Part I-M/C
Assume a company does not elect the fair value option for reporting financial assets and liabilities. Which of the following is not classified as other comprehensive income? I. An adjustment to pension liability to record the funded status of the plan II. Subsequent decreases of the fair value of available-for-sale debt securities that have been previously written down as impaired III. Decreases in the fair value of held-to-maturity securities IV. None of the available choices I only. II only. III only. IV only.
III only. If the fair value option is not elected, held-to-maturity securities are reported at amortized cost. Any decreases or increases in fair value are reported neither in net income nor as part of other comprehensive income.
A patent, purchased in year 1 and being amortized over a 10-year life, was determined to be worthless in year 5. The write-off of the asset in year 5 is an example of which of the following principles? Associating cause and effect. Immediate recognition. Systematic and rational allocation. Objectivity.
Immediate recognition. This answer is correct. Per SFAC 5, the principle of immediate recognition requires that items carried as assets in prior periods that are discovered to be impaired in value be charged to expense (e.g., a patent that is determined to be worthless).
When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on which of the following criteria? A portion of an asset or liability Instrument-by-instrument basis Type-by-type basis At the entity level
Instrument-by-instrument basis Correct! When an entity elects to apply the fair value option to a financial instrument, the application can be on an instrument-by-instrument basis.
Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability's fair value, except Quoted prices for identical assets and liabilities in markets that are not active. Quoted prices for similar assets and liabilities in markets that are active. Internally generated cash flow projections for a related asset or liability. Interest rates that are observable at commonly quoted intervals.
Internally generated cash flow projections for a related asset or liability. This response is a false statement—internally generated cash flow projections are not an observable input.
Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent's debt-to-equity ratio? 2.63 1.08 0.52 0.48
1.08 This answer is correct. The debt-to-equity ratio is equal to total liabilities divided by total owners' equity. Total owners' equity is common stock plus retained earnings, or $365,000 ($150,000 + $215,000). Since assets equal liabilities plus owners' equity, liabilities are equal to $395,000 ($760,000 − $365,000). The debt-to-equity ratio is equal to 1.08 ($395,000/$365,000).
A company calculated the following data for the period: Cash received from customers $25,000 Cash received from sale of equipment 1,000 Interest paid to bank on note 3,000 Cash paid to employees 8,000 What amount should the company report as net cash provided by operating activities in its Statement of Cash Flows? $14,000 $15,000 $18,000 $26,000
$14,000 Cash received from the customers and paid to employees are operating activities. Interest paid on a bank note is also an operating activity. Therefore, the cash for from operating activities is $25,000 − 3,000 − 8,000 = $14,000.
Wagner, a holder of a $1,000,000 Palmer, Inc. bond, collected the interest due on March 31, year 2, and then sold the bond to Seal, Inc. for $975,000. On that date, Palmer, a 100% owner of Seal, had a $1,075,000 carrying amount for this bond. Was there an effect from Seal's purchase of Palmer's bonds? Retained earnings Noncontrolling interest $ 100,000 increase $ 0 $ 75,000 increase $ 25,000 increase $ 0 $ 25,000 increase $ 0 $ 100,000 increase
$ 100,000 increase $ 0 This answer is correct. When Seal purchased the bonds from Wagner, the bonds were viewed as retired from a consolidated viewpoint since there is no longer any obligation to an outside party. Therefore, the consolidated entity would recognize a $100,000 gain ($1,075,000 carrying amount − $975,000 cash paid), which would increase net income, thus increasing consolidated retained earnings. This transaction has no effect on the noncontrolling interest, since the acquiree (Seal) has merely exchanged one asset for another (cash for investment in bonds).
On December 27, year 1, Holden Company sold a building, receiving as consideration a $400,000 noninterest bearing note due in 3 years. The building cost $380,000 and the accumulated depreciation was $160,000 at the date of sale. The prevailing rate of interest for a note of this type was 12%. The present value of $1 for three periods at 12% is 0.71. In its year 1 income statement, how much gain or loss should Holden report on the sale? $ 20,000 gain. $ 64,000 gain. $ 96,000 loss. $180,000 gain.
$ 64,000 gain. This answer is correct. The gain (loss) is the difference between the value of the consideration received and the book value of the building sold. The consideration received is a 3-year, noninterest-bearing, $400,000 note. Per ASC Topic 835, such receivable is to be recorded at its present value. PV of note $400,000 × .71 = $ 284,000 Book value $380,000 - $160,000 = $ 220,000 Gain $284,000 - $220,000 = $ 64,000 The entry to record this transaction is as follows: Note receivable 400,000 Accum. depr. 160,000 Discount on N/R 116,000 Building 380,000 Gain 64,000
Selected information from the separate and consolidated balance sheets and income statements of Pard, Inc. and its subsidiary, Spin Co., as of December 31, year 1, and for the year then ended is as follows: Pard Spin Consolidated Balance sheet accounts Accounts receivable $ 26,000 $ 19,000 $ 39,000 Inventory 30,000 25,000 52,000 Investment in Spin 67,000 -- -- Goodwill -- -- 30,000 Noncontrolling interest -- -- 10,000 Stockholders' equity 154,000 50,000 154,000 Income statement accounts Revenues $200,000 $140,000 $308,000 Cost of goods sold 150,000 110,000 231,000 Gross profit 50,000 30,000 77,000 Equity in earnings of Spin 20,000 -- -- Net income 36,000 20,000 40,000 Additional information 1) During year 1, Pard sold goods to Spin at the same markup on cost that Pard uses for all sales. At December 31, year 1, Spin had not paid for all of these goods and still held 37.5% of them in inventory. 2) Pard acquired its interest in Spin on January 2, year 1. In Pard's consolidated balance sheet, what was the carrying amount of the inventory that Spin purchased from Pard? $ 3,000 $ 6,000 $ 9,000 $12,000
$ 9,000 Pard's intercompany sales to Spin totaled $32,000 during year 1. Therefore, Spin recorded a purchase of inventory of $32,000. At 12/31/Y1, Spin still held 37.5% of these goods in inventory; in Spin's books, this inventory was carried at $12,000 (37.5% × $32,000). In the consolidated balance sheet, the intercompany profit would be eliminated, and this inventory would be carried at Pard's original cost. Pard's sales to Spin were at the same markup on cost that Pard uses for all sales. In Pard's income statement, cost of sales is 75% of sales ($150,000 ÷ $200,000). Therefore, Pard's original cost for the $12,000 of goods in Spin's inventory is $9,000 (75% × $12,000).
On December 1, year 2, Greer Co. committed to a plan to dispose of its Hart business component's assets. The disposal meets the requirements to be classified as discontinued operations. On that date, Greer estimated that the loss from the disposition of the assets would be $700,000 and Hart's year 2 operating losses were $200,000. Disregarding income taxes, what net gain (loss) should be reported for discontinued operations in Greer's year 2 income statement? $0 $(200,000) $(700,000) $(900,000)
$(900,000) The loss from discontinued operations would equal the loss from operations plus the estimated loss from disposal of the component.
Kelly Corp. barters with Ace Corporation for goods that are similar in nature and value. The value of the goods was $1,000. The cost of the goods was $400. If Kelly uses IFRS to prepare financial statements, what amount should Kelly recognize as income? $1,000 $0 $400 $600
$0 This answer is correct because if a barter transaction is for goods that are similar in nature and value, then no income or expense is recognized.
Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available: Mortgage repayment $20,000 Available-for-sale securities purchased 10,000 increase Bonds payable—issued 50,000 increase Inventory 40,000 increase Accounts payable 30,000 decrease What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year? $0 $10,000 $20,000 $30,000
$0 This answer is correct because the net cash from operating activities is $70,000 − $40,000 − $30,000 = $0. The mortgage repayment is a financing activity. The available-for-sale securities purchased are an investing activity, and the bonds issued are a financing activity.
The separate condensed balance sheets and income statements of Purl Corp. and its wholly owned subsidiary, Scott Corp., are as follows: BALANCE SHEETS December 31, year 2 Purl Scott Assets Current assets: Cash $ 80,000 $ 60,000 Accounts receivable (net) 140,000 25,000 Inventories 90,000 50,000 Total current assets 310,000 135,000 Property, plant, and equipment (net) 625,000 280,000 Investment in Scott (equity method) 400,000 — Total assets $1,335,000 $ 415,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 160,000 $ 95,000 Accrued liabilities 110,000 30,000 Total current liabilities 270,000 125,000 Stockholders' equity: Common stock ($10 par) 300,000 50,000 Additional paid-in capital — 10,000 Retained earnings 765,000 230,000 Total stockholders' equity 1,065,000 290,000 Total liabilities and stockholders' equity $1,335,000 $ 415,000 INCOME STATEMENTS For the year ended December 31, year 2 Purl Scott Sales $2,000,000 $750,000 Cost of goods sold 1,540,000 500,000 Gross margin 460,000 250,000 Operating expenses 260,000 150,000 Operating income 200,000 100,000 Equity in earnings of Scott 70,000 — Income before income taxes 270,000 100,000 Provision for income taxes 60,000 30,000 Net income $ 210,000 $ 70,000 Additional information: • On January 1, year 2, Purl purchased for $360,000 all of Scott's $10 par, voting common stock. On January 1, year 2, the fair value of Scott's assets and liabilities equaled their carrying amount of $410,000 and $160,000, respectively, except that the fair values of certain items identifiable in Scott's inventory were $10,000 more than their carrying amounts. These items were still on hand at December 31, year 2. Goodwill is determined to be unimpaired at December 31, year 2. • During year 2, Purl and Scott paid cash dividends of $100,000 and $30,000, respectively. For tax purposes, Purl receives the 100% exclusion for dividends received from Scott. • There were no intercompany transactions, except for Purl's receipt of dividends from Scott and Purl's recording of its share of Scott's earnings. • Both Purl and Scott paid income taxes at the rate of 30%. In the December 31, year 2 consolidated financial statements of Purl and its subsidiary, total assets should be $1,740,000 $1,460,000 $1,350,000 $1,325,000
$1,460,000 This answer is correct. In the consolidated balance sheet, the parent company's investment account is eliminated and replaced with the specific assets of the acquiree. Therefore, the total consolidated assets include Purl's assets (less the investment account), Scott's assets (adjusted to reflect FMVs at date of purchase), and any goodwill purchased at time of investment. This computation is illustrated below. Purl's assets $ 1,335,000 Less: Investment in Scott (400,000) $ 935,000 Scott's assets ($415,000 + $10,000) 425,000 $1,360,000 Goodwill 100,000 $1,460,000 Scott's assets are increased by $10,000 to reflect the excess market value at 1/1/Y2 of inventory items, purchased as a part of the investment in Scott, which are still on hand at 12/31/Y2. Goodwill purchased at 1/1/Y2 is the excess of the cost of the investment ($360,000) over the FV of the net assets purchased ($410,000 - $160,000 + $10,000), or $100,000.
At December 31, year 1, the Merlin Company had 50,000 shares of common stock issued and outstanding. On April 1, year 2, an additional 10,000 shares of common stock were issued. Merlin's net income for the year ended December 31, year 2, was $172,500. During year 2, Merlin declared and paid $100,000 cash dividends on its nonconvertible preferred stock. The basic earnings per common share, rounded to the nearest penny, for the year ended December 31, year 2, should be $1.26 $1.32 $3.00 $3.14
$1.26 This answer is correct. The formula for EPS is EPS = (Net income − Applicable preferred dividends) (Weighted-average number of common shares outstanding) The $172,500 must be reduced by the $100,000 dividend to the preferred stockholders. The 50,000 shares outstanding at the beginning of the year must be adjusted to reflect the 10,000 shares that were outstanding for 9 months, resulting in a total weighted-average of 57,500 shares outstanding. The final computation is the $72,500 of adjusted earnings divided by 57,500 shares, resulting in $1.26 of EPS.
Georgia, Inc. has an authorized capital of 1,000 shares of $100 par, 8% cumulative preferred stock and 100,000 shares of $10 par common stock. The equity account balances at December 31, year 2, are as follows: Cumulative preferred stock $ 50,000 Common stock 90,000 Additional paid-in capital 9,000 Retained earnings 13,000 Treasury stock, common—100 shares at cost (2,000) $ 160,000 Dividends on preferred stock are in arrears $2,000 for the year 2. The book value of a share of common stock at December 31, year 2, should be $11.69 $11.78 $11.91 $12.36
$11.69 This answer is is correct! Book value (BV) per share of common stock is: BV per share = Common stockholders' equity/Outstanding shares. The amount allocated to preferred stock (PS), calculated below, plus any arrears, is deducted from total stockholders' equity to obtain common stockholders' equity. Par value of PS outstanding + 2000 dividends in arrears = Amount allocated to preferred stock $50,000 + (8%) ($50,000) + $2,000 The remaining unallocated owners' equity is $106,000 ($160,000 total owners' equity − $56,000 PS's share). Georgia has issued 9,000 shares of stock ($90,000 total par value/$10 par per share), and 100 shares are held in treasury, leaving 8,900 shares outstanding. Thus BV per share is $11.69 ($104,000/8,900 shares).
Grant, Inc. has current receivables from affiliated companies at December 31, year 2, as follows: • A $50,000 cash advance to Adams Corporation. Grant owns 30% of the voting stock of Adams and accounts for the investment by the equity method. • A receivable of $160,000 from Bullard Corporation for administrative and selling services. Bullard is 100% owned by Grant and is included in Grant's consolidated statements. • A receivable of $100,000 from Carpenter Corporation for merchandise sales on open account. Carpenter is a 90% owned, unconsolidated subsidiary of Grant. In the current assets section of its December 31, year 2 consolidated balance sheet, Grant should report accounts receivable from investees in the total amount of $ 90,000 $140,000 $150,000 $310,000
$150,000 This answer is correct. The accounts receivable from investees to be reported on the balance sheet should only include the receivables from investees considered unconsolidated subsidiaries. The receivables from the unconsolidated subsidiaries ($50,000 + $100,000) would not be eliminated and, therefore, would be reported as receivables in the consolidated balance sheet. However, the $160,000 receivable from the consolidated subsidiary would be eliminated on the consolidated worksheet and thus not reported on the consolidated balance sheet.
A cash flow of $200,000 may be received by Lydia Nickels, Inc. in one year, two years, or three years, with probabilities of 20%, 50%, and 30%, respectively. The rate of interest on default risk-free investments is 5%. The present value factors are PV of 1, at 5%, for 1 year is .95238 PV of 1, at 5%, for 2 years is .90703 PV of 1, at 5%, for 3 years is .86384 What is the expected present value of Lydia Nickels' cash flow (in whole dollars)? $181,406 $180,628 $ 90,703 $ 89,925
$180,628 The computation of expected present value using a single interest rate is as follows: PV of $200,000 in one year at 5% $190,476 Probability 20% $38,095 PV of $200,000 in two years at 5% $181,406 Probability 50% 90,703 PV of $200,000 in three years at $172,768 5% Probability 30% 51,830 $ 180,628 According to SFAC 7, expected present value refers to the sum of probability-weighted present values in a range of estimated cash flows, all discounted using the same interest rate convention.
Ward, a consultant, keeps her accounting records on a cash basis. During year 2, Ward collected $200,000 in fees from clients. At December 31, year 1, Ward had accounts receivable of $40,000. At December 31, year 2, Ward had accounts receivable of $60,000, and unearned fees of $5,000. On an accrual basis, what was Ward's service revenue for year 2? $175,000 $180,000 $215,000 $225,000
$215,000 The following formula is used to adjust service revenue from the cash basis to the accrual basis: Cash fees collected + End. AR − Beg. AR + Beg. unearned fees − End. unearned fees = Accrual basis service revenue $200,000 + $60,000 − $40,000 + 0 − $5,000 = $ 215,000 As an alternative, T-accounts can be used.
Decker Company assigns some of its patents to other enterprises under a variety of licensing agreements. In some instances advance royalties are received when the agreements are signed, and in others, royalties are remitted within 60 days after each license year-end. The following data are included in Decker's December 31 balance sheet: Year 1 Year 2 Royalties receivable $90,000 $85,000 Unearned royalties 60,000 40,000 During Year 2, Decker received royalty remittances of $200,000. In its income statement for the year ended December 31, Year 2, Decker should report royalty revenue of $195,000 $215,000 $220,000 $225,000
$215,000 This answer is correct. Since the $200,000 cash receipts is not separated into earned and unearned revenue, set up T-accounts for royalties receivable and unearned royalties. The diagram shows two tables. The first table has the heading "Royalties receivable," which shows beginning balance 90,000, earned royalty 195,000, cash received 200,000 and end balance 85,000. The second table has the heading "Unearned royalties," which shows earned royalty 20,000, beginning balance 60,000 and end balance 40,000. By analyzing the T-accounts, the $195,000 debit to royalties receivable represents revenue earned.; In addition, the $20,000 decrease in unearned royalties represents Year 2 royalty revenue. Therefore, Decker should report $215,000 ($195,000 + $20,000) of earned royalty revenue.
On the December 31, year 1 balance sheet of the Stat Company, the current assets were comprised of the following items: Cash $ 70,000 Accounts receivable 120,000 Inventories 60,000 An examination of the accounts revealed that the accounts receivable were composed of the following items: Trade accounts $ 93,000 Allowance for uncollectible accounts (2,000) Claim against shipper for goods lost in transit (11/Y1) 3,000 Selling price of unsold goods sent by Stat on consignment at 130% of cost (and not included in Stat's ending inventory) 26,000 $120,000 What is the correct amount of current assets as of 12/31/Y1? $221,000 $224,000 $244,000 $250,000
$244,000 This answer is correct. The additional detail of accounts receivable indicates that goods out on consignment are included in accounts receivable at their selling price. Consignment goods should be included in inventory at their cost. Since the selling price of the consigned goods is 130% of cost, the cost of the $26,000 of goods at retail is $20,000 ($26,000/130%). Accounts receivable should be reduced to $94,000 ($120,000 − $26,000), and inventory should be increased to $80,000 ($60,000 + $20,000). Therefore, total current assets are $244,000 ($70,000 + $94,000 + $80,000).
In Dart Co.'s year two single-step Income Statement, as prepared by Dart's controller, the section titled "Revenues" consisted of the following: Sales $250,000 Purchase discounts 3,000 Recovery of accounts written off 10,000 Total revenues $263,000 In its year two single-step Income Statement, what amount should Dart report as total revenues? $250,000 $253,000 $260,000 $263,000
$250,000 Revenues are inflows of economic resources. The purchase discounts would be netted against purchases, not sales. The recovery of accounts written off is not revenue, it is an adjustment to the allowance for uncollectible accounts. Therefore the total revenue reported should be $250,000.
Duke Co. reported cost of goods sold of $270,000 for 20X5. Additional information is as follows: December 31 January 1 Inventory $60,000 $45,000 Accounts payable 26,000 39,000 If Duke uses the direct method, what amount should Duke report as cash paid to suppliers in its 20X5 Statement of Cash Flows? $242,000 $268,000 $272,000 $298,000
$298,000 Cost of goods sold is used as a beginning estimate for cash paid to suppliers. It is adjusted by the change in the two accounts that affect payments to suppliers: inventory and accounts payable. Cost of goods sold $270,000 Plus inventory increase (an amount of inventory purchased but not sold during the period, thus increasing cash payments relative to cost of goods sold) 15,000 Plus decrease in accounts payable (an amount of accounts payable paid in excess of purchases, thus increasing cash payments relative to cost of good sold) 13,000 Equals cash paid to suppliers $298,000
In Yew Co.'s year 1 annual report, Yew described its social awareness expenditures during the year as follows: The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human service organizations, of which $80,000 was contributed by employees through payroll deductions. In addition, consistent with the Company's commitment to the environment, the Company spent $100,000 to redesign product packaging. What amount of the above should be included in Yew's income statement as charitable contributions expense? $310,000 $390,000 $410,000 $490,000
$310,000 Charitable contributions expense should include all expenses incurred in year 1 by Yew Co. which involve charitable contributions to other entities. The total charitable contributions expense is $310,000, consisting of the $250,000 donated to youth and educational programs and the $60,000 ($140,000 − $80,000) donated to health and human service organizations. The other $80,000 was given to these organizations by the employees, with the company merely acting as an agent collecting that amount through payroll deductions and forwarding it on to the organizations. The expenditure for redesigning product packaging ($100,000) would be properly classified as research and development expense.
King, Inc. owns 70% of Simmon Co.'s outstanding common stock. King's liabilities total $450,000, and Simmon's liabilities total $200,000. Included in Simmon's financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements? $520,000 $550,000 $590,000 $650,000
$550,000 The consolidated financial statements should reflect 100% of the assets and liabilities of the subsidiary less any intercompany balances. Therefore the balance on the consolidated balance sheet should be: $450,000 + 200,000 − 100,000 = $550,000.
The following information pertains to Klein Corp. and its operating segments for the year ended December 31, year 1: Combined profit of segments reporting profit $600,000 Combined loss of segments reporting loss (400,000) Combined profit and loss of all segments 200,000 Klein has a reportable segment if that segment's operating profit or loss is $25,000 profit. $60,000 profit. $55,000 loss. $55,000 profit.
$60,000 profit. This answer is correct. ASC Topic 280 requires that selected data for a segment be reported separately if any one of three criteria is met. One of these criteria is met when a segment's operating profit (loss) is greater than or equal to 10% of the greater of the absolute combined segment profit or loss. Thus, Klein has a reportable segment if the absolute amount of that segment's profit or loss exceeds $60,000 ($600,000 × 10%).
Rey, Inc. SELECTED FINANCIAL DATA December 31, Year 2 Year 1 Cash $ 170,000 $ 90,000 Accounts receivable (net) 450,000 400,000 Merchandise inventory 540,000 420,000 Short-term marketable securities 80,000 40,000 Land and building (net) 1,000,000 1,000,000 Mortgage payable—current portion 60,000 60,000 Accounts payable and accrued liabilities 240,000 220,000 Short-term notes payable 100,000 140,000 Net credit sales totaled $3,000,000 and $2,000,000 for the years ended December 31, year 2 and year 1, respectively. At December 31, year 2, Rey's quick (acid-test) ratio was 1.50 to 1. 1.75 to 1. 2.06 to 1. 3.10 to 1.
1.75 to 1. The quick (acid-test) ratio is quick assets (cash, temporary investments in marketable equity securities, and net receivables) divided by current liabilities. The quick ratio measures the ability to pay current liabilities from cash and near-cash items. In this case, quick assets total $700,000 ($170,000 + $450,000 + $80,000) and current liabilities total $400,000 ($60,000 + $240,000 + $100,000), resulting in a quick ratio of 1.75 to 1 ($700,000 ÷ $400,000).
Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year: 4/1 Issued 30,000 shares of common stock. 6/1 Issued 36,000 shares of common stock. 7/1 Declared a 5% stock dividend. 9/1 Purchased as treasury stock 35,000 shares of its common stock. Balm used the cost method to account for the treasury stock. What is Balm's weighted average of common stock outstanding at December 31? 131,000 139,008 150,675 162,342
139,008 More than one approach is available to compute WA (each yields the same answer) but perhaps the easiest is to weight each item separately going forward to the end of the year. This approach yields 139,008 = [100,000(12/12) + 30,000(9/12) + 36,000(7/12)](1.05) - 35,000(4/12). The beginning shares are outstanding the entire year (12/12). The next two items are weighted for the fraction of the year they are outstanding. Stock dividends and splits are retroactively applied to all items before their issuance - hence the multiplication by 1.05. The treasury shares are removed from the average for 4/12 of the year - these shares already reflect the stock dividend.
Port, Inc. owns 100% of Salem, Inc. On January 1, year 6, Port sold Salem delivery equipment at a gain. Port had owned the equipment for two years and used a five-year straight-line depreciation rate with no residual value. Salem is using a three-year straight-line depreciation rate with no residual value for the equipment. In the consolidated income statement, Salem's recorded depreciation expense on the equipment for year 6 will be decreased by 20% of the gain on sale. 33 1/3% of the gain on sale. 50% of the gain on sale. 100% of the gain on sale.
33 1/3% of the gain on sale. The requirement is to determine by how much depreciation will be reduced. Use the solutions approach and set up a simple numerical example. Port's original cost = $1,000 Depreciation per yr = $200 Selling price = $810 If Port sells equipment for $810, it recognizes a $210 gain on the sale (selling price of $810 − carrying value of the equipment $600). Salem, Inc. will now depreciate the equipment on their books at $810, the price that they paid. Because the gain was not realized with an entity outside of the consolidated entity, it must be eliminated. In the consolidated financial statements, equipment will be reported at its original carrying value, the gain on the sale will be removed and depreciation expense must be recorded at Port, Inc. original amount ($200), not the amount of depreciation that Salem, Inc. records. Salem would record depreciation of $270 ($810/3). Therefore, depreciation must be reduced by $70 on the consolidated financial statements to reflect the original depreciation recorded by Port. Depreciation is reduced by $70, which as shown by the example, is 33 1/3% of the gain ($70/$210).
On January 15, year 1, Forrester Company paid property taxes on its factory building for calendar year 1 in the amount of $60,000. The first week of April year 1 Forrester made unanticipated major repairs to its plant equipment at a cost of $240,000. These repairs will benefit operations for the remainder of the calendar year. How should these expenses be reflected in Forrester's quarterly income statements? The table shows data for every 3 months ended on March 31,Year 1, June 30, Year 1, September 30, Year 1, and December 31, Year 1. There are four rows named A, B, C and D. For March 31, Year 1, A is $15,000, B is $15,000, C is $60,000, and D is $75,000. For June 30, Year 1, A is $95,000, B is $255,000, C is $240,000, and D is $75,000. For September 30, Year 1, A is $95,000, B is $15,000, C is $0, and D is $75,000. For December 31, Year 1, A is $95,000, B is $15,000, C is $0, and D is $75,000. A. B. C. D.
A. This answer is correct. Annual period expenses should be allocated among the interim periods clearly benefited through the use of accruals and/or deferrals. Property taxes should be reflected each quarter. However, April year 1 repairs only benefit operations for the remaining three quarters of the calendar year. This is summarized in the following table: Q1 Q2 Q3 Q4 Taxes $15,000 $15,000 $15,000 $15,000 Repairs 0 80,000 80,000 80,000 Totals $15,000 $95,000 $95,000 $95,000
According to the FASB conceptual framework, which of the following is an enhancing quality that relates to both relevance and faithful representation? Comparability. Confirmatory value. Predictive value. Freedom from error.
Comparability. Per SFAC 8, comparability is an enhancing quality of financial reporting which relates to both relevance and faithful representation. Confirmatory value and predictive value only relate to relevance. Freedom from error only relates to faithful representation.
Sun Co. is a wholly owned subsidiary of Star Co. Both companies have separate general ledgers, and prepare separate financial statements. Sun requires stand-alone financial statements. Which of the following statements is correct? Consolidated financial statements should be prepared for both Star and Sun. Consolidated financial statements should only be prepared by Star and not by Sun. After consolidation, the accounts of both Star and Sun should be changed to reflect the consolidated totals for future ease in reporting. After consolidation, the accounts of both Star and Sun should be combined together into one general-ledger accounting system for future ease in reporting.
Consolidated financial statements should only be prepared by Star and not by Sun.
According to the FASB conceptual framework, the relevance of providing information in financial statements is subject to the constraint of Comparability. Cost-benefit. Reliability. Faithful representation.
Cost-benefit. The FASB conceptual framework has identified the cost-benefit constraint to the relevance of providing financial reports. Information is not disclosed if the costs of disclosure outweigh the benefits of providing the information. Comparability is an enhancing qualitative characteristic. Reliability is no longer part of the conceptual framework according to SFAC 8. Faithful representation is a fundamental qualitative characteristic.
Which one of the following areas does not require disclosures about the risks and uncertainties that exist? Nature of operations. Use of estimates in preparation of financial statements. Current vulnerability due to a possible recession. Current vulnerability due to concentrations
Current vulnerability due to a possible recession. This answer is correct. Current vulnerability due to a possible recession is not a required disclosure regarding risks and uncertainties. The nature of operations, the use of estimates in preparation of financial statements, and current vulnerability due to concentrations are all required disclosures according to ASC Topic 275, Risks and Uncertainties.
Zenk Co. wrote off obsolete inventory of $100,000 during year 1. What was the effect of this write-off on Zenk's ratio analysis? Decrease in current ratio but not in quick ratio. Decrease in quick ratio but not in current ratio. Increase in current ratio but not in quick ratio. Increase in quick ratio but not in current ratio.
Decrease in current ratio but not in quick ratio. This answer is correct. The current ratio and quick ratio are calculated as follows: Current ratio = Current assets Current liabilities Quick ratio = Cash + Net receivables + Marketable securities Current liabilities When Zenk wrote off $100,000 of inventory, the current ratio decreased. This true because the numerator of the ratio, current assets, decreased while the denominator stayed the same, resulting in a smaller ratio. However, the calculation of the quick ratio excludes inventory from current assets. Thus, the quick ratio is unaffected by any change in inventory levels. This answer is correct because the current ratio decreased while the quick ratio remained unchanged.
An inventory loss from a market price decline occurred in the first quarter. The loss was not expected to be restored in the fiscal year. However, in the third quarter the inventory had a market price recovery that exceeded the market decline that occurred in the first quarter. For interim financial reporting, the dollar amount of net inventory should Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of decrease in the first quarter. Not be affected in the first quarter and increase in the third quarter by the amount of the market price recovery that exceeded the amount of the market price decline. Not be affected in either the first quarter or the third quarter.
Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of decrease in the first quarter. A decline in inventory market price, expected to be other than temporary, should be recognized in the period of decline. A subsequent recovery of market value should be recognized as a cost recovery in the period of increase, but never above original cost. The decline should be recognized when it occurs in the first quarter. The subsequent recovery should be recognized when it occurs in the third quarter. The subsequent recovery cannot exceed the amount of decline. A nontemporary decline should be shown in the quarter of price decrease.
A company with a simple capital structure for purposes of computing earnings per share would include which of the following in the computation of basic earnings per share? Dividends on nonconvertible cumulative preferred stock. Dividends on common stock. Potentially dilutive securities. Number of shares of nonconvertible cumulative preferred stock.
Dividends on nonconvertible cumulative preferred stock. This answer is correct because a corporation's capital structure is considered "simple" if it consists only of common stock or does not include potentially dilutive securities that could dilute earnings per common share upon conversion or exercise. The computation of earnings per share is net income (adjusted as described below) divided by the weighted-average number of shares outstanding during the period. Net income is decreased by both dividends on cumulative preferred stock and declared dividends on noncumulative preferred stock. The rationale for this treatment is that both types of dividends are not available to common stockholders.
Glenda Corporation prepares its financial statements in accordance with IFRS. Glenda must report finance costs on the statement of cash flows In operating activities. Either in operating activities or financing activities. In financing activities. In investing activities or financing activities.
Either in operating activities or financing activities. Under IFRS finance costs (interest expense) may be reported in either the operating or financing section of the statement of cash flows. However, once it is disclosed in a particular section, it must be reported on a consistent basis. Therefore, this answer is correct.
Which one of the following is not a purpose of the fair value framework as set forth in ASC 820, "Fair Value Measurement"? Provide a uniform definition of "fair value" for GAAP purposes. Provide a framework for determining fair value for GAAP purposes. Establish new measurement requirements for financial instruments. Establish expanded disclosures about fair value when it is used.
Establish new measurement requirements for financial instruments. Providing a uniform definition of "fair value" for GAAP purposes is one of the purposes of the fair value framework, as is providing a framework for determining fair value and establishing expanded disclosures about fair value when it is used.
What is the underlying concept that supports estimating a fixed asset impairment charge? Substance over form. Consistency. Matching. Faithful representation.
Faithful representation. An estimate of an impairment charge to a fixed asset can only be a faithful representation if the entity has applied impairment rules properly, disclosed the process of arriving at the impairment estimate and disclosed any uncertainties that affect the impairment estimate. Assuming the above is true, and no other estimate is better than the derived estimate, then the estimate is comprised of the best available information. Therefore, it is a faithful representation.
Which statement is true with respect to push-down accounting? IFRS permits the use of push-down accounting. IFRS does not permit the use of push-down accounting. SEC accounting does not permit the use of push-down accounting. Both SEC accounting and IFRS permit the use of push-down accounting.
IFRS does not permit the use of push-down accounting. This answer is correct because IFRS disallows the use of push-down accounting.
U.S. GAAP includes a very large set of accounting guidance. Choose the correct statement. The FASB Accounting Standards Codification includes guidance about items that are not under the purview of the Generally Accepted Accounting Principles, such as the income tax basis of accounting. Authoritative guidance from FASB Statements adopted before the FASB Accounting Standards Codification does not appear in the Codification. There is an implied hierarchy within the FASB Accounting Standards Codification, with FASB Statements assuming the top level. International accounting standards are not included in the FASB Accounting Standards Codification.
International accounting standards are not included in the FASB Accounting Standards Codification. IFRS are not U.S. GAAP and thus are not included in the Codification.
General-purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users? Regulatory and taxing authorities Investors and creditors and their advisors The board of directors of the corporation Management of the corporation
Investors and creditors and their advisors CORRECT! External financial reporting provides information for external users of the financial statements to aid decision making. Those users include investors, creditors, and their advisors.
It is generally presumed that an entity is a variable interest entity subject to consolidation if its equity is Less than 50% of total assets. Less than 25% of total assets. Less than 10% of total assets. Less than 10% of total liabilities.
Less than 10% of total assets. It is presumed that an entity with equity of less than 10% of total assets does not have sufficient funding to finance its activities unless there is definitive evidence to the contrary (e.g., a source of outside financing).
According to ASC Topic 820, a stock market quotation from the New York Stock Exchange is considered what level of valuation input for determining fair value measurement? Level 1. Level 2. Level 3. Level 4.
Level 1. This answer is correct. Level 1 inputs include quoted prices from active markets for identical assets or liabilities.
Assume a private firm elects to early adopt ASU 2014-08: Business Combinations: Accounting for Intangible Assets in a Business Combination. Noncompetition agreements: Must be separately measured as an intangible asset apart from goodwill. May be excluded from both intangible asset and goodwill accounting. Must be measured and included within goodwill. May be measured and included within goodwill.
May be measured and included within goodwill. This answer is correct. ASU 2014-18 allows (not requires) private firms, in a business combination, to measure noncompetition agreements as part of goodwill.
Under IFRS for SMEs, which of the following, if any, must be disclosed in financial statements? Earnings per Share (EPS) Information by Segment Yes Yes Yes No No Yes No No
No No Under IFRS for SMEs, neither earnings per share (EPS), nor information by segment is required in financial statements. Since financial statements prepared under IFRS for SMEs are those of entities not traded on exchanges or otherwise required to file with regulatory agencies, earnings per share and segment reporting are not considered important information for users. These are two of the simplifications in IFRS for SMEs that make the standards less burdensome than either U.S. GAAP or full IFRS.
In determining diluted earnings per share, a potentially dilutive security was antidilutive in year 1 and dilutive in year 2. The common stock equivalent would be included in the computation for Year 1 Year 2 Yes Yes No Yes No No Yes No
No Yes This answer is correct. In computing diluted EPS, only dilutive common stock equivalents are included. Furthermore, the determination of whether a potentially dilutive security is dilutive must be made at every reporting date. A situation may arise in which a potentially dilutive security may be dilutive at one reporting date and antidilutive the next. In this circumstance, the potentially dilutive security should only be included in the diluted EPS calculation on the date on which it is dilutive. Therefore, the potentially dilutive security would be included in the year 2 computation but not the year 1 computation.
For IFRS purposes, cash advances and loans from bank overdrafts should be reported on the statement of cash flows as Operating activities. Investing activities. Financing activities. Other significant noncash activities.
Operating activities. The IFRS requires cash advances and loans from bank overdrafts to be classified as operating activities.
The fair value option election applies to all of the following items except for Pensions. Long-term notes payable. Warranties that can be settled by paying a third party. Held-to-maturity investments.
Pensions. This answer is correct. ASC Topic 825 provides that the fair value option does not apply to pensions.
Under IFRS for SMEs, which of the following methods, if any, can be used by an investor to account for an investment in another entity (an associate) over which the investor has significant influence? Cost Method Equity Method Yes Yes Yes No No Yes No No
Yes Yes Under IFRS for SMEs, either the cost method or equity method may be used by an investor to account for an investment in another entity (called an "associate" in IFRS for SMEs) over which the investor has significant influence. Under U.S. GAAP, only the equity method may be used.
Income tax basis financial statements differ from those prepared under GAAP in that income tax basis financial statements Do not include nontaxable revenues and nondeductible expenses in determining income. Include detailed information about current and deferred income tax liabilities. Contain no disclosures about capital and operating lease transactions. Recognize certain revenues and expenses in different reporting periods.
Recognize certain revenues and expenses in different reporting periods. When financial statements are prepared using an income tax basis, two accounting methods can be used: (1) modified cash basis—hybrid method of IRS and (2) accrual basis—IRS. The modified cash basis reflects the use of accrual basis for inventories, cost of goods sold, sales, and depreciation, if these are significant. The accrual basis uses accruals and deferrals with several exceptions (e.g., prepaid income, warranty expense). When financial statements are prepared on an income tax basis, the financial statements should not simply repeat items and amounts reported in the tax return. Thus, items such as nontaxable municipal interest and the nondeductible portion of travel and entertainment expense should be fully reflected in the income statement on the basis used for tax purposes, with footnote disclosure of the differences between the amounts reported in the income statements and tax return.
When an entity uses the fair value option for eligible financial assets and liabilities, which one of the following is not an expected outcome of the disclosures required of that entity? Users being able to understand management's reasons for using the fair value option Users being able to understand how changes in fair value affect net income Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value Users being able to understand the difference between fair value and cash flows
Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value The disclosures required when the fair value option is used are not intended to replace the kind and amount of information that would have been provided if the fair value option had not been used. Rather, the intent is to provide the same kind and amount of information that would have been provided if the fair value option had not been elected.
Which of the following is an example of the expense recognition principle of associating cause and effect? Allocation of insurance cost. Sales commissions. Depreciation of fixed assets. Officers' salaries.
Sales commissions. This answer is correct because sales commissions are recognized as an expense on the basis of a presumed direct association with the related sales revenue (SFAC 5).
SEC's regulation S-X describes The requirements for information and forms required by other regulations. The reporting requirements for asset backed securities. The form and content of financial statements to be filed with the SEC. A mandate that publicly traded companies disclose material information to all investors simultaneously.
The form and content of financial statements to be filed with the SEC. SEC's regulation S-X describes the form and content of financial statements to be filed with the SEC.
SEC's regulation S-X describes The form and content of financial statements to be filed with the SEC. The requirements for information and forms required by other regulations. The reporting requirements for asset-backed securities. A mandate that publicly traded companies disclose material information to all investors simultaneously.
The form and content of financial statements to be filed with the SEC. This answer is correct. Regulation S-X describes the form and content of financial statements to be filed with the SEC.
