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1

AICPA.920515FAR-P1-FA
Notes Receivable


On December 31, 2005, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity.
The note from Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, 2005 was 8%. The compound interest factors to convert future values into present values at 8% follow:
Present value of $1 due in nine months: .944
Present value of $1 due in five years: .680

At what amounts should these two notes receivable be reported in Jet's December 31, 2005, balance sheet?

Hart Maxx
$9,440 $6,800
$9,652 $7,820
$10,000 $6,800
$10,000 $7,820


Incorrect...

The five years of interest at 3% will also be received at maturity and must be discounted along with the $10,000 face value payment.

2

AICPA.911127FAR-P1-FA




Tag Question

Each of Potter Pie Co.'s 21 new franchisees contracted to pay an initial franchise fee of $30,000.
By December 31, 2005, each franchisee had paid a nonrefundable $10,000 fee and signed a note to pay $10,000 principal plus the market rate of interest on December 31, 2006 and December 31, 2007.
Experience indicates that one franchise will default on the additional payments. Services for the initial fee will be performed in 2006.
What amount of net unearned franchise fees would Potter report on December 31, 2005?

A. $400,000
B. $600,000
C. $610,000
D. $630,000

Incorrect...

This amount excludes the $10,000 received from the one franchisee that is expected to default. No services have been performed as of the end of 2005. Therefore, all cash collected also represents unearned revenue.
When the actual default occurs, the $10,000 will be recognized as a gain or included in revenue.

B

Incorrect...

This amount excludes the $10,000 received from the one franchisee that is expected to default. No services have been performed as of the end of 2005. Therefore, all cash collected also represents unearned revenue.
When the actual default occurs, the $10,000 will be recognized as a gain or included in revenue.

C
Correct!

The $610,000 net unearned fee revenue = (21)($30,000) - $20,000. This amount includes the notes received, but does not include the one expected uncollectible note.
The notes receivable balance, recorded along with the unearned revenue, will not reflect the note expected to be uncollectible. Bad debt expense is not recorded for this note because there has been no revenue recognized against which to match the expense.

3

AICPA.901103FAR-P2-FA
Notes Receivable
On June 1, 2005, Yola Corp. loaned Dale $500,000 on a 12% note, payable in five annual installments of $100,000 beginning January 2, 2006. In connection with this loan, Dale was required to deposit $5,000 in a noninterest-bearing escrow account.
The amount held in escrow is to be returned to Dale after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2005. Dale made timely payments through November 1, 2005. On January 2, 2006, Yola received payment of the first principal installment plus all interest due.

On December 31, 2005, Yola's interest receivable on the loan to Dale should be

A. $0
B. $5,000
C. $10,000
D. $15,000

C
Correct!

Because the last interest payment was made on November 1, the interest for November and December is unpaid as of December 31, 2005. Therefore, two months of interest is receivable, as of December 31, 2005, for a total receivable of $10,000 = (2/12)(12%)($500,000). No principal payments have yet been made as of this date.

4

AICPA.931115FAR-P1-FA
Criteria for Sale of Receivables
Roth, Inc. received from a customer a one-year, $500,000 note bearing annual interest of 8%. After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash did Roth receive from the bank?
A. $540,000
B. $523,810
C. $513,000
D. $495,238

C

Correct!

Maturity value of the note: $500,000(1.08)
$540,000
Less discount to the bank: $540,000(.10)(6/12)
(27,000)
Equals proceeds to Roth
$513,000
The bank charges its discount on the maturity amount, for the period it holds the note. In effect, it is charging interest on interest yet to accrue (for the last six months). This procedure is followed because the maturity value is the amount at risk.

5

AICPA.931115FAR-P1-FA
Criteria for Sale of Receivables

Roth, Inc. received from a customer a one-year, $500,000 note bearing annual interest of 8%. After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash did Roth receive from the bank?
A. $540,000
B. $523,810
C. $513,000
D. $495,238

B
Incorrect...

This answer incorrectly computes the discount to the bank. The correct approach is:
Maturity value of the note: $500,000(1.08)
$540,000
Less discount to the bank: $540,000(.10)(6/12)
(27,000)
Equals proceeds to Roth
$513,000

C
Correct!

Maturity value of the note: $500,000(1.08)
$540,000
Less discount to the bank: $540,000(.10)(6/12)
(27,000)
Equals proceeds to Roth
$513,000
The bank charges its discount on the maturity amount, for the period it holds the note. In effect, it is charging interest on interest yet to accrue (for the last six months). This procedure is followed because the maturity value is the amount at risk.

6

AICPA.900505FAR-P1-FA

Garr Co. received a $60,000, 6-month, 10% interest-bearing note from a customer. After holding the note for two months, Garr was in need of cash and discounted the note at the United Local Bank at 12%.
The amount of cash Garr received from the bank was
A. $60,480
B. $60,630
C. $61,740
D. $62,520

B
Incorrect...

The $60,630 answer does not correctly consider the time period the note has been outstanding, and the time period the bank will hold the note. The correct answer is:
Maturity value of the note: $60,000 + $60,000(.10)(6/12) =
$63,000
Less discount to bank: $63,000(.12)(4/12) =
2,520
Equals proceeds to Garr
$60,480

A
Correct!

The calculation leading to the correct answer is:
Maturity value of the note: $60,000 + $60,000(.10)(6/12) =
$63,000
Less discount to bank: $63,000(.12)(4/12) =
2,520
Equals proceeds to Garr
$60,480
The bank charges its discount on the maturity value of the note, for the period of time it will hold the note.

7

AICPA.911117FAR-P1-FA
Criteria for Sale of Receivables

On July 1, 2005, Lee Co. sold goods in exchange for a $200,000, 8-month, noninterest-bearing note receivable. At the time of the sale, the note's market rate of interest was 12%.
What amount did Lee receive when it discounted the note at 10% on September 1, 2005?

A. $194,000
B. $193,800
C. $190,000
D. $188,000

A
Incorrect...

This answer uses an incorrect combination of interest rates and periods in computing the proceeds.
The correct analysis is:

Maturity value of note:
$200,000
Less discount: $200,000(.10)(6/12)
(10,000)
Equals proceeds on note
$190,000

B
Correct

8

AICPA.920541FAR-P1-FA
Criteria for Sale of Receivables

Ace Co. sold King Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments. This note was discounted to yield a 9% rate to King. The present value factors of an ordinary annuity of $1 for five periods are as follows:

8% 3.992
9% 3.890
What should be the total interest revenue earned by King on this note?

A. $9,000
B. $8,000
C. $5,560
D. $5,050

A, B, D
Incorrect...

This answer fails to first compute the annual payment based on the 8% contractual rate, and then to compute the total interest as the difference between the total payments to be received and the amount paid to Ace. The proceeds to Ace use the 9% rate because that is the true yield rate. The correct analysis is:

The annual payment P is found as: $20,000 = P(3.992). P = $5,010

Total interest revenue = total payments by Ace - proceeds to Ace
= 5($5,010) - $5,010(3.89) = $5,560.

c

Correct!

Total interest over the life of the note equals the total amount paid by Ace over the life of the note less the proceeds to Ace. The proceeds equal the present value of the payments at the 9% yield rate. The annual payment is found using the 8% rate because that rate is contractually set and determines the annual payment.
The annual payment P is found as: $20,000 = P(3.992). P = $5,010

Total interest revenue = total payments by Ace - proceeds to Ace
= 5($5,010) - $5,010(3.89) = $5,560.

9

AICPA.911112FAR-P1-FA
Introduction to Inventory
On December 28, 2005, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows:

Packaging for shipment
$1,000
Shipping
1,500
Special handling charges
2,000
These goods were received on December 31, 2005. In Kerr's December 31, 2005 balance sheet, what amount of cost for these goods should be included in inventory?

A. $54,500
B. $53,500
C. $52,000
D. $50,000

Incorrect...

This answer adds all three listed costs to Kerr's carrying value.

But Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs. Even the shipping costs are borne by the seller because the terms are FOB destination.

This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr's recorded cost is $50,000.

D

Correct!

Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs.

Even the shipping costs are borne by the seller because the terms are FOB destination. This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr's recorded cost is $50,000.

10

AICPA.930520FAR-P1-FA
Introduction to Inventory

The following items were included in Opal Co.'s inventory account on December 31, 2004:
Merchandise out on consignment, at sales price, including 40% markup on selling price
$40,000
Goods purchased, in transit, shipped FOB shipping point
36,000
Goods held on consignment by Opal
27,000
By what amount should Opal's inventory account at December 31, 2004 be reduced?

A. $103,000
B. $67,000
C. $51,000
D. $43,000

D
Correct!

The merchandise out on consignment is included in inventory at selling price. But inventory must be measured at cost. $40,000 = cost + .40($40,000). Thus, cost = $24,000. Therefore, inventory should be reduced by the $16,000 of markup on the merchandise out on consignment.
The goods held on consignment should be removed from the inventory because these goods do not belong to Opal.

Hence, the total reduction from inventory is $43,000 ($16,000 + $27,000). The goods in transit are properly included in inventory because they were shipped FOB shipping point, which means the goods belong to Opal when the goods reach the common carrier at the shipping point.

11

AICPA.911102FAR-P1-FA
Introduction to Inventory

King Corp.'s trial balance for the year ended December 31, 2005, included the following:

Debit Credit
Sales $300,000
Cost of sales $120,000
Administrative expenses 30,000
Loss on sale of equipment 18,000
Sales commissions 20,000
Interest revenue 10,000
Freight-out 6,000
Loss on early retirement of long-term debt 20,000
Bad debt expense 6,000 __________
$220,000 $310,000
========= =========
Other information
Finished goods inventory:
January 1, 2005 $200,000
December 31, 2005 180,000
In King's 2005 multiple-step income statement, the cost of goods manufactured was

A. $100,000
B. $106,000
C. $140,000
D. $146,000

A
Correct!

Finished goods manufactured
+ beginning inventory
- ending inventory
= cost of goods sold
X + $200,000 - $180,000 = $120,000
X = $100,000 = cost of goods manufactured

12

AICPA.941113FAR-FA




Tag Question

Herc Co.'s inventory on December 31, 2005 was $1,500,000, based on a physical count priced at cost, and before any necessary adjustment for the following:
Merchandise costing $90,000, shipped FOB shipping point from a vendor on December 30, 2005, was received and recorded on January 5, 2006.
Goods in the shipping area were excluded from inventory although shipment was not made until January 4, 2006. The goods, billed to the customer FOB shipping point on December 30, 2005, had a cost of $120,000.
What amount should Herc report as inventory in its December 31, 2005, balance sheet?

A. $1,500,000
B. $1,590,000
C. $1,620,000
D. $1,710,000

D
Correct!

The correct ending inventory balance is $1,710,000 ($1,500,000 + $90,000 + $120,000).
The $90,000 of merchandise is included because it was shipped before year-end and the title was transferred to Herc at the shipping point (before year-end). The $120,000 also is included because the goods have not been shipped. The FOB designation is irrelevant because the goods have not yet reached a common carrier.

13




Tag Question

The following information was taken from Cody Co.'s accounting records for the year ended December 31, 2005:
Decrease in raw materials inventory $ 15,000
Increase in finished goods inventory 35,000
Raw materials purchased 430,000
Direct labor payroll 200,000
Factory overhead 300,000
Freight-out 45,000

There was no work-in-process inventory at the beginning or end of the year. Cody's 2005 cost of goods sold is
A. $895,000
B. $910,000
C. $950,000
D. $955,000

C
Incorrect...

The correct answer is $910,000:
Raw materials purchased $430,000
Plus decrease in raw materials 15,000*
Direct labor 200,000
Factory overhead 300,000
Less finished goods increase (35,000) **
Cost of goods sold $910,000
* The decrease in raw materials is added to the amount purchased resulting in the cost of materials incorporated into production. In other words, $15,000 of materials purchased in 2005 were placed into production in 2005. The total cost of materials brought into production in 2005 equals $445,000.


** The increase in finished goods represents costs incurred in the current period to finish inventory that was not sold in the current period. Therefore, these costs must be removed in determining cost of goods sold.
Freight-out is not a manufacturing cost but rather is a distribution cost.

Therefore, freight-out is not inventoried.

There is no change in work-in-process inventory to affect the calculation.

14

AICPA.900507FAR-P1-FA
Equity Method
Lee, Inc. acquired 30% of Polk Corp.'s voting stock on January 1, 2004 for $100,000.
During 2004, Polk earned $40,000 and paid dividends of $25,000. Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During 2005, Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1.
On July 1, 2005, Lee sold half of its stock in Polk for $66,000 cash.

The carrying amount of this investment in Lee's December 31, 2004 Balance Sheet should be:

A. $100,000
B. $104,500
C. $112,000
D. $115,000

Correct!

$104,500 = $100,000 + .30[$40,000-$25,000] because the equity method is used by Lee, who has significant influence over Polk.
Under the equity method, the investor recognizes its share of undistributed earnings in the investee, since acquiring the investment, in its income.

Use the format !

Equity Method
Dr) Orig cost 100
Dr.) Equity Accrued 40 x 30% =12
Cr.) Dividends 25X30% 7.5
= Equity Investment in S
B
Correct!

$104,500 = $100,000 + .30[$40,000-$25,000] because the equity method is used by Lee, who has significant influence over Polk.
Under the equity method, the investor recognizes its share of undistributed earnings in the investee, since acquiring the investment, in its income.

15

AICPA.920542FAR-P1-FA
Equity Method

Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. Green's 30% ownership of common stock gives it significant influence over Axel.
In 2004, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations.
What amount of dividend revenue should Green report in its Income Statement for the year ended December 31, 2004?

A. $0
B. $30,000
C. $60,000
D. $90,000

C
Correct!

Only the dividends received on the preferred stock are recognized as revenue: $60,000 = 100% x ($60,000). The common stock investment is accounted for under the equity method, which treats all dividends received as a return of capital. Dividends reduce the investment account under this method.

Preferred Stockは会社のCSではないので、会社のCSによる議決権に関係ないから、Dividend Incomeで認識。

16

AICPA.901113FAR-P1-FA
Bond Complications

On September 1, 2005, Cobb Co. issued a note payable to the National Bank in the amount of $900,000, bearing interest at 12%, and payable in three equal annual principal payments of $300,000.
On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2006.
At December 31, 2006, Cobb should record accrued interest payable of

A. $36,000
B. $33,000
C. $24,000
D. $22,000

C
Correct!

As of 12/31/06, the first $300,000 principal installment has been paid, along with interest. This payment was made 9/1/06. The remaining principal outstanding on that date is $600,000 ($900,000 - $300,000). Thus, accrued interest on 12/31/06 is $24,000 = 600,000(.12)(4/12).

17

AICPA.920529FAR-P1-FA
Bond Complications



Dixon Co. incurred costs of $3,300 when it issued, on August 31, 2005, 5-year debenture bonds dated April 1, 2005.
What amount of bond issue expense should Dixon report in its income statement for the year ended December 31, 2005?

A. $220
B. $240
C. $495
D. $3,300

C
Incorrect...

This answer uses the incorrect bond term. There are four years and seven months in the bond term (5 years less the 5 months from April 1 to August 31), or a total of 55 months. Thus, the 2005 amortization of bond issue costs, which is capitalized as a deferred charge, is $240 [(4/55)$3,300].
The bonds were outstanding four months in 2005.

18

AICPA.911128FAR-P1-FA
Bond Complications


On October 1, 2005, Brock, Inc. issued 200 of its 10%, $1,000 bonds at 101 plus accrued interest. The bonds are dated July 1, 2005, and mature on July 1, 2015. Interest is payable semiannually on January 1 and July 1.
At the time of issuance, Brock received cash of

A. $207,000
B. $205,000
C. $202,000
D. $197,000

A
Correct!

The proceeds on a bond issue equal the total bond price plus accrued interest since the last interest date. The proceeds of $207,000 = 200($1,000)(1.01) + 200($1,000)(.10)(3/12).
The 3/12 factor is the time between the bond date (or previous interest date) and the issuance date.

C
Incorrect...

This is the total bond price only. The accrued interest from July 1 must also be included in the proceeds.