FAR Overall
True or false: Magazine subscription revenues may be recognized as production and delivery occur.
True
True or false: Revenues and gains are usually measured by the exchange prices of the items involved.
True
Troop Co. frequently borrows from the bank to maintain sufficient operating cash. The following loan was at a 12% interest rate, with interest payable at maturity. Troop repaid the loan on its scheduled maturity date. Troop records interest expense when the loans are repaid. Date of Loan - 2/1/Y4 Amount - $30,000 Maturity Date - 7/31/Y4 Term of Loan - 6 months How much interest expense should be charged in year 4 for the following loan?
$1,800 *30,000 x 12% x 6/12 = 1,800
Cash of $50,000 (includes $10,000 in bond-sinking fund for long-term bond payable). How much is considered a current asset?
$40,000 *the $10,000 in bond-sinking fund is consider noncurrent
Can a write-down be reversed under GAAP?
In the interim financial statements, inventory losses from a nontemporary market decline must be recognized at the interim date. If the loss is recovered in another quarter, it is recognized as a gain and treated as a change in estimate. The amount recovered is limited to the losses previously recognized.
The weighted average for the year inventory cost flow method is applicable to which of the following inventory systems: perpetual, periodic, or both?
Periodic only *the weighted average method only determines average cost at the end of the period
Bonds payable issue costs are classified as: a) current liabilities b) noncurrent liabilities c) capital stock d) additional paid-in capital e) retained earnings f) other classification
b) noncurrent liabilities *direct deduction from the face amount
Discount on bonds payable are classified as: a) current liabilities b) noncurrent liabilities c) capital stock d) additional paid-in capital e) retained earnings f) other classification
b) noncurrent liabilities *direct deduction from the face amount
Wilson Corp. experienced a $50,000 decline in the market value of its LIFO inventory in the first quarter of its fiscal year. Wilson had expected this decline to reverse in the third quarter, and the third quarter recovery exceeded the previous decline by $10,000. Wilson's inventory did not experience any other declines in market value during the fiscal year. What amounts of loss or gain should Wilson report in its interim financial statements for the first and third quarters?
First Quarter - $0 since they expect it to reverse in the third quarter Third Quarter - $0 Recoveries of market value may only be recognized to the extent of previous losses, so no gain was recognized in the third quarter.
Direct Costs of Issuing C/S are classified as: a) current liabilities b) noncurrent liabilities c) capital stock d) additional paid-in capital e) retained earnings f) other classification
d) additional paid-in capital *reduce both the net proceeds received and additional paid-in capital
Appropriation for contingencies are classified as: a) current liabilities b) noncurrent liabilities c) capital stock d) additional paid-in capital e) retained earnings f) other classification
e) retained earnings *deduction to R/E
In the income statement, gains from extinguishment of debt are most likely classified in net income only or income from continuing operations?
income from continuing operations
Prior service cost not recognized in net periodic pension cost. How does this affect OCI?
it decreases it - it's a cost
Realization
Conversion of noncash resources into money
An element that does not appear in the financial statements of not-for-profit entities.
Investment by owners
A firm has basic earnings per share of $1.29. If the tax rate is 30%, is the following security dilutive? 10% convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of C/S.
No - $3.50 > $1.29 1) 10% x $1,000 = 100 2) 100 x (1-30%) = $70 3) 70/20 = $3.50
How does overstating ending inventory affect net income?
The overstatement of EI understates COGS which then overstates NI and R/E
Does prepaid rent and prepaid interest get split between current and noncurrent?
Yes
On October 1, Year 1, Little Co. enters into a contract with a customer to build a factory on the customer's land for $1,000,000. The construction of the factory is expected to be completed at the end of Year 5. Based on Little's accounting policies, the progress toward completion of the factory is measured using the input method based on costs incurred. During Year 1, Little incurred $450,000 in costs in respect to this contract and billed the customer for $600,000. At the end of Year 1, Little cannot reasonably estimate the total expected costs of the construction and cannot reasonably estimate the progress toward completion of the factory. However, Little expects to recover the costs incurred in the construction. What amount of revenue from this contract will be recognized in Little's Year 1 income statement? A) $0 B) $150,000 C) $450,000 D) $600,000
$450,000 *When the outcome of the contract is not reasonably measurable, but the costs incurred in satisfying the performance obligation are expected to be recovered, revenue must be recognized only to the extent of the costs incurred.
On July 1, 20X6, Aaron signed a contract with Start Company to sell Segment C for $48,000 on October 1, 20X6. Consequently, it was properly classified as held for sale. On July 1, 20X6, its carrying amount was $50,000, and the fair value (net of cost to sell) was $35,000. Segment C incurred a $50,000 operating loss from January 1, 20X6, through June 30, 20X6. After the contract was signed, Segment C reported a $60,000 operating loss from July 1, 20X6, through October 1, 20X6. The operating losses do not include any amount from the disposal or the adjustment due to classification as held for sale. Segment C's tax rate is the same as Aaron's 40% rate. What is the loss on discontinued operations in Aaron's annual income statement for 20X6?
$67,200 Gain on disposal = 48,000 - 35,000 = 13,000 *When a discontinued operation is classified as held for sale, it is measured at the lower of its carrying amount or fair value minus cost to sell. Loss on writedown = 50,000 - 35,000 = (15,000) Operating loss = 50,000 + 60,000 = (110,000) (15,000) + (110,000) + 13,000 = 112,000 x (1-40%) = $67,200
Inventory at base year costs = 100,000 for Y1 = 110,000 for Y2 Annual Cost Index = 1.00 for Y1 = 1.25 for Y2 Dollar-Value LIFO Ending Inventory = 100,000 How do you find Dollar-Value LIFO Ending Inventory?
1) 110,000 - 100,000 = 10,000 2) 10,000 x 1.25 = 12,500 3) 100,000 + 12,5000 = 112,500 (dollar value LIFO + layer)
Inventory at base year costs = 130,000 for Y5 = 125,000 for Y6 Annual Cost Index = 1.50 for Y5 = 1.60 for Y6 Dollar Value LIFO Ending Inventory = 142,500 How do you find Dollar-Value LIFO Ending Inventory?
1) 125,000 - 130,000 = (5,000) 2) (5,000) x 1.50 = (7,500) 3) 142,500 - 7,500 = 135,000 *In any year when the balance declines, a portion of the most recent year's layer must be removed. Therefore, Year 5 price index of 1.50 is used, not Year 6.
During Year 1, a company invested $50,000 and $150,000 in the research phase and development phase, respectively, for the internal development of a patent for its own use. The patent was registered and ready for its intended use on January 1, Year 2. When preparing the financial statements for Year 4, the controller discovered that the R&D costs incurred in Year 1 were capitalized for the cost of the patent and amortized from January 1, Year 2, based on the straight-line method over 10 years. 1. What J/E did they mistakenly make in Year 2 and Year 3? 2. What was the J/E they SHOULD HAVE made in Year 1? 3. How do they correct this?
1. Dr Patent $20,000 Cr Amort. Exp $20,000 **Total of $40,000 2. Dr R&D Exp $200,000 Cr Cash $200,000 3. Dr R/E $160,000 (200-40) Cr Patent $160,000
If a project has a loss, how much is recognized when using the input method?
100% of the loss is recognized (only gains are on a completed contract basis)
Loire Co., a calendar year-end firm, has used the FIFO method of inventory measurement since it began operations in Year 3. Loire changed to the weighted-average method for determining inventory costs at the beginning of Year 6. Justification for this change was that it better reflected inventory flow. Year-end inventory balance under the FIFO = 90,000 and under the weighted-average method = 108,000. What adjustment, before taxes, should Loire make retrospectively to the balance reported for retained earnings at the beginning of Year 4?
18,000 increase (108,000-90,000) *If the weighted-average method had been applied in Year 3, cost of goods sold would have been $18,000 lower. Pretax net income and ending retained earnings for Year 3 (beginning retained earnings for Year 4) would have been $18,000 greater.
Is land held for resale that was sold within the year a current asset?
Yes - Current assets are reasonably expected to be realized in cash, sold, or consumed within 1 year or the normal operating cycle of the business, whichever is longer.
Can a write-down be reversed under IFRS?
A write-down may be reversed in subsequent periods, but not above original cost.
At the end of Year 1, a company reduced its inventory cost from $100 to its net realizable value of $80. As of the end of Year 2, the inventory was still on hand and its net realizable value increased to $150. Under IFRS, what journal entry should the company record for Year 2 to properly report the inventory value? A) Debit inventory for $20 and credit expense for $20. B) Debit inventory for $70 and credit expense for $70. C) Debit inventory for $20, debit expense for $30, and credit retained earnings for $50. D) Debit inventory for $70, credit retained earnings for $50, and credit expense for $20.
A) Debit inventory for $20 and credit expense for $20. *At the end of year 1, the loss on write-down of $20 ($100 cost - $80 NRV) was recognized. NRV is assessed each period. Accordingly, a write-down may be reversed but not above original cost. The write-down and reversal are recognized in profit or loss. Therefore, only the original $20 write-down can be reversed by debiting inventory for $20 and crediting the expense account for $20.
On January 5, Year 6, Luge redeemed its outstanding bonds and issued new bonds with a lower rate of interest. The reacquisition price was in excess of the carrying amount of the bonds. A) Disclosure only B) Accrual only C) Both disclosure and accrual D) Neither disclosure or accrual
A) Disclosure only *No accrual is necessary because the refunding did not affect balance sheet amounts at 12/31/Year 5. However, disclosure is most likely necessary to prevent the financial statements from being misleading. The statements for Year 5 must present the extinguishment loss with full disclosure.
A government contract completed during Year 5 is subject to renegotiation. Although Luge estimates that it is reasonably possible that a refund of approximately $200,000 to $300,000 may be required by the government, it does not wish to publicize this possibility. A) Disclosure only B) Accrual only C) Both disclosure and accrual D) Neither disclosure or accrual
A) Disclosure only *The loss is only reasonably possible. Thus, it must be disclosed but not accrued. The nature and the amount should be disclosed in the notes.
An entity entered into a contract to construct a building. Based on the contract's terms, the entity appropriately determined that the performance obligation in the contract will be satisfied over time. At an early stage of the contract, the entity cannot reasonably measure the outcome of the contract, but it expects to recover the costs incurred in the construction of the building. The revenue from the contract should be recognized A) Only to the extent of the costs incurred. B) Based on the progress toward completion of the project. C) Evenly over the contract period on a straight-line basis. D) Only upon completion of the construction.
A) Only to the extent of the costs incurred.
Which one of the following would most likely cause basic earnings per share to increase? A) Purchasing treasury stock. B) Issuing stock options when the option price is greater than the market price. C) Selling shares of stock at a price greater than the par value. D) Postponing the declaration of dividends.
A) Purchasing treasury stock. *The purchase of treasury stock reduces the number of outstanding shares, increasing the earnings per share ratio.
The assignment of an amount according to a plan or formula. Is it recognition, allocation, or amortization?
Allocation
An entity recognizes revenue from a long-term contract over time. However, early in the performance of the contract, it cannot reasonably measure the outcome, but it expects to recover the costs incurred. Revenue should be recognized based on A) A straight-line calculation. B) A zero profit margin. C) The completed-contract method. D) The output method.
B) A zero profit margin.
The purchase of research and development services. There were no other research and development activities. A) Income from continuing operations, with no separate disclosure B) Income from continuing operations, with separate disclosure C) Income from discontinued operations D) OCI E) None of the above
B) Income from continuing operations, with separate disclosure
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive? A) Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock. B) Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock. C) Cumulative 8%, $50 par preferred stock. D) Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.
B) Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock. A - 100 x 6% = 6 / 4 = 1.50 > 1.29 = anti dilutive B - 1000 x 7% = 70 x (1-0.30) = 49 / 40 = 1.225 < 1.29 = Dilutive C - nonconvertible P/S is anti dilutive D - 1000 x 10% = 100 x (1-0.30) = 70 / 20 = 3.50 > 1.29 = anti dilutive *convertible bonds are taxed, convertible P/S are not
In Year 3, Bulldog determined that it recorded duplicate sales invoices in Years 1 and 2 for $100,000 and $135,000, respectively. Bulldog's effective tax rate for Years 1 through 3 is 30%. Record any required Year 3 journal entry related to the Years 1 and 2 sales.
Correction of an error in previously issued financial statements J/E that needs reversed: DR A/R $235,000 CR Revenue $164,500 CR Income Taxes Payable $70,500 Reversal: DR R/E $164,500 (235,000 x (1-30%)) DR Income Taxes Payable $70,500 (235,000 x 30%) CR A/R $235,000
Consistency. A) Enhancing qualitative characteristic B) Fundamental qualitative characteristic C) Aspect of enhancing qualitative characteristic D) Aspect of fundamental qualitative characteristic
C) Aspect of enhancing qualitative characteristic (comparability)
Subsequent events affecting the realization of assets ordinarily will require recognition in the financial statements because such events typically represent the A) Preliminary estimate of losses relating to new events that occurred after the balance sheet date. B) Discovery of new conditions occurring as subsequent events. C) Culmination of conditions that existed at the balance sheet date. D) Final estimates of losses relating to casualties that are subsequent events.
C) Culmination of conditions that existed at the balance sheet date.
What information should a public entity present about geographic areas, if feasible? A) Disclose as a combined amount sales to external customers and intersegment sales. B) No disclosure of revenues from foreign operations need be reported. C) Disclose the revenues from external customers attributed to all foreign countries in total. D) Disclose separately the amount of sales to each external customer in a foreign country.
C) Disclose the revenues from external customers attributed to all foreign countries in total.
Trading securities. Are these classified as current assets or investments/funds?
Current assets because investments/funds are items held more than one year
The relevant attribute used to measure assets expected to be sold at below their carrying amount.
Current market value
In Year 1, an entity recognized an unrealized holding loss on bonds. These bonds were classified as available-for-sale securities in the balance sheet. In Year 2, the bonds were sold at a loss. The pre-tax entry to record the sale is what?
Debit loss Credit OCI
The following information pertains to Deal Corp.'s Year 2 cost of goods sold: Inventory, 12/31/Year 1 $ 90,000 Year 2 purchases 124,000 Year 2 write-off of obsolete inventory 34,000 Inventory, 12/31/Year 2 30,000 The inventory written off became obsolete because of an unexpected and unusual technological advance by a competitor. In its Year 2 income statement, what amount should Deal report as cost of goods sold? A) $124,000 B) $218,000 C) $184,000 D) $150,000
D) $150,000 BI + Purchases - Write Off - EI = COGS 90,000 + 124,000 - 34,000 - 30,000 = 150,000
On January 1, Year 4, Card Corp. signed a 3-year, noncancelable purchase contract that allows Card to purchase up to 500,000 units of a computer part annually from Hart Supply Co. The price is $.10 per unit, and the contract guarantees a minimum annual purchase of 100,000 units. During Year 4, the part unexpectedly became obsolete. Card had 250,000 units of this inventory at December 31, Year 4, and believes these parts can be sold as scrap for $.02 per unit. What amount of probable loss from the purchase commitment should Card report in its Year 4 income statement? A) $8,000 B) $24,000 C) $20,000 D) $16,000
D) $16,000 *Consequently, given that 200,000 units must be purchased over the next 2 years for $20,000 (200,000 × $.10), and the parts can be sold as scrap for $4,000 (200,000 × $.02), the amount of probable loss for Year 4 is $16,000 ($20,000 - $4,000).
Rice Co. was incorporated on January 1, Year 6, with $500,000 from the issuance of stock and borrowed funds of $75,000. During the first year of operations, net income was $25,000. On December 15, Rice paid a $2,000 cash dividend. No additional activities affected equity in Year 6. At December 31, Year 6, Rice's liabilities had increased to $94,000. In Rice's December 31, Year 6 balance sheet, total assets should be reported at A) $598,000 B) $692,000 C) $600,000 D) $617,000
D) $617,000 *Total liabilities were $94,000 at year end, and equity amounted to $523,000 ($500,000 from issuance of stock + $25,000 net income - $2,000 cash dividend). Total assets are therefore $617,000 ($523,000 + $94,000).
The financial statements included in the annual report to the shareholders are least useful to which one of the following? A) Stockbrokers. B) Bankers preparing to lend money. C) Competing businesses. D) Managers in charge of operating activities.
D) Managers in charge of operating activities. *they are not useful to managers making day-to-day operating decisions
Luge has been sued by a former employee for wrongful dismissal. Luge's lawyers believe the suit to be without merit. A) Disclosure only B) Accrual only C) Both disclosure and accrual D) Neither disclosure or accrual
D) Neither disclosure or accrual *because it's without merit (not likely to end in a liability)
What are the Statements of Financial Accounting Concepts intended to establish? A) The meaning of "present fairly in accordance with generally accepted accounting principles." B) Generally accepted accounting principles in financial reporting by business enterprises. C) The hierarchy of sources of generally accepted accounting principles. D) The objectives and concepts for use in developing standards of financial accounting and reporting.
D) The objectives and concepts for use in developing standards of financial accounting and reporting.
The accounting process for cash prepayments received or paid.
Deferral
What is the adjusting entry for inventory using the periodic method? Assume Purchases had a balance of $75,000 and cost of goods sold were $85,000.
Dr COGS 85,000 CR Purchases 75,000 CR Inventory 10,000
The probable receipt of $1 million from a pending lawsuit. A) Income from continuing operations, with no separate disclosure B) Income from continuing operations, with separate disclosure C) Income from discontinued operations D) OCI E) None of the above
E) None of the above *A gain contingency is not recognized until realized, but it should be disclosed. However, care should be taken to avoid misleading implications about the likelihood of realization.
An increase in the fair value of an investment in debt securities that are classified as held-to-maturity. A) Income from continuing operations, with no separate disclosure B) Income from continuing operations, with separate disclosure C) Income from discontinued operations D) OCI E) None of the above
E) None of the above *An investment in debt securities that are classified as held-to-maturity is reported at amortized cost. Accordingly, an increase in the fair value of these securities has no effect on the financial statements.
On January 1, Year 1, Mike issued to its employees call options to purchase 10,000 shares of Mike's common stock at $14 per share. No options were exercised during Year 1. The Year 1 average market price per share of Mike's common stock was $12. Is DEPS greater than, less than, or equal to BEPS?
Equal - The DEPS calculation includes the effects of dilutive potential common shares (PCS). Call options are dilutive only if the average market price for the period of the common shares is greater than the exercise price of the options. But the average market price of the common shares ($12) is lower than the exercise price of the options ($14). These call options are antidilutive and have no effect on the calculation of DEPS.
The UNO Company was formed on January 2, Year 1, to sell a single product. Over a 2-year period, UNO's costs increased steadily. Inventory quantities equaled 3 months' sales at December 31, Year 1, and zero at December 31, Year 2. Assuming the periodic system and no accounting changes, the inventory cost method that reports the highest amount for COGS in year 2 is what?
FIFO
The UNO Company was formed on January 2, Year 1, to sell a single product. Over a 2-year period, UNO's costs increased steadily. Inventory quantities equaled 3 months' sales at December 31, Year 1, and zero at December 31, Year 2. Assuming the periodic system and no accounting changes, the inventory cost method that reports the highest amount of ending inventory in year 1 is what?
FIFO
If given FIFO Inventory and Inventory at Base-Year Costs, how do you find Inventory at Base-Year Costs?
FIFO Inventory/Annual Cost Index
Cash restricted to payment of pension obligations. Is this classified as a current asset, investment/fund, or other noncurrent asset?
Investment/fund
Balm, Co. had 100,000 shares of C/S outstanding as of January 1. The following events occurred during the year: 4/1 issued 30,000 shares of C/S 6/1 issued 36,000 shares of C/S 7/1 declared a 5% stock dividend What is Balm's weighted average C/S outstanding as of December 31?
Jan 1 = 100,000 x 1.05 = 105,000 Apr 1 = 30,000 x 9/12 x 1.05 = 23,625 June 1 = 36,000 x 7/12 x 1.05 = 22,050 Total = 105,675
Selling Price = $3 Disposal Cost = $0.50 Normal Profit Margin = 10% of the Selling Price Cost per Unit = $15 # of Units = 1,500 What is the amount of the loss recorded?
NRV = $3 - $0.50 = $2.50 Normal Profit Margin = $3 x 10% = $0.30 NRV - Normal Profit Margin = $2.50 - $0.30 = $2.20 Total Cost of EI before Write-Down to LCM = $15 x 1,500 = $22,500 Market = $2.20 x 1,500 = $3,300 22,500 - 3,300 = 19,200 loss which decreases inventory
On June 30, Year 2, Lomond, Inc., issued 20, $10,000, 7% bonds at par. Each bond was convertible into 200 shares of common stock. On January 1, Year 3, 10,000 shares of common stock were outstanding. The bondholders converted all the bonds on July 1, Year 3. Net income for the rest was $35,000. What amount should Lomond report as its Year 3 diluted earnings per share (DEPS)? A) $2.50 B) $2.85 C) $3.00 D) $3.50
Net Income = 35,000 Shares = (10,000 x 12/12) + (200 x 20 x 6/12) = 12,000 BEPS = 35,000/12,000 = 2.92 To determine if the potential common shares are dilutive, their incremental effect on EPS is calculated. This effect is equal to the after-tax interest that would be added back to net income divided by the potential common shares that would be added to the denominator. After-tax Interest = 10,000 x 20 x 7% x (1-30%) x 6/12) = 4,900 Dilutive PCS = 200 x 2 x 6/12 = 2,000 DEPS = (35,000+4,900)/(12,000+2,000) = 2.85
Loans to officers not expected to be collectible within 1 year. How is this classified?
Noncurrent asset
Unexercised call options to purchase 50,000 shares of the company's common stock at $5 per share were outstanding at the beginning and the end of the year. Average market price = $8. How would this affect the DEPS numerator and DEPS denominator?
Numerator - no effect Denominator - add 18,750 shares (50,000 x 5)/8 = 31,250 50,000 - 31,250 = 18,750
On March 31, the company issued 6,000 common shares for $10,000 in cash. How would this affect the DEPS numerator and DEPS denominator?
Numerator - no effect Denominator - add 4,500 shares (6000 x 9/12)
A firm has basic earnings per share of $1.29. If the tax rate is 30%, is the following security dilutive? 7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of C/S.
Yes - $1.23 < $1.29 1) 7% x $1,000 = 70 2) 70 x (1-30%) = 49 3) 49/40 = $1.23
Deposit received from customers. How is this classified?
as a liability
