FAR

Ajax Corp. has an effective tax rate of 30%. On January 1 of the current year, Ajax purchased equipment for $100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will Ajax realize during the year by using the 150%-declining-balance method of depreciation for tax purposes instead of the straight-line method? A. $1,500 B. $3,000 C. $4,500 D. $5,000

A Ajax will realize $1,500 of current tax benefit using the 150%-declining-balance method: Tax benefit of 150%-declining-balance ($100,000 x .15 = $15,000; $15,000 x .30) $4,500 Tax benefit of straight-line ($100,000 / 10 = $10,000; $10,000 x .30) 3,000 Benefit of using 150%-declining-balance $1,500

Which of the following factors determines whether an identified segment of an enterprise should be reported in the enterprise's financial statements under FASB ASC 280-10-50-12 (Quantitative Thresholds)? 1. The segment's assets constitute more than 10% of the combined assets of all operating segments. 2. The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments. A. I only B. II only C. Both I and II D. Neither I nor II

A

A local government established a new special revenue fund during the current year. The fund incurred the following transactions: Purchased new machines: 5-year life $140,000Paid interest debt 300,000Paid debt principal 200,000Paid management salaries 100,000Purchased office equipment: 4-year life 100,000Paid utilities 50,000Purchased office supplies (1/2 used up) 20,000 If the unit expects the assets to have no salvage value, what amount would be recognized as expenditures for the current year? A. $910,000 B. $713,000 C. $513,000 D. $450,000

A All of the items listed represented actual outgoing cash payments (i.e., expenditures) during the year. The total is $910,000. The salvage value of the asset or any depreciation (not an expenditure) are irrelevant to this problem.

A town's basic financial statements include information for major and nonmajor governmental funds. There were no internal service or enterprise funds. One of the nonmajor funds is the Road Tax fund, which accounts for a share of tax moneys remitted by the state on a prorated basis. Individual fund statements with prior-year comparative data would have to be presented for the Road Tax fund if: A. state law requires prior-year comparative data for any individual fund receiving a prorated share of state tax collections. B. the town has opted to present budgetary data as required supplementary information rather than as part of the basic financial statements. C. the Road Tax fund is the town's only special revenue fund. D. every governmental fund must be reported individually.

A As a nonmajor fund, the financial information for the Road Tax fund is combined with other nonmajor funds in the basic financial statements. Individual fund financial statements would be required to demonstrate compliance with state law in this case. Whether shown in RSI or as part of the basic financial statements, the budgetary data would not otherwise show the details of individual, nonmajor funds. In combining nonmajor funds, it does not matter if only one of the governmental funds was a special revenue fund. Because the focus of fund financial reporting is on major funds, nonmajor funds should be aggregated and do not need to be shown individually.

A company leases trucks and properly classifies the leases as finance leases. The leases have a 10-year term, and the lease calculations were done 3 years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions? A. Leases are not eligible for the fair value option. B. Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings. C. Recognize the change to fair value accounting with an unrealized loss in the income statement. D. Recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income.

A Companies may choose to measure a wide range of financial assets and liabilities at fair value. Even though leases are considered financial in nature, the FASB specifically excludes "financial assets and financial liabilities recognized under leases" from the fair value option of accounting (FASB ASC 825-10-15-5). The remaining answer choices are not correct as there is no option to recognize the change in fair value.

Selected information from the accounting records of Dalton Manufacturing Company is as follows: Net sales from the current year $1,800,000 Cost of goods sold for the current year 1,200,000 Inventories at December 31 previous year 336,000 Inventories at December 31 current year 288,000 Assuming that there are 300 working days per year, what is the number of days' sales in average inventories for the current year? A. 78 B. 72 C. 52 D. 48

A Days' sales in inventory = (Average inventory ÷ Cost of goods sold) × Working days per year: (($336,000 + $288,000) ÷ 2) ÷ $1,200,000 = 0.26 0.26 × 300 days = 78 days

A building was donated to Savannah City in 20X4. The city intends to use the building as a storage facility for its landscaping equipment. The building required a roof repair (cost was $9,400), an electrical system update (cost was $12,700), and the installation of new garage doors (cost was $2,100). The building's fair market value on the donation date was $403,900. What amount should be reported as a capital asset in the government-wide statement of net position in the governmental activities column for this building? A. $428,100 B. $417,500 C. $415,400 D. $403,900

A Donated capital assets should be reported at their estimated fair value at donation date plus ancillary charges, if any. General capital assets are capital assets not specifically related to activities reported in proprietary or fiduciary funds. They are reported in the governmental activities column of the government-wide statement of net position. Building preparation costs of $24,200 ($12,700 + $9,400 + $2,100) and the $403,900 fair market value of the building are all properly included in the $428,100 cost of the building.

During the current year, Casual Wear Co. had total retail sales of $800,000 and collected a 5% state sales tax on all sales. At the end of the prior year, Casual Wear had $4,500 in sales taxes that had not been remitted to the state authorities. During the current year, Casual Wear remitted $39,500 in state sales tax. What amount should be recorded in Casual Wear's current-year financial statements? A. $5,000 in sales tax payable B. $39,500 in sales tax expense C. $40,000 in sales tax revenue D. $840,000 in sales revenue

A Expenses are accrued (expensed) based on the matching principle. The matching principle states that the accrual basis of accounting correctly matches the revenue from the sale of goods with the historical cost of the inventory sold, the salesperson's salary, and other applicable costs and expenses such as sales tax. Beginning sales tax payable $ 4,500Additional sales tax due ($800,000 × 5%) 40,000Sales tax remitted to the state (39,500)Current-year sales tax payable balance $ 5,000

On April 1, Aloe, Inc., factored $80,000 of its accounts receivable without recourse. The factor retained 10% of the accounts receivable as an allowance for sales returns and charged a 5% commission on the gross amount of the factored receivables. What amount of cash did Aloe receive from the factored receivables? A. $68,000 B. $68,400 C. $72,000 D. $76,000

A Factoring a receivable without recourse is, in effect, a sale of the receivable. Amount factored $80,000 10% sales return allowance (8,000) 5% commission (4,000) Cash received by Aloe $68,000

The expenditure element "salaries and wages" is an example of which type of classification? A. Object B. Program C. Function D. Activity

A In governmental accounting, expenditures should be recorded in a multiple classification scheme—typically by (1) fund, (2) function or program, (3) organizational unit (e.g., department), (4) activity, (5) character, and (6) object ("object of expenditure"). Object refers to "the type[s] of items purchased or services obtained" (GASB 1800.137) which expenditures are for—that is, "what" is acquired. Governments pay salaries and wages in order to acquire "personal services."

The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob's liability to Mene: Carrying amount of liability liquidated $150,000Carrying amount of real estatetransferred 100,000Fair value of real estate transferred 90,000 What amount should Knob report as gain (loss) on transfer of real estate? (Do not include any gain or loss on the debt restructuring.) A. $(10,000) B. $0 C. $50,000 D. $60,000

A In the case of a transfer of assets to satisfy a debt in a troubled debt restructuring, the debtor shall recognize a gain/loss: Fair value of real estate transferred $ 90,000 Carrying amount of real estate 100,000 Ordinary loss on transfer of real estate ($ 10,000) ========== The liability is retired by the transfer of real estate to Mene. An ordinary operating gain or loss is recognized on the transfer of real estate. The ordinary loss is the excess of the real estate's carrying amount over its fair market value ($100,000 − $90,000 = $10,000). The journal entry to record the full liquidation of Knob's liability to Mene is: Dr. Note payable 150,000 Loss - transfer of real estate 10,000 Cr Real estate: 100,000 Gain - restructure of debt 60,000

The Town of Starbuck's general fund received a notice of a federal grant award for an expenditure-driven (reimbursement) grant in the amount of $2,000,000. Included with the notice was an advance of $1,000,000. During the year, the Town incurred $1,400,000 of program expenditures of which $800,000 were considered eligible qualifying expenditures. No additional money had been received from the grantor during the year. What would be the amount of revenues reported at the entity-wide level? A. $800,000 B. $1,000,000 C. $1,400,000 D. $2,000,000

A Regardless of whether you are reporting the revenue at the fund or entity-wide level, the basic recognition criterion is the same: when all applicable eligibility requirements are met. The availability requirement does not apply with entity-wide statements, but availability does not make a difference in this case.

On October 1, 20X6, EriK's A/C, Inc. agrees to manufacture industrial air conditioning units for five Evergreen Apartment complexes. Under the terms of the contract, Evergreen Apartment will pay EriK's A/C a total of $50,000; Evergreen can cancel the contract at any time but must pay EriK for work completed. EriK believes that they could sell the A/C units to another apartment complex and still make a profit even if Evergreen canceled the contract. The contract is expected to last five months, and as of December 31, 20X6, the job is 50% complete. How much revenue should EriK's A/C recognize in 20X6 for this contract? A. $0 B. $50,000 C. $30,000 D. $25,000

A Revenue for long-term contracts is recognized over time when any one of the following criteria is met: the customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs; the entity's performance creates or enhances an asset, such as work-in-process (WIP), that the customer controls as the asset is created or enhanced; or the entity's performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. This arrangement does not qualify for revenue recognition over time, because the asset the seller is creating has an alternative use to it. Therefore, EriK must wait until completion of the contract before recognizing revenue.

Which of the following reports would a company file to meet the U.S. Securities and Exchange Commission's requirements for unaudited, interim financial statements reviewed by an independent accountant? A. Form 10-Q B. Form 10-K C. 14A Proxy Statement D. Form S-1

A SEC Form 10-Q is the quarterly report and would be used to file interim information. Form 10-K is the required annual report. SEC Form S-1 is the initial registration form for new securities required by the SEC for public companies. The SEC requires that shareholders of a company whose securities are registered under Section 12 of the Securities Exchange Act of 1934 receive a proxy statement (pursuant to Section 14(a)) prior to an annual or special meeting.

Hancock Co.'s December 31, Year 1, balance sheet contained the following items in the long-term liabilities section: Unsecured: 9.375% registered bonds ($25,000 maturingannually beginning in Year 5) $275,00011.5% convertible bonds, callable beginningin Year 10, due Year 21 125,000 Secured: 9.875% guaranty security bonds, due 2020 $250,00010.0% commodity-backed bonds ($50,000maturing annually beginning in Year 6) 200,000 What are the total amounts of serial bonds and debenture bonds? A. Serial bonds, $475,000; Debenture bonds, $400,000 B. Serial bonds, $475,000; Debenture bonds, $125,000 C. Serial bonds, $450,000; Debenture bonds, $400,000 D. Serial bonds, $200,000; Debenture bonds, $650,000

A Serial bonds mature in installments (only part of the total principal is paid back each year, so only some of the total bonds are paid off each year) and thus are described as maturing annually. Thus, the serial bonds are the 9.375% bonds and the 10% bonds for a total of $475,000 ($275,000 + $200,000). Debenture bonds are unsecured debt, and so these are the 9.375% and the 11.5% bonds for a total of $400,000 ($275,000 + $125,000).

Under current generally accepted accounting principles, which approach is used to determine income tax expense? A. Asset and liability approach B. "With and without" approach C. Net of tax approach D. Periodic expense approach

A The FASB determines income tax expense by requiring an asset and liability approach to the expense. This method recognizes that tax expense is the result of current-year activities and preceding-year activities. This method focuses on the calculation of and change in deferred tax assets and liabilities, current income tax payable, and valuation allowances, and calculates the periodic expense or benefit as the change in the asset or liability from the prior balance sheet date. Note that all deferred tax assets and liabilities are classified as long term on the balance sheet.

Alpha Hospital, a large not-for-profit entity, has adopted an accounting policy that does not imply a time restriction on gifts of long-lived assets. An accounting firm prepared Alpha's annual financial statements without charge to Alpha. Indicate the manner in which this transaction affects Alpha's financial statements. A. Increase in unrestricted revenues, gains, and other support B. Decrease in an expense C. Increase in net assets with donor restrictions D. Increase in board-restricted net assets

A The donation of a professional service, which the hospital would otherwise have to pay out cash for, is reportable as a donation and would increase unrestricted revenues, gains, and other support. It would also increase expense. The designation "board-restricted net assets" does not exist.

In November 20X1, Hake purchased the following investments in equity securities (I and II) that it bought and held principally to sell in the near term, and in fact sold on February 28, 20X2. Relevant data is as follows: Fair Value Fair Value Cost (December 31, 20X1) (February 28, 20X2) I. $125,000 $145,000 $155,000 II. 235,000 205,000 230,000 Select the proper financial statement category for the amount of holding gain or loss on December 31, 20X1. A. Income from continuing operations B. Other comprehensive income C. Cumulative effect of change in accounting principle D. Prior-period adjustment to beginning retained earnings

A The holding gain or loss on investment in equity securities is always included in income from continuing operations.

On November 2, 20X1, Finsbury, Inc., issued warrants to its stockholders giving them the right to purchase additional $20 par value common shares at a price of $30. The stockholders exercised all warrants on March 1, 20X2. The shares had market prices of $33, $35, and $40 on November 2, 20X1, December 31, 20X1, and March 1, 20X2, respectively. What were the effects of the warrants on Finsbury's additional paid-in-capital and net income? A. Additional paid-in capital increased in 20X2; no effect on net income. B. Additional paid-in capital increased in 20X1; no effect on net income. C. Additional paid-in capital increased in 20X2; net income decreased in 20X1 and 20X2. D. Additional paid-in capital increased in 20X1; net income decreased in 20X1 and 20X2.

A The only accounting effect of the issue and exercise of the warrants would be a memo entry to record the issuance of warrants on November 2, 20X1, and the following journal entry to record the exercise of warrants on March 1, 20X2: Cash XX Common stock XX Additional paid-in capital XX (We know there was additional paid-in capital because the exercise price was $30, $10 more than the par value of the stock.) As a result, additional paid-in capital increased in 20X2, but net income was not affected.

At the end of 20X5, Eliason Company discovered an overstatement of ending inventory of $27,000 and an overstatement of ending inventory at the end of 20X6 of $19,000. At the end of 20X6, what is the result of these two inventory errors? A. Cost of goods sold is overstated by $8,000. B. Net income is overstated by $8,000. C. Retained earnings is overstated by $8,000. D. Net income is overstated by $19,000.

A The overstatement of $27,000 in 20X5 will cause the 20X6 cost of goods sold to be overstated by $27,000 (because beginning inventory will be overstated). The overstatement of $19,000 in 20X6 will cause 20X6 cost of goods sold to be understated by $19,000. The net effect of these two errors is that 20X6 cost of goods sold will be overstated by $8,000. Ignoring any income tax effect, in 20X6 net income and retained earnings will be understated by $8,000.

Costs of joint activities like mailings and telethons are required to be reported as fundraising activities unless certain criteria are satisfied. Which of the following is not one of those criteria? A. One or more of the purposes of the activity is to accomplish some program function or management and general responsibility of the entity. B. The audience for the activity was chosen based on some criteria other than the ability to make contributions. C. The content of the activity motivates the audience to take specific actions other than making contributions, and these actions support the program goals or fulfill a management and general responsibility of the entity. D. All of the answer choices are conditions under which joint activities are not required to be reported as fundraising activities.

A There are three conditions that must be met to allow a nongovernmental not-for-profit to report costs of joint activities in a category other than fundraising activities. Those three conditions are: one or more of the purposes of the activity is to accomplish some program function or management and general responsibility of the entity; the audience for the activity was chosen based on some criteria other than the ability to make contributions; and the content of the activity motivates the audience to take specific actions other than making contributions, and these actions support the program goals or fulfill a management and general responsibility of the entity. Therefore, all of the answer choices are conditions under which joint activities are not required to be reported as fundraising activities.

Which of the following statements regarding fiduciary funds is true? A. Fiduciary funds and fiduciary component units are not reported in the government-wide financial statements. B. Custodial funds are not required to report a statement of changes in net position. C. Private-purpose trust funds are governmental funds. D. Revenues and expenses are reported in the statement of changes in net position for investment trust funds.

A Fiduciary funds and fiduciary component units represent assets held in a trust or custodial capacity by the government. They may not be used to support government programs and, as such, are not reported in the government-wide financial statements. Custodial funds are required to report a statement of changes in net position in the fund financial statements. Private-purpose trust funds are fiduciary funds, not governmental funds. Investment trust funds do not report revenues and expense in the statement of changes in net position; additions and deductions are reported.

According to the FASB conceptual framework, which of the following correctly pairs a primary qualitative characteristic of accounting information with one of its components? A. Relevance and predictive value B. Relevance and verifiability C. Faithful representation and predictive value D. Faithful representation and feedback value

A. Relevance and faithful representation are the primary qualitative characteristics of accounting information. The components of relevance are predictive value, confirmatory value, and materiality. The characteristics of faithful representation are completeness, neutrality, and being free from error.

The City of Smithville enters into securities lending transactions. The costs of these transactions should be: A. reported as increases in the carrying value of the collateral. B. reported as expenditures or expenses. C. netted with interest revenue from investment of cash collateral. D. reported as intangible assets.

B "The costs of securities lending transactions should be reported as expenditures or expenses in the operating statement." They should not be netted with interest revenue or the income from the investment of any cash collateral (GASB I60.106).

How would a municipality that uses modified accrual and encumbrance accounting record the condition of an excess of estimated inflows over estimated outflows? A. Credit appropriations control B. Credit budgetary fund balance C. Debit appropriations control D. Credit other financing sources

B Encumbrance accounting is a feature of the accounting practices used by municipalities for governmental funds. Accounting for governmental funds is done on the modified accrual basis. Annual budgets of estimated inflows and estimated outflows are prepared for the general fund and most other governmental funds. The budget is so important to a city's financial operations for a fiscal year that "budgetary accounting," a method of integrating budgeted amounts into a city's accounting system, is used. Adoption of the operating budget is recorded by debiting appropriate budgetary accounts for estimated inflows ("estimated revenues") and crediting the appropriate budgetary accounts for estimated and approved outflows ("appropriations"). "Budgetary fund balance" is debited or credited for the difference. In this problem, since estimated inflows exceed estimated outflows, budgetary fund balance is credited for the difference. (Note: This budgetary entry is reversed at the end of the period as the first closing entry.)

During 20X1, Sloan, Inc., began a project to construct new corporate headquarters. Sloan purchased land with an existing building for $750,000. The land was valued at $700,000 and the building at $50,000. Sloan planned to demolish the building and construct a new office building on the site. What is the appropriate accounting treatment for interest of $186,000 on construction financing paid during construction? A. Classify as land and do not depreciate B. Classify as building and depreciate C. Expense D. None of the answer choices are correct.

B FASB ASC 360-10-30-1 provides: "If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset." The $186,000 should be classified as building cost and would be depreciated.

Which of the following is a practical expedient for recognizing revenue on an individual contract with a customer? A. Aggregate approach B. Portfolio approach C. Simplified approach D. Combined approach

B FASB ASC 606 includes a practical expedient that allows an entity to use a "portfolio approach" to apply the revenue recognition guidance. An entity may apply the guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

Cole Co. began constructing a building for its own use in January 20X1. During 20X1, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 20X1 was $40,000. What amount of interest cost should Cole capitalize? A. $20,000 B. $40,000 C. $50,000 D. $70,000

B For qualifying assets being constructed for an entity's own use, FASB ASC 835-20-30-2 requires interest cost to be capitalized equal to the less of (a) the avoidable interest (based on the weighted-average amount of accumulated expenditures), or (b) the actual interest cost incurred. Cole's avoidable interest is given to be $40,000. Since the $70,000 actual interest cost incurred ($50,000 + $20,000) is greater than the avoidable interest of $40,000, the amount of interest that Cole can capitalize is $40,000.

On January 1, Fonk City approved the following general fund resources for the new fiscal period: Property taxes $5,000,000 Licenses and permits 400,000 Intergovernmental revenues 150,000 Transfers in from other funds 350,000 What amount should Fonk record as estimated revenues for the new fiscal year? A. $5,400,000 B. $5,550,000 C. $5,750,000 D. $5,900,000

B Governments usually prepare their budgets showing estimated revenues and estimated expenditures or appropriations on a basis consistent with financial reporting. This budget includes revenues, increases in the general fund resources not matched by decreases in another fund resources, and also expected interfund transfers. Interfund transfers are recognized in the records as "other financing sources" and result from a movement of resources from one fund to another. Property taxes, licenses and permits, and intergovernmental revenues will all be represented in the budget as "estimated revenues." The expected transfers in will be represented by "estimated other financing sources" in the budget.

On January 1, Year 4, Krill Co. purchased 120 of the $1,000 face amount, 6% bonds of Huron, Inc., for $109,200. The bonds, which mature on January 1, Year 10, pay interest semiannually on January 1 and July 1. Krill used the straight-line method of amortization and appropriately recorded the bonds as a long-term investment. Krill plans to hold the bonds to maturity. On Krill's December 31, Year 7, balance sheet, the bonds should be reported at: A. $120,000. B. $116,400. C. $109,200. D. $102,000.

B Held-to-maturity investments are reported at amortized cost. The bonds were sold at a discount of $10,800 (the face value of $120,000 less the price of $109,200). Applying the straight-line method of amortization, the discount will be amortized equally over the months remaining in the bond's term. The bonds were purchased on January 1 of Year 4 and will mature on January 1 of Year 10. The total term of the bonds is 6 years, or 72 months. The total discount of $10,800 divided equally by 72 months is $150 per month. Thus, the bond carrying amount at December 31, Year 7, after the bond is held for 48 months (all of Years 4, 5, 6, and 7) will be: $109,200 (Initial price) + ($150 × 48 months) = $109,200 + $7,200 = $116,400

An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than: A. the face amount of the bond. B. neither the cash paid to the seller nor the face amount of the bond. C. the cash paid to the seller. D. both the cash paid to the seller and the face amount of the bond.

B If the investor buys a bond at a discount, then the bond will be carried at the discount price initially, which is below the face amount of the bond. However, if the investor buys a bond between interest payment dates, the investor will pay (in part) for the already accrued interest that the investor will soon receive back. Thus, the carrying amount of the bond will actually be less than the total the investor pays to acquire the bond, both its discount price plus the amount paid for the interest receivable.

Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values. As a consequence of the exchange, Sable recognizes: A. a gain equal to the difference between the fair value and carrying amount of the truck given up. B. a gain determined by the proportion of cash received to the total consideration. C. a loss determined by the proportion of cash received to the total consideration. D. neither a gain nor a loss.

B Sable will recognize a gain determined by the proportion of cash received to the total consideration. Similar trucks were exchanged in the transaction; therefore, there would be no gain. Very similar trucks would not significantly change cash flows—so the transaction would lack commercial substance. Now, add in the fact that Bensol paid Sable money. Since Sable received money, Sable now has to record a gain.

On January 1, 10 years ago, Andrew Co. created a subsidiary for the purpose of buying an oil tanker depot at a cost of $1,500,000. Andrew expected to operate the depot for 10 years, at which time it 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 10th year is $155,000. What amount of retirement expense should Andrew Co. recognize in its financial statements in Year 10? A. None, recognized in prior years B. $20,000 expense C. $150,000 expense D. $155,000 expense

B The estimated cost to dismantle the depot and remove the underground storage tanks would be expensed during the 10 years the assets were being used. Only the annual amortization of the estimated costs ($150,000 ÷ 10) plus the additional, unexpected expense $5,000 would be recognized at the end of the assets' lives.

Inge Co. determined that the net value of its accounts receivable on December 31, 20X1, based on an aging of the receivables, was $325,000. Additional information is as follows: Allowances for uncollectible accounts (01/01/X1) $ 30,000Uncollectible accounts written off during 20X1 18,000Uncollectible accounts recovered during 20X1 2,000Accounts receivable on 12/31/X1 350,000 For 20X1, what would be Inge's uncollectible accounts expense? A. $5,000 B. $11,000 C. $15,000 D. $21,000

B The key to solving this problem lies in evaluating the allowance for uncollectible accounts. Balance of "allowance" on 01/01/X1 $30,000Less balance of "allowance" on 12/31/X1($350,000 - $325,000) 25,000Decrease in "allowance" (i.e., debits) $ 5,000=======Net write-offs of accounts receivable($18,000 - $2,000) $16,000Less decrease in "allowance" account($30,000 - $25,000) (5,000)Uncollectible accounts expense(i.e., credits to "allowance" account) $11,000=======Allowance for uncollectible accounts:Beginning balance $30,000Uncollectible accounts written off (18,000)Written-off accounts now collectible 2,000Uncollectible accounts expense ?Year-end balance $25,000======= Thus, the expense ("?") equals $11,000. Note that $350,000 accounts receivable less the allowance for uncollectible accounts (i.e., $25,000) equals the $325,000 net accounts receivable.

On January 2, 20X2, Lake Mining Co.'s board of directors declared a cash dividend of $400,000 to stockholders of record on January 18, 20X2, payable on February 10, 20X2. The dividend is permissible under law in Lake's state of incorporation. Selected data from Lake's December 31, 20X1, balance sheet are as follows: Accumulated depletion $100,000 Capital stock 500,000 Additional paid-in capital 150,000 Retained earnings 300,000 The $400,000 dividend includes a liquidating dividend of: A. $0. B. $100,000. C. $150,000. D. $300,000.

B The liquidating dividend is that portion of the cash dividend that exceeds the balance in retained earnings because other equity accounts must be debited. Thus, for Lake: Total amount of January 2, 20X2, cash dividend $400,000 Less: Retained earnings balance 300,000 Liquidating dividend $100,000 ======== Liquidating dividends are a return of the investment rather than a return on the investment.

When a snowplow purchased by a governmental unit is received, it should be recorded in the general fund as: A. an encumbrance. B. an expenditure. C. a fixed asset. D. an appropriation.

B The purchase of capital assets (such as a snowplow) with general fund financial resources decreases the resources of the general fund, so should be recorded as a general fund expenditure. The capital asset itself is not recorded in the general fund (or any other governmental fund) because capital assets are not expendable financial resources.

In the current year, a state government collected income taxes of $8,000,000 for the benefit of one of its cities that imposes an income tax on its residents. The state remitted these collections periodically to the city. The state should account for the $8,000,000 in the: A. general fund. B. custodial fund. C. internal service funds. D. special assessment funds.

B When one governmental entity collects revenues for another and has the responsibility to remit the funds to the other entity, the first entity acts as a fiduciary for the second. The state must record the collected taxes in a custodial fund. This is a fund which allows the collection and subsequent remission of the monies to be recorded without affecting the funds with which the state itself operates. (GASB 1300.114)

A storm broke glass windows in Lea Meditators' building. Lea is a not-for-profit religious organization. A member of Lea's congregation, a professional glazier, replaced the windows at no charge. In Lea's statement of activities, the breakage and replacement of the windows should: A. not be reported. B. be reported by note disclosure only. C. be reported as an increase in both expenses and contributions. D. be reported as an increase in both net assets and contributions.

C

Must an entity identify immaterial performance obligations and allocate a portion of the transaction price to them? A. Yes. All performance obligations in a contract must be identified, with transaction price allocated to each identified performance obligation. B. No. An entity needs to identify all performance obligations related to contracts accounted for in a foreign currency but not those accounted for in U.S. dollars. C. No. An entity only needs to identify material performance obligations in a contract and allocate transaction price to those. D. No. Entities can combine all performance obligations into one for revenue recognition purposes if the contract period is for greater than one year.

C

Coriander Corporation acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $237,000 and discounted cash flow estimates of $153,000. Coriander reported a total asset retirement obligation of $196,000 in last year's financial statements. Coriander paid $102,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $61,000. What amount should Coriander report for the asset retirement obligation in this year's balance sheet? A. $563,000 B. $349,000 C. $308,000 D. $257,000

C An asset retirement obligation (ARO) refers to an obligation associated with the retirement of a tangible, long-lived asset, such as a nuclear power plant. An entity should originally recognize the fair value of an ARO in the period in which it is incurred if a reasonable estimate of fair value can be made. The amount is $308,000, computed as follows: Total obligation $196,000Add: Discounted cash flow 153,000*Accretion expense 61,000Deduct: Payment (102,000)$308,000======== * The original undiscounted cash flow of $237,000 should be adjusted to the discounted cash flows estimate.

In Year 3, a company incurred $500,000 of legal costs defending several patents. Included in that amount was $400,000 of legal costs associated with successful outcomes and $100,000 of legal costs associated with unsuccessful outcomes. What amount of legal costs, if any, should the company expense for Year 3? A. $500,000 B. $400,000 C. $100,000 D. $0

C Any legal costs in a successful defense of a patent right are capitalized into the patent account. Any unsuccessful legal costs in a patent defense are expensed as legal expenses. Thus, only the $100,000 would be expensed.

Miro Co. began business on January 2, 20X0. Miro used an accelerated method of depreciation for financial statement purposes for its building, and the straight-line method for income taxes. On January 16, 20X2, Miro elected to switch to the straight-line method for both financial statement and tax purposes. The building cost $240,000 in 20X0, which has an estimated useful life of 15 years and no salvage value. Data related to the building is as follows: Accelerated Straight-Line Year Depreciation Depreciation 20X0 $30,000 $16,000 20X1 20,000 16,000 Miro's tax rate is 40%. Which of the following statements is correct? A. There should be no reduction in Miro's deferred tax liabilities or deferred tax assets in 20X2. B. Miro's deferred tax liability should be reduced by $554 in 20X2. C. Miro's deferred tax asset should be reduced by $554 in 20X2. D. Miro's deferred tax asset should be increased by $554 in 20X2.

C During 20X0 and 20X1, the amount of taxes paid was higher than justified by its GAAP income. The amount of the "overpayment" equals the temporary difference in the GAAP basis of the asset ($240,000 − $50,000, or $190,000) and its tax basis ($240,000 − $32,000, or $208,000) at December 31, 20X1, times the 40% tax rate in effect at December 31, 20X1. More taxes have been paid than justified by GAAP income; therefore, the company has an asset for this "prepayment." The asset is called a deferred tax asset. The temporary difference is $18,000, making the deferred tax asset at December 31, 20X1, $18,000 × 40%, or $7,200. Changes in depreciation methods are accounted for prospectively. Therefore, the change to the straight-line method for GAAP purposes does not eliminate the temporary difference. However, straight-line depreciation for GAAP purposes in 20X2 will be less than that for tax purposes. GAAP depreciation is $190,000 ÷ 13 years, or $14,615. The GAAP basis of the asset at December 31, 20X2, is $240,000 − $64,615, or $175,385; the tax basis is $240,000 − $48,000, or $192,000. The temporary difference is reduced to $16,615. The deferred tax asset at December 31, 20X2, is $16,615 × 40%, or $6,646. Therefore, the deferred tax asset balance decreased by $554 during 20X2. GAAP DepreciationStraight-Line Tax Depreciation Depreciation Difference Tax Rate Deferred Tax 20X0 $30,000 - $16,000 = $14,000 x 0.40 = $5,600 20X1 20,000 - 16,000 = 4,000 x 0.40 = 1,600 20X2 14,615 - 16,000 = -1,385 x 0.40 = -554 $64,615 $48,000 $16,615 $6,646 ======= ======= ======= ====== ($240,000 − $20,000 − $30,000) ÷ 13 = $14,615 $16,000 − $14,615 = $1,385 $1,385 × 0.40 = $554

Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance? A. It defers any gains and losses. B. It defers losses to the extent of any gains. C. It recognizes gains and losses immediately. D. It defers gains and recognizes losses immediately.

C Generally, a nonmonetary exchange should be based on the fair values of the assets exchanged—resulting in the immediate recognition of a gain or loss. Exceptions to this treatment include the following: Fair value is not determinable Exchange transaction to facilitate sales to customers Exchange transaction that lacks commercial substance Under these exceptions, no gains or losses are recognized.

The following information is relevant to one of the City of Mullins' General Fund's derived tax revenues: Fiscal year-end June 30 Beginning receivables $ 450,000 Beginning deferred revenues 100,000 Beginning allowance for doubtful accounts 50,000 Receipts 1,250,000 Ending receivables 600,000 Receivables collected 6/30 - 8/30 125,000 Ending allowance for doubtful accounts 60,000 The City of Mullins considers derived tax receivables collected within 60 days after the close of the fiscal year to be "available." Furthermore, the City wrote off $30,000 of receivables as uncollectible during the year. What amount of revenues would be reported at the entity-wide level? A. $1,090,000 B. $1,100,000 C. $1,390,000 D. $1,400,000

C Governmental entities should recognize assets from derived tax revenue transactions in the period when the exchange transaction on which the tax is imposed occurs or when the resources are received, whichever occurs first. Revenues should be recognized, net of estimated allowances for doubtful accounts in the same period that the assets are recognized. From the entity-wide perspective, "availability" is not a criterion for recognizing revenues, so classification as "deferred" is unnecessary. Receipts current year $1,250,000 Add ending receivables 600,000 Less ending allowance for doubtful accounts (60,000) 1,790,000 Less beginning receivables (450,000) Add beginning allowance for doubtful accounts 50,000 Current-year revenue $1,390,000 ===========

Which of the following should be disclosed as supplemental information in the statement of cash flows? A. The issuance of stock to acquire a new warehouse B. The amount of cash paid for taxes during the period C. Both the issuance of stock to acquire a new warehouse and the amount of cash paid for taxes during the period D. Neither the issuance of stock to acquire a new warehouse nor the amount of cash paid for taxes during the period

C Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities, but that do not result in cash receipts or cash payments in the period (i.e., noncash transactions), shall be reported in related disclosures (FASB ASC 230-10-50-3). The acquisition of assets for stock is an example of this type of item. Disclosing the amount of cash paid during the period for interest and taxes is also required to be reported in related disclosures.

Fleming Co.'s five operating segments have revenues and profits/losses as shown below: Revenues ($) Profit/(Loss) ($)Rust 64 13Slad 12 (25)Tov 26 21Ulp 8 4Vin 28 (17)138 (4)=== ==== Which of these operating segments are deemed to be reportable operating segments? A. Rust and Slad only B. Rust, Tov, and Vin C. Rust, Slad, Tov, and Vin D. Rust, Slad, Tov, Ulp, and Vin

C Once an enterprise identifies its operating segments, it must report information separately for each operating segment that meets any of the following three tests: Revenue test: If its revenue is 10% or more of the combined revenue of all operating segments Profitability test: If the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute terms, of:a. the combined reporting profit of all operating segments that did not report a loss orb. the combined reported loss of all operating segments that did report a loss Asset test: If its assets are 10% or more of the combined assets of all operating segments Following these rules, segments must be reported if: Revenue > = $13.8 ($138 × 10%)Segments meeting requirement: Rust, Tov, and Vin Profit or loss > = $4.2 ($42 combined losses × 10%) > ($38 combined profit)Segments meeting requirement: Rust, Slad, Tov, and Vin An operating segment must only meet one test to require separate reporting. Under the revenue test or the profitability test, Rust, Slad, Tov, and Vin would have to report separately. Ulp is not required to report under either the revenue or profitability test.

Wildcat Oil intends to sell 20,000 barrels of crude oil on July 1, 20X6. To hedge against a possible decline in the selling price of crude oil, Wildcat buys a 6-month futures contract on January 1, 20X6, to sell 20,000 barrels of crude oil for $60 per barrel. The company properly documents the futures contract as a cash flow hedge. On June 30, 20X6, the price of crude oil has dropped to $54 per barrel. What adjusting entry does Wildcat record on June 30, 20X6? A. Futures contract expense 120,000Unrealized holding gain--equity 120,000 B. Unrealized holding loss 120,000Futures contract 120,000 C. Option (futures contract) 120,000Unrealized holding gain--equity 120,000 D. No entry is made.

C Since the price of crude oil has fallen, the value of the futures contract (the derivative) increased in value. Since the contract was a 6-month contract, it expires on June 30, 20X6, and has a fair value just before it expires of $120,000 (($60 per barrel future − $54 per current barrel) × 20,000 barrels). That $120,000 increase in fair value of the derivative results in a debit to the Futures Contract account (an asset) of $120,000 and a credit to unrealized gain of $120,000. Since the futures contract serves as a hedge of an "anticipated" transaction (the probable sale of 20,000 barrels of crude oil on July 1, 20X6), if it satisfies all other conditions for a hedge, the derivative represents a cash flow hedge rather than a fair value hedge. Accordingly, the unrealized gain of $120,000 would be included in other comprehensive income rather than in net income.

Acme Co.'s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information: At December 31, Acme has a $50,000 debit balance in its accounts payable resulting from a payment to a supplier for goods to be manufactured to Acme's specifications. Goods shipped FOB destination on December 20 were received and recorded by Acme on January 2; the invoice cost was $45,000. In its December 31 balance sheet, what amount should Acme report as accounts payable? A. $850,000 B. $895,000 C. $900,000 D. $945,000

C The $50,000 debit balance in accounts payable for goods to be manufactured should be shown in accounts receivable unless right to set off exists. The goods shipped FOB destination should not be included as a liability until received and were not included in the $850,000 balance. $850,000 + 50,000 = $900,000

A Building Authority was created by the city and organized as a separate legal entity. The Authority is governed by a five-person board appointed for 6-year terms by the mayor, subject to city council approval. The authority uses the proceeds of its tax-exempt bonds to finance the construction or acquisition of general capital assets for the city only. The bonds are secured by the lease agreement with the city and will be retired through lease payments from the city. Which of the following describes the city's reporting of the Building Authority? A. The Building Authority is not a component unit of the city and will not be reported by the city. B. The Building Authority is a component unit and the city will make a note disclosure only. C. The Building Authority is a component unit and will be reported as blended with the city's funds. D. The Building Authority is a component unit and will be reported as discretely presented in the city's financial statements.

C The Authority is a component unit of the city. The Authority's governing body is appointed by the city and the lease constitutes the imposition of a financial burden on the city. A component unit should be included in the reporting entity or primary government's financial statements using the blending method if the component unit's governing body is the same as the primary government; if the component unit provides services entirely or almost entirely to the primary government; or if the component unit's debt is expected to be repaid with resources provided by the primary government even if provided through a lease arrangement. The Authority will be reported using the blending method because the Authority provides services entirely to the city and its debt will be repaid with city resources over time. Only one of the three criteria needs to be met for the blending method to be used. In this case, two of the three criteria were met.

A county's balances in the general fund included the following: Appropriations $745,000 Encumbrances 37,250 Expenditures 298,000 Vouchers payable 55,875 What is the remaining amount available for use by the county? A. $353,875 B. $391,125 C. $409,750 D. $447,000

C The appropriations included in the adopted budget constitute the maximum authorized for expenditure during the period, and cannot legally be exceeded unless subsequently amended by the legislative body. In this question, the appropriation was established at $745,000; expenditures incurred to date were $298,000 and $37,250 was encumbered. Only $409,750 remains available for spending. The vouchers payable represent past expenditures waiting only for cash payment. Appropriation $745,000 Expenditures (298,000) Encumbrances (37,250) Funds available $409,750

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.

C The definition of matching is recording expenses and expired costs necessary to generate revenue in the same period as the revenue.

Which of the following financial categories are used in a nongovernmental not-for-profit entity's statement of financial position? A. Net assets, income, and expenses B. Income, expenses, and changes in net assets C. Assets, liabilities, and net assets D. Changes in net assets with donor restrictions and net assets without donor restrictions

C The statement of financial position is the term for the balance sheet reported by not-for-profit (NFP) entities. Balance sheets report the balances of permanent accounts on a specific date. Therefore, income, expenses, or changes in net asset categories are not reported. The FASB recommends that the financial statements of an NFP focus on the entity as a whole. The NFP account equation uses the term "net assets" for equity. Its accounting equation is assets equal liabilities plus net assets.

At the beginning of the year, Cann Co. started construction on a new $2 million addition to its plant. Total construction expenditures made during the year were $200,000 on January 2, $600,000 on May 1, and $300,000 on December 1. On January 2, the company borrowed $500,000 for the construction at 12%. The only other outstanding debt the company had was a 10% interest rate, long-term mortgage of $800,000, which had been outstanding the entire year. What amount of interest should Cann capitalize as part of the cost of the plant addition? A. $140,000 B. $132,000 C. $72,500 D. $60,000

C The total interest cost during the year includes the $500,000 at 12% interest ($500,000 × 0.12 = $60,000) and the interest on the other debt ($800,000 × 0.10 = $80,000). There cannot be more than $140,000 interest capitalized (the total interest accrued of $60,000 and $80,000). The weighted-average accumulated expenditures take into account the amounts expended on the building during the year based on how much of the year occurred after the payment. The $200,000 paid in January was paid at the beginning of the year and was outstanding all year ($200,000 × 12/12 of the year, or $200,000). The May payment was only outstanding for May through December for 8/12 of the year, so $600,000 × 8/12 = $400,000 weighted-average expenditure. The December payment was made for only the last month, or 1/12 of the year, for an expenditure of $300,000 × 1/12 = $25,000. The total weighted-average accumulated expenditures were thus $200,000 + $400,000 + $25,000, for a total of $625,000. The capitalized interest cost on these expenditures is based on the interest rates of the debt outstanding during the year, first, to the extent of any specific construction debt, i.e., the $500,000 at 12%. The interest capitalized on the first $500,000 of expenditures is based on 12%, or $60,000, and the interest on the remaining $125,000 of expenditures ($625,000 - $500,000) is paid at the rate of 10% for another $12,500 of capitalized interest. Thus, the total of the capitalized interest is $60,000 and $12,500, for a total of $72,500.

A city's water division generated $1.5 million in revenue. It reported expenses of $1 million, which included $200,000 paid to an internal service fund. The water division also transferred $50,000 to the general fund. What amount is the water division's change in net position on the statement of revenues, expenses, and changes in fund net position? A. $250,000 B. $300,000 C. $450,000 D. $500,000

C The water division would be classified as a proprietary fund because it is primarily financed through funds received from the use of its water. Proprietary funds change in net position is the sum of revenues, expenses, and transfers in/out. The city water division would then report a change in net position of $450,000 ($1,500,000 − $1,000,000 − $50,000).

Correy Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to Correy's operating segments for the current year ended December 31: Operating Identifiable Segment Total Revenues Operating Profit Assets at 12/31A $10,000,000 $1,750,000 $20,000,000B 8,000,000 1,400,000 17,500,000C 6,000,000 1,200,000 12,500,000D 3,000,000 550,000 7,500,000E 4,250,000 675,000 7,000,000F 1,500,000 225,000 3,000,000$32,750,000 $5,800,000 $67,500,000=========== ========== =========== In its segment information for the current year, how many reportable segments does Correy have? A. Three B. Four C. Five D. Six

C To be a reportable segment, the segment must report revenue, profit, or assets of 10% of the total entity. Segment F does not have 10% of any of these attributes, so it is not reported as a segment, leaving five reportable segments (A-E).

A company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods. This type of commitment is: A. recorded and reported on the balance sheet at the present value of the future required payments. B. recorded and reported on the balance sheet at the fair value of the goods to be received. C. not reported on the balance sheet but disclosed in the notes to the financial statements. D. not reported or disclosed in the financial statements.

C When a company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods, it has an unconditional purchase commitment. Such an obligation is not reported on the balance sheet but is disclosed in the notes to the financial statements at the present value of the future required payments.

On September 22, 20X1, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency. On that date, the spot rate was $.55. Yumi paid the bill in full on March 20, 20X2, when the spot rate was $.65. The spot rate was $.70 on December 31, 20X1. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, 20X1? A. $0 B. $500 C. $1,000 D. $1,500

D A foreign currency transaction loss occurred because it cost more to purchase the units of foreign currency on December 31 ($.70) than it cost when the transaction originated on September 22 ($.55). The amount of loss would be computed as follows: Transaction loss = Number of units x Change in rate= 10,000 x ($.70 - $.55)= 10,000 x $.15= $1,500

The term "tax position" as used by the FASB refers to which of the following? A. A decision not to file a tax return B. An allocation or a shift of income between jurisdictions C. The characterization of income or a decision to exclude reporting taxable income in a tax return D. All of the answer choices are correct.

D All of the listed choices are contained in the FASB ASC 740-10-20 definition: "A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. The term tax position also encompasses, but is not limited to: "A decision not to file a tax return "An allocation or a shift of income between jurisdictions "The characterization of income or a decision to exclude reporting taxable income in a tax return "A decision to classify a transaction, entity, or other position in a tax return as tax exempt "An entity's status, including its status as a pass-through entity or a tax-exempt not-for-profit entity."

Which of the following fund types should account for capital assets in a manner similar to a "for-profit" organization? A. Special revenue fund B. Capital projects fund C. Permanent fund D. Enterprise fund

D An enterprise fund is the only answer choice in which capital assets are treated in a manner similar to a "for-profit" organization. The assets are recorded in the enterprise fund because they are used in production of the goods and/or services for which the fund exists. Depreciation of these assets is included in the expenses recorded as part of fund activity. Capital assets resulting from the activities of a special revenue fund, a capital projects fund, or a permanent fund are general capital assets, which should not be reported as assets in governmental funds, but would be reported as assets in the governmental activities column of the government-wide statement of net position. (GASB 1400.114-.115)

An entity should recognize an impairment loss in profit or loss to the extent that the carrying amount of an asset recognized exceeds: A. the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates. B. the costs that relate directly to providing those goods or services that have not been recognized as expenses. C. costs that are explicitly chargeable to the customer under the contract. D. the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates, less the costs that relate directly to providing those goods or services that have not been recognized as expenses.

D An entity should recognize an impairment loss in profit or loss to the extent that the carrying amount of an asset recognized exceeds the remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates, less the costs that relate directly to providing those goods or services that have not been recognized as expenses. To determine the amount of consideration that an entity expects to receive, an entity should use the principles for determining the transaction price and adjust that amount to reflect the effects of the customer's credit risk. The entity should also consider expected contract renewals and extensions and include both the amount of consideration it has already received but has not recognized as revenue and the amount it expects to receive in the future.

The calculation of the income recognized in the third year of a 5-year construction contract where revenue is recognized over time includes the ratio of: A. costs incurred in Year 3 to total billings. B. costs incurred in Year 3 to total estimated costs. C. total costs incurred to date to total billings. D. total costs incurred to date to total estimated costs.

D Because total estimated costs can change over the life of a long-term contract, the computation of income for any year except the first must accommodate the possibility of a change in estimate. Therefore, the company must compute the income for Year 3 as the difference between the: total income earned in Years 1 to 3 (total costs incurred to date over total estimated costs) times estimated total income on the contract (total contract revenue less total estimated costs based on estimates at the end of Year 3) less total income recognized in Years 1 and 2, leaving income assigned to Year 3.

Which of the following would represent an option with a material right offered to a customer? A. A coupon offering 20% off the next purchase that is given to all customers B. An offer to accept a returned product for a full refund that is offered to all customers C. An online advertisement that highlights an upcoming holiday sale D. A coupon offering 50% off of a customer's next purchase if the customer spends over a specified amount, with customers not spending over that amount getting no such offer

D Certain options that grant a material right to a customer are considered as separate performance obligations with a portion of the transaction price allocated to them and recognized when the option is exercised. If an option provides a material right to the customer that it would not have received without entering into the contract, it should be considered as a separate performance obligation. For example, offering a 50% discount on future purchases over and above one offered to all customers would be considered a material right. Offering a free item when a customer purchases other products would be another example of an option granting a material right. A coupon offering 20% off the next purchase that is given to all customers, an offer to accept a returned product for a full refund that is offered to all customers, and an online advertisement that highlights an upcoming holiday sale are not examples of an option with a material right.

North Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 20X1, North's unadjusted balance of liability for compensated absences was $21,000. North estimated that there were 150 vacation days and 75 sick days available at December 31, 20X1. North's employees earn an average of $100 per day. In its December 31, 20X1, balance sheet, what amount of liability for compensated absences is North required to report? A. $36,000 B. $22,500 C. $21,000 D. $15,000

D FASB ASC 710-10-25-7 provides that "an employer is not required to accrue a liability for nonvesting accumulating rights to receive sick pay benefits..." Thus, North Corp.'s liability for compensated absences at December 31, 20X1, is $15,000 for the 150 vacation days (at $100 per day).

How should the amortization of bond discount on long-term debt be reported in a statement of cash flows prepared using the indirect method? A. As a financing activities inflow B. As a financing activities outflow C. In operating activities as a deduction from income D. In operating activities as an addition to income

D Interest paid would be an expense included in the determination of net income, and therefore a cash outflow from operating activities. Amortization of bond discount is noncash interest expense. Net income must be increased by noncash expenses that did not result from a cash outflow.

Which of the following does not affect an internal service fund's net income? A. Depreciation expense on its fixed assets B. Operating transfer sources C. Residual equity transfers D. Temporary transfers

D Internal service funds are used to account for in-house business enterprise activities (i.e., to account for the financing of goods or services provided by one government department or agency to other departments or agencies of the government and perhaps to other governments also) on a cost-reimbursement basis. By the very nature of "temporary," the implication is to undo the transfer at some point in time, and it should not impact the net income of the fund.

A town's fund financial statements are prepared following major fund reporting requirements, and combining fund statements detailing nonmajor funds are also provided. In reviewing the comprehensive annual financial report, you notice that all the internal service funds were combined and reported in a single column in the basic financial statements. The combining financial statements for internal service funds included a column for each of the town's four internal service funds. The explanation of this presentation is: A. the internal service funds provided service specifically for governmental activities. B. none of the internal service funds accounted for 10% of the total assets, liabilities, revenues, or expenditures/expenses of the proprietary funds or 5% of those elements of all funds. C. management did not feel that any internal service fund was important enough for separate presentation in the basic financial statements, although the officials had the option of including any fund felt to be important. D. major fund reporting requirements do not apply to internal service funds.

D Major fund reporting requirements do not apply to internal service funds. Therefore, they are usually combined for financial reporting and presented individually with combining statements. The other answer choices are not sufficient explanations for the town's presentation of the internal service fund financial information.

When computing purchasing power gain or loss on net monetary items, which of the following accounts is classified as nonmonetary? A. Advances to unconsolidated subsidiaries B. Allowance for uncollectible accounts C. Unamortized premium on bonds payable D. Accumulated depreciation of equipment

D Monetary assets are cash or items whose amounts are fixed in terms of numbers of dollars. All of the assets are monetary assets except for accumulated depreciation.

A county that operates a capital projects fund for infrastructure needs had the following information available on transactions for the current year: Proceeds from debt issuance $1,000,000Transfer from general fund 500,000Special assessments 400,000Fees for extra services 100,000 How much would the capital projects fund report as other financing sources for the current year? A. $500,000 B. $900,000 C. $1,000,000 D. $1,500,000

D Other financing sources appear in the statement of revenues, expenditures, and changes in fund balance. Other financing sources include transfers to and from other funds, as well as proceeds from debt issuances (usually bonds) and proceeds from capital asset sales. In this problem, the proceeds from debt ($1,000,000) and the transfer from the general fund ($500,000) are both positive other financing sources in the total amount of $1,500,000 ($1,000,000 + $500,000). The special assessments and fees for services would both be reported as revenues.

Lime Co.'s payroll for the month ending January 31, 20X1, is summarized as follows: Total wages $10,000 Federal income tax withheld 1,200 All wages paid were subject to the Federal Insurance Contributions Act (FICA). FICA tax rates were 7.65% each for employee and employer. Lime remits payroll taxes on the 15th of the following month. In its financial statements for the month ending January 31, 20X1, what amounts should Lime report as total payroll tax liability and as payroll tax expense? A. Liability: $1,200; Expense: $1,530 B. Liability: $1,965; Expense: $1,530 C. Liability: $1,965; Expense: $765 D. Liability: $2,730; Expense: $765

D Payroll tax liability: Federal income tax withheld $1,200 Employee FICA (7.65% x $10,000) 765 Employer FICA (7.65% x $10,000) 765 Total $2,730 Payroll tax expense: Employer FICA (7.65% × $10,000) = $765

SEC Regulation S-X provides guidance for the issuer regarding: A. nonfinancial forms and disclosures required by the SEC. B. instructions on electronically filing the forms required by the SEC. C. the use of EDGAR by SEC registrants. D. format and content of financial information submitted to the SEC.

D Regulation S-X contains information regarding the financial statements that must be submitted to the SEC. Regulation S-K contains the instructions for filing the nonfinancial statement forms required by the SEC. Regulation S-T contains instructions for the electronic filing of required SEC forms. Both Regulation S-K and S-T should be read together, as some parts of Regulation S-X may supersede the instructions in Regulation S-K.

Dale City is accumulating financial resources that are legally restricted to payments of general long-term debt principal and interest maturing in future years. At December 31, $5,000,000 has been accumulated for principal payments and $300,000 has been accumulated for interest payments. These restricted funds should be accounted for in the: A. Debt service fund, $0; General fund, $5,300,000. B. Debt service fund, $300,000; General fund, $5,000,000. C. Debt service fund, $5,000,000; General fund, $300,000. D. Debt service fund, $5,300,000; General fund, $0.

D The debt service fund is a reserve used to account for and report payments of the maturing principal and interest of general government short- and long-term debt. These liabilities are recorded in the General Capital Assets and General Long-Term Liabilities accounts, which are subaccounts of the debt service fund.

A state had general obligation bonds outstanding that required payment of interest on July 1 and January 1 of each year. State law allowed for the general fund to make debt payments without the use of a fiscal agent. The fiscal year ended June 30. Which of the following accounts would have decreased when the state paid the interest due on July 1? A. Interest expenditures B. Interest payable C. Interest expense D. Fund balance

D The use of a debt service fund to account for the payment of bond interest may be required by law. Otherwise, the general fund is used for transactions not required to be reported in another fund. In this case, state law allows the interest payment to be recorded in the general fund. Paying interest would increase, not decrease, expenditures, so interest expenditures is not correct. In a governmental fund, the interest would not have been accrued, so the payable would not be decreased, and interest payable would not be correct. In a governmental fund, expense (the expiration of resources matched to the earning of revenue) is not measured, so interest expense would not be correct. The correct answer is fund balance, which would be decreased when expenditures, a temporary account, is closed at the end of the period.

A company manufactured 1,000 units of product during the year and sold 800 units. Costs incurred during the current year are as follows: Direct materials and direct labor $7,000Indirect materials and indirect labor 2,000Insurance on manufacturing equipment 3,000Advertising 1,000 What amount should be reported as inventory in the company's year-end balance sheet? A. $1,400 B. $1,800 C. $2,600 D. $2,400

D The work-in-process and finished-goods inventories of a manufacturing concern include the applicable direct and indirect materials and labor costs and a representative share of the manufacturing overhead costs (which would include insurance on manufacturing equipment). Inventory cost should not include any general and administrative expenses such as advertising. Total costs incurred related to the manufacturing of inventory is $12,000 ($7,000 + $2,000 + $3,000). The $1,000 in advertising costs is expensed as incurred and is not capitalized to inventory. There were 1,000 units produced and 800 units sold, so 200 units remain in inventory at a cost of $2,400 ($12,000 total inventory × 200/1,000 units). Note that because no cost assumptions (i.e., LIFO, FIFO, weighted average) were provided, we can assume that all inventory was manufactured at the same cost.

During the year, Hauser Co. wrote off a customer's account receivable. Hauser used the allowance method for uncollectable accounts. What impact would the write-off have on net income and total assets? A. Net income: Decrease; Total assets: Decrease B. Net income: Decrease; Total assets: No effect C. Net income: No effect; Total assets: Decrease D. Net income: No effect; Total assets: No effect

D When the allowance method of accounting for bad debts is applied, the accounts that will be eventually written off are in both the accounts receivable and the allowance account balances. When the account is written off, it is taken out of both at the same time, and the bad debt expense had already been taken as an estimated expense when the sale was made. The write-off lowers accounts receivable with a credit, and the allowance account with a debit of the same amount. The write-off entry does not affect expenses, and leaves the net realizable amount of accounts receivable the same.

Large City does not use the modified approach to account for roads. At the beginning of the current year, the city spent $800,000 on new roads. The roads have a 20-year useful life. What amount should Large City report as an expense related to the new roads in the statement of activities for the current year? A. $0 B. $20,000 C. $40,000 D. $800,000

Except for qualifying infrastructure capital assets, governments are required to depreciate all capital assets with limited lives. Because Large City is not electing the modified approach, standard straight-line depreciation is to be utilized over each year of the asset's life, for an annual expense of $40,000 ($800,000 ÷ 20 years).