Acconting 4356 Exam 2
Samson Inc. leases equipment from Gerhard for a six-year period. The lease contract includes a purchase option, the conditions of which make it likely that Samson will exercise the option. The equipment's estimated useful life is eight years. Samson should amortize the associated right-to-use asset over
8 years.
Which of the following is not part of the IFRS revaluation rules for tangible long-lived assets?
A company can elect to revalue individual assets.
Which of the following is not an accurate statement regarding asset retirement obligations (AROs)?
A liability is recorded with a credit entry in a contra-asset account.
Which of the following statements regarding inventory accounting is false?
A manufacturing firm that uses a just-in-time system, and wants to avoid "stock-outs" if possible, would prefer a periodic inventory system.
When two companies exchange products to facilitate sales to customers and the exchange also includes a cash payment, which of the following is the proper treatment of the transaction by the recipient of the cash?
A portion of any gain is recorded.
Which of the following is not an accurate description of the controversies surrounding the fair value accounting option?
Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress
Consistent with IFRS No. 7, the fair value must be disclosed for receivables and loans with the following characteristics:
All of these choices are correct
Which of the following statements regarding inventory accounting is false?
Although many firms use the LIFO cost flow assumption, there are no examples where the actual physical flow of units is also last-in, first-out.
Which of the following statements is not correct regarding amortization when using the effective interest method (basis)?
Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life.
Which of the following statements is correct?
Amortization of discount on bonds payable (bond discount) results in an increase in a bond's carrying value.
Amortization of discount on bonds payable (bond discount) results in which of the following?
An increase in the carrying value of the bond.
Which of the following is an accurate statement regarding testing for impairments of tangible assets and amortizable intangible assets?
Assets may be tested as a group if they are used in combination with other assets in the group.
Which of the following statements regarding inventory accounting is false?
Both U.S. GAAP and IFRS apply lower of cost or market in the same manner when accounting for inventory.
Which of the following represent(s) a bond valuation account?
Both bond premium and discount
Which of the following statements regarding inventory accounting is false?
By charging the oldest costs to the income statement, LIFO automatically includes in income any holding gains on the units that are sold.
Which of the following is false regarding uncollectible accounts?
Companies are generally not able to adopt stringent credit standards to keep credit losses at a minimum.
Which item below is not an accurate description of lessor disclosures under ASC 842?
Disclosure includes operating lease income only for amounts that are variable payments.
Which one of the following is an example of the expected benefit approach for valuing long-lived assets?
Discounted present value.
The double extension method is an alternate term for
Dollar-value LIFO
Which of the following is not a difference between U.S. GAAP and IFRS treatment of impaired assets?
Due to differences, U.S. GAAP may trigger an impairment loss that would not be triggered by IFRS
In comparing firms in the same industry, which of the following does not present a challenge for analysts?
Each of these answer choices presents a challenge for analysts.
The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas?
FIFO inventory = LIFO inventory + LIFO reserve
Which of the following is used to measure the amount of the write-down that must be recognized on an impaired asset such as depreciable equipment?
Fair value of the asset minus the current carrying value of the asset.
Financial analysts can make comparisons between the long-lived assets of two companies, both of which use straight-line depreciation, by computing the average useful life of assets with which one of the following formulas?
Gross depreciable property, plant, and equipment/straight-line depreciation expense.
When a company retires debt, which of the following is not an accurate statement?
If a company finances the early retirement of debt by issuing new debt, GAAP prohibits recording a gain on the early retirement.
Which of the following statements is true regarding a troubled debt restructuring?
In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender.
Under ASC 842 for lease accounting, which statement below is not accurate with respect to financial reporting?
Lease expense is shown in the financing section of the statement of cash flows.
According to U.S. GAAP, technological feasibility is established when an entity has completed all of the following activities necessary to establish that a product can be produced, except:
Measuring.
In assessing whether an exchange transaction has commercial substance, the firm's future cash flows are expected to change significantly as a result of the exchange. Which item below does not describe whether a significant change in cash flow is expected?
Only the timing and amount of future cash flows is required to be significant - risk and entity-specific value are optional.
Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000. Flimm's journal entry to recognize the inception of the lease includes a debit to
Right-to-use asset for $240,000
Roberts owns 100 shares of $1,000 face amount convertible bonds issued by Bearny Inc. Choose the statement that correctly describes this transaction.
Roberts may choose to exchange the bonds for Bearny Inc. common stock, or retain the bonds until maturity.
Which of the following statements is not correct for sale-and-leaseback transactions consistent ASC Topic 842?
Seller-lessees have higher motivation to enter into a finance lease under ASC 842 than they did under prior GAAP (ASC 840).
Which of the following is a correct statement about preparing a balance sheet?
Some financial instruments possess the characteristics of both debt and equity.
Which of the following is not a valid statement regarding floating-rate debt?
The accounting entries are more complex due to the risk-sharing characteristics of floating rate debt.
An analyst notes that ABC Inc.'s allowance for credit losses as a percentage of year-end accounts receivable has changed. Which of the following would not be a plausible explanation for the change?
The company has stopped making sales on credit.
Which of the following is not a true statement regarding the fair value accounting option?
The fair value option increases earning volatility.
Which of the following statements is correct with respect to the use of fair value accounting for liabilities under IFRS?
The fair value option is permitted under IFRS only under two specific sets of circumstances.
Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales represents a red flag?
The firm adopts an aggressive revenue recognition policy.
Regarding accounts receivable and an allowance for credit losses account, which of the following statements is false?
The net realizable value of accounts receivable is decreased when a credit loss is written off.
Which of the following statements regarding inventory accounting is true?
The primary difference between FIFO and LIFO is that each method makes a different choice regarding which financial statement element is shown at the out-of-date cost
In a troubled debt restructuring, the restructured loan can differ from the original loan in any of the ways listed below except:
The repayment schedule is shortened and the interest rate is significantly increased.
Which of the following statements regarding inventory accounting is false?
The tax advantage of LIFO is that it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities.
U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except:
There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company's offices).
Which of the following does not represent guidance for assets held for sale?
They are reported at the lower of book value or fair value.
Which of the following statements regarding inventory accounting is false?
U.S. GAAP prescribes a standardized format for disclosing the LIFO reserve.
Which of the following statements regarding inventory accounting is false?
U.S. GAAP requires that inventory costs should include the costs of the purchasing department and other administrative costs incurred with the acquisition and distribution of inventory.
Which of the following statements regarding inventory accounting is false?
Under U.S. GAAP, current cost (replacement cost) accounting may be used at the discretion of management with proper disclosure.
Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. Ford uses which one of the following interest rates to record this lease?
Use 10.0% because it is the implicit lease rate of return to the lessor.
Which of the following statements is false regarding factoring receivables?
When a company factors its receivables with recourse, it cannot be required to make a payment to the factor if a customer's account proves to be uncollectible.
Which of the following statements is false regarding accounts receivable reporting?
When a firm's sales growth exceeds its growth in receivables, it could be an indication of aggressive revenue recognition policies.
Which of the following statements regarding inventory accounting is true?
When physical inventory levels are increasing and a company uses the absorption cost method, net income tends to increase.
Which of the following statements regarding inventory accounting is true?
When using the absorption costing method, all production costs should be inventoried.
With a loan collateralized by receivables,
a company receives cash and is responsible for repaying the loan.
When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset's life,
a liability simultaneously arises for those future expenditures.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at:
a premium.
When the market rate of interest is below the stated rate of interest, a bond sells at:
a premium.
Regan, Inc. implemented a program to improve the collection of its receivables. Over the past two years, the company has collected 88% of its receivables, up from 80%. A review of the company's financial statements would be expected to show:
a reduction in the percentage of the allowance for credit losses to receivables.
Consistent with ASC topic 326, expected credit losses are recognized as
a separately reported loss.
If a lease contains a residual value guarantee, the lessee must:
add the present value of the guaranteed amount to the present value of the minimum lease payments.
Inventory turnover distortion under LIFO inventory costing may be adjusted by:
adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
Current ratio distortion under LIFO inventory costing may be adjusted by:
adding the LIFO reserve to current assets.
Information about credit quality, amortization cost by credit quality indicator for the prior five years and in the aggregate, and the methodology for estimating credit losses must be disclosed for
all receivables reported at amortized cost
Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000. Flimm uses the straight-line method to allocate lease-related assets to accounting periods during which benefits are derived from the leased assets. To allocate the costs of the related asset, Flinn should debit
amortization expense for $40,000
Accounts receivables initially are recognized at
amortized cost.
LIFO layers are more likely to be liquidated when inventory records arekept on:
an item-by-item basis.
U.S. GAAP for long-lived assets significantly impedes rate-of-return comparisons across companies unless the firms:
apply the same depreciation methods and the same useful lives among similar groups of assets.
Gwen Inc. operates in a regulated industry. Recently passed regulation will require an additional expenditure of $54,000 to dispose of one of Gwen Inc.'s operational assets, which is expected to be retired in four years. The asset was acquired five years ago, with a nine-year estimated service life. A liability related to the newly legislated disposal cost should be recognized
at the date new regulation was passed.
When interest rates have increased and bonds are retired before maturity, market value is:
below book value generating an accounting gain.
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on:
both the severity of input cost changes and the rapidity of physical inventory turnover.
The major issue in inventory accounting is
choosing the method for allocating goods available for sale to ending inventory and cost of goods sold.
Research findings almost uniformly indicate that existing U.S. GAAP for both R&D and software development is:
conservative.
The use of the fair value option tends to:
decrease income volatility.
Investors need to review transactions involving debt-for-debt swaps carefully to ensure that there is an underlying:
economic benefit.
Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000. The "property rights approach" is evident under ASB Topic 842 and IFRS No. 16 because both standards require that the
essee recognize an asset and a liability for leases exceeding one year.
Net realizable value of receivables is gross receivables minus
estimated provision for credit losses and estimated returns and allowances
A seller/lessee who enters into a sale and leaseback agreement that does not meet revenue recognition criteria under ASC Topic 606 must account for the lease as a
finance lease.
Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. On Ford's books, this lease is treated as a/an:
finance lease.
Which one of the following ratios increases with the lessee's capitalization of a lease?
financial leverage
TAD, Inc. uses the LIFO-lower of cost or market method to value inventory. If the inventory value is replacement cost, which one of the following statements is true?
going concern.
Amortizable intangible assets include all of the following except:
goodwill.
The dominant method under GAAP for measuring long-lived assets is the:
historical cost approach.
The mechanics of absorption costing can lead to year-to-year income changes:
if production and sales levels are not the same.
Which of the following statements with respect to floating-rate debt is incorrect?
if the market rate of interest decreases, both the issuing company and the investors benefit.
If a long-lived amortizable intangible asset's future undiscounted net cash flows fall below the asset's net book value, the asset is considered to be a/an:
impaired asset.
When the differences in useful lives of long-lived assets reflect real economic differences, the attempt on the part of financial analysts to undo these differences may:
impede profit and loss comparisons.
Donau Inc. performs services with a normal contract price of $265,000 for a new customer. The customer signs a non-interest bearing note of $300,000. The differences between the normal contract price and the face amount of the note is considered
imputed interest.
Margot leases equipment with an estimated useful life of five years, for a term of four years. Margot should classify this lease as a (n)
inance lease.
Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported net income tends to:
increase.
Erickson Company currently holds crypto currency. On its classified balance sheet, Erickson should report the crypto currency as
intangible asset.
Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrowings using receivables, the critical issue:
is whether the transferor surrenders control over the receivables.
When market rates of interest decrease, the use of floating-rate debt benefits:
issuing companies.
LIFO's tax advantage is that:
it provides a lower net income than FIFO during periods of rising prices and level inventory quantities.
Which of the following is correct with respect to ASU 842 for lease accounting?
it retained the distinction between operating and finance leases for lessees.
Under IFRS, research must be expensed but some development expenditures may be capitalized. To capitalize development expenditures, firms must demonstrate several factors that include all of the following except:
length of time the intangible asset is expected to provide benefits.
Some financial analysts contend that reporting debt at amortized historical cost rather than at fair value:
makes it easier to manipulate accounting numbers.
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to
match current costs with current revenues.
To preclude firms from generating artificial gains on exchange transactions being recorded at fair value, U.S. GAAP requires that the transaction:
must possess commercial substance.
GAAP establishes specific criteria for the treatment of leases under ASC 842. If any of the criteria are met, the lessee
must treat the lease as a finance lease.
Floating-rate debt is the most common method for lenders to protect themselves from losses that may arise as a result of:
ncreases in the market interest rate.
When the sum of the future cash flows of a restructured note is above the current note's carrying value, the debtor recognizes:
neither a gain nor a loss on the debt restructure.
When applying lower of cost or market under IFRS, market is defined as:
net realizable value.
The seller/lessee under a sales leaseback agreement that meets the criteria consistent with ASC Topic 606 must treat the leaseback portion as a(n)
operating lease.
Prior to FASB issuing pre-codified Statement of Financial Accounting Standards (SFAS) No. 13, lessees classified virtually all leases as _______ leases, which under current GAAP is consistent with accounting for _______ leases.
operating, short-term
An impairment loss is reported on the income statement as:
part of income from continuing operations.
Management must periodically assess the reasonableness of the allowance for credit losses if it uses the
percent of sales or the percent of gross receivables method.
Which one of the following items would be charged to the cost of a building rather than the cost of land?
rchitectural fees.
Salt Corporation issues bonds with a face amount of $10 million and a stated interest rate of 8%. The market interest rate associated with the bonds is 6%. Bond issue costs are $200,000. The bond issue costs should be recognized as a:
reduction of the bond premium.
The market value of floating-rate debt of $200,000 will:
remain unchanged with a change in interest rates.
Evaluation and testing for impairment assessments of indefinite-lived intangible assets:
requires a quantitative impairment test if, after a qualitative assessment, it is more likely than not that the asset is impaired.
If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than the average yield on the mortgages in the portfolio, the selling price:
s higher than the carrying value of the mortgages on the bank's books.
Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. On Ray's books, this lease is treated as a(n):
sales-type capital lease.
Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 20X1 under the following terms: 1.Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2.The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3.The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4.The tractor has a six-year economic life. 5.Morey has an excellent credit rating. 6.Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. For Equity Leasing, this is treated as a(n)
sales-type capital lease.
If a car dealership leases cars for four years with guaranteed purchase options, guaranteed residual values, and insured financing agreements, the dealership classifies the lease as a(n):
sales-type lease.
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the:
severity of input cost change.
Blume Corporation leases equipment for a ten-month period. The entire related lease payment is due at the end of the ten-month period. The journal entry to recognize the monthly accrual related to the lease will include a debit to:
short-term lease expense.
When a firm does not adopt the fair value option, it
still must disclose the fair value of its long-term notes receivable but need not disclose the accounts receivable fair value if the fair values approximates the reported value
Presume that an asset exchange transaction does not culminate an earning process and that the transaction does not involve cash. In such a case:
the assets acquired are recorded at the book value of the assets relinquished.
Goods held on consignment are included in the inventory valuation of:
the consignor.
Consistent with ASC Topic 842, operating lease expense is equal to
the lease expense that would have been recognized if classified as a short-term lease.
Under current U.S. GAAP, the transferor of receivables to a securitization entity (SE) that it has formed should treat the transfer as a collateralized borrowing instead of a sale if the transferor has:
the power to direct the activities of the SE and the right to participate in the SE's gains and losses.
Over the lease term, the total income derived from a lease is _______ if the lease is classified as a sales-type lease instead of an operating lease
the same
Under ASC 842, the difference between the expense charged relating to a finance lease and an operating lease is:
the timing of the expense recognition.
When a financial analyst adjusts a company's reported depreciation expense to improve comparisons of profitability with another firm that uses the same depreciation method, the analyst assumes all of the following to be true except that:
the useful lives differences are "real".
Per authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the:
transferor surrenders control over the receivable.
The difference in the lessor's income recognition over the life of the lease, between an operating lease and a sales-type lease is:
zero.
