11.12.18 Flashcards
(33 cards)
Corey Co.’s income statement accounts for the year ended December 31, Year 2, included the following: Sales: $800,000 Cost of sales: 320,000 Administrative expenses: 80,000 Interest expenses: 10,000
Other Information
Available-for-sale debt securities held by the company had fair values of $250,000 and $300,000 on December 31, Year 1, and December 31, Year 2, respectively. On December 31, Year 2, 70,000 shares of common stock, $1.00 par, were outstanding. Corey repurchased 25,000 shares on June 1, Year 2. Corey’s enacted tax rate for the current and future years is 30%.
Corey’s comprehensive income is
$308,000.
Corey’s income before income taxes for Year 2 is $390,000 ($800,000 sales – $320,000 cost of sales – $80,000 administrative expenses – $10,000 interest expense), and net income is $273,000 [$390,000 × (1.0 – .30)]. Corey’s other comprehensive income includes the unrealized holding gain on available-for-sale debt securities, net of tax. Other comprehensive income is $35,000 [$50,000 × (1.0 – .30)]. Thus, comprehensive income is $308,000 ($273,000 + $35,000).
Which of the following should be disclosed for each reportable operating segment of an entity?
Profit or loss:
Total assets:
Yes
Yes
An operating segment is a component (1) engaged in business from which it may earn revenues and incur expenses, (2) whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resource allocation and to assess performance, and (3) for which separate financial information is available. An operating segment is reportable if it meets one of the quantitative thresholds (revenue, assets, or absolute amount of profit or loss). Disclosures include a measure of profit or loss and total assets for each reportable segment.
In determining diluted earnings per share (DEPS), a potential common stock (PCS) was antidilutive in Year 2 and dilutive in Year 3. The potential common stock would be included in the computation for
Year 2:
Year 3:
No
Yes
DEPS is based on the number of common shares outstanding during the period plus the common shares that would have been outstanding if dilutive potential common shares had been issued. Thus, in a period in which the effect of potential common stock is antidilutive, it is not included in the determination of DEPS. It is included, however, in those periods in which its effect is dilutive.
Among the items reported on Cord, Inc.’s income statement for the year ended December 31 were the following:
Compensation expense for a stock option plan: $50,000
Insurance premium on the life of an officer (Cord is the owner and beneficiary.): 25,000
Neither is deductible for tax purposes. Temporary differences amount to
$0
Expenses for compensation expense for a stock option plan and payment of a premium for life insurance covering a key executive are recognized in the financial statements but are not deductible under the provisions of the federal tax code. Because neither will result in taxable or deductible amounts in future years, they are permanent, not temporary differences.
Which of the following governmental entities that use proprietary fund accounting should be reported in a statement of cash flows?
Public Benefit Corporation:
Governmental Utilities:
Yes
Yes
Because proprietary funds concentrate on the capital maintenance concept, their reporting requirements are similar to those for business enterprises. Thus, the measurement focus concentrates on the recording of revenues and expenses. The statements required for proprietary funds include (1) a statement of net position; (2) a statement of revenues, expenses, and changes in fund net position; and (3) a statement of cash flows.
The renovation of Fir City’s municipal park was accounted for in a capital projects fund. Financing for the renovation, which was begun and completed during the current year, came from the following sources:
Grant from state government: $400,000
Proceeds from general obligation bond issue: 500,000
Transfer from Fir’s general fund: 100,000
In its governmental fund statement of revenues, expenditures, and changes in fund balances for the current year, Fir should report these amounts as
Revenues:
Other Financing Sources:
$400,000
$600,000
Governmental fund revenues are increases in fund financial resources other than from (1) interfund transfers, (2) debt issue proceeds, and (3) redemptions of demand bonds. Thus, revenues of a capital projects fund include grants. The grant (a voluntary nonexchange transaction) is recognized when all eligibility requirements, including time requirements, have been met. When modified accrual accounting is used, as in a capital projects fund, the grant also must be available. Other financing sources include proceeds from bonds and interfund transfers in. Thus, revenues of $400,000 and other financing sources of $600,000 ($500,000 + $100,000) are reported in the governmental fund statement of revenues, expenditures, and changes in fund balances.
Benedict Company leased equipment to Mark, Inc., on January 1, Year 2. The lease is for an 8-year period expiring December 31, Year 9. The first of 8 equal annual payments of $600,000 was made on January 1, Year 2. Benedict had purchased the equipment on December 29, Year 1, for $3,200,000. The lease is appropriately accounted for as a sales-type lease by Benedict. Assume that the present value at January 1, Year 2, of all rent payments over the lease term discounted at a 10% interest rate was $3,520,000. What amount of interest income should Benedict record in Year 3 (the second year of the lease period) as a result of the lease?
$261,200.
The net investment to be recorded by the lessor at 1/1/Year 2 is given as $3,520,000, the present value of the minimum lease payments discounted at 10%. The net investment is immediately reduced by the $600,000 lease payment on 1/1/Year 2, resulting in a carrying amount for Year 2 of $2,920,000. Interest earned for the Year 2 at a rate of 10% ($2,920,000 × 10%) is $292,000. Thus, the $600,000 1/1/Year 3 lease payment consists of the $292,000 interest component and a $308,000 reduction of the net investment. Because the Year 3 net investment balance is $2,612,000 ($2,920,000 – $308,000), interest income for Year 3 is $261,200 ($2,612,000 × 10%).
In accounting for inventories, GAAP require departure from the historical cost principle when the utility of inventory has fallen below cost. Inventory accounted for under certain cost flow methods can be measured at the lower of cost or net realizable value (NRV). The term “net realizable value (NRV)” as defined here means
Estimated selling price minus estimated costs of completion and disposal.
Inventory measured using any cost method other than LIFO or retail (e.g., FIFO or average cost) must be measured at the lower of cost or NRV. NRV is the estimated selling price in the ordinary course of business, minus reasonably predictable costs of completion, disposal, and transportation.
A water district is administered by a separately elected board. The board has no power to levy taxes or issue bonds. The board is substantively the same as the county that approves the water district’s budget. The county
Should use the blending method to report the water district’s financial results.
Discrete presentation is reporting component unit financial data separately from that of the primary government (the county). However, some component units are, in substance, the same as the primary government (the county) and should be reported as a part of it by using the blending method. The water district is part of the county and is not legally separate. Also, the county has a financial benefit or burden relationship with the water district. The water district cannot levy taxes or issue bonds. Accordingly, the water district’s financial data should be blended in the county’s financial statements.
The computation of the current value of an asset using the present value of future cash flows method does not include the
Cost of alternate uses of funds given up.
The calculation of the current value of an asset using the present value method requires (1) the discount period (the productive life of the asset), (2) the discount rate (the applicable interest rate), and (3) the future values (the future amounts of cash receipts or cash savings). This method does not consider opportunity costs (benefits of the best alternative use of funds).
Savor Co. had $100,000 in cash-basis pretax income for Year 2. At December 31, Year 2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, Year 1, balances. Compared to the accrual basis method of accounting, Savor’s cash pretax income is
Lower by $16,000.
The increase in accounts receivable indicates that cash-basis pretax income is $10,000 lower than accrual-basis pretax income. Revenues from the increase in receivables are reported as earned in an earlier period (Year 2) than the future related cash inflows. The decrease in accounts payable indicates that cash-basis pretax income is $6,000 lower than accrual-basis pretax income. The cash outflows related to the increase in payables occurred in Year 2, but the related expense was accrued in Year 1. Hence, cash pretax income is lower than accrual-basis income by $16,000.
Spring Corp. entered into a 5-year lease agreement with Fall Corp. Spring, the lessee, paid an additional $5,000 nonrefundable lease bonus to Fall upon signing the operating lease agreement. When would Fall recognize in income the nonrefundable lease bonus paid by Spring?
Over the life of the lease.
Nonrefundable lease bonuses should be recognized as rental revenue on a straight-line basis over the lease term.
On October 15, Year 5, a major investment advisor issued a pessimistic report on the entity’s long-term prospects. The market price for its common stock subsequently declined by 50%. How should this event be presented in the financial statements?
No financial statement disclosure.
The market price for the entity’s common stock is not a financial event that affects the fairness of the presentation of the financial statements. Accordingly, no disclosure is necessary for changes in the market price of the securities.
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.
The payment of dividends, the repayment of debt (the mortgage), and the issuance of debt (the bonds) are financing activities. The purchase of debt or equity instruments the (available-for-sale securities) is an investing activity. Operating cash flows exclude these financing and investing cash flows. Moreover, these items do not affect net income. Consequently, net cash provided by operating activities can be determined by adjusting net income for the changes in inventory and accounts payable. To account for the difference between cost of goods sold (a deduction from income) and cash paid to suppliers, a two-step adjustment is necessary. The difference between cost of goods sold and purchases is the change in inventory. The difference between purchases and the amount paid to suppliers is the change in accounts payable. Accordingly, the conversion of cost of goods sold to cash paid to suppliers requires subtracting the inventory increase and the accounts payable decrease. The net cash provided by operating activities is therefore $0 ($70,000 net income – $40,000 inventory increase – $30,000 accounts payable decrease).
Kind Nurses Assoc. is a voluntary health and welfare organization. Nurses are paid to visit homes of elderly people and are reimbursed for mileage and supplies. Which of the following items should Kind record as a support activity expense in its statement of activities?
Fundraising costs.
NFPs must report expenses by functional and natural classifications. Examples of natural classifications are (1) salaries, (2) rent, (3) interest, (4) electricity, (5) depreciation, (6) awards and grants to others, and (7) professional fees. Program services distribute goods and services to beneficiaries, customers, or members to fulfill the purposes of the entity. Supporting activities are not program services and include management and general, membership development, and fundraising activities.
A nongovernmental not-for-profit entity discovered that equipment purchased on January 1, Year 1, for $750,000 was incorrectly expensed instead of capitalized. The equipment should have been depreciated (straight-line method) over 5 years with no salvage value. What is the depreciation expense presented on the cash flow statement (indirect method) dated December 31, Year 3?
$150,000.
Any error related to a prior period discovered after the statements are available to be used must be reported as an error correction by restating the prior period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) net assets at the beginning of the first period reported are adjusted for the cumulative effect of the error on the prior periods. Corrections of prior period errors must not be included in the change in net assets from operations for the current year. Thus, depreciation expense should not be adjusted for the prior-period errors. The correction is to restate the prior period statements or beginning net assets. Accordingly, the financial statements for Year 3 should report depreciation expense of $150,000 [($750,000 ÷ 5 years) – $0 salvage value]. This noncash expense is included in the change in net assets. It is therefore added to the change in net assets in the reconciliation to net cash flow from operating activities.
A transportation company purchased a passenger bus for $100,000 on January 1, Year 1. The company expects the bus to be used for 20 years if it follows a maintenance schedule of replacing the engine after 10 years and replacing the seats every 8 years. It estimates that the current cost to replace the engine is $25,000 and the current cost to replace the seats is $10,000. The company uses straight-line depreciation and the bus has no residual value. The company considers any component equal to or greater than 10% of the overall cost to be significant. Under IFRS, how much depreciation expense should the company recognize for the bus for the year ended December 31, Year 1?
$7,000.
Under IFRS, each part of an item with a cost significant to the total cost must be depreciated separately. The engine and the seats are considered significant to the total cost and thus should be depreciated separately. The company uses straight-line depreciation, and the bus has no residual value. Therefore, the depreciation expense for the engine is $2,500 ($25,000 ÷ 10 years), for the seats is $1,250 ($10,000 ÷ 8 years), and for the rest of the bus is $3,250 [($100,000 – $25,000 – $10,000) ÷ 20 years]. The total depreciation expense the company should recognize for the bus for the year ended December 31, Year 1, is $7,000 ($2,500 + $1,250 + $3,250).
A statement of cash flows is to be presented in general-purpose external financial statements by which of the following?
All business and not-for-profit entities.
A statement of cash flows is required as part of a full set of financial statements of all business entities (both publicly held and privately held) and nongovernmental not-for-profit entities.
During the current fiscal year, Foxx, a nongovernmental not-for-profit entity, received pledges of $300,000. Of the pledged amount, $200,000 was designated by donors for use during the current year, and $100,000 was designated for next year. Five percent of the pledges are expected to be uncollectible. What amount should Foxx report as net assets with donor restrictions (contributions) in the statement of activities for the current year?
$95,000.
Contributions are classified as increases in net assets with donor restrictions if, for example, the donor stipulates that resources are to be used only after a specified date. Pledges in the amount of $100,000 were stipulated for use next year. Of this amount, 5% is expected to be uncollectible. Accordingly, $95,000 [$100,000 – ($100,000 × 5%)] is reported as net assets with donor restrictions (contributions).
Fact Pattern: During the year just ended, 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 feasibility: 10,000
Other coding costs after establishment of technological feasibility: 24,000
Other testing costs after establishment of technological feasibility: 20,000
Costs of producing product masters for training materials: 15,000
Duplication of computer software and training materials from product masters (1,000 units): 25,000
Packaging product (500 units): 9,000
The guidance pertaining to accounting for the costs of computer software to be sold, leased, or otherwise marketed applies.
In Pitt’s December 31 balance sheet, what amount should be capitalized as software cost subject to amortization?
$59,000.
Costs incurred internally in creating a computer software product are expensed when incurred as research and development until technological feasibility has been established for the product. Afterward, all software production costs incurred until the product is available for general release to customers are capitalized and amortized separately for each product. Subsequently, the lower of unamortized cost or net realizable value at the end of the period is reported in the balance sheet. Hence, (1) the costs of completing the detail program design and establishing technological feasibility are expensed; (2) the costs of duplicating software, documentation, and training materials and packaging the product are inventoried; and (3) the costs of coding and other testing after establishing technological feasibility and the costs of producing product masters are capitalized and amortized. The amount capitalized as software cost subject to amortization is therefore $59,000 ($24,000 + $20,000 + $15,000).
During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions?
$0.
An entity’s transactions in its own stock do not affect net income or the results of operations.
When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using historical exchange rates?
Inventories carried at cost.
The current rate of exchange is used for remeasuring certain balance sheet items and the historical rate for other balance sheet items. Nonmonetary balance sheet items and related revenue, expense, gain, and loss accounts are remeasured at the historical rate. Monetary accounts are remeasured at the current rate. Inventories valued at cost are nonmonetary items and are measured at historical rates.
On March 31, Dallas Co. received an advance payment of 60% of the sales price for special order goods to be manufactured and delivered within 5 months. At the same time, Dallas subcontracted for production of the special order goods at a price equal to 40% of the main contract price. What liabilities should be reported in Dallas’s March 31 balance sheet?
Deferred revenues:
Payables to subcontractor:
60% of main contract price
None
The 60% advance payment is a deferred revenue (a contract liability) because it is an obligation to transfer goods to a customer for which consideration already has been received from the customer. The agreement with the subcontractor does not create a liability because the entity has no performance obligation to transfer goods or provide services. That obligation will not arise until the subcontractor has performed.
Which of the following financial categories are used in a nongovernmental not-for-profit organization’s statement of financial position?
Assets, liabilities, and net assets.
The categories used in an NFP’s statement of financial position are assets, liabilities, and net assets. Assets and liabilities must be classified into reasonably homogeneous groups. Net assets are classified at a minimum as net assets without donor restrictions and net assets with donor restrictions.
