in income for that amount.
Willett Co. had the following amounts related to the sale of consignment inventory: Cost of merchandise shipped to consignee $100,000 Sales revenue for three fourths of inventory sold by consignee $125,000 Freight cost for merchandise shipped $10,000 Advertising paid for by consignee, to be reimbursed $5,000 10% commission due the consignee for the sale $12,500 What amount should Willett report as net profit (loss) from this transaction for the year? A. $22,500 B. $23,750 C. $25,000 D. $26,250
Choices C (Correct) and A, B, D (Incorrect): Cost of sales will consist of ¾ of the $100,000 cost of the merchandise, or $75,000, and ¾ of the $10,000 in freight, or $7,500, for a total of $82,500. The gross margin is $125,000 - $82,500, or $42,500. This is reduced by advertising $5,000 and commissions of $12,500, both of which are recognized immediately as expense. The net profit will be $42,500 - $17,500 or $25,000.
hoose the correct statement(s) regarding the retail inventory method: I. It precludes the need for physical counts of inventory. II. It is allowable for year-end financial reporting purposes. III. The cost-to-retail ratio is computed from different inputs depending on the underlying inventory cost flow assumption. A. I, II, and III. B. II and III only. C. III only D. None of the above.
Choices C (Correct) and A, B, D (Incorrect): The retail inventory method is a means of estimating inventory amounts by estimating the relationship between the cost of inventory and the sales price and applying that ratio to the ending inventory measured at sales price. The amounts used to calculate the ratios will depend on the cost flow assumption being applied as different factors are used, for example, in FIFO and LIFO retail approaches. Inventory may be estimated using the retail inventory method for interim financial reporting periods to avoid the expense of taking a frequent physical count but does not replace the need for a physical count, which is usually taken at least annually.
ABC Trading Co. commenced operations during the year as a large importer and exporter of sundries. The imports were all from one country overseas. The export sales were conducted as drop shipments. ABC never actually took possession of the goods, which were merely transshipped at Houston. ABC Trading reported the following data: Purchases during the year $15.0 million Shipping costs from overseas $1.5 million Shipping costs to export customers $1.0 million Inventory at year end $3.0 million What amount of shipping costs should be included in ABC Trading's year-end inventory valuation? A. $0 B. $200,000 C. $300,000 D. $500,000
Choices C (Correct) and A, B, D (Incorrect): The shipping costs from overseas are included in inventory costs, but the shipping costs to export customers are selling costs that are recognized as expense in the period incurred. Since the $3,000,000 in inventory at year end represents 20% of the $15,000,000 purchased during the year, 20% of the $1,500,000 in shipping costs, or $300,000, will be included in inventory cost.
West Co. recorded the following inventory information during the month of February: Units Unit cost Total cost Units on Hand Balance on 2/1 800 $2 $1,600 800 Purchased on 2/8 1,000 $3 $3,000 1,800 Sold on 2/14 1,500 300 Purchased on 2/17 2,000 $1 $2,000 2,300 Sold on 2/23 1,600 700 Purchased on 2/28 800 $4 $3,200 1,500 West uses the LIFO method to cost inventory. What amount should West report as inventory at the end of February under each of the following methods of recording inventory? A.Perpetual: $3,700, Periodic: $3,700. B.Perpetual: $3,700, Periodic: $4,200. C.Perpetual: $4,200, Periodic: $3,700. D.Perpetual: $4,200, Periodic: $4,200.
Choices C (Correct) and A, B, D (Incorrect): Under the perpetual method, purchases and sales are recognized as they occur. As a result, the sale of 1,500 units on 2/14 would consist of the 1,000 units purchased on 2/8 and 500 of those in beginning inventory, leaving 300 from beginning inventory. The 1,600 units sold on 2/23 all would have come from the 2,000 purchased on 2/17, leaving 400 of those unites in ending inventory. As a result, ending inventory would consist of 300 from beginning inventory at $2, or $600, 400 from the purchase on 2/17 at $1, or $400, and the 800 purchased on 2/28 at $4, or $3,200 for a total of $4,200. Under the periodic method, it is assumed that all sales occurred at the end of the period. As a result, the total sales of 3,100 units would have included the 800 purchased on 2/28, the 2,000 purchased on 2/17, and 300 of those purchased on 2/8. Ending inventory would consist of the 800 units in beginning inventory at $2 per unit, or $1,600, and the 700 remaining from the purchase on 2/8 at $3 per unit, or $2,100, for a total of $3,700.
At year end, Rim Co. held several investments with the intent of selling them in the near term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000, and other debt securities purchased for $35,000. At year end, the bonds were selling on the open market for $105,000 and the other debt securities had a market value of $50,000. What amount should Rim report as trading securities in its year-end balance sheet? A. $127,000 B. $142,000 C. $155,000 D. $50,000
Choices C (Correct) and A, B, D (Incorrect): Trading securities are investments in debt instruments, such as bonds, which the investor has acquired in an attempt to make a profit by buying and selling within a short period of time. These are classified as current assets and valued at fair market value at the date of the balance sheet. In addition, all realized and unrealized profit and loss are part of continuing operations on the income statement, unlike available for sale and held to maturity securities.
A wholesaler which prepares its financial statements according to International Financial Reporting Standards (IFRS) has the following per-unit costs for one of its products: Cost $18.00 Net realizable value $15.00 Net realizable value less normal profit margin $14.40 Current replacement cost $14.70 In accordance with IFRS, what is the per-unit carrying value of inventory in the statement of financial positions? A. $12.00 B. $14.40 C. $14.70 D. $15.00
Choices D (Correct) and A, B, C (Incorrect): Under IFRS, inventory is valued at the lower of cost or net realizable value. Because the cost of $18 per unit is higher than the net realizable value of $15 per unit, the per-unit carrying value of the inventory in the statement of financial position will be $15.
On September 1, 20X3, Cano & Co., a US corporation, sold merchandise to a foreign firm for 250,000 Botswana pula. Terms of the sale require payment in pula on February 1, 20X4. On September 1, 20X3, the spot exchange rate was $.20 per pula. At December 31, 20X3, Cano's year end, the spot rate was $.19, but the rate increased to $.22 by February 1, 20X4, when payment was received. How much should Cano report as foreign exchange transaction gain or loss as part of 20X4 income? A. $0. B. $2,500 loss. C. $5,000 gain. D. $7,500 gain.
Choices D (Correct) and A, B, C (Incorrect): When the sale was made on 9/1/X3, the receivable would have been recorded at the spot rate of .20, or $50,000. On December 31, X3, the spot rate had declined to .19. The receivable would have been reduced to $47,500 and a foreign currency transaction loss of $2,500 would have been recognized in 20X3. When the receivable was settled in 20X4, the exchange rate was .22, and the amount received would be $55,000. Since the carrying value of the receivable was $47,500, the difference of $7,500 would be recognized as a gain in 20X4.
At the beginning of year 2, a company invested $40,000 in a marketable debt security. At that time the security was appropriately classified as an available-for-sale security. At the end of year 2, the security had a fair value of $28,500. The change in fair value is deemed temporary. How should this change in fair value be reported in the financial statements? A. As a realized loss of $11,500 as part of net income. B. As a realized loss of $11,500 as part of other comprehensive income. C. As an unrealized loss of $11,500 as part of net income. D. As an unrealized loss of $11,500 as part of other comprehensive income.
Choices D (Correct) and A, B, C (Incorrect): A realized gain or loss occurs when an asset is disposed of. A change in fair value, however, results in an unrealized gain or loss. Unrealized gains and losses on trading securities are reported in income but unrealized gains and losses on available-for-sale securities are reported in other comprehensive income.
When preparing a draft of its 20X0 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, which approximates market value on December 31 $24,000 Idle machinery $11,200 Cash surrender value of life insurance on corporate executives $13,700 Allowance for decline in market value of debt securities available for sale $8,400 At what amount should Mont's net assets be reported in the December 31, 20X0, balance sheet? A. $834,500 B. $842,600 C. $850,000 D. $851,000
Choices D (Correct) and A, B, C (Incorrect): Although idle machinery would be reclassified out of property, plant, and equipment and into some other asset category, it is still properly reported as an asset. The cash surrender value of the life insurance policies is also properly reported as an asset. The allowance for decline in market value of noncurrent debt securities is a contra asset account, reducing the investment in debt securities available for sale and is also appropriately included in the calculation of net assets. Treasury stock is reported as a reduction of stockholders' equity and should be excluded from assets. As a result, net assets will be reduced by $24,000 for the treasury stock, resulting in a balance of $851,000.
The following data pertains to Tyne Co's investments in marketable debt securities: Market value Cost 12/31/X2 12/31/X1 Trading $150,000 $155,000 $100,000 Available for sale $150,000 $130,000 $120,000 What amount should Tyne report as net unrealized loss on marketable debt securities at December 31, 20X2, in its statement of stockholders' equity? A. $0 B. $10,000 C. $15,000 D. $20,000
Choices D (Correct) and A, B, C (Incorrect): Investments in available for sale debt securities are reported at market value with increases or decreases reported in other comprehensive income. In any given period, the company will report increase or decreases in other comprehensive income based on current period changes in the value of the investment. The amount reported in stockholders' equity, however, is the cumulative amount. It will be equal to the difference between the cost and the market value of the shares on the balance sheet date, or ($150,000 - $130,000) $20,000.
On April 1, 20X3, Ivy began operating a service proprietorship with an initial cash investment of $1,000. The proprietorship provided $3,200 of services in April and received full payment in May. The proprietorship incurred expenses of $1,500 in April which were paid in June. During May, Ivy drew $500 against her capital account. What was the proprietorship's income for the two months ended May 31, 20X3, under the following methods of accounting? A. Cash-basis: $1,200 Accrual-basis: $1,200 B. Cash-basis: $1,700 Accrual-basis: $1,700 C. Cash-basis: $2,700 Accrual-basis: $1,200 D. Cash-basis: $3,200 Accrual-basis: $1,700
Choices D (Correct) and A, B, C (Incorrect): Neither the capital investment of $1,000 nor the drawing of $500 would affect net income under either the cash or accrual basis of accounting. Under the cash basis, the proprietorship would recognize the $3,200 in revenues received in May but none of the expenses since they were not paid until June. As a result, income for the 2 months would be $3,200 on a cash basis. Under the accrual basis, the proprietorship would recognize the $3,200 in revenues earned in April and the $1,500 of expenses incurred in April, for a net amount of $1,700.
An investor purchased a bond classified as long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than the I. Cash paid to seller II. Face amount of bond A.Both I and II B.I only C.II only D. Neither I nor II
Choices D (Correct) and A, B, C (Incorrect): When a bond is purchased between interest dates, the amount paid will be the fair market value of the bond, which will be the carrying value at the purchase date, plus interest accruing from the last interest date to the date of purchase. The carrying amount excludes the interest and will be lower than the amount of cash paid. When a bond is purchased at a discount, the carrying value will be lower than the face amount of the bond. As a result, a bond purchased between interest dates at a discount has a carrying amount that is lower than both the cash paid to the seller and the face amount of the bond.
Which of the following phrases best describes a Level 1 input for measuring the fair value of an asset or liability? A. Inputs for the asset or liability based on the reporting entity's internal data. B. Inputs that are principally derived from or corroborated by observable market data. C. Quoted prices for similar assets or liabilities in active markets. D. Unadjusted quoted prices for identical assets or liabilities in active markets.
Choices D (Correct) and A, B, C (Incorrect): When reporting items at fair value, an entity is required to disclose the level of inputs used to measure fair value with level 1 being the most reliable and level 3 being the least. Level 1 consists of unadjusted quoted market prices for identical assets or liabilities in active markets. Quoted prices for similar assets or liabilities in active markets and inputs that are principally derived from or corroborated by observable market data would be level 2 inputs. Inputs based on the reporting entity's internal data are level 3 inputs.
Mirr, Inc. was incorporated on January 1, 20X0, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, 20X1. No additional activities affected owners' equity in 20X0. Mirr's liabilities increased to $120,000 by December 31, 20X0. On Mirr's December 31, 20X0, balance sheet, total assets should be reported at A. 875,000 B. 878,000 C. 882,000 D. 885,000
Choices D (Correct) and A, B, C (Incorrect): With an initial equity of $750,000, income of $18,000 and dividends of $3,000, Mirr would have total stockholders' equity of $765,000 at 12/31/X0. With liabilities of $120,000, assets will equal the total of liabilities and stockholders' equity, or $885,000.
A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principle market for the financial asset. The information on the two exchanges is as follows: Quoted price of asset Transaction costs Market A $1,000 $75 Market B 1,050 150 What is the fair value of the financial asset? A. 1000 B. 1050 C. 900 D. 925
Choice A (Correct): When there is no principle market, the value is determined using observable market date from the most advantageous market, which is the market in which the entity's proceeds, net of transaction and transportation costs, is the greatest. Market A will provide net proceeds of $925, compared to $900 in market B, making A the most advantageous market. Fair value measurements do not, however, take into account transaction costs and, as a result, fair value would be measured at $1,000. Choice B (Incorrect): When there is no principle market, fair value is measured on the basis of inputs from the most advantageous market, which is presumably the market in which the greatest proceeds would be derived, net of transaction and transportation costs. Market B would provide net proceeds of $900, which is lower than market A, indicating that market B is not the most advantageous market and fair value would not be measured as $1,050. Choice C (Incorrect): Fair value does not take into account disposal costs and, as a result, would not be the $1,050 quoted price in market B minus the $150 transaction costs, for a net of $900. Choice D (Incorrect): Fair value does not take into account disposal costs and, as a result, would not be the $1,000 quoted price in market B minus the $75 transaction costs, for a net of $925.
Palmyra Co. has net income of $11,000, a positive $1,000 net cumulative effect of a change in accounting principle, a $3,000 unrealized loss on available-for-sale securities, a positive $2,000 foreign currency translation adjustment, and a $6,000 increase in its common stock. What amount is Palmyra's comprehensive income? Your answer was incorrect: A. $10,000 B. $11,000 C. $17,000 D. $4,000
Choice A (Correct): Only the unrealized loss on available-for-sale securities and the foreign currency translation adjustment have an effect on Palymyra Co.'s comprehensive income (i.e., in other comprehensive income), the net effect of which is $10,000 (11,000 - 3,000 + 2,000 = 10,000). Neither the net cumulative effect of a change in accounting principle nor the increase in common stock has an effect on comprehensive income. The net cumulative effect of a change in accounting principle is retrospectively restated with an adjustment to the opening balance of retained earnings (i.e., a balance sheet item, not income statement). The increase in common stock is also reflected on the balance sheet in cash and stockholder's equity, not the income statement. Note: Comprehensive income = Net income + other comprehensive income. Choices B, C, D (Incorrect): Only the unrealized loss on available-for-sale securities and the foreign currency translation adjustment have an effect on Palymyra Co.'s comprehensive income (i.e., in other comprehensive income). Neither the net cumulative effect of a change in accounting principle nor the increase in common stock has an effect on comprehensive income. The net cumulative effect of a change in accounting principle is retrospectively restated with an adjustment to the opening balance of retained earnings (i.e., a balance sheet item, not income statement). The increase in common stock is also reflected on the balance sheet in cash and stockholder's equity, not the income statement. Note: Comprehensive income = Net income + other comprehensive income.
During a reporting period, a computer manufacturing company used raw materials of $50,000, had direct labor costs of $75,000, and factory overhead of $30,000. Other expenses were for advertising of $5,000, staff salaries of $10,000, and bad debt of $3,000. The company did not have a beginning balance in any inventory account. All goods manufactured during the period were sold during the period. What amount was the company's cost of goods sold during the reporting period? A. $155,000 B. $160,000 C. $170,000 D. $173,000
Choice A (Correct): Raw materials, direct labor, and factory overhead are all inventoriable costs and therefore will be included in cost of goods sold for inventory sold during the reporting period. Advertising, staff salaries, and bad debt are period expenses. They are not included in inventory or cost of goods sold. Choice B (Incorrect): Advertising is normally a period expense, not an inventoriable cost. Choice C (Incorrect): Advertising and staff salaries are period expenses. Choice D (Incorrect): Advertising, staff salaries, and bad debt expense are period expenses. They are not included in inventory or cost of goods sold.
Three companies are doing business with a German entity and, as a result, each has entered into a forward exchange contract on December 18, 20X2, under which each will purchase 300,000 Euros on February 18, 20X3. Relevant exchange rates are as follows: Spot rate Forward rate (for 2/18/X3) November 18, 20X2 $1.27 $1.30 December 18, 20X2 $1.32 $1.25 December 31, 20X2 $1.35 $1.31 February 18, 20X3 $1.37 Company C purchased printing supplies from a German supplier on November 18, 20X2, on 90 day terms, and is required to pay 300,000 Euros on February 18, 20X3. When the exchange rate increased on December 18, the company decided to enter into the forward exchange contract, which was not designated as a hedge. What amount of foreign currency gain should be recognized in income on December 31, 20X2? A. $0 B. $6,000 loss C. $9,000 gain D. $9,000 loss
Choice B (Correct): When Company C incurred the liability on November 18, 20X2, it recorded the liability at the spot rate of $1.27 resulting in a liability of $381,000. On December 31, 20X2, when the spot rate was $1.35, the liability would be increased to $405,000, resulting in a loss of $24,000, which will be reported in earnings. In addition, the company entered into a contract to purchase 300,000 Euros at $1.25 on December 18, 20X3. As of December 31, it is expected that those Euros are expected to be worth $1.31 each and, as a result, Company A will gain $.06 per Euro or a total of $18,000. Since the derivative was acquired on speculation, the gain will also be recognized in earnings. As a result, the net amount recognized in earnings will be a loss of $6,000. Choice C (Incorrect): When Company C incurred the liability on November 18, 20X2, it recorded the liability at the spot rate of $1.27 resulting in a liability of $381,000. On December 31, 20X2, when the spot rate was $1.35, the liability would be increased to $405,000, resulting in a loss of $24,000, which are expected to be reported in earnings. In addition, the company entered into a contract to purchase 300,000 Euros at $1.25 on February 18, 20X3. As of December 31, it is expected that those Euros are expected to be worth $1.31 each and, as a result, Company A will gain $.06 per Euro or a total of $18,000. Since the derivative was acquired on speculation, the gain will also be recognized in earnings. As a result, the net amount recognized in earnings will be a loss of $6,000. Choices A, D (Incorrect): When Company C incurred the liability on November 18, 20X2, it recorded the liability at the spot rate of $1.27 resulting in a liability of $381,000. On December 31, 20X2, when the spot rate was $1.35, the liability would be increased to $405,000, resulting in a loss of $24,000, which will be reported in earnings. In addition, the company entered into a contract to purchase 300,000 Euros at $1.25 on February 18, 20X3. As of December 31, it is expected that those Euros are expected to be worth $1.31 each and, as a result, Company A will gain $.06 per Euro or a total of $18,000. Since the derivative was acquired on speculation, the gain will also be recognized in earnings. As a result, the net amount recognized in earnings will be a loss of $6,000.
At October 31 of the current year, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15 payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance. How should accounts be reported in Dingo's October 31 classified balance sheet? A. The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft. B. The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability. C.The segregated and regular accounts should be reported as current assets net of the overdraft. D.The segregated and regular accounts should be reported as current assets, and the overdraft should be reported a current liability.
Choice B (Correct): When a cash account is segregated for the purpose of making bond sinking fund payments, it is reported as a noncurrent asset since the sinking fund is noncurrent. When an account has a negative balance, it is reported as a current liability unless it is at the same bank as another account with a positive balance, in which case it may usually be netted. Since these accounts are at separate banks, netting is not appropriate. As a result, the segregated account will be a noncurrent asset, the account with a positive balance will be reported as a current asset, and the overdrawn account will be reported as a current liability. Choice A (Incorrect): When an account has a negative balance, it is reported as a current liability unless it is at the same bank as another account with a greater positive balance. Choice C (Incorrect): When a cash account is segregated for the purpose of making bond sinking fund payments, it is reported as a noncurrent asset since the sinking fund is noncurrent. When an account has a negative balance, it is reported as a current liability unless it is at the same bank as another account with a greater positive balance. Choice D (Incorrect): When a cash account is segregated for the purpose of making bond sinking fund payments, it is reported as a noncurrent asset since the sinking fund is noncurrent.
A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000 and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue for new sales made during the month? A. $185,000 B. $190,000 C. $195,000 D. $200,000
Choice B (Correct): The amount the company records as net sales for new sales made during the month will not be affected by actual returns on sales made in prior months but will instead reflect a provision for returns based on the 5% sales return estimate. (200,000 - (200,000 X 5%) = 190,000). Choice A (Incorrect): The amount the company records as net sales for new sales made during the month will not be affected by actual returns on sales made in prior months. Choice C (Incorrect): The amount the company records as net sales for new sales made during the month will not be affected by actual returns on sales made in prior months. Instead, netsales revenue on new sales must take into account the 5% sales return estimate. Choice D (Incorrect): Because there is an estimate that sales returns will occur, net sales revenue on new sales must take into account the 5% sales return estimate.
Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets? A.A loss can occur only when assets are sold or disposed of in a monetary transaction. B.A loss is deferred so that the asset received in the exchange is properly valued. C.A loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price. D.A loss, if any, which is unrelated to the determination of the amount of the asset received should be recorded.
Choice C (Correct): A loss on an exchange of nonmonetary assets is recognized immediately. Assets received should not be valued at more than their cash equivalent price. Choices A, B, D (Incorrect): A loss on an exchange of nonmonetary assets is not deferred. A loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price.
A company's foreign subsidiary operation maintains its financial statements in the local currency. The foreign operation's capital accounts would be translated to the functional currency of the reporting entity using which of the following rates? A. Current exchange rate at the balance sheet date. B. Functional exchange rate. C. Historical exchange rate. D. Weighted-average exchange rate.
Choice C (Correct): The contributed capital accounts of a foreign subsidiary are translated into the currency of the reporting entity using historical exchange rates, the rates in effect when the capital was contributed to the entity. Choice A (Incorrect): The contributed capital accounts of a foreign subsidiary are translated into the currency of the reporting entity using historical exchange rates, the rates in effect when the capital was contributed to the entity. The current exchange rate at the balance sheet date would be used for financial assets and liabilities. Choice B (Incorrect): The contributed capital accounts of a foreign subsidiary are translated into the currency of the reporting entity using historical exchange rates, the rates in effect when the capital was contributed to the entity. There is no functional exchange rate. There is, however, a functional currency. Choice D (Incorrect): The contributed capital accounts of a foreign subsidiary are translated into the currency of the reporting entity using historical exchange rates, the rates in effect when the capital was contributed to the entity. The weighted average exchange rate is used for many revenue and expense items.
On January 1 ten years ago, Andrew Co. created a subsidiary for buying an oil tanker depot at a cost of $1,500,000. Andrew expected to operate the depot for 10 years, at which time Andrew is legally required to dismantle the depot and remove underground storage tanks. It was estimated that it would cost $150,000 to dismantle the depot and remove the tanks at the end of the depot's useful life. However, the actual cost to demolish and dismantle the depot and remove the tanks in the tenth year is $155,000. What amount of expense should Andrew recognize in its financial statements in year 10? A. $150,000 expense. B. $155,000 expense. C. $5,000 expense. D. None, recognized in prior years.
Choice C (Correct): The liability for the estimated $150,000 in disposal costs would have been amortized over the asset's useful life. Because the additional $5,000 in disposal costs was not planned for and amortized over the asset's useful life, it must be expensed in the year in which it occurred. Actually the total asset retirement expense connected with this asset in year 10 would be $5,000 + the portion of the $150,000 already planned to be expensed for year 10; however, this is not an answer option. Remember that the examiners' instructions say to select the best answer. Be prepared to encounter similarly flawed questions on your actual exam. The next best answer is $5,000. Clearly, "none" is not a answer, because $5,000 more than was planned to be expensed must be expensed. Clearly, year 10 asset retirement expenses will not be either $150,000 or $155,000; these amounts are far more than would be expensed for asset retirement in year 10. Given only the information in this question, we cannot know exactly what amount to expense for year 10 as we don't know the applicable interest rate. If the asset retirement obligation (ARO) had been figured on a straight-line basis, Andrew Co. would have expensed $150,000 /10 = $15,000 annually in years 1 through 9 and $15,000 + $5,000 = $20,000 in year 10. Choices A, B, D (Incorrect): The liability for the estimated $150,000 in disposal costs would have been amortized over the asset's useful life. Because the additional $5,000 in disposal costs was not planned for and amortized over the asset's useful life, it must be expensed in the year in which it occurred.
Sun Corp. had investments in marketable debt securities costing $650,000. On June 30, 20X2, Sun decided to hold the investments indefinitely and accordingly reclassified them from trading securities to noncurrent securities available for sale on that date. The investments' market value was $575,000 at December 31, 20X1, $530,000 at June 30, 20X2, and $490,000 at December 31, 20X2. What amount of loss from investments should Sun report in its 20X2 income statement? A. $120,000 B. $160,000 C. $45,000 D. $85,000
Choice C (Correct): Debt securities reclassified from trading to available for sale are initially recorded at the market value on the date of transfer. The decrease in value from the beginning of the year until the date of transfer, while the security was considered a trading security, will be recognized in income. Once it is reclassified, however, any changes in value from the date of transfer until the financial statement date are recognized in other comprehensive income. Sun would recognize a loss of $45,000, the difference between $575,000, the carrying value at the beginning of the period, and $530,000, the fair value at the date of transfer. The $40,000 decrease between the date of the transfer and the end of the period will be recognized in other comprehensive income. Here are journal entries for this problem: Purchased at a cost of $650,000 sometime in 20X1: Investment in trading securities $650,000 Cash $650,000 Written down to market value of $575,000 at December 31, 20X1: Unrealized loss on trading securities (I/S) $75,000 Investment in trading securities $75,000 Convert to AFS by 'selling' from trading portfolio to AFS portfolio. AFS securities now held at June 30, 20X2 market value of $530,000: Loss on transfer of trading securities to AFS (I/S) $45,000 AFS securities $530,000 Investment in trading securities $575,000 Write-down to market value of AFS securities at end of 20X2: Unrealized loss on AFS securities (OCI not I/S) $40,000 Investment in AFS securities (or an allowance account may be used) $40,000 The answer is $45,000 income statement effect in 20X2 because only the $45,000 loss on transfer hits the income statement in 20X2. Choices A, B, D (Incorrect): Debt securities reclassified from trading to available for sale are initially recorded at the market value on the date of transfer. The decrease in value from the beginning of the year until the date of transfer, while the security was considered a trading security, will be recognized in income. Once it is reclassified, however, any changes in value from the date of transfer until the financial statement date are recognized in other comprehensive income. Sun would recognize a loss of $45,000, the difference between $575,000, the carrying value at the beginning of the period, and $530,000, the fair value at the date of transfer. The $40,000 decrease between the date of the transfer and the end of the period will be recognized in other comprehensive income.
Garcel, Inc. held unfinished inventory at a cost of $85,000 with a sales value of $125,000. The inventory will cost $10,500 to complete. The normal profit margin is 30% of sales. The replacement cost of the inventory was $75,000. If Garcel uses the last-in, first-out method to determine inventory cost, what amount should Garcel report as inventory on its balance sheet? A. $114,500 B. $75,000 C. $77,000 D. $85,000
Choice C (Correct): LIFO and retail method inventories are valued at lower of cost or market. Cost is $85,000. Market is replacement cost of $75,000, subject to a floor and ceiling limitation. The ceiling, which is the maximum amount that may be reported as market, is the net realizable value of the inventory, which is the sale price of $125,000, less costs of disposal and costs required to complete the inventory, $10,500, for a net amount of $114,500. The floor, which is the lowest amount that may be reported as market, is the net realizable value of $114,500, minus a normal profit margin, which is 30% of $125,000, or $37,500, making the floor $77,000. Since replacement cost is lower than floor, market will be considered the floor amount of $77,000, which will also be the value of the inventory since it is lower than cost. Expanded explanation: The lower of cost or market rule (LCM) applies only to inventory accounted for under the LIFO or retail inventory methods. For all other inventory a simplified lower of cost or NRV rule applies. Choices A, B, D (Incorrect): LIFO and retail method inventories are valued at lower of cost or market. Cost is $85,000. Market is replacement cost of $75,000, subject to a floor and ceiling limitation. The ceiling, which is the maximum amount that may be reported as market, is the net realizable value of the inventory, which is the sale price of $125,000, less costs of disposal and costs required to complete the inventory, $10,500, for a net amount of $114,500. The floor, which is the lowest amount that may be reported as market, is the net realizable value of $114,500, minus a normal profit margin, which is 30% of $125,000, or $37,500, making the floor $77,000. Since replacement cost is lower than floor, market will be considered the floor amount of $77,000, which will also be the value of the inventory since it is lower than cost.
Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of A. Consistency B. Going concern C. Matching D. Substance over form
Choice C (Correct): Under the matching concept, some expenses are recognized in the same period the entity recognizes the revenues that result directly and jointly from the same transaction as the expenses. Uncollectible accounts expense results from selling goods or services on credit to another party that ultimately will not pay for them. As a result, the uncollectible accounts expense would be recognized in the same period as the revenue. Choice A (Incorrect): Consistency refers to utilizing the same accounting methods for the same items, either from period to period, or within a single period to all entities incorporated into the financial statements. Since this question addresses how uncollectible accounts expense is calculated but does not address whether the same method is being used in every period, consistency is not addressed. Choice B (Incorrect): The going concern concept is the assumption that the entity will be able to meet its obligations as they come due for a reasonable period of time. It is not directly related to how the entity estimates uncollectible accounts expense. Choice D (Incorrect): Substance over form refers to reflecting the financial reality of an event or transaction, especially complex or non-routine transactions, regardless of the form in which the event or transaction appears, such as a long-term lease being treated as a purchase when it effectively transfers the rights and risks of ownership from the lessor to the lessee.
On both December 31, 20X1, and December 31, 20X2, Kopp Co.'s only marketable debt security had the same market value, which was below cost. Kopp considered the decline in value to be temporary in 20X1 but other than temporary in 20X2. At the end of both years the security was classified as a noncurrent security available for sale. Kopp could not exercise significant influence over the investee. What should be the effects of the determination that the decline was nontemporary on Kopp's 20X2 net noncurrent assets and net income? A. Decrease in both net noncurrent assets and net income. B. Decrease in net noncurrent assets and no effect on net income. C. No effect on both net noncurrent assets and net income. D. No effect on net noncurrent assets and decrease in net income.
Choice D (Correct): Investments in marketable debt securities classified as available for sale and reported at market value. Since the market value was the same at both 12/31/X1 and 12/31/X2, noncurrent assets would remain unchanged. Upon determining that the decline in value was nontemporary, Kopp would treat the decline as a realized loss. As a result, it will be reported on the income statement in 20X2, reducing net income. Choices A, B, C (Incorrect): Investments in marketable debt securities classified as available for sale are reported at market value. Since the market value was the same at both 12/31/X1 and 12/31/X2, noncurrent assets would remain unchanged. Upon determining that the decline in value was nontemporary, Kopp would treat the decline as a realized loss. As a result, it will be reported on the income statement in 20X2, reducing net income.
Sork Inc. has a portfolio of marketable debt securities classified as available-for-sale securities. At the end of the year, the fair values of the securities exceeded their costs. Choose any statements below that are true about the accounting treatment or financial reporting of these unrealized gains. 1. Only the cumulative amount of net gains are reported in the statement of stockholders' equity. 11. Only current period changes in the value of the investment are reported in the statement of stockholders' equity. 111. A correct journal entry to report unrealized gains would be an increase to the investment and an increase to other comprehensive income. A. I and III only B. I only C. II and III only D. III only
Choices A (Correct) and B, C, D (Incorrect): Unrealized gains are recognized with a debit (increase) to the investment and a credit (increase) to other comprehensive income (OCI). Unrealized losses are recognized with an entry crediting the investment and debiting OCI. OCI is closed into accumulated other comprehensive income (AOCI), a stockholders' equity account on the balance sheet, which has a balance equal to the cumulative net unrealized gain or loss on the securities since acquisition. The entity will report the balance in AOCI, which is the cumulative amount of net gains, and the current period's changes in AOCI, which is the current period's change in the net value of the investments. These items may be reported in the statement of stockholders' equity, on the face of the financial statements, or in the disclosures.
At the end of year 1, Lane Co. held trading securities that cost $86,000 and which had a year-end market value of $92,000. During year 2, all of these securities were sold for $104,500. At the end of year 2, Lane had acquired additional trading securities that cost $73,000 and which had a year-end market value of $71,000. What is the impact of these activities on Lane's year 2 income statement? A. Gain of $10,500. B. Gain of $16,500. C. Gain of $18,500. D. Loss of $2,000.
Choices A (Correct) and B, C, D (Incorrect): When holding trading securities all realized and unrealized gains and losses are recognized in net income from continuing operations during the current year and valued at FMV at the date of the balance sheet. Lane Co. trading securities had a year 1 market value of $92,000 at the date of the balance sheet. They were sold the following year 2 for $104,500, yielding a trading profit of $12,500. In addition Lane Co. had acquired additional trading securities for $73,000 and had a year 2 market value of $71,000, yielding a trading loss of $2000. When the trades are netted against each other as a component of income from continuing operations the formula is (104,500 - 92,000) - ($71,000 - $73,000) = $10,500.
On December 1, 20X1, two companies entered into a 90-day forward exchange contract for speculative purposes in which A will buy £180,000 from B at the 90-day forward rate of $1.65/£1. On December 31, 20X1, the spot rate was $1.70 and the 60-day forward rate was $1.80. In their December 31, 20X1 financial statements: A. Company A will report an asset and a gain of $27,000 and Company B will report a liability and a loss of $27,000. [] B. Company A will report an asset and a gain of $9,000 and Company B will report a liability and a loss of $9,000. [] C. Company B will report a liability and a loss of $27,000, but Company A will not recognize a gain until it is realized when the contract is settled. [] D. Company B will report a liability and a loss of $9,000, but Company A will not recognize a gain until it is realized when the contract is settled. []
Choices A (Correct) and B, C, D (Incorrect): A forward exchange contract is a derivative and is reported at fair value on every balance sheet date and unrealized gains and losses are recognized in the period of the change in the exchange rate. As of December 31, 20X1, A is obligated to buy, and Company B is obligated to sell, £180,000 at the end of 60 days for $297,000 (£180,000 x $1.65), when they are expected to be worth $324,000 (£180,000 x $1.80), the 60-day forward rate. As a result, A will recognize and asset and a gain for the difference of $27,000 and B will recognize a liability and loss for the same amount.
Which inventory costing method would a company that wishes to minimize profits in a period of rising prices use? A.Dollar-value LIFO. B.FIFO. C.Moving average. D.Weighted average.
Choices A (Correct) and B, C, D (Incorrect): During a period of rising prices, FIFO, which reports cost of sales based on the earliest units purchased, will report the highest ending inventory and, therefore the highest profit while LIFO, which reports cost of sales based on the most recent units purchased, will report the lowest inventory and the lowest profit. Either average approach will provide results in between FIFO and LIFO.
Park Co.'s wholly owned subsidiary, Schnell Corp., maintains its accounting records in Thai Baht. Because all of Schnell's branch offices are in Switzerland, its functional currency is the Swiss franc. Remeasurement of Schnell's 20X3 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain. What amount should Park report as a foreign exchange gain as net income in its income statement for the year ended December 31, 20X3? A. A. $0 B. $15,700 C. $7,600 D. $8,100
Remeasurement adjustments, such as the $7,600 gain, that result from converting financial statements from the local currency into the functional currency, are recognized in income. Translation adjustments, such as the $8,100 gain, that result from converting financial statements from the functional currency into the reporting currency, are recognized in other comprehensive income, not in the income statement.
ABC Trading Co. commenced operations during the year as a large importer and exporter of sundries. The imports were all from one country overseas. The export sales were conducted as drop shipments. ABC never actually took possession of the goods, which were merely transshipped at Houston. ABC Trading reported the following data: Purchases during the year $15.0 million Shipping costs from overseas $1.5 million Shipping costs to export customers $1.0 million Inventory at year end $3.0 million What amount of shipping costs should be included in ABC Trading's year-end inventory valuation? A.$0 B.$200,000 C.$300,000 D.$500,000
The shipping costs from overseas are included in inventory costs, but the shipping costs to export customers are selling costs that are recognized as expense in the period incurred. Since the $3,000,000 in inventory at year end represents 20% of the $15,000,000 purchased during the year, 20% of the $1,500,000 in shipping costs, or $300,000, will be included in inventory cost.