FAR Module 7
On January 3, Year 5, Ard Corp. owned a machine that had cost $60,000. The accumulated depreciation was $50,000, estimated salvage value was $5,000, and fair market value was $90,000. On January 4, Year 5, this machine was irreparably damaged by Rice Corp. and became worthless. In October Year 5, a court awarded damages of $90,000 against Rice in favor of Ard. At December 31, Year 5, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Ard's attorney, Rice's appeal will be denied. At December 31, Year 5, what amount should Ard accrue for this gain contingency?
$ -0-
On November 1, Year 4, Beni Corp. was awarded a judgment of $1,500,000 in connection with a lawsuit. The decision is being appealed by the defendant, and it is expected that the appeal process will be completed by the end of Year 5. Beni's attorney feels that it is highly probable that an award will be upheld on appeal, but that the judgment may be reduced by an estimated 40%. In addition to footnote disclosure, what amount should be reported as a receivable in Beni's balance sheet at December 31, Year 4?
$ -0-
Bloy Corp.'s payroll for the pay period ended October 31, 2005 is summarized as follows: Federal incomeAmount of wages subject to payroll taxesDepartment PayrollTotal WagesTax withheldF.I.C.A.UnemploymentFactory22,0003,00016,0002,000Sales18,0002,0008,000-Office60,0007,00056,00018,000Total$100,000$12,000$80,000$20,000=================================== Assume the following payroll tax rates: F.I.C.A. for employer and employee 7% each Unemployment 3% What amount should Bloy accrue as its share of payroll taxes in its October 31, 2005 balance sheet?
$ 6,200
Included in Lee Corp.'s liability account balances at December 31, year 4, were the following: 14% note payable issued October 1, year 4, maturing September 30, year 5$125,00016% note payable issued April 1, year 3, payable in six equal annual installments of $50,000 beginning April 1, year 3200,000 Lee's December 31, year 4 financial statements were issued on March 31, year 5. On January 15, year 5, the entire $200,000 balance of the 16% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, year 5, Lee consummated a noncancelable agreement with the lender to refinance the 14%, $125,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement, and there have been no violations of the agreement's provisions. On the December 31, year 4 balance sheet, the amount of the notes payable that Lee should classify as short-term obligations is
$0
Martin Pharmaceutical Co. is currently involved in two lawsuits. One is a class-action suit in which consumers claim that one of Martin's best selling drugs caused severe health problems. It is reasonably possible that Martin will lose the suit and have to pay $20 million in damages. Martin is suing another company for false advertising and false claims against Martin. It is probable that Martin will win the suit and be awarded $5 million in damages. What amount should Martin report on its financial statements as a result of these two lawsuits?
$0
Northstar Co. acquired a registered trademark for $600,000. The trademark has a remaining legal life of five years, but can be renewed every 10 years for a nominal fee. Northstar expects to renew the trademark indefinitely. What amount of amortization expense should Northstar record for the trademark in the current year?
$0
During the year, Vest Co. incurred the following costs: Testing in search for process alternatives$280,000 Routine design of tools, jigs, molds, and dies250,000 Modification of the formulation of a process410,000 Research and development services performed by Acme Corp. for Vest325,000 In Vest's income statement, research and development expense should be
$1,015,000.
Willem Co. reported the following liabilities at December 31, year 1: Accounts payable-trade$ 750,000Short-term borrowings400,000Mortgage payable, current portion $100,0003,500,000Other bank loan, matures June 30, year 21,000,000 The $1,000,000 bank loan was refinanced with a 20-year loan on January 15, year 2, with the first principal payment due January 15, year 3. Willem's audited financial statements were issued February 28, year 2. What amount should Willem report as current liabilities at December 31, year 1?
$1,250,000
Ball Labs incurred the following costs: Direct costs of doing contract research and development work for the government to be reimbursed by governmental unit$400,000 Research and development costs not included above were: Depreciation$300,000 Salaries700,000 Indirect costs appropriately allocated200,000 Materials180,000 What was Ball's total research and development expense?
$1,380,000
Black Corp.'s accounts payable at December 31, 20X4, totaled $900,000 before any necessary year-end adjustments relating to the following transactions: On December 27, 20X4, Black wrote and recorded checks to creditors totaling $400,000, causing an overdraft of $100,000 in Black's bank account at December 31, 20X4. The checks were mailed out on January 10, 20X5. On December 28, 20X4, Black purchased and received goods for $153,061, terms 2/10, n/30. Black records purchases and accounts payable at net amounts. The invoice was recorded and paid on January 3, 20X5. Goods shipped F.O.B. destination on December 20, 20X4 from a vendor to Black were received January 2, 20X5. The invoice cost was $65,000. At December 31, 20X4, what amount should Black report as total accounts payable?
$1,450,000
On January 2, year 4, Beal, Inc. acquired a $70,000 whole-life insurance policy on its president. The annual premium is $2,000. The company is the owner and beneficiary. Beal charged officer's life insurance expense as follows: 20X4 $2,00020X5 1,80020X6 1,50020X7 1,100Total $6,400===== In Beal's December 31, 20X7 Balance Sheet, the investment in cash surrender value should be:
$1,600
The following information pertains to Rik Co.'s two employees: NameWeekly salaryNumber of weeks worked in 2005Vacation rights vest or accumulateRyan$80052YesTodd60052No Neither Ryan nor Todd took the usual two-week vacation in 2005. In Rik's December 31, 2005, financial statements, what amount of vacation expense and liability should be reported?
$1,600
On June 30, year 5, Town Co. had outstanding 8%, $2,000,000 face amount, 15-year bonds that matured on June 30, year 15. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, year 5 were $70,000 and $20,000, respectively. On June 30, year 5, Town acquired all these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?
$1,910,000.
Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?
$100,000
Under state law, Acme may pay 3% of eligible gross wages or it may reimburse the state directly for actual unemployment claims. Acme believes that actual unemployment claims will be 2% of eligible gross wages and has chosen to reimburse the state. Eligible gross wages are defined as the first $10,000 of gross wages paid to each employee. Acme had five employees each of whom earned $20,000 during 20X4. In its December 31, 20X4 balance sheet, what amount should Acme report as accrued liability for unemployment claims?
$1000
Hull Co. bought a trademark from Roe Corp. on January 1, year 5, for $224,000. Hull retained an independent consultant who estimated the trademark's remaining useful life to be 20 years. The trademark most likely will not be renewed. Its unamortized cost on Roe's accounting records was $112,000. At December 31, year 5, what is reported as amortization expense?
$11,200
East Corp. manufactures stereo systems that carry a two-year warranty against defects. Based on past experience, warranty costs are estimated at 4% of sales for the warranty period. During Year 5, stereo system sales totaled $3,000,000, and warranty costs of $67,500 were incurred. In its income statement for the year ended December 31, Year 5, East should report warranty expense of:
$120,000
Kemp Co. must determine the December 31, 20X2, year-end accruals for advertising and rent expenses. A bill for $500 in advertising expenses was received January 7, 20X3, comprising costs of $375 for advertisements in December 20X2 issues, and $125 for advertisements in January 20X3 issues of the newspaper. A store lease, effective December 16, 20X1, calls for fixed rent of $1,200 per month, payable one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over $300,000 per calendar year is payable on January 31 of the following year. Net sales for 20X2 were $550,000. In its December 31, 20X2 balance sheet, Kemp should report accrued liabilities of
$13,475
On January 1, year 1, Alpha Co. signed an annual maintenance agreement with a software provider for $15,000 and the maintenance period begins on March 1, year 1. Alpha also incurred $5,000 of costs on January 1, year 1, related to software modification requests that will increase the functionality of the software. Alpha depreciates and amortizes its computer and software assets over five years using the straight-line method. What amount is the total expense that Alpha should recognize related to the maintenance agreement and the software modifications for the year ended December 31, year 1?
$13,500
During Year 4, Gum Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31, Year 4 and Year 5 are as follows: SalesActual warranty expendituresYear 4$150,000$2,250Year 5250,0007,500$400,000$9,750================== What amount should Gum report as estimated warranty liability in its December 31, Year 5, balance sheet?
$14,250
North Corp. has an employee benefit plan for compensated absences that gives employees ten paid vacation days and ten paid sick days per year. 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, 2004, 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, 2004. North's employees earn an average of $100 per day. In its December 31, 2004 balance sheet, what amount of liability for compensated absences is North required to report?
$15,000
On July 12, year 4, Carver, Inc. acquired Jones Company in a business combination. The carrying value for each of the three reporting units of the acquired company is as follows. Retailing$30,000Service$20,000Financing$40,000 Near the end of year 4 a new major competitor entered the company's market and Carver was concerned that this might cause a significant decline in the value of goodwill. Accordingly, Carver computed the fair value of the three major reporting units at December 31, year 4, as follows: Retailing$25,000Service$10,000Financing$60,000 Determine the amount of impairment of goodwill that should be recorded by Carver at December 31, year 4.
$15,000
Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of forty cents on the dollar. Hale holds a $30,000 noninterest-bearing note receivable from Seco collateralized by an asset with a book value of $35,000, and a liquidation value of $5,000. The amount to be realized by Hale on this note is
$15,000
During the current year ended December 31, Metal, Inc. incurred the following costs: Laboratory research aimed at discovery of new knowledge$ 75,000 Design of tools, jigs, molds, and dies involving new technology22,000 Quality control during commercial production, including routine testing35,000 Equipment acquired two years ago, having an estimated useful life of five years with no salvage value, used in various R&D projects150,000 Research and development services performed by Stone Co. for Metal, Inc.23,000 Research and development services performed by Metal, Inc. for Clay Co.32,000 What amount of research and development expenses should Metal report in its current-year income statement?
$150,000
(Note: This AICPA question has been amended.) On January 1, year 15, Hart, Inc. redeemed its 15-year bonds of $500,000 par value for 102. They were originally issued on January 1, year 3 at 98 with a maturity date of January 1, year 18. The bond issue costs relating to this transaction were $20,000. Hart amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Hart recognize on the redemption of these bonds?
$16,000
A company has the following liabilities at year end: Mortgage note payable; $16,000 due within 12 months$355,000Short-term debt that the company is refinancing with long-term debt175,000Deferred tax liability arising from depreciation25,000 What amount should the company include in the current liability section of the balance sheet?
$16,000
On November 1, 20X5, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1, 20X5. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31, 20X5 balance sheet?
$16,000
Mann Corp.'s liability account balances at June 30, 20X3 included a 10% note payable in the amount of $3,600,000. The note is dated October 1, 20X2, and is payable in three equal annual payments of $1,200,000 plus interest. The first interest and principal payment was made on October 1, 20X3. In Mann's June 30, 20X4 balance sheet, what amount should be reported as accrued interest payable for this note?
$180,000
On December 31, 20X5. Cobb issued 2,000 of its 10%, $1,000 bonds at 99. The issuance price established a bond discount of $20,000. In connection with the sale of these bonds. Cobb paid the following expenses: Legal and accounting fees$45,000Printing of the prospectus55,000Underwriting fees85,000 In Cobb's December 31, 20X5, balance sheet, bond issue costs total
$185,000.
Kew Co.'s accounts payable balance at December 31, 20X2 was $2,200,000 before considering the following data: Goods shipped to Kew F.O.B. shipping point on December 22, 20X2 were lost in transit. The invoice cost of $40,000 was not recorded by Kew. On January 7, 20X3, Kew filed a $40,000 claim against the common carrier. On December 27, 20X2, a vendor authorized Kew to return, for full credit, goods shipped and billed at $70,000 on December 3, 20X2. The returned goods were shipped by Kew on December 28, 20X2. A $70,000 credit memo was received and recorded by Kew on January 5, 20X3. Goods shipped to Kew F.O.B. destination on December 20, 20X2 were received on January 6, 20X3. The invoice cost was $50,000. What amount should Kew report as accounts payable in its December 31, 20X2 balance sheet?
$2,170,000
On March 1, 20X4, Fine Co. borrowed $10,000 and signed a two-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 20X6. What amount should Fine report as a liability for accrued interest at December 31, 20X5?
$2,320
Brand Co. incurred the following research and development project costs at the beginning of the current year: Equipment purchased for current and future projects$100,000 Equipment purchased for current projects only200,000 Research and development salaries for current project400,000 Equipment has a five-year life and is depreciated using the straight-line method. What amount should Brand record as depreciation for research and development projects at December 31?
$20,000
A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized?
$200,000
On January 2, year 4, Paye Co. purchased Shef Co. at a cost that resulted in recognition of goodwill of $200,000. During the first quarter of year 4, Paye spent an additional $80,000 on expenditures designed to maintain goodwill. In its December 31, year 4 balance sheet, what amount should Paye report as goodwill?
$200,000
The management of Devin Corporation is testing two of its reporting units for impairment of goodwill. Information about results of these tests are shown below. Reporting Units TelecommunicationsNetworkingReporting unit carrying amount (including goodwill)$2,500,000$3,000,000Carrying value of goodwill 500,000 500,000Estimated fair value of total 2,900,000 2,800,000Estimated fair value of assets and liabilities other than goodwill 2,100,000 2,500,000 After properly adjusting the goodwill for impairment, what will be the amount of the goodwill impairment loss reported by Devin Corporation?
$200,000
On October 1, Year 1, Brock, Inc. issued 200 of its 10%, $1,000 bonds at 101 plus accrued interest. The bonds are dated July 1, Year 1, and mature on July 1, Year 11. Interest is payable semiannually on January 1 and July 1. At the time of issuance, Brock received cash of
$207,000.
On April 1, 20X4, Hill Corp. issued 200 of its $1,000 face value bonds at 101 plus accrued interest. The bonds were dated November 1, 20X3, and bear interest at an annual rate of 9% payable semiannually on November 1 and May 1. What amount did Hill receive from the bond issuance?
$209,500
On January 1, 20X5, Korn Co. sold to Kay Corp. $400,000 of its 10% bonds for $354,118 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Korn report as interest expense for the six months ended June 30, 20X5?
$21,247
In year 1, Chain, Inc. purchased a $1,000,000 life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ended December 31, year 5, follows: During year 5, dividends of $6,000 were applied to increase the cash surrender value of the policy. What amount should Chain report as life insurance expense for year 5?
$210,000
On January 2, Year 4, Gill Co. issued $2,000,000 of 10-year, 8% bonds at par. The bonds, dated January 1, Year 4, pay interest semiannually on January 1 and July 1. Bond issue costs were $250,000. What amount of bond issue costs are unamortized at June 30, Year 5, assuming straight-line method?
$212,500
On June 1, Greendale Corp. issued $700,000, five-year bonds at 8%, with interest payable annually on May 31. The bonds sold for $728,700 when the market rate of interest was 7%. Greendale uses the effective interest method for amortizing premiums on bonds payable. What is the balance of the premiums on bonds payable account immediately following the first interest payment?
$23,709
On January 1, year 1, a company appropriately capitalized $40,000 of software development costs for computer software to be sold. The company estimated an economic life of two years for the software and believes that it will generate $500,000 in total software sales. It had software sales of $300,000 in year 1. What amount of software amortization expense, if any, should the company report in its financial statements for the year ended December 31, year 1?
$24,000
On September 1, Year 1, Cobb Co. issued a note payable to the National Bank in the amount of $900,000, bearing interest at 12%, and payable in three equal annual principal payments of $300,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, Year 2. At December 31, Year 2, Cobb should record accrued interest payable of
$24,000
Dixon Co. incurred costs of $3,300 when it issued, on August 31, 20X5, five-year debenture bonds dated April 1, 20X5. Dixon uses the straight-line method to amortize bond issue costs. By what amount is 20X5 interest expense increased by the amortization of bond issue costs?
$240
On June 2, year 1, Tory, Inc. issued $500,000 of 10%, 15-year bonds at par. Interest is payable semiannually on June 1 and December 1. Bond issue costs were $6,000. On June 2, year 6, Tory retired half of the bonds at 98. What is the net amount that Tory should use in computing the gain or loss on the retirement of debt?
$248,000
During Year 3, Manfred Corp. guaranteed a supplier's $500,000 loan from a bank. On October 1, Year 4, Manfred was notified that the supplier had defaulted on the loan and filed for bankruptcy protection. Counsel believes Manfred will probably have to pay between $250,000 and $450,000 under its guarantee.As a result of the supplier's bankruptcy, Manfred entered into a contract in December Year 4 to retool its machines so that Manfred could accept parts from other suppliers. Retooling costs are estimated to be $300,000. What amount should Manfred report as a liability in its December 31, Year 4, balance sheet?
$250,000
On December 31, year 4, Largo, Inc. had a $750,000 note payable outstanding, due July 31, year 5. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing long-term bonds. Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, year 5. In February year 5, Largo completed a $1,500,000 bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during year 5. On March 3, year 5, Largo issued its year 4 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, year 4 balance sheet?
$250,000
Finch Co. reported a total asset retirement obligation of $257,000 in last year's financial statements. This year, Finch acquired assets subject to unconditional retirement obligations measured at undiscounted cash flow estimates of $110,000 and discounted cash flow estimates of $68,000. Finch paid $87,000 toward the settlement of previously recorded asset retirement obligations and recorded an accretion expense of $26,000. What amount should Finch report for the asset retirement obligation in this year's balance sheet?
$264,000
On 12/31/x1, DInc. owed CInc. the full face value of a 10%, $350,000 note that requires interest payments annually on Dec. 31. DInc. paid the interest due 12/31/x1, but is experiencing financial problems and requested that the loan agreement be restructured. Three years remain in the note term as of today. The two parties agree to the following restructuring agreement: DInc. will pay no more interest. DInc. will pay $196,270 one year from today, and that same amount again two years from today (total of two payments of $196,270). What amount of interest expense will DInc. recognize on 12/31/x2 when the firm makes the first of two payments of $196,270? Factor for PV Ordinary Annuity for 2 periods at 8%= 1.78326Factor for PV Annuity Due for 2 periods at 8%= 1.92593Factor for Single Sum for 2 periods at 8%= .85734
$28,000
Cody Corp. incurred the following costs during the year: Design of tools, jigs, molds, and dies involving new technology$125,000 Modification of the formulation of a process160,000 Troubleshooting in connection with breakdowns during commercial production100,000 Adaption of an existing capability to a particular customer's need as part of a continuing commercial activity110,000 In its income statement, Cody should report research and development expense of
$285,000.
Hemple Co. maintains escrow accounts for various mortgage companies. Hemple collects the receipts and pays the bills on behalf of the customers. Hemple holds the escrow monies in interest-bearing accounts. They charge a 10% maintenance fee to the customers based on interest earned. Hemple reported the following account data: Escrow liability beginning of year$ 500,000 Escrow receipts during the year1,200,000 Real estate taxes paid during the year1,450,000 Interest earned during the year40,000 What amount represents the escrow liability balance on Hemple's books?
$286,000
Rabb Co. records its purchases at gross amounts but wishes to change to recording purchases net of purchase discounts. Discounts available on purchases recorded from October 1, Year 3 to September 30, Year 4, totaled $2,000. Of this amount, $200 is still available in the accounts payable balance. The balances in Rabb's accounts as of and for the year ended September 30, Year 4, before conversion are: Purchases$100,000Purchase discounts taken800Accounts payable30,000 What is Rabb's accounts payable balance as of September 30, 20X4 after the conversion?
$29,800
Dana Co.'s officers' compensation expense account had a balance of $224,000 at December 31, 20X4 before any appropriate year-end adjustment relating to the following: No salary accrual was made for December 30-31, 20X4. Salaries for the two-day period totaled $3,500. 20X4 officers' bonuses of $62,500 were paid on January 31, 20X5. In its 20X4 income statement, what amount should Dana report as officers' compensation expense?
$290,000
Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the creditor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt?
$3,000
At December 31, Year 1, a $1,200,000 note payable was included in Cobb Corp.'s liability account balances. The note is dated October 1, Year 1, bears interest at 15%, and is payable in three annual payments including $400,000 of principle plus interest due. The first interest and principal payment was made on October 1, Year 2. In its December 31, Year 2 balance sheet, what amount should Cobb report as accrued interest payable for this note?
$30,000
On January 1, Year 1, a company with a calendar year end began developing a software program that it intends to market and sell to its customers. The software coding was completed on March 31, Year 1, at a cost of $200,000, and the software testing was completed on June 30, Year 1, at a cost of $100,000. The company achieved technological feasibility on July 31, Year 1, at which time the company began producing product masters at a cost of $125,000. What amount should the company report for the total research and development expense for the year ended December 31, Year 1?
$300,000
On July 1, Year 1, Howe Corp. issued 300 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, year 1 and mature on April 1, year 11. Interest is payable semiannually on April 1 and October 1. What amount did Howe receive from the bond issuance?
$304,500
Gavin Co. grants all employees two weeks of paid vacation for each full year of employment. Unused vacation time can be accumulated and carried forward to succeeding years and will be paid at the salaries in effect when vacations are taken or when employment is terminated.There was no employee turnover in 2005. Additional information relating to the year ended December 31, 2005 is as follows: Liability for accumulated vacations at December 31, 2004$35,000Pre-2005 accrued vacations taken from January 1, 2005 to 30 September 2005 (the authorized period for vacations)20,000Vacations earned for work in 2005 (adjusted to current rates)30,000 Gavin granted a 10% salary increase to all employees on October 1, 2005, its annual salary increase date. For the year ended December 31, 2005, Gavin should report vacation pay expense of
$31,500
In its Year 5 financial statements, Cris Co. reported an interest expense of $85,000 in its income statement and a cash amount of $68,000 paid for interest in its cash flow statement. There was no prepaid interest or interest capitalization at either the beginning or end of Year 5. The accrued interest at December 31, Year 4 was $15,000. What amount should Cris Co. report as accrued interest payable in its December 31, Year 5 balance sheet?
$32,000
During year 2, Colt Co. experienced financial difficulties and was likely to default on a $1,000,000, 15%, three-year note dated January 1, year 1, payable to Cain National Bank. On December 31, year 2, the bank agreed to settle the note and unpaid year 2 interest of $150,000 for $820,000 cash payable on January 31, year 3. What is the amount of gain, before income taxes, from the debt restructuring?
$330,000
Case Cereal Co. frequently distributes coupons to promote new products. On October 1, year 2, Case mailed 1,000,000 coupons for $.45 off each box of cereal purchased. Case expects 120,000 of these coupons to be redeemed before the December 31, year 2, expiration date. It takes thirty days from the redemption date for Case to receive the coupons from the retailers. Case reimburses the retailers an additional $.05 for each coupon redeemed. As of December 31, year 2, Case had paid retailers $25,000 related to these coupons and had 50,000 coupons on hand that had not been processed for payment. What amount should Case report as a liability for coupons in its December 31, year 2 balance sheet?
$35,000
On September 1, 20X3, Brak Co. borrowed on a $1,350,000 note payable from the Federal Bank. The note bears interest at 12% and is payable in three equal annual principal payments of $450,000. On this date, the bank's prime rate was 11%. The first annual payment for interest and principal was made on September 1, 20X4. At December 31, 20X4, what amount should Brak report as accrued interest payable?
$36,000
Kent, Co. filed a voluntary bankruptcy petition on August 15, 20X5 and the statement of affairs reflects the following accounts: Book ValueCurrent ValueAssets:Assets pledged with fully secured creditors$ 300,000$370,000Assets pledged with partially secured creditors180,000120,000Free assets420,000320,000$ 900,000$810,000====================Liabilities:Liabilities with priority$ 70,000Fully secured creditors260,000Partially secured creditors200,000Unsecured creditors540,000$1,070,000========== Assume that the assets are converted to cash at the estimated current values and the business is liquidated. What amount of cash will be available to pay unsecured non-priority claims?
$360,000
On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600. What amount did Vole receive upon issuing the bonds?
$360,000
Bake Co.'s trial balance included the following at December 31, Year 1: Accounts payable $80,000 Bonds payable, due Year 2 300,000 Discount on bonds payable 15,000 Deferred income tax liability 25,000 The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in Year 2. What amount should be included in the current liability section of Bake's December 31, Year 1 balance sheet?
$365,000
On January 1, 2004, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, 2003 and mature on October 1, 2013. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, 2003 to January 1, 2004, amounted to $8,000. On January 1, 2004, what amount should Oak report as bonds payable, net of discount?
$388,000
West Co. paid $50,000 for an intangible asset other than goodwill. Fair value of the asset is $55,000. West signed a contract to sell the asset for $10,000 in 10 years. What amount of amortization expense should West record each year?
$4,000
Pane Co. had the following borrowings on its books at the end of the current year: $100,000, 12% interest rate, borrowed five years ago on September 30; interest payable March 31 and September 30. $75,000, 10% interest rate, borrowed two years ago on July 1; interest paid April 1, July 1, October 1, and January 1. $200,000, noninterest bearing note, borrowed July 1 of current year, due January 2 of next year; proceeds of $178,000. What amount should Pane report as interest payable in its December 31 balance sheet?
$4,875
During Year 5, Tedd Co. became involved in a tax dispute with the IRS. At December 31, Year 5, Tedd's tax advisor believed that an unfavorable outcome was probable. A reasonable estimate of additional taxes was $400,000 but could be as much as $600,000. After the Year 5 financial statements were issued, Tedd received and accepted an IRS settlement offer of $450,000. What amount of accrued liability should Tedd have reported in its December 31, Year 5 balance sheet?
$400,000
During year 5, Kent Co. incurred $204,000 of research and development costs in its laboratory to develop a patent that was granted on July 1, year 5. Legal fees and other costs associated with registration of the patent totaled $41,000. The estimated economic life of the patent is 10 years. What amount should Kent capitalize for the patent on July 1, year 5?
$41,000
Mill Co.'s trial balance included the following account balances at December 31, Year 3: Accounts payable$15,000Bonds payable, due Year 425,000Discount on bonds payable, due Year 43,000Dividends payable 1/31/Y48,000Notes payable, due Year 520,000 What amount should be included in the current liability section of Mill's December 31, Year 3 balance sheet?
$45,000
On December 31, year 4, Byte Co. had capitalized software costs of $600,000 with an economic life of 4 years. Sales for year 5 were 10% of expected total sales of $600,000. At December 31, year 5, the software had a net realizable value of $480,000. In its December 31, year 5 balance sheet, what amount should Byte report as net capitalized cost of computer software?
$450,000
For a public business entity, the goodwill impairment test is required to be performed
Any time during the fiscal year, provided that it is performed at the same time every year
Heller Co. incurred the following costs during the year: Research and development services performed by Kay Corp. for Heller$150,000 Testing for evaluation of new products125,000 Laboratory research aimed at discovery of new knowledge185,000 What amount should Heller report as research and development costs in its income statement for the year-end?
$460,000
Large purchased all of Small's voting stock for $11 million when Small's total owners' equity was $4 million. The book value and fair value of Small's liabilities equal $3 million. However, the fair value of term-12Small's total assets equals $9 million. What amount of goodwill is recorded by Large (in millions)?
$5
Baker Co. sells consumer products that are packaged in boxes. Baker offered an unbreakable glass in exchange for two box tops and $1 as a promotion during the current year. The cost of the glass was $2.00. Baker estimated at the end of the year that it would be probable that 50% of the box tops will be redeemed. Baker sold 100,000 boxes of the product during the current year and 40,000 box tops were redeemed during the year for the glasses. What amount should Baker accrue as an estimated liability at the end of the current year, related to the redemption of box tops?
$5,000
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 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?
$5,000 in sales tax payable
Dunn Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Dunn's past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Dunn's liability for stamp redemptions was $6,000,000 at December 31, year 1. Additional information for year 2 is as follows: Stamp service revenue from stamps sold to licensees$4,000,000Cost of redemptions (stamps sold prior to 1/1/Y2)2,750,000 If all the stamps sold in year 2 were presented for redemption in year 3, the redemption cost would be $2,250,000. What amount should Dunn report as a liability for stamp redemptions at December 31, year 2?
$5,050,000
As of December 15, Year 1, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for Year 1 of $100,000 have not yet been declared. The Board of Directors plans to declare cash dividends on its preferred and common stock on January 16, Year 2. Aviator paid an annual bonus to its CEO based on the company's annual profits. The bonus for Year 1 was $50,000, which will be paid on February 10, Year 2. What amount should Aviator report as current liabilities on its balance sheet at December 31, Year 1?
$50,000
During year 8, Orr Co. incurred the following costs: Research and development services performed by Key Corp. for Orr$150,000 Design, construction, and testing of preproduction prototypes and models200,000 Testing in search for new products or process alternatives175,000 In its year 8 income statement, what should Orr report as research and development expense?
$525,000
On July 31, year 1, Dome Co. issued $1,000,000 of 10%, 15-year bonds at par and used a portion of the proceeds to call its 600 outstanding 11%, $1,000 face-value bonds, due on July 31, year 15, at 102. On that date, the unamortized bond premium relating to the 11% bonds was $65,000. In its year 1 income statement, what amount should Dome report as a gain or loss, before income taxes, from the retirement of the bonds?
$53,000 gain.
Loeb's Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable at maturity. Loeb repaid each loan on its scheduled maturity date. Date of loanAmountMaturity dateTerm of loan11/1/X4$ 5,00010/31/X51 Year2/1/X515,0007/31/X56 Months5/1/X58,0001/31/X69 Months Loeb records interest expense when the loans are repaid. As a result, the interest expense of $1,500 was recorded in 20X5. If no correction is made, by what amount would 20X5 interest expense be understated?
$540
During year 4, Pitt Corp. incurred costs to develop and produce a routine, low-risk computer software product as follows: Completion of detail program design$13,000 Costs incurred for coding and testing to establish technological feasibility10,000 Other coding costs after establishment of technological feasibility24,000 Other testing costs after establishment of technological feasibility20,000 Costs of producing product masters for training materials15,000 Duplication of computer software and training materials from product masters (1,000 units)25,000 Packaging product (500 units)9,000 In Pitt's December 31, year 4, balance sheet, what amount should be capitalized as software cost, subject to amortization?
$59,000
Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a 4-year useful life. Yellow has a policy of taking a full-year's amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program. What amount should Yellow report as an expense for the current year?
$6,050,000
The recording of an asset retirement obligation for a natural resources development site increases which of the following for the firm involved in the site?
Liability = Yes Depletion base = Yes
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 estate transferred100,000Fair value of real estate transferred90,000 What amount should Knob report as a gain (loss) on restructuring of payables?
$60,000
On July 1, Year 5, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, Year 5 and mature on April 1, Year 15. Interest is payable semiannually on April 1 and October 1. What amount did Eagle receive from the bond issuance?
$609,000
Gar, Inc.'s trial balance reflected the following liability account balances at December 31, 20X5: Accounts payable$19,000Bonds payable, due 20X634,000Deferred income tax payable4,000Discount on bonds payable2,000Dividends payable on 2/15/X65,000Income tax payable9,000Notes payable, due 1/19/X76,000 The deferred income tax payable is based on temporary differences that will reverse in 20X7 and 20X8. In Gar's December 31, 20X5 balance sheet, the current liabilities total was
$65,000
Doren Co.'s officers' compensation expense account had a balance of $490,000 at December 31, 20X4, before any appropriate year-end adjustment relating to the following: No Salary accrual was made for the week of December 25-31, 20X4. Officers' salaries for this period totaled $18,000 and were paid on January 5, 20X5. Bonuses to officers for 20X4 were paid on January 31, 20X5 in the total amount of $175,000. The adjusted balance for officers' compensation expense for the year ended December 31, 20X4, should be:
$683,000
On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31, balance sheet, what amount should World report as note payable?
$758,300
On January 1, year 1, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, year 11 but were callable at 101 any time after December 31, year 4. Interest was payable semiannually on July 1 and January 1. On July 1, year 6, Fox called all of the bonds and retired them. The bond premium was amortized on a straight-line basis. Before income taxes, Fox's gain or loss in year 6 on this early extinguishment of debt was
$8,000 gain
Firm A purchased Firm B for $4,000 when B's total owners' equity was $2,000. Firm A determined that it is more likely than not that goodwill may be impaired. B had one asset worth $500 more than the book value. One year after the purchase, Firm B's total fair value had dropped to $3,200 and the fair value of its net identifiable assets was $2,000. What amount of goodwill impairment loss is recorded?Firm A purchased Firm B for $4,000 when B's total owners' equity was $2,000. Firm A determined that it is more likely than not that goodwill may be impaired. B had one asset worth $500 more than the book value. One year after the purchase, Firm B's total fair value had dropped to $3,200 and the fair value of its net identifiable assets was $2,000. What amount of goodwill impairment loss is recorded?
$800
On December 30, year 4, Hale Corp. paid $400,000 cash and issued 80,000 shares of its $1 par value common stock to its unsecured creditors on a pro rata basis pursuant to a reorganization plan under Chapter 11 of the bankruptcy statutes. Hale owed these unsecured creditors a total of $1,200,000. Hale's common stock was trading at $1.25 per share on December 30, year 4. As a result of this transaction, Hale's total stockholders' equity had a net increase of
$800,000
The following information pertains to Camp Corp.'s issuance of bonds on July 1, 20X5: Face amount$800,000Term10 yearsStated interest rate6%Interest payment datesAnnually on July 1Yield9%At 6%At 9%Present value of 1 for 10 periods0.5580.422Future value of 1 for 10 periods1.7912.367Present value of ordinary annuity of 1 for 10 periods7.3606.418 What should be the issue price for each $1,000 bond?
$807
Hill Corp. began production of a new product. During the first calendar year, 1,000 units of the product were sold for $1,200 per unit. Each unit had a two-year warranty. Based on warranty costs for similar products, Hill estimates that warranty costs will average $100 per unit. Hill incurred $12,000 in warranty costs during the first year and $22,000 in warranty costs during the second year. The company uses the expense warranty accrual method. What should be the balance in the estimated liability under warranties account at the end of the first calendar year?
$88,000
On January 31, Year 4, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, Year 3, and mature on December 31, Year 10. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, Year 4 balance sheet?
$9,000
Bold Company estimates its annual warranty expense at 2% of annual net sales. The following data are available: Net sales for year 2$4,000,000Warranty liability account: December 31, year 1$60,000 creditWarranty payments during year 250,000 debit After recording the year 2 estimated warranty expense, the warranty liability account would show a December 31, year 2 balance of
$90,000
Tone Company is the defendant in a lawsuit filed by Witt in year 1 disputing the validity of a copyright held by Tone. At December 31, year 1, Tone determined that Witt would probably be successful against Tone for an estimated amount of $400,000. Appropriately, a $400,000 loss was accrued by a charge to income for the year ended December 31, year 1. On December 15, year 2, Tone and Witt agreed to a settlement providing for cash payment of $250,000 by Tone to Witt, and transfer of Tone's copyright to Witt. The carrying amount of the copyright on Tone's accounting records was $60,000 at December 15, year 2. What would be the effect of the settlement on Tone's income before income tax in year 2?
$90,000 increase
On January 1, year 1, Boston Group issued $100,000 par value, 5% five-year bonds when the market rate of interest was 8%. Interest is payable annually on December 31. The following present value information is available: 5%8%Present value of $1 (n = 5)0.783530.68058Present value of an ordinary annuity (n = 5)4.329483.99271 What amount is the value of net bonds payable at the end of year 1?
$90,064
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 F.O.B. 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?
$900,000
Blake Foods Corporation mails coupons to consumers which may be presented by a stated expiration date at retail food stores to obtain discounts on certain Blake products. Retailers are reimbursed for the face value of coupons redeemed, plus 10% of coupon value as compensation for handling costs. Blake honors requests for coupon redemption by retailers received up to 3 months after the consumer expiration date. In Blake's experience, 60% of the coupons issued ultimately are redeemed. Information with respect to the two separate series of coupons issued by Blake during year 1 is as follows: Series ASeries BConsumer expiration dateJune 30, year 1December 31, year 1Total face value of coupons issued$100,000$200,000Total payments to retailers as of December 31, year 1$ 60,500$ 40,500 What amount should Blake report as a liability for unredeemed coupons at December 31, year 1?
$91,500
On December 30, 2005, Bart, Inc. purchased a machine from Fell Corp. in exchange for a non-interest bearing note requiring eight payments of $20,000. The first payment was made on December 30, 2005, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: PeriodThe present value of an ordinary annuity of 1 at 11%The present value of an annuity in advance of 1 at 11%74.7125.23185.1465.712 On Bart's December 31, 2005 balance sheet, the note payable to Fell was
$94,240
On June 30, 20X5, Huff Corp. issued at 99, 1000 of its 8%, $1,000 bonds. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, 20X5, Huff should report the bond liability at
$955,000
The balance in Kemp Corp.'s accounts payable account at December 31, 20X5 was $900,000 before any necessary year-end adjustment relating to the following: Goods were in transit to Kemp from a vendor on December 31, 20X5. The invoice cost was $50,000. The goods were shipped F.O.B. shipping point on December 29, 20X5 and were received on January 4, 20X6. Goods shipped F.O.B. destination on December 21, 20X5 from a vendor to Kemp were received on January 6, 20X6. The invoice cost was $25,000. On December 27, 20X5, Kemp wrote and recorded checks to creditors totaling $40,000 that were mailed on January 10, 20X6. In Kemp's December 31, 20X5 balance sheet, the accounts payable should be
$990,000
Nu Corp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machine's original cost was $140,000. The note's face amount was $110,000. On the date of the agreement, the note's carrying amount was $105,000, and its present value was $96,000. The machine's carrying amount was $109,000, and its fair value was $96,000. What amount of net gain (or losses) should Nu recognize?
($4,000)
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 estate transferred100,000Fair value of real estate transferred90,000 What amount should Knob report as an ordinary gain (loss) on transfer on disposal?
(10,000)
Which of the following actions helps a firm to maintain compliance with a debt covenant that includes a minimum current ratio and a minimum retained earnings balance: (1) refinancing current debt on a long-term basis, (2) appropriating retained earnings, (3) purchasing treasury stock, (4) declaring cash dividends.
1 and 2
A firm's natural resource exploitation site will require an expenditure of $5 million to reclaim the site for environmental purposes. That expenditure is expected to be made five years from now. The present value today of that amount is $3.5 million. Because of this obligation, by what amount will (1) total depletion on the site increase and (2) how much accretion expense will be recognized, over the five years (in millions)?
1: $3.5 2: $1.5
On December 31, year 1, Taylor, Inc. signed a binding agreement with a bank for the refinancing of an existing note payable scheduled to mature in February, year 2. The terms of the refinancing included extending the maturity date of the note by three years. On January 15, year 2, the note was refinanced. How should Taylor report the note payable in its December 31, year 1 balance sheet?
A long-term liability.
Foley Co. is preparing the electronic spreadsheet below to amortize the discount on its 10-year, 6%, $100,000 bonds payable. Bonds were issued on December 31 to yield 8%. Interest is paid annually. Foley uses the effective interest method to amortize bond discounts. ABCDE1YearCash paidInterest expenseDiscount amortizationCarrying amount21 $86,58032$6,000 Which formula should Foley use in cell E3 to calculate the carrying amount of the bonds at the end of Year 2?
E2 + D3
Abbot Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Abbot's lawyer states that it is probable that Abbot will lose the suit and be found liable for a judgment costing Abbot anywhere from $500,000 to $2,500,000. However, the lawyer states that the most probable cost is $1,000,000. As a result of the above facts, Abbot should accrue
A loss contingency of $1,000,000 and disclose an additional contingency of up to $1,500,000.
If the payment of employees' compensation for future absences is probable, the amount can be reasonably estimated, and the obligation relates to rights that accumulate, the compensation should be
Accrued if attributable to employees' services already rendered.
On December 31, 20x5, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work-in-process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31, 20x5 balance sheet?
Accrued liabilities = Understated Retained earnings = No effect
In determining whether to accrue employees' compensation for future absences, among the conditions that must be met are that the obligation relates to rights that
Accumulate = Yes Vest = Yes
At December 31, 2004, Taos Co. estimates that its employees have earned vacation pay of $100,000. Employees will receive their vacation pay in 2005. Should Taos accrue a liability at December 31, 2004 if the rights to this compensation accumulated over time or if the rights are vested?
Accumulated = Yes Vested = Yes
Which of the following costs should not be included in research and development?
Administrative costs.
Invern, Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and other claims. As a result of a year 2 accident, Invern is a defendant in a lawsuit in which it will probably have to pay damages of $190,000. What are the effects of this lawsuit's probable outcome on Invern's year 2 financial statements?
An increase in both expenses and liabilities.
A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date?
An interest expense that is greater than the cash payment made to bondholders.
On December 31, year 2, Paxton Co. had a note payable due on August 1, year 3. On January 20, year 3, Paxton signed a financing agreement to borrow the balance of the note payable from a lending institution to refinance the note. The agreement does not expire within one year, and no violation of any provision in the financing agreement exists. On February 1, year 3, Paxton was informed by its financial advisor that the lender is not expected to be financially capable of honoring the agreement. Paxton's financial statements were issued on March 31, year 3. How should Paxton classify the note on its balance sheet at December 31, year 2?
As a current liability because the lender is not expected to be financially capable of honoring the agreement.
Cali, Inc., had a $4,000,000 note payable due on March 15, year 6. On January 28, year 6, before the issuance of its year 5 financial statements, Cali issued long-term bonds in the amount of $4,500,000. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its December 31, year 5, financial statements?
As a noncurrent liability, with separate disclosure of thenote refinancing.
Under ASC Topic 350, goodwill should be tested periodically for impairment
At the operating segment level or one level below.
Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?
Capitalized and depreciated over its estimated useful life.
A 15-year bond was issued in year 5 at a discount. During year 15, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the year 15 bond transactions was to increase long-term liabilities by the excess of the 10-year bond's face amount over that of the 15-year bond's:
Carrying amount.
Which of the following accounting strategies (for financial reporting purposes) is the least likely for a firm that is currently only marginally fulfilling the quantitative measures (all involving earnings) of its debt covenants?
Changing to the successful efforts method of accounting for natural resource exploration costs.
Which of the following types of assets would typically be reported on a company's balance sheet as an intangible asset?
Cost of patent registrations
A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?
Current liabilities of $30,000, long-term liabilities of $100,000.
A firm is required by its creditors to maintain a 2.00 (or greater) current ratio in order to maintain compliance with a debt covenant. The current ratio of the firm is currently at the minimum before any of the transactions are listed. Which of the following actions would cause the firm to fall out of compliance?
Declare cash dividends.
Which of the following is not one of the qualitative factors considered to determine if it is more likely than not that the reporting unit is less than its carrying value?
Decline in the implied goodwill by using a discounted cash flow model.
The beginning of the current year, a firm invested $30 million in a natural resources site. This amount was applied to the acquisition of the mineral rights, exploring for the resource (full-costing method is used), and development. In addition, the firm must bring the property back to its original state three years from today. Two estimates of the future cost for that future effort are: (1) $6 million with 30% probability, and (2) $4 million with 70% probability. 6% is the appropriate risk adjusted rate of return. The present value of $1 in three years at 6% is 0.83962. By the end of the current year, the firm had removed 20% of the total estimated resource in the deposit. Compute depletion and accretion expense for the current year.
Depletion $6,772,450 Accretion expense $231,735
Which of the following is a research and development cost?
Development or improvement of techniques and processes
Management can estimate the amount of the loss that will occur if a foreign government expropriates some company assets. If expropriation is reasonably possible, a loss contingency should be:
Disclosed but not accrued as a liability
Eagle Co. has cosigned the mortgage note on the home of its president, guaranteeing the indebtedness in the event that the president should default. Eagle considers the likelihood of default to be remote. How should the guarantee be treated in Eagle's financial statements?
Disclosed only.
At December 31, Year 5, Creole Co. was suing a competitor for patent infringement. The award from the probable favorable outcome could be reasonably estimated. Creole's Year 5 financial statements should report the expected award as a:
Disclosure by footnote only.
Conlon Co. is the plaintiff in a patent-infringement case. Conlon has a high probability of a favorable outcome, and can reasonably estimate the amount of the settlement. What is the proper accounting treatment of the patent infringement case?
Disclosure in the notes only.
In year 2, a contract dispute between Dollis Co. and Brooks Co. was submitted to binding arbitration. In year 2, each party's attorney indicated privately that the probable award in Dollis' favor could be reasonably estimated. In year 3, the arbitrator decided in favor of Dollis. When should Dollis and Brooks recognize their respective gain and loss?
Dollis' gain = Year 3 Brooks' loss = Year 2
A company's research department incurred $1,000,000 in material, labor, and overhead costs to construct a prototype of a new product and $100,000 to test and modify the prototype. Which of the following statements correctly describes the accounting treatment of prototype costs incurred by the company?
Expense $1,100,000 as incurred.
Wind Co. incurred organization costs of $6,000 at the beginning of its first year of operations. How should Wind treat the organization costs in its financial statements in accordance with GAAP?
Expensed immediately
Which of the following contingencies should generally be accrued on the balance sheet as a liability when the occurrence of the contingent event is reasonably possible and its amount can be reasonably estimated?
Expropriation of assets = No Product warranty obligation = No
When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the
Face value of the bonds at the beginning of the period by the contractual interest rate.
Which of the following is a pair of values that are compared to determine the amount of a possible impairment loss on an intangible asset, with an indefinite life, other than goodwill?
Fair value, carrying value.
Allam, Inc. contracted for services to be provided over a period of time with full payment in Allam's $2 par common stock when the service is completed. At the time of the agreement, Allam stock was trading at $20 per share. The agreed-upon total value of the contract is $20,000. When the service was completed, Allam's stock price was $25 per share. Therefore, Allam
Increases the common stock account $1,600.
After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?
It is prohibited.
Choose the best description of accretion expense associated with an asset retirement obligation.
Growth in asset retirement obligation
On February 1, year 1, Blake Corporation issued bonds with a fair value of $1,000,000. What methods may Blake use to report the bonds on its December 31, year 1 statement of financial position? I.Amortized cost. II.Fair value through other comprehensive income. III.Fair value through profit or loss.
I and III only
On July 1, year 2, Marseto Corporation borrows $100,000 on a 10%, five-year interest-bearing note. At December 31, year 2, the fair value of the note is determined to be $97,500. Marseto elects the fair value option for reporting its financial liabilities. On its December 31, year 2 financial statements, what amounts should be presented for this note? I. Interest Expense II. Note Payable III. Gain (Loss)
I. $5,000 II. $97,500 III. $2,500
Which of the following is an indication that a cloud computing arrangement includes a software license? I. The customer has contractual right to take possession of the software at any time during the hosting period without significant penalty. II. The cloud computing arrangement has an indefinite life because the contract is renewable indefinitely. III. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.
I. and III.
Choose the correct statement concerning the classification of a liability when a firm is subject to a debt covenant.
If the covenant includes a subjective acceleration clause and there is only a remote chance that debt will be called, then the liability is classified as noncurrent.
A debtor and a creditor have negotiated new terms on a note. How can you determine whether the restructuring is a troubled debt restructure?
If the present value of the restructured flows using the original interest rate is less than the book value of the debt at the date of the restructure.
Which of the following is reported as interest expense?
Imputed interest on noninterest-bearing note
At December 31, Year 4, Date Co. awaits judgment on a lawsuit for a competitor's infringement of Date's patent. Legal counsel believes it is probable that Date will win the suit and indicated the most likely award together with a range of possible awards. How should the lawsuit be reported in Date's Year 4 financial statements?
In note disclosure only
Grim Corporation operates a plant in a foreign country. It is probable that the plant will be expropriated. However, the foreign government has indicated that Grim will receive a definite amount of compensation for the plant. The amount of compensation is less than the fair market value but exceeds the carrying amount of the plant. The contingency should be reported
In the notes to the financial statements.
A firm selling put options to sell the firm's stock
Increases a liability for the fair value of the options.
Renwood, Inc. contracted for services to be provided over a period of time in return for 2,000 shares of Renwood's $5 par common stock when the service is completed. At the time, Renwood stock was selling for $10 per share. When the service was completed, Renwood's stock price was $12 per share. Therefore, Renwood
Increases contributed capital in excess of par $10,000.
Which of the following accurately describes the appropriate accounting by a public company for goodwill acquired through a business combination?
It should be recorded at cost and tested for impairment on an annual basis and more often if certain events occur.
A company completes construction of a $400 million offshore oil platform and places it into service on January 1. State law requires that the platform be dismantled and removed at the end of its useful life, which is estimated to be 10 years. The company estimates that the cost of dismantling the platform will be $20 million. The discounted value of the liability is $9 million using the company's credit-adjusted, risk-free rate. The company has already capitalized the $400 million construction cost of the platform. What amounts should the company record as liability and expense when the asset is placed into service?
Liability, $9,000,000; expense, $0.
Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs?
Litigation costs would be capitalized if the patent right is successfully defended.
A company issued a short-term note payable to a bank with a stated 12 percent rate of interest. The bank charged a .5% loan origination fee and remitted the balance to the company. The effective interest rate paid by the company in this transaction would be
More than 12.5%
In a modification of the terms, troubled debt restructure of type II (sum of new flows > book value of debt), what amount of gain is recognized by the debtor?
No gain is recognized.
Weald Co. took advantage of market conditions to refund debt. This was the fifth refunding operation carried out by Weald within the last four years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a(an)
Part of continuing operations.
A company reported $6 million of goodwill in last year's statement of financial position. How should the company account for the reported goodwill in the current year?
Perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value
Which of the following is generally associated with payables classified as accounts payable?
Periodic payment of interest = No Secured by collateral = No
When a bond is purchased, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond?
Price
Snelling Co. did not record an accrual for a contingent loss, but disclosed the nature of the contingency and the range of the possible loss. How likely is the loss?
Reasonably possible.
Gains or losses from the early extinguishment of debt, if material, should be
Recognized in income as ordinary gains and losses or as unusual
Early in 20x3, Shifter, Inc. wrote put options for 1,000 shares of its common stock. Purchasers of the options can sell Shifter stock back to Shifter for $20 per share on 12/31/x3. The estimated fair value of each option is $2 at the time of sale. At 12/31/x3, the share price is $15 and the options are exercised. As a result, Shifter
Recognizes a $3,000 loss.
Which of the following should a company classify as a research and development expense?
Redesign of a product prerelease.
Witt Corp. has outstanding at December 31, year 4 two long-term borrowings with annual sinking fund requirements and maturities as follows: Sinking fund requirementsMaturitiesYear 4$1,000,000$ -Year 51,500,0002,000,000Year 61,500,0002,000,000Year 72,000,0002,500,000Year 82,000,0003,000,000$8,000,000$9,500,000==================== In the notes to its December 31, Year 4, balance sheet, how should Witt report the above data?
The combined aggregate of $17,500,000 of maturities and sinking fund requirements detailed by year should be disclosed.
Which of the following methods should a company use to account for a contingent liability when the loss is probable but not reasonably estimated?
The liability should only be disclosed in the notes to the financial statements.
A firm's debt to equity ratio (total debt to total owners' equity) cannot exceed 3.0 without allowing a major creditor to call a loan to the firm. The ratio is currently at the maximum before any of the transactions are listed. Which of the following transactions would not subject the firm to an immediate call by the creditor?
Retire a different loan by issuing common stock.
A customer is considering buying a television set with a retail price of $2,000. The customer asks the store manager if the store will consider paying the sales tax so that the total cash payment is $2,000. The sales tax is 8%. The store manager agrees to accept $2,000 cash. What should the accountant credit in this transaction?
Sales = $1,852 Sales Tax Payable = $148
Hudson Hotel collects 15% in city sales taxes on room rentals, in addition to a $2 per room, per night, occupancy tax. Sales taxes for each month are due at the end of the following month, and occupancy taxes are due 15 days after the end of each calendar quarter. On January 3, 20X5 Hudson paid its November 20X4 sales taxes and its fourth quarter 20X4 occupancy taxes. Additional information pertaining to Hudson's operations is: 20X4Room RentalsRoom NightsOctober$100,0001,100November110,0001,200December150,0001,800 What amounts should Hudson report as sales taxes payable and occupancy taxes payable in its December 31, 20X4 balance sheet?
Sales Taxes = $39,000 Occupancy Taxes = $8,200
What type of bonds in a particular bond issuance will not all mature on the same date?
Serial bonds
A bond issued on June 1, Year 1, has interest payment dates of April 1 and October 1. The bond interest expense for the year ended December 31, year 1 is for a period of
Seven Months
A bond issued on June 1, 20X5, has interest payment dates of April 1 and October 1. The bond interest expense for the year ended December 31, 20X5, is for a period of
Seven months.
Ames, Inc. has $500,000 of notes payable due June 15, year 3. Ames signed an agreement on December 1, year 2, to borrow up to $500,000 to refinance the notes payable on a long-term basis with no payments due until year 4. The financing agreement stipulated that borrowings may not exceed 80% of the value of the collateral Ames was providing. At the date of issuance of December 31, year 2, financial statements, the value of the collateral was $600,000 and is not expected to fall below this amount during year 3. In Ames' December 31, year 2, balance sheet, the obligation for these notes payable should be classified as
Short term = $20,000 Long term = $480,000
The management of Devin Corporation is testing two of its reporting units for impairment of goodwill. Information about results of these tests are shown below. Reporting Units TelecommunicationsNetworkingSegment carrying amount (including goodwill)$2,500,000$3,000,000Carrying value of goodwill 500,000 500,000Estimated fair value of total 2,900,000 2,800,000Estimated fair value of assets and liabilities other than goodwill 2,100,000 2,500,000 After properly adjusting the goodwill for impairment, which of the following represents the adjusted amount of goodwill for the two reporting units?
Telecommunications = $500,000 Networking = $300,000
If both an asset group and goodwill in one of a company's reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses?
The other asset group should be tested for an impairment loss before goodwill is tested
Which of the following information about threatened litigation should not be considered to determine whether an accrual is appropriate prior to an issuance of a company's financial statements?
The period in which the threatened litigation became known to management.
For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring?
The total future cash payments.
In determining whether to accrue employees' compensation for future absences, one of the conditions that must be met is that the employer has an obligation to make payment even if an employee terminates. This an example of a(n)
Vested right.
Vadis Co. sells appliances that include a three-year warranty. Service calls under the warranty are performed by an independent mechanic under a contract with Vadis. Based on experience, warranty costs are estimated at $30 for each machine sold. When should Vadis recognize these warranty costs?
When the machines are sold.
Choose the correct statement concerning transactions involving the issuance of shares in payment of obligations for goods and services.
When the value of shares to be issued is fixed, the number of shares to be issued is variable. This is recorded as a liability.
