Day 1-14

Question 1

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:

Answer 1

Economic entity.

Question 2

What is the underlying concept governing the Generally Accepted Accounting Principles pertaining to recording gain contingencies?

Answer 2

Conservatism.

Question 3

According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of:

Answer 3

Cost-benefit.

Question 4

In determining the fair value of an asset in the most advantageous market, the market-based exit price should be adjusted for:
Transaction Cost(yes/no)
Transportation Cost(yes/no)

Answer 4

Transportation cost

Question 5

In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account:

Answer 5

What is:
Physically possible
Financially feasible
Legally Permissible

Question 6

Which of the following statements concerning the fair value hierarchy used in ascertaining fair value is/are correct?

I. Quoted market prices should be adjusted for a “blockage factor” when a firm holds a sizable portion of the asset being valued.

II. Quoted market prices in markets that are not active because there are few relevant transactions cannot be used.

Answer 6

Neither I or II

Question 7

Which of the following levels of the fair value hierarchy is the highest and which is the lowest in terms of desirability for use in determining fair value?

Answer 7

Highest: 1
Lowest: 3

Question 8

According to the IASB Framework for the Preparation and Presentation of Financial Statements, the qualitative characteristic of faithful representation includes

Answer 8

Neutrality, completeness, and free from error.

Question 9

When should an item that meets the definition of an element be recognized?

Answer 9

The item has a cost or value that can be measured reliably.

Question 10

Which of the following statements, if any, concerning IFRS for SMEs is/are correct?

I. IFRS for SMEs is based on accrual basis accounting.

II. Generally, IFRS for SMEs may be used as an alternative to using OCBOA.

Answer 10

Both I and II.

Question 11

IFRS requires a classified Statement of Financial Position. What are the required classifications?

Answer 11

Current and non-current assets and liabilities.

Question 12

Converting Cash to Accrual Basis:

Prepaid’s and accrued expenses…

Answer 12

Add: beginning balance of prepaid expenses(because they were paid in the prior year but consumed in the current year.)
Subtract: End of year prepaid expenses(because they were paid this year and will be consumed next year)

Subtract: Beginning of year accrued expense(because they were not paid last year, but were last years expense item paid this year)
Add: End of the year accrued expenses(because they were not paid this year, but are this years expense paid next year).

Question 13

Converting Cash to Accrual:
Assets and Liabilities
General Rule:

Answer 13

General Rule:

Add: decreases in liabilities and increases in assets

Subtract: Increases in liabilities and decreases in assets

Question 14

Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization?
Reliability.
Timeliness.
Neutrality.
Relevance.

Answer 14

Relevance

Question 15

According to the FASB conceptual framework, predictive value is an ingredient of:
Relevance or Faithful Representation?
One or the other?
Both?

Answer 15

Relevance

Predictive value is one of the ingredients of relevance, one of the primary characteristics of accounting information. The other ingredient of relevance is confirmatory value.

Predictive value is not an ingredient of faithful representation. Faithful representation is the other primary characteristic of accounting information. Its three main ingredients are completeness, free from material error, and neutrality.

Question 16

Conceptually, interim financial statements can be described as emphasizing:
Timeliness over faithful representation.
Faithful representation over relevance.
Relevance over comparability.
Comparability over neutrality.

Answer 16

Timeliness over faithful representation.

Question 17

On December 31, 20X2, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, 20X2, the net realizable value of the equipment was below historical cost.

What is the appropriate measurement basis for equipment included in Brooks’ December 31, 20X2, Balance Sheet?

Answer 17

Net Realizable Value

Question 18

ASC 820(Fair Value) exempts what from the purview of the fair value framework?

Answer 18

Share-based payment transactions (and inventory valuing and other minor items)

Question 19

Fair value measurement approach that discounts future cash flows?

Answer 19

Income approach

Question 20

On January 15, 2008, Able Co. made a significant investment in the debt securities of Baker Co., which it intends to hold until the debt matures. Able’s fiscal year-end is December 31. If Able Co. intends to measure and report its investment in Baker Co. debt securities at fair value as permitted by ASC 820 on which one of the following dates must Able elect to implement the fair value option?

Answer 20

Date that they acquire the debt

Question 21

The appropriate basis for determining fair value of an asset or liability is an:
exit price or entry price?

Answer 21

exit price

Question 22

Level three fair value observations are——

Answer 22

non observable

Question 23

What are the two fundamental (primary) qualitative characteristics of useful financial information in the IASB framework?

Answer 23

relevance
and
faithful representation

Question 24

What are the five elements in the IASB framework?

Answer 24

asset, liability, equity, income and expense.

Question 25

What inventory valuation methods can be used under IFRS for SMEs?

Answer 25

FIFO, and Weighted average cost. LIFO cannot be used

Question 26

Name 3 OCBOAs (other comprehensive basis of accounting)

Answer 26

Cash basis, modified cash basis, and income tax basis IFRS for SMEs is a form of GAAP

Question 27

Which one of the following is a characteristic of accounting under IFRS for SMEs? - Interest incurred during construction must be capitalized. - Earnings per share must be provided in the financial statements. - Goodwill must be amortized. - The LIFO cost flow assumption can be used in valuing inventories.

Answer 27

Goodwill must be amortized

Question 28

``` 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? Both? Neither? ```

Answer 28

Both

Question 29

The process of converting noncash resources and rights into cash or claims to cash:

Answer 29

Earnings

Question 30

Valuation method for Long-term receivables

Answer 30

present value of future cash flows

Question 31

Valuation method for equipment

Answer 31

historical cost or historical proceeds

Question 32

Valuation method for Warranty obligations

Answer 32

Net realizable value or settlement rate

Question 33

Valuation method for short-term payables

Answer 33

historical cost or historical proceeds

Question 34

Valuation method for accounts receivable

Answer 34

net realizable value or settlement rate

Question 35

Valuation method for bonds payable due in 10 years

Answer 35

present value of future cash flows

Question 36

How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord's financial statements?

Answer 36

Unearned rent is a liability. The landlord debits cash and credits unearned rent when they receive the rent from the tenants.

Question 37

What type of activity is this on the statement of cashflows? | "Collection of a note receivable from a related party"

Answer 37

investing activity

Question 38

Which of these are general and admin expenses? Interest or Advertising Both/none/one

Answer 38

neither

Question 39

Should prior year amortization expense adjustment be included in net income?

Answer 39

No, it is a retroactive adjustment to retained earnings.

Question 40

The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid-in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year?

Answer 40

$12

Question 41

What is included as a supplement to the statement of cashflows? Cashflow per share? Conversion of debt to equity? One/Both/Neither?

Answer 41

Conversion of debt to equity would appear in the supplemental noncash disclosure schedule.

Question 42

Bay Manufacturing Co. purchased a three-month U.S. Treasury bill. In preparing Bay's Statement of Cash Flows, this purchase would:

Answer 42

Have no effect because three months is the cuttoff for cash equivalents. There is no effect on statement of cashflows because the company is essentially trading cash for a cash equivalent.

Question 43

Working capital equals:

Answer 43

Current assets minus current liabilities.

Question 44

The summary of significant accounting policies should disclose the: - Pro forma effect of retroactive application of an accounting change. - Basis of profit recognition on long-term construction contracts. - Adequacy of pension plan assets in relation to vested benefits. - Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.

Answer 44

Basis of profit recognition on longterm construction contracts.

Question 45

``` Which of the following is not an aspect of a firm's operations necessitating disclosure of risks and uncertainties? Principal markets Products and services Pension plan Geographical location ```

Answer 45

Pension plan.... this is an internal policy matter and is not listed as a specific attribute for disclosure in the standard.

Question 46

Under what conditions is disclosure about risks and uncertainty pertaining to concentrations required?

Answer 46

If the firm is vulnerable to a severe impact in the near term because of a concentration, and it is at least reasonably possible that the impact will occur

Question 47

Which of the following is not a source of risk and uncertainty for which disclosures are required by GAAP? - Nature of a firm's operations - Effect of changes in government regulations - Use of estimates in financial statements - Vulnerability to significant concentrations

Answer 47

effect of changes in government regulations.

Question 48

Working Capital=

Answer 48

Current Assets/Current Liabilities

Question 49

Acid test ratio(quick ratio) =

Answer 49

(Cash + Net Receivables +Marketable securities)/Current Liabilities

Question 50

Securities Defensive-interval ratio=

Answer 50

(Cash +Net Receivables+ Marketable Securities)/ Average Daily Cash Expenditures

Question 51

Times interest earned ratio=

Answer 51

(Net Income+ Interest Expense + Income Tax)/ Interest Expense

Question 52

Times Preferred dividend earned ratio=

Answer 52

Net Income/ Annual Preferred Dividend Obligation

Question 53

A/R Turnover=

Answer 53

Net Credit Sales/ (Average net accounts receivable)

Question 54

Inventory Turnover=

Answer 54

COGS/Avg. Inventory

Question 55

Operating cycle=

Answer 55

Days Receivable/Days inventory

Question 56

Consolidated financial statements are based on the concept that: - In the preparation of financial statements, legal form takes precedence over economic substance. - In the preparation of financial statements, economic substance takes precedence over legal form. - Financial information should be presented separately for each legal entity. - Separate financial statements are more meaningful than consolidated financial statements.

Answer 56

In the preparation of financial statements, economic substance takes precedence over legal form.

Question 57

Which one of the following kinds of eliminations, if any, will be required in every consolidating process? - Intercompany receivables/payables? - Intercompany investment? - Intercompany Revenues/expanses? - Both/Neither

Answer 57

Intercompany investment

Question 58

Which one of the following kinds of accounts is least likely to be eliminated through an eliminating entry on the consolidating worksheet? - Receivables. - Investment. - Goodwill. - Payables.

Answer 58

goodwill

Question 59

Under which of the following methods of carrying a subsidiary on its books, if any, will the carrying value of the investment normally change following a combination? Cost/Equity/Both/Neither?

Answer 59

Equity

Question 60

``` A subsidiary, acquired for cash in a business combination, owned equipment with a market value in excess of book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would treat this excess as: Goodwill Plant and Equipment Retained Earnings Deferred Credits ```

Answer 60

Plant and equip

Question 61

On the date of a business combination using acquisition accounting, the consolidated stockholders' equity will exactly equal:

Answer 61

the parent company stockholders' equity. This will continue to be the case as long as the parent company uses a complete equity method of accounting for the subsidiary.

Question 62

On January 1, 20X1, Prim, Inc. acquired all the outstanding common shares of Scarp, Inc. for cash equal to the book value of the stock. The carrying amount of Scarp's assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. In preparing Prim's 20X1 consolidated income statement, which of the following adjustments would be made? - Depreciation expense would be decreased, and goodwill would be recognized. - Depreciation expense would be increased, and goodwill would be recognized. - Depreciation expense would be decreased, and no goodwill would be recognized. - Depreciation expense would be increased, and no goodwill would be recognized.

Answer 62

Depreciation expense would be decreased, and goodwill would be recognized.

Question 63

When a parent company uses the cost method on its books to carry its investment in a subsidiary, which one of the following will be recorded by the parent on its books? - Parent's share of subsidiary's net income/net loss. - Parent's amortization of goodwill resulting from excess investment cost over fair value of subsidiary's net assets. - Parent's share of subsidiary's cash dividends declared. - Parent's depreciation of excess investment cost over book values of subsidiary's net assets.

Answer 63

Parents share of subsidiary's cash dividends declared.

Question 64

If the parent uses the cost method to account for its investment in a subsidiary, the parent will recognize: - the parent's share of the subsidiary's net income. - the parent's share of the subsidiary's dividends. - amortization of parent's excess cost of investment over the book value of the subsidiary. - the parent's share of the subsidiary's net loss.

Answer 64

the parents share of the subsidiary's dividends

Question 65

Deferred income tax expense resulting from temporary differences related to depreciation of plant assets should be presented in a statement of cash flows (using indirect approach for operating activities) as a(n): - Noncash financing and investing activity reported in a separate schedule. - Financing activity. - Deduction from net income. - Addition to net income.

Answer 65

Addition to net income

Question 66

Which of the following describes a principal market for establishing fair value of an asset? - The market that has the greatest volume and level of activity for the asset - Any broker or dealer market that buys or sells the asset - The most observable market in which the price of the asset is minimized - The market in which the amount received would be maximized

Answer 66

The market that has the greatest volume and level of activity for the asset.

Question 67

What is a 10-Q?

Answer 67

Quarterly reviewed financial information an other information about the company.

Question 68

Assume that in acquiring a subsidiary, the parent determined that several depreciable assets had a fair value greater than book value. If the parent accounts for its investment in the subsidiary using the equity method, what effect will the amortization of the excess fair value over the book value of the subsidiary's assets have on the following parent's accounts? Investment in subsidiary (Increase/Decrease) Equity Revenue from subsidiary (Increase/Decrease)

Answer 68

Both Decrease When the fair value of a subsidiary's assets is greater than book value, it is as though the parent paid more for the assets than the subsidiary paid for those assets. Using the equity method of accounting for the investment, the parent must depreciate the excess of fair value over book value. That equity entry would be: DR: Equity Revenue - to reduce it by the amount of depreciation on the excess of fair value over book value, and CR: Investment in Subsidiary - to offset a portion of the net income (or increase the amount of net loss) recognized from the subsidiary. Thus, both accounts would be decreased.

Question 69

If a parent uses the equity method on its books to carry its investment in a subsidiary, which one of the following current year entries (made by the parent) must be reversed on the consolidating worksheet? Income from subsidiary (yes/no) Dividends from Subsidiary (yes/no)

Answer 69

Yes/Yes When a parent uses the equity method to account for its investment in a subsidiary, the parent will recognize on its books during the year its share of the subsidiary's income (or loss) and its share of dividends declared by the subsidiary. Therefore, in the consolidating process, those entries (and any other equity-based entries made by the parent) must be reversed so that the elements that make up those entries (revenues, expenses, etc.) can be individually recognized on the consolidating worksheet and the consolidated financial statements.

Question 70

Parco owns 100% of its subsidiary, Subco, which it acquired at book value. It carries its investment in Subco on its books using the equity method of accounting. At the beginning of its 2009 fiscal year, the investment in Subco account was $552,000. During 2009, Subco reported the following: Net income- $42,000 Dividends Declared/Paid -$12,000 There were no other transactions between the firms in 2009. In preparing its 2009 fiscal year consolidated statements, which one of the following is the amount of the investment eliminating entry that Parco will make as a result of its ownership of Subco?

Answer 70

552,000 The amount of an investment eliminating entry is the balance in the investment account as of the beginning of the period being consolidated. In this case, that was $552,000. If the parent uses the equity method to account for its investment in the subsidiary, the entries it makes during the year are reversed so that the investment account has its beginning of the year balance.

Question 71

Assume that in acquiring a subsidiary, the parent determined there were several depreciable assets of the subsidiary that had a fair value greater than book value. What effect will the excess fair value over book value of the subsidiary's assets have on the following accounts in the preparation of consolidated statements? Depreciable Assets (Increase/Decrease) Depreciation Expense (Increase/Decrease)

Answer 71

Increase/Increase The investment eliminating entry on the consolidating worksheet will write up (increasing on the worksheet) the value of depreciable asset, from book value to fair value on the date of the combination. The additional depreciable asset value recognized on the worksheet will then be depreciated on the worksheet, resulting in additional (increasing) depreciation expense.

Question 72

Assume that in acquiring a subsidiary, the parent determined there were several depreciable assets of the subsidiary that had a fair value less than book value. What effect will this fair value less than book value of the subsidiary's assets have on the following accounts in the preparation of consolidated statements? Depreciable assets (inc./dec.) Depreciation Expense (inc./dec.)

Answer 72

decrease/decrease Both accounts will be decreased. The investment eliminating entry on the consolidating worksheet will write down (decreasing on the worksheet) the value of depreciable asset, from book value to the lower fair value on the date of the combination. The decrease in depreciable asset value recognized on the worksheet will mean that the depreciation expense on the worksheet, brought on by the subsidiary, will overstate depreciation expense to the parent, resulting in a reduction (decreasing) depreciation expense for consolidated statement purposes.

Question 73

On January 1, 20x1 Ritt Corp. purchased 80% of Shaw Corp.'s $10 par common stock for $975,000. Ritt's cost reflects an appropriate fair value measure for all of Shaw's outstanding common stock. The original cost to the noncontrolling investors for the 20% of Shaw's common stock not acquired by Ritt was $200,000. At the date of Ritt's purchase, the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net) which were $100,000 in excess of the carrying amount. Which one of the following is the amount of noncontrolling interest that should be reported in a consolidated balance sheet prepared immediately following the business combination?

Answer 73

$243,750 Take total fair value of shaw (including goodwill) at the date Ritt acquired shaws common stock ($975,000/.8) $1,218,750. NCI would equal (.2*$1,218,750) $243,750. DR: Identifiable Net Assets $1,100,000 Goodwill 118,750 CR: Investment in Shaw $975,000 Noncontrolling Interest $243,750

Question 74

During 2008, Popco acquired 80% of the voting stock of Sonco in a legal acquisition. Which one of the following is least likely to be a type of intercompany balance that results from transactions between Popco and Sonco during 2009? Receivable. Inventory. Goodwill. Revenue.

Answer 74

Goodwill

Question 75

During 200X, Papa Company sold inventory, which cost it $18,000, to its subsidiary, Sonnyco, for $27,000. At the end of 200X, Sonnyco had $9,000 of the intercompany goods still on its books. The balance had been resold to unaffiliated customers for $24,000. Which one of the following is the amount of ending inventory that should be eliminated for consolidated statements? $3,000 $6,000 $9,000 $15,000

Answer 75

3,000 With a cost from non-affiliates of $18,000 and an intercompany selling price of $27,000, there is a $9,000 intercompany profit on the inventory transaction. Therefore, $9,000 profit/$27,000 cost to the buying affiliate results in a one third profit in ending inventory. Since the ending inventory at the buying affiliate's cost is $9,000, 1/3 × $9,000 = $3,000 is the intercompany profit in ending inventory and the amount that would have to be eliminated.

Question 76

``` Which of the following can be overstated on consolidated financial statements if intercompany inventory balances on-hand at the end of a period are not eliminated? Consolidated Income (Yes/No)? Consolidated Loss (Yes/No)? ```

Answer 76

Yes/Yes Either consolidated income or consolidated loss could be overstated on consolidated statements as a result of failure to eliminate intercompany inventory balances. An overstatement of income would result if the goods were sold by the selling affiliate at a price greater than the cost to the selling affiliate. An overstatement of loss would result if the goods were sold by the selling affiliate at a price less than the cost to the selling affiliate.

Question 77

Pine Company acquired goods for resale from its manufacturing subsidiary, Strawco, at Strawco's cost to manufacture of $12,000. Pine subsequently resold the goods to a nonaffiliate for $18,000. Which one of the following is the amount of the elimination that will be needed as a result of the intercompany inventory transaction? $-0- $6,000 $12,000 $18,000

Answer 77

12,000 Even though the intercompany inventory sale from Strawco to Pine was at no profit or loss (at Strawco's cost to manufacture), the intercompany sale and purchase, nevertheless, must be eliminated. Otherwise, consolidated sales and purchases (cost of goods sold) will be overstated. Therefore, the elimination related to the intercompany inventory transaction will be for $12,000, the cost of the sale from Strawco to Pine.

Question 78

An intercompany depreciable fixed asset transaction resulted in an intercompany gain. Which one of the following is least likely to be reflected in the consolidated financial statements prepared at the end of the period in which the intercompany transaction occurred? - Consolidated income will be less than the sum of the incomes of the separate companies being combined. - Consolidated assets will be less than the sum of the assets of the separate companies being combined. - Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined. - Consolidated accumulated depreciation will be more than the sum of accumulated depreciation of the separate companies being combined.

Answer 78

Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined. Consolidated depreciation expense will be less, not more, than the sum of depreciation expense of the separate companies being combined. Because the intercompany transaction resulted in a gain, the buying affiliate will have the asset on its books with the intercompany gain included in its carrying value and will depreciate that value on its books. For consolidated purposes, that depreciation on the intercompany gain will be eliminated, resulting in less depreciation expense than the sum of the depreciation expense of the separate companies.

Question 79

On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability. Which one of the following is the amount of premium or discount on Pico's investment in Sico's bonds? $250,000 premium $100,000 premium $50,000 premium $50,000 discount

Answer 79

50,000 discount 250,000par-200,000 purchase

Question 80

Which one of the following is not a characteristic of intercompany bonds? - Intercompany bonds may occur on the date of a business combination or subsequent to a business combination. - When bonds become intercompany, it is as though the bonds have been retired for consolidated purposes. - Intercompany bonds can result in the recognition of a gain or a loss for consolidating purposes. - When bonds become intercompany, they are written off of the books of the issuing affiliate and the investing affiliate.

Answer 80

-When bonds become intercompany, they are written off of the books of the issuing affiliate and the investing affiliate. The liability and investment related to intercompany bonds are eliminated only on the consolidating worksheet. They are not written off the books of either the issuing or the investing affiliate. From the perspective of the separate companies, the liability and investment related to the bonds continue to exist, but for consolidated purposes, they have been constructively retired.

Question 81

Which of the following statements about the differences between U.S. GAAP and IFRS in determining whether or not to consolidate an entity is/are correct? - ---IFRS guidelines for determining the eligibility of an entity to be consolidated are more principles-based than are U.S. GAAP guidelines. - ---In assessing an investor's level of ownership of an investee, both U.S. GAAP and IFRS consider outstanding securities that are exercisable or convertible into voting shares. - ---Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated. One?2?All?

Answer 81

1 and 3. Correct! Statement I and Statement III are correct; Statement II is not correct. Under IFRS, the guidelines for determining whether or not to consolidate an entity are more principles-based than are U.S. GAAP (Statement I). Under IFRS, the basic guideline is that an entity must be consolidated when another entity has the ability to govern the financial and operating policies of the entity to obtain benefits from it. U.S. GAAP has a specific two-tiered assessment process that must be followed to determine whether or not an entity should be consolidated. Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated (Statement III). U.S. GAAP does not require consolidation of a majority-owned subsidiary when the investor cannot exercise control of the subsidiary. IFRS does not require consolidation of a majority-owned subsidiary under certain conditions when the parent will be consolidated with a higher-level parent.

Question 82

Under IFRS the asset goodwill may be recognized: - -When it is acquired by purchase. - -When it is internally generated or acquired by purchase. - -When it is clear that it exists and has value. - -When it has future economic benefits.

Answer 82

When it is acquired by purchase.

Question 83

Which statement is true with respect to noncontrolling interest? - --US GAAP records noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree. - --IFRS only records noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree. - --Both US GAAP and IFRS record noncontrolling interest at the proportionate share of the value of identifiable net assets of the acquiree. - --IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.

Answer 83

IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.

Question 84

Under IFRS, a parent may exclude a subsidiary from consolidation if all of the following conditions exist, except: - --It is wholly or partially owned and its other owners do not object to nonconsolidation. - --It reports only one class of stock in its balance sheet. - --Its parent prepares consolidated financial statements that comply with IFRS. - --It does not have any debt or equity instruments publicly traded.

Answer 84

It reports only one class of stock in its balance sheet.

Question 85

Combined statements may be used to present the results of operations of: Unconsolidated Subsidiaries (yes/no) Companies under common management (yes/no)

Answer 85

yes/yes

Question 86

Combined statements may be used to present the results of operation of: Companies under common management(yes/no) Commonly controlled companies (yes/no)

Answer 86

yes/yes

Question 87

``` In the preparation of combined financial statements, would the following issues be treated in the same way as when preparing consolidated financial statements or in a different way? Minority Interest (different/same) Foreign operations (different/same) Different fiscal periods (different/same) ```

Answer 87

same/same/same

Question 88

Pride, Inc. owns 80% of Simba, Inc.'s outstanding common stock. Simba, in turn, owns 10% of Pride's outstanding common stock. What percentage of the common stock cash dividends declared by the individual companies should be reported as dividends declared in the consolidated financial statements? Dividends declared by pride (%)? Dividends declared by simba (%)?

Answer 88

90% Pride....0% Simba

Question 89

On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability. Which one of the following is the net amount of gain or loss that will be recognized by Pico in its December 31, 2008, consolidated financial statements as a result of its intercompany bonds? $25,000 $50,000 $75,000 $150,000

Answer 89

75,000 In the elimination of intercompany bonds, the intercompany bond liability at par will be eliminated against the intercompany bond investment at par. Therefore, the gain or loss recognized as a result of constructive retirement of intercompany bonds is the net of the premium or discount on the bond liability and the premium or discount on the bond investment. In this case, there is a total $100,000 premium on the bond liability, but because only one-fourth ($250,000/$1,000,000 = 1/4) of the bonds are intercompany, only one fourth of the premium is eliminated. Thus, $25,000 of premium on the bond liability (a credit) will be eliminated against the $50,000 discount on the bond investment (also a credit). As a result of eliminating the two credits ($25,000 + $50,000 = $75,000), a $75,000 gain on constructive retirement will be recognized.

Question 90

The SEC is comprised of five commissioners, appointed by the President of the United States, and five divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts? - Division of Corporate Finance. - Division of Enforcement. - Division of Trading and Markets. - Division of Investment Management.

Answer 90

Division of Corporate Finance. The Division of Corporate Finance oversees the compliance with the securities acts and examines all filings made by publicly held companies.

Question 91

The SEC enforces the corporate registration requirements of the Securities Act of 1933 as one of its principal objectives. These requirements are intended to provide information that enables the SEC to: - Evaluate the financial merits of the corporation offering the securities to the public. - Ensure that investors are provided with adequate information on which to base investment decisions. - Guarantee that the facts contained in the registration statement are accurate. - Assure investors of the accuracy of the financial statements.

Answer 91

Ensure that investors are provided with adequate information on which to base investment decisions. The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. In order to carry out the mandates in the Securities Act of 1933, the SEC is ensuring that investors are provided with adequate information on which to base investment decisions.

Question 92

Even though the SEC delegates the creation of accounting standards to the private sector, the SEC frequently comments on accounting and auditing issues. The main pronouncements published by the SEC are:

Answer 92

Financial Reporting Releases (FRR)

Question 93

Which regulation governs the form and content of financial statement disclosures?

Answer 93

Regulation S-X

Question 94

A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period?

Answer 94

40 days

Question 95

``` U.S. Securities and Exchange Commission (SEC) regulations for the financial statement presentation and disclosure requirements of SEC filings can be found in? Regulation S-B. Regulation S-K. Regulation S-T. Regulation S-X. ```

Answer 95

S-X

Question 96

Wood Co.'s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated? - The current-year dividends and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should NOT be included in the calculation. - The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should NOT be included in the calculation. - The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. - Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.

Answer 96

The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.

Question 97

On January 31, 2004, Pack, Inc. split its common stock 2 for 1, and Young, Inc. issued a 5% stock dividend. Both companies issued their December 31, 2003, financial statements on March 1, 2004. Should Pack's 2003 earnings per share (EPS) take into consideration the stock split, and should Young's 2003 EPS take into consideration the stock dividend? Pack's 2003 EPS (yes/no) Young's 2003 EPS (yes/no)

Answer 97

yes for both *they both happened before the balance sheet date* EPS is used primarily as an input to predictions of future earnings. The stock split and dividend cause the number of shares outstanding to increase, and thus affect the future earnings prospects on a per share basis. These events should be included in the computation of EPS even though they did not occur as of the balance sheet date. Financial statement users view the information as if it were current as of the date of publication.

Question 98

``` Under ASC 220, Comprehensive Income, corrections of errors are reported in: Other comprehensive income. Other income/(expense). Retained earnings. Stockholders' equity. ```

Answer 98

Retained Earnings

Question 99

Comprehensive income is defined as: - Changes in equity for a period resulting from all sources. - Changes in retained earnings for a period resulting from owner sources. - Changes in equity for a period from all sources except those by nonowner sources. - Net income plus other comprehensive income.

Answer 99

Net income plus OCI

Question 100

The treasury stock method of entering stock options into the calculation of diluted EPS: - Is used only for dilutive treasury stock. - Computes the increase in common shares outstanding from assumed exercise of options to be the number of shares under option. - Is called the treasury stock method because the proceeds from assumed exercise are assumed to be used to purchase treasury stock. - Assumes the treasury shares are purchased at year-end.

Answer 100

Is called the treasury stock method because the proceeds from assumed exercise are assumed to be used to purchase treasury stock. Firms may use the proceeds from the exercise of stock options for any purpose. However, to promote uniformity in reporting, and to reduce the dilution from exercise, the assumption is that the proceeds are used to purchase the firm's stock on the market. This reduces the net number of new shares outstanding from assumed exercise.

Question 101

If everything else is held constant, earnings per share is increased by: - Purchase of treasury stock. - Issuance of new shares of common stock. - Payment of a cash dividend to common stockholders. - Payment of a cash dividend to both preferred and common stockholders.

Answer 101

purchase of treasury stock Earnings per share is calculated by dividing earnings (profit) available to common stockholders by weighted average number of shares of common stock outstanding. If the denominator is decreased by purchasing treasury stock, then the EPS result is increased.

Question 102

AB Company reported earnings per share of $10.50 on income before discontinued operations, ($2.00) on income (loss) attributed to discontinued operations, and $8.50 on net income. Which EPS figure is more relevant to a potential investor? ($2.00) $7.50 $8.50 $10.50

Answer 102

10.50 Potential investors and current investors are interested in the future earnings potential of the entity. Thus, they are interested in the earnings per share on continuing income, which would be the $10.50 per share. The EPS attributed to discontinued operations cannot be used in predicting future earnings, as they are one-time events.

Question 103

A public entity sells steel for use in construction. One of its customer's accounts for 43% of sales, and another customer accounts for 40% of sales. What should the entity disclose in its annual financial statements about these two customers? - The payment terms of accounts receivable due from each of the two customers. - The amount of the entity's revenue from each of the two customers. - The names of the two customers. - The financial condition of the two customers.

Answer 103

The amount of the entity's revenue from each of the two customers. The entity must disclose the amount of revenues received from a single customer that total 10% or more of total revenues.

Question 104

Opto Co. is a publicly traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers? - The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues - The identity of any external customer providing 10% or more of a particular operating segment's revenue - The identity of any external customer considered to be "major" by management - Information on major customers is not required in segment reporting.

Answer 104

The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues

Question 105

In financial reporting of segment data, which of the following must be considered in determining if an industry segment is a reportable segment? Sales to unaffiliated customers (yes/no) Intersegment sales (yes/no)

Answer 105

yes/yes There are three possible quantitative tests to determine if a segment is reportable. If one or more of the tests is met, the segment is reported. One of these tests is the revenue test. This test determines if the segment's revenue, which includes both sales to external (unaffiliated customers) and intersegment sales, is 10% or more of the combined revenue of all the company's operating segments. Therefore, both items are considered

Question 106

What information should a public company present about revenues from foreign operations? - Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales between geographical areas. - Disclose as a combined amount sales to unaffiliated customers and intracompany sales between geographical areas. - Disclose separately the amount of sales to unaffiliated customers but not the amount of intracompany sales between geographical areas. - No disclosure of revenues from foreign operations needs to be reported.

Answer 106

Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales between geographical areas.

Question 107

How are discontinued operations that occur at midyear initially reported? - Disclosed only in the notes to the year-end financial statements. - Included in net income and disclosed in the notes to the year-end financial statements. - Included in net income and disclosed in the notes to interim financial statements. - Disclosed only in the notes to interim financial statements.

Answer 107

Included in net income and disclosed in the notes to interim financial statements. Discontinued operations are not related to any other interim period. Therefore, it would be erroneous to allocate their financial statement effects to more than one interim period.

Question 108

Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter? $3,500 $5,000 $6,000 $7,500

Answer 108

$6,000 Interim income tax expense equals the difference between (1) the total income tax through the end of the interim period at the estimated annual tax rate, and (2) the income tax expense recognized in previous interim periods of the same year. For the second quarter, income tax expense therefore is computed as ($10,000 + $20,000)(.25) − $1,500 = $6,000.

Question 109

An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year. However, in the third quarter, the inventory's market price recovery 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 decrease in the first quarter. - 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 not be affected in the third quarter. - Not be affected in either the first quarter or the third quarter.

Answer 109

Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter. When interim period inventory market value declines are not considered temporary (not expected to reverse), they are recognized in the quarter in which the decline occurs. Later recoveries are recognized as gains to the extent of previous losses only. The inventory may not be marked up above cost.

Question 110

ASC 270, Interim Reporting, concluded that interim financial reporting should be viewed primarily in which of the following ways? - As useful only if activity is spread evenly throughout the year. - As if the interim period were an annual accounting period. - As reporting for an integral part of an annual period. - As reporting under a comprehensive basis of accounting other than GAAP.

Answer 110

as reporting for an integral part of an annual period.

Question 111

A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is: Favorable (yes/no) Unfavorable (yes/no)

Answer 111

yes/yes

Question 112

Which of the following statements, if any, concerning the modified cash basis of accounting is/are correct? I. The modified cash basis of accounting employs some elements of accrual accounting. II. To be acceptable, modifications to the cash basis of accounting must have substantial support in practice.

Answer 112

Both

Question 113

Alco, Inc., a small manufacturing company, prepares its financial statements using its income tax basis of accounting. In December, 2012, it determined that an error had been made in the amount of rent expense reported in its 2011 tax return. How should Alco account for the amount of the rental expense error in its 2012 financial statements? - As an adjustment to 2012 rental income. - As an income tax expense in 2012. - As a prior period adjustment. - No reporting in 2012 required.

Answer 113

As a prior period adjustment

Question 114

When a set of financial statements is prepared using the cash basis or the modified cash basis of accounting, which one of the following is least likely to be an appropriate financial statement title? - Statement of Cash Receipts and Cash Disbursements. - Balance Sheet. - Income Statement. - Statement of Financial Position.

Answer 114

Income statement When the cash basis or the modified cash basis of accounting is used, the title Income Statement, which is appropriate when the accrual basis of accounting is used, should be replaced by the title Statement of Cash Receipts and Cash Disbursements. This helps distinguish that the statement is not based on full accrual accounting consistent with U.S. GAAP.

Question 115

If a company that is not a public business entity wants to apply the simplified hedge accounting approach to a cash flow hedge of a variable rate borrowing with a receive-variable, pay-fixed interest rate swap, which of the following is a condition that must be met? - The notional value of the swap is greater than the principal of the hedged borrowing. - The fair value of the interest rate swap executed has a value equivalent to the hedged borrowing. - The variable interest rate on the interest rate swap is capped at 250 basis points above the cap on the hedged borrowing. - The variable interest rate on the interest rate swap and the variable interest rate on the hedged borrowing are linked to the same index.

Answer 115

The variable interest rate on the interest rate swap and the variable interest rate on the hedged borrowing are linked to the same index.

Question 116

A private company decided to adopt one of the standards issued by the Private Company Council. What are the requirements upon adoption of the PCC standard? - Apply the new standard on a retrospective basis. - Apply the new standard on a prospective basis. - Assess whether application of the new standard is preferable and apply on a retrospective basis. - Assess whether application of the new standard is preferable and apply on a prospective basis.

Answer 116

Apply the new standard on a prospective basis.

Question 117

Which of the following qualifies as a reportable operating segment? - Corporate headquarters, which oversees $1 billion in sales for the entire company - North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer - South American segment, whose results of operations are reported directly to the chief operating officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits - Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company's assets, 12% of revenues, and 11% of profits

Answer 117

North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer. Must be at the 10% level, and also report to the company-wide chief operating decision maker.

Question 118

In financial statements prepared on the income-tax basis, how should the nondeductible portion of expenses, such as meals and entertainment, be reported? - Included in the expense category in the determination of income. - Included in a separate category in the determination of income. - Excluded from the determination of income but included in the determination of retained earnings. - Excluded from the financial statements.

Answer 118

-Included in the expense category in the determination of income.

Question 119

True/False 1. ) The method used for reporting segment information is the asset-liability approach. 2. ) If management judges that an operating segment is reportable in year 1 and is of continuing significance, information about that segment should be reported in year 2 even if it does not meet the requirements for reportability in year 2. 3. )An enterprise must report separate information about an operating segment if its assets are 10% or more of the combined assets of all operating segments

Answer 119

1. False 2. True 3. True

Question 120

True/False 4. An enterprise must report separately the costs and expenses incurred by each segment. 5. One of the requirements of segment reporting is to report cash flows for each reportable segment. 6. An enterprise must report the interest revenue for each reportable segment if this information is normally reviewed by the chief operating decision maker.

Answer 120

4. False 5. False 6. True

Question 121

On October 31, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15 payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance. How should these accounts be reported in Dingo's October 31 classified balance sheet? - The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability. - The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability. - The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft. - The segregated and regular accounts should be reported as current assets net of the overdraft.

Answer 121

The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability. The accounts are with different banks. Thus, the accounts cannot be offset against one another. The overdraft is a liability because the bank honored a check or withdrawal causing the account to be negative. The firm owes the bank this amount. The regular corporate account is part of the cash account, a current asset. The segregated account is a long-term investment. The cash in this asset is set aside for a specific purpose. There is no intent to use the cash for ordinary operating purposes.

Question 122

``` A bank reconciliation with the headings "Balance per Books" and "Balance per Bank" lists three adjustments under the former and four adjustments under the latter. The company makes separate adjusting entries for each item in the reconciliation that requires an adjustment. How many adjusting entries are recorded? 3 4 7 0 ```

Answer 122

3. Only amounts adjusting the balance per books require an adjusting entry because only those amounts explain why the firm's recorded cash balance is not the same as the true cash balance. Common adjustments of this type include bank service charges, notes collected, and interest. The firm cannot alter the bank balance

Question 123

Gibbs Co. uses the allowance method for recognizing uncollectible accounts. Ignoring deferred taxes, the entry to record the write-off of a specific uncollectible account - Affects neither net income nor working capital. - Affects neither net income nor accounts receivable. - Decreases both net income and accounts receivable. - Decreases both net income and working capital.

Answer 123

Affects neither net income nor working capital.

Question 124

Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, 2004. Additional information is as follows: Rents receivable - November 30, 2004 $1,060,000 Rents receivable - November 30, 2003 800,000 Uncollectible rents written off during the fiscal year 30,000 Under Accrual basis, Marr should report rental revenue of?

Answer 124

$2,500,000

Question 125

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest revenue earned by Leaf over the life of this note?

Answer 125

$5,560 Total interest revenue is the amount received over the term of the note less the present value of the note: 5($5,009) − $19,485 = $5,560. Leaf paid $19,485 for the note, and will receive 5($5,009) over the note term. The difference is interest revenue.

Question 126

After being held for 40 days, a 120-day, 12% interest-bearing note receivable was discounted at a bank at 15%. The proceeds received from the bank equal Maturity value less the discount at 12%. Maturity value less the discount at 15%. Face value less the discount at 12%. Face value less the discount at 15%.

Answer 126

Maturity value less the discount at 15% The bank charges its discount (its fee) on the maturity value, which is the face value of the note plus 12% interest for 120 days. The bank charges 15% on this amount for the 80 remaining days in the note term. Thus, the proceeds equal the maturity value less its fee.

Question 127

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?

Answer 127

$513,000 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 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.

Question 128

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?

Answer 128

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.

Question 129

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? $540,000 $523,810 $513,000 $495,238

Answer 129

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.

Question 130

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct? - Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored. - Good Neighbor Financing will assume the responsibility of collecting the receivables. - Milton will retain control of the receivables. - Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.

Answer 130

Milton will retain control of receivables In a pledge arrangement, the title remains with the originator, in this case with Milton Co.

Question 131

# Choose the correct accounting by the creditor for a loan impairment. Column (1): recognize a loss or expense upon recognizing the impairment. Column (2): rate of interest to use in computing the revised book value of the receivable after the impairment. 1. (yes/no) | 2. (Original effective rate/ New implied effective rate)

Answer 131

1. yes | 2. original effective rate

Question 132

On June 1, Year 2, Archer, Inc. issued a purchase order to Cotton Co. for a new copier machine. The machine requires one month to produce and is shipped f.o.b. destination on July 1, Year 2, and is received by Archer on July 15, Year 2. Cotton issues a sales invoice dated July 2, Year 2, for the machine. As of what date should Archer record a liability for the machine?

Answer 132

July 15, Year 2 The term f.o.b. destination means that title transfers to the buyer when it arrives at the destination. A liability is recorded when the title transfers.

Question 133

Delar Co. completed its year-end physical count of inventory. The inventory was valued at first-in, first-out (FIFO) costs and totaled $500,000. Delar subsequently noted the following two items: 1,000 units of inventory with a FIFO cost of $10 each were shipped and billed to a customer, f.o.b. destination. These items were included in the physical count. 6,000 units at a FIFO cost of $5 each were held on consignment for one of its suppliers, but were excluded from the physical count. What amount should Delar report as inventory at year end?

Answer 133

500,000 Goods on consignment are excluded from ending inventory and goods shipped f.o.b. destination are included. There is no adjustment need to the $500,000 inventory value.

Question 134

On October 20, 2005, Grimm Co. consigned 40 freezers to Holden Co. for sale at $1,000 each and paid $800 in transportation costs. On December 30, 2005, Holden reported the sale of 10 freezers and remitted $8,500. The remittance was net of the agreed 15% commission. What amount should Grimm recognize as consignment sales revenue for 2005?

Answer 134

10,000 Consignment sales revenue is the revenue recognized on consignment sales. In this case, total consignment revenue is 10 × $1,000 = $10,000. The commission and transportation costs are expenses that reduce earnings on consignment revenues, but they do not affect total revenues to be recognized.

Question 135

An item had Merchandise price Freight-in Freight-out Purchase Returns... What is the inventoriable cost

Answer 135

Merch. Plus Freight In Less Returns. Freight-out is not an inventoriable cost because the inventory is already in a suitable condition for sale when it ships out.

Question 136

Which of the following statements regarding inventory accounting systems is true? -A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts. - A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages. - An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple. - An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.

Answer 136

A periodic system does not record the cost of each item as it is sold; nor does it maintain a continuously current record of the inventory balance. Rather, cost of goods sold is the amount derived from the equation: Beginning inventory + Purchases = Ending inventory + Cost of goods sold. A count of ending inventory establishes the inventory remaining at the end of the period, but there is no recording of cost of goods sold during the period. Cost of goods sold is the amount that completes the equation. Thus, cost of goods sold is really the cost of inventory no longer with the firm at year-end - an amount that includes shrinkage. Inventory shrinkage refers to breakage, waste, and theft. Shrinkage cannot be identified directly with a periodic inventory system.

Question 137

Generally, which inventory costing method approximates most closely the current cost for each of the following? ``` COGS(LIFO/FIFO) Ending Inventory (FIFO/LIFO) ```

Answer 137

COGS-LIFO ENDING INVENTORY- FIFO LIFO assumes the sale of the most recent purchases first and thus results in cost of goods sold that is the most current value. FIFO assumes the sale of the earliest purchases first (and beginning inventory before any purchases) and thus results in ending inventory that is the most current value. FIFO is sometimes called LISH: last in still here.

Question 138

When marking up a specific line of household items for resale, a retailer computes its markup as 40% of cost. For purposes of estimating ending inventory using the gross margin method, what percentage is applied to sales when estimating cost of goods sold?

Answer 138

71% The gross margin method applies the cost to sales ratio to sales in order to derive an estimate of cost of goods sold. Subtracting the resulting estimate of cost of goods sold from the cost of goods available for sale yields an estimate of ending inventory without counting the items. This firm determines the selling price to be 140% of cost because the markup is 40% of cost. Cost plus markup yields selling price. Therefore, the cost to sales ratio is 1.00/1.40 or .71.

Question 139

How does the retail inventory method establish the lower-of-cost-or-market valuation for ending inventory? - The procedure is applied on a cost basis at the unit level. - By excluding net markups from the cost-to-retail ratio. - By excluding beginning inventory from the cost-to-retail ratio. - By excluding net markdowns from the cost-to-retail ratio.

Answer 139

By excluding net markdowns from the cost-to-retail ratio Although the result is approximate, by excluding net markdowns from the denominator of the cost-to-retail ratio, the ratio is a smaller amount, resulting in a lower ending inventory valuation.

Question 140

The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale? Purchase returns. Sales returns. Net markups. Freight in.

Answer 140

Purchase returns. The retail method measures beginning inventory and net purchases at both cost and retail. It then applies the average relationship between cost and retail (based on beginning inventory and purchases) to ending inventory at retail to determine ending inventory at cost. Purchase returns reduce net purchases at both cost and retail because returns represent amounts included in gross purchases that are not available for sale.

Question 141

Moss Co. has determined its December 31, 20X4 inventory to be $400,000 on a FIFO basis. Information pertaining to that inventory follows: ``` Estimated selling price $408,000 Estimated cost of disposal 20,000 Normal profit margin 60,000 Current replacement cost 360,000 Moss records losses that result from applying lower of cost or net realizable value. On December 31, 20X4, what should be the net carrying value of Moss' inventory? ```

Answer 141

$388,000 Lower of cost or net realizable value applies to inventories that are carried at FIFO or Average cost. Net realizable value is selling price less cost of disposal. In this case it is $408,000 − $20,000 = $388,000.

Question 142

The replacement cost of an inventory item is below the net realizable value and above the net realizable value less the normal profit margin. The original cost of the inventory item is below the net realizable value less the normal profit margin. Under the lower of cost or market method, the inventory item should be valued at - Net realizable value. - Net realizable value less the normal profit margin. - Original cost. - Replacement cost.

Answer 142

Original Cost In LCM, market value is replacement cost if replacement cost is between the ceiling value (net realizable value) and the floor value (net realizable value less normal profit margin). This is the situation in this question. The original cost is below the floor value. Thus, market exceeds cost and the item is recorded at cost (lower of cost or market).

Question 143

Kahn Co., in applying the lower of cost or market method, reports its inventory at replacement cost. Which of the following statements are correct? The original cost is greater than replacement cost? (yes/no) The NRV, less a normal profit margin, is greater than replacement cost? (yes/no)

Answer 143

yes no Under LCM, the market value of inventory is the middle of three figures (in amount): replacement cost net realizable value net realizable value less normal profit margin. If the middle figure (market) is less than cost, then the inventory is reported at market. The inventory in this question is reported at replacement cost, which means that replacement cost is market value and replacement cost is less than cost. Also, replacement cost is the middle of the three figures (or tied with one of the other two). Net realizable value less normal profit margin could not exceed replacement cost because that would imply that replacement cost is the lowest of the three figures, which contradicts the fact that replacement cost is market value. Therefore, in terms of the question, (1) original cost is greater than replacement cost, and (2) net realizable value less normal profit margin is not greater than replacement cost.

Question 144

At the end of the year, Ian Co. determined its inventory to be $258,000 on a LIFO (last in, first out) basis. The current replacement cost of this inventory was $230,000. Ian estimates that it could sell the inventory for $275,000 at a disposal cost of $14,000. If Ian's normal profit margin for its inventory was $10,000, what would be its net carrying value?

Answer 144

251,000 The "ceiling" for LCM (lower of cost or market) valuation is $261,000 net realizable value ($275,000 selling price less $14,000 disposal cost). The "floor" is net realizable value less normal profit margin or $251,000 ($261,000 − $10,000). Replacement cost of $230,000 is below the floor so "market" value is the floor, or middle, of the three amounts ($251,000). This amount is less than cost of $258,000. Therefore, the lower of cost or market valuation is $251,000.

Question 145

The original cost of an inventory item is above the replacement cost. The inventory item's replacement cost is above the net realizable value. Under the lower of cost or market method, the inventory item should be valued at - Original cost. - Replacement cost. - Net realizable value. - Net realizable value LESS normal profit margin.

Answer 145

NRV Inventory must be carried at lower of cost (such as LIFO or market. Market is replacement cost subject to a ceiling and floor. The ceiling for replacement cost is net realizable value (selling price less cost to complete) and the floor is net realizable value less normal profit margin. Use simple numbers to help solve this abstract question. In this question original cost (assume = 100) is greater than market ((replacement cost) assume = 80). Market (80) is greater than net realizable value (assume = 70). Market is subject to a ceiling of net realizable value (70). In this case the inventory would be valued at net realizable value.

Question 146

Moss Co. has determined its December 31, 20X4 inventory to be $400,000 on a FIFO basis. Information pertaining to that inventory follows: ``` Estimated selling price $408,000 Estimated cost of disposal 20,000 Normal profit margin 60,000 Current replacement cost 360,000 Moss records losses that result from applying lower of cost or net realizable value. On December 31, 20X4, what should be the net carrying value of Moss' inventory? ```

Answer 146

$388,000 Lower of cost or net realizable value applies to inventories that are carried at FIFO or Average cost. Net realizable value is selling price less cost of disposal. In this case it is $408,000 − $20,000 = $388,000. report an error

Question 147

Bren Co.'s beginning inventory at January 1, 2005 was understated by $26,000, and its ending inventory was overstated by $52,000. As a result, Bren's cost of goods sold for 2005 was: - Understated by $26,000. - Overstated by $26,000. - Understated by $78,000. - Overstated by $78,000.

Answer 147

Understated by 78,000

Question 148

If ending inventory for 20x5 is understated because certain items were missed in the count, then: - Net income for 20x5 will be overstated. - CGS for 20x5 will be understated. - Net income for 20x5 will be understated, but net income for 20x6 will be unaffected. - Net income for 20x5 will be understated and CGS for 20x6 will be understated.

Answer 148

Net income for 20x5 will be understated and CGS for 20x6 will be understated. Use the equation BI + PUR = EI + CGS. When EI is understated, CGS must be overstated to maintain the equation. Net income, therefore, is understated (20x5). Then next year, BI is also understated because BI for 20x6 is EI for 20x5. Using the equation, if BI is understated, CGS is also understated to maintain the equation.

Question 149

At the end of 20x4, a firm recognized a loss on a contractual commitment to purchase inventory for $60,000. The value of the inventory at the end of 20x4 is $52,000. When the inventory was actually purchased in 20x5, its value had risen to $62,000. Choose the correct statement concerning reporting in 20x5. A $10,000 gain is recognized. The inventory is recorded at $60,000. The inventory is recorded at $52,000. There is no additional loss or gain recognized.

Answer 149

Inventory is recorded at $60,000 The maximum recorded value of the inventory is $60,000, which is the contractual amount and, also, the cost. If the firm can sell the inventory for more than $60,000, then gross margin will be recognized. The value of the inventory more than fully recovered, but gains are limited to the amount of previously recognized losses, which in this case, is $8,000.

Question 150

A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, by a material amount. Which of the following accounting treatments is most appropriate? - Describe the nature of the contract in a note to the financial statements, recognize a loss in the Income Statement, and recognize a liability for the accrued loss. - Describe the nature of the contract and the estimated amount of the loss in a note to the financial statements, but do not recognize a loss in the Income Statement. - Describe the nature of the contract in a note to the financial statements, recognize a loss in the Income Statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation account. - Neither describe the purchase obligation nor recognize a loss on the Income Statement or Balance Sheet.

Answer 150

Describe the nature of the contract in a note to the financial statements, recognize a loss in the Income Statement, and recognize a liability for the accrued loss The firm has committed to a fixed price but must recognize the loss in the period the decline in price occurred, much like under lower-of-cost-or-market. Inventory is not reduced because the firm has not purchased the inventory under contract. There is no asset to reduce, but the decrease in net assets is accomplished by recording the liability for the portion of the purchase price that has no value.

Question 151

Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an): - Reduction of the cost of the new warehouse. - Gain from discontinued operations, net of income taxes. - Part of continuing operations. - Extraordinary gain, net of taxes.

Answer 151

Part of continuing operations The gain or loss on the sale of an asset is part of continuing operations as it is expected that a company will sell existing assets from time to time as the assets are replaced.

Question 152

Talton Co. installed new assembly line production equipment at a cost of $185,000. Talton had to rearrange the assembly line and remove a wall to install the equipment. The rearrangement cost was $12,000 and the wall removal cost was $3,000. The rearrangement did not increase the life of the assembly line but it did make it more efficient. What amount of these costs should be capitalized by Talton?

Answer 152

200,000 All the costs to get the equipment ready for use.

Question 153

Derby Co. incurred costs to modify its building and to rearrange its production line. As a result, an overall reduction in production costs is expected. However, the modifications did not increase the building's market value, and the rearrangement did not extend the production line's life. Should the building modification costs and the production line rearrangement costs be capitalized? Building Modification costs (yes/no) Production line rearrangement costs (yes/yes)

Answer 153

Yes/Yes The criterion for capitalizing post-acquisition costs is not whether the market value of the overall asset is increased. Rather, the criteria are (1) increase in useful life or (2) increase in productivity or efficiency including cost reduction. An overall reduction in production costs meets the second criterion. Therefore, both costs are capitalized rather than immediately expensed.

Question 154

Plant assets are occasionally acquired by means other than by paying cash. Choose the correct statement about such acquisitions. - If equipment is acquired with 100% debt financing, the equipment is capitalized at the sum of all interest and principal payments on the debt. - If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, the fair value of the building should be used to initially debit the building account. - If land is received by a firm as a donation, no amount should be recorded for the land because there is no cost to the firm. - If land is acquired as one component of a group of plant assets for a discounted aggregate price, the amount capitalized for the land is its market value.

Answer 154

If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, the fair value of the building should be used to initially debit the building account. The more objective or readily determinable value is used for recording the building. If the number of shares is significant in relation to the total shares outstanding, the stock price will be affected by the increase in the shares outstanding resulting from the purchase. The more objective value is the appraised value of the building

Question 155

Two approaches are available for applying interest rates to average accumulated expenditures for the purpose of capitalizing interest. These approaches are called the specific method and the weighted average method. In some cases, these approaches yield the same results. Two situations may be encountered in practice for a specific period: (1) average accumulated expenditures exceed total interest bearing debt (principal) and (2) the interest rates on all interest bearing debt instruments are the same. Which situation yields the same results for the two approaches? One?Both?Neither?

Answer 155

Both When average accumulated expenditures exceeds interest bearing debt, all interest for the period is capitalized because all debt could have been avoided if the construction had not taken place. Also, if the interest rates on all debt are the same, then the two approaches yield the same results because, ultimately, only one interest rate is applied to average accumulated expenditures for computing capitalized interest.

Question 156

During Year 1, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete. How much of the interest incurred should be reported as interest expense in the Year 1 Income Statement? Interest incurred for machinery for own use (All interest incurred/ interest incurred after completion) Interest incurred for machinery held for sale (all interest earned/ interest incurred after completion)

Answer 156

Interest incurred after completion All interest incurred Interest during construction on assets constructed for a firm's own use is capitalized until construction is complete. Thus, only the interest incurred after completion is expensed. Interest is capitalized on the construction of assets for sale only if the assets are large, individual, discrete projects, such as ships or real estate developments. The equipment constructed for sale does not appear to be a discrete item in that sense and, thus, none of the interest is capitalized. It is all expensed.

Question 157

Average accumulated expenditures for year five on a construction project amounted to $70,000. The total cash invested in the project by the end of year five, was $160,000. During year six, the firm spent another $240,000 (total) on the project, uniformly throughout the year. Compute average accumulated expenditures for year six.

Answer 157

280,000 Average accumulated expenditures is the amount of debt for the annual period that could have been avoided. In this case, the firm has $160,000 already invested in the project at the beginning of year six. That amount represents $160,000 in debt, that could have been avoided for year six if the firm had not been involved in the construction project. The expenditures during year six were incurred evenly. Average accumulated expenditures therefore = $160,000(12/12) + $240,000/2 = $280,000. Also, [$160,000 + ($160,000 + $240,000)]/2 = $280,000.

Question 158

A firm has spent the last two years constructing a building to be used as the firm's headquarters. At the end of the first year of construction, the balance of building under construction was $400,000, which includes capitalized interest. During year two, the firm paid $240,000 to the contractor on March 1, and $600,000 on October 1. The building was not finished by the end of the second year. The firm had one loan outstanding all year, an 8%, $3,000,000 construction loan. Compute capitalized interest for year two.

Answer 158

$60,000 Average accumulated expenditures for the second year = $400,000(12/12) + $240,000(10/12) + $600,000(3/12) = $750,000. Interest capitalized = .08($750,000) = $60,000. Note that the interest capitalized in year one is compounded in year two because year one capitalized interest is included in average accumulated expenditures for the second year.

Question 159

A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable. To account for these events, the owner should: - Reduce accumulated depreciation equal to the cost of refurbishing. - Record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building. - Capitalize the cost of refurbishing, and record a loss in the current period equal to the carrying amount of the damaged portion of the building. - Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building.

Answer 159

Capitalize the cost of refurbishing, and record a loss in the current period equal to the carrying amount of the damaged portion of the building. When the cost and accumulated depreciation of a component or portion of a larger asset is identifiable, and that component or portion is replaced, the replacement is treated as two separate transactions: (1) disposal of the old component (for zero proceeds in this case, due to the fire damage) and (2) purchase of the new component. Thus, a loss equal to the book value of the old component is recognized for (1) and the amount paid to purchase the new component is capitalized as a separate purchase for (2)

Question 160

On January 1, 20X5, Brecon Co. installed cabinets to display its merchandise in customers' stores. Brecon expects to use these cabinets for five years. Brecon's 20X5 multi-step Income Statement should include: - One-fifth of the cabinet costs in cost of goods sold. - One-fifth of the cabinet costs in selling, general, and administrative expenses. - All of the cabinet costs in cost of goods sold. - All of the cabinet costs in selling, general, and administrative expenses.

Answer 160

One-fifth of the cabinet costs in selling, general, and administrative expenses. With a five year life, 1/5 of the cost of the cabinets is expensed as depreciation. The cabinets are not involved in the manufacturing of the goods. Rather, they are used to help sell the merchandise. Thus, the depreciation is not included in cost of goods sold; rather, it is included in selling, general, and administrative expenses.

Question 161

Zahn Corp.'s comprehensive Balance Sheet at December 31, 2005 and 2004 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 2005. Depreciation charged to operations in 2005 was:

Answer 161

$210,000 The accumulated depreciation on the property sold was $10,000 ($50,000 cost less $40,000 carrying value). The sale of property requires that the accumulated depreciation on the property be removed from the accounts. Thus, the $10,000 amount is a decrease in accumulated depreciation. With an overall increase of $200,000 in accumulated depreciation during the period ($800,000-$600,000), depreciation must have been $210,000 ($200,000 + $10,000).

Question 162

A fixed asset with a five-year estimated useful life and no residual value is sold at the end of the second year of its useful life. How would using the sum-of-the-years'-digits method of depreciation, instead of the double declining balance method of depreciation, affect a gain or loss on the sale of the fixed asset? Gain (increase/decrease) Loss (increase/decrease)

Answer 162

Gain (decrease) Loss (increase)

Question 163

# Choose the best association of terms in the natural resources accounting area with the conceptual framework. - Successful efforts method-matching. - Full costing method-definition of asset. - Depletion-fair value accounting. - Successful efforts method-definition of asset.

Answer 163

Successful efforts method-definition of asset. The successful efforts method capitalizes only the cost of exploration efforts that locate the resource. As such, only those efforts that yield a probable future benefit are capitalized. This is a direct application of the asset definition, which requires that an asset have a probable future benefit.

Question 164

Last year, Katt Co. reduced the carrying amount of its long-lived assets used in operations from $120,000 to $100,000 in connection with its annual impairment review. During the current year, Katt determined that the fair value of the same assets had increased to $130,000. What amount should Katt record as restoration of previously recognized impairment loss in the current year's financial statements?

Answer 164

$0 Recovery of impairment losses is prohibited under U.S. GAAP

Question 165

Restoration of the carrying value of a long-lived asset is permitted under IFRS if the asset's fair value increases subsequent to recording an impairment loss for which of the following? Held for use(yes/no) Held for disposal(yes/no)

Answer 165

Yes/Yes Under IFRS the impairment loss can be recovered if the asset is held for use or disposal.

Question 166

Under IFRS the test for asset impairment is to compare the carrying value of the asset to its recoverable amount. Which of the following is the recoverable amount according to IFRS? - The greater of future undiscounted cash flows or future discounted cash flows. - The greater of future discounted cash flows or fair value. - The greater of fair value less cost to sell or value in use. - The greater of fair value or value in use.

Answer 166

The greater of fair value less cost to sell or value in use.

Question 167

Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct? - When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued. - When an asset is revalued, individual assets within a class of property, plant, and equipment to which that asset belongs can be revalued. - Revaluations of property, plant and equipment must be made at least every three years. - Increases in an asset's carry value as a result of the first revaluation must be recognized as a component of profit and loss.

Answer 167

When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be revalued. When remeasurement to fair value is used, it must be applied to the entire class or components of PPE.

Question 168

On January 1, year one, an entity acquires a new piece of machinery for $100,000 with an estimated useful life of 10 years. The machine has a drum that must be replaced every five years and costs $20,000 to replace. Also included in the cost of the machine is an inspection fee of $8,000. Continued operations of the machine requires an inspection every four years after purchase. The company uses the straight-line method of depreciation. Under IFRS what is the depreciation expense for year one?

Answer 168

13,200 Under IFRS the components of the asset must be depreciated over their estimated useful life. Therefore, the $100,000 cost is broken down into the following components: ``` Depreciable value Life Depreciation $72,000 10 yr. $7,200 20,000 5 yr. 4,000 8,000 4 yr. 2,000 $13,200 ```

Question 169

On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker's tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld?

Answer 169

The book value of the delivery truck is $60,000 ($140,000 − $80,000). Its fair value is $90,000. A gain of $30,000 is therefore implied. Cash was paid and the exchange had commercial substance. Therefore, the gain is fully recognized. If the exchange lacked commercial substance, no gain would be recognized.

Question 170

Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets? - A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price. - A loss is deferred so that the asset received in the exchange is properly valued. - A loss, if any, which is unrelated to the determination of the amount of the asset received should be recorded. - A loss can occur only when assets are sold or disposed of in a monetary transaction.

Answer 170

-A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price.

Question 171

Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values. The exchange has commercial substance. As a consequence of the exchange, Sable recognizes Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values. The exchange has commercial substance. As a consequence of the exchange, Sable recognizes - A gain equal to the difference between the fair value and carrying amount of the truck given up - A gain determined by the proportion of cash received to the total consideration. - A loss determined by the proportion of cash received to the total consideration. - Neither a gain nor a loss.

Answer 171

A gain equal to the difference between the fair value and carrying amount of the truck given up With commercial substance, the exchange is measured at fair value. The full gain is recognized and is equal to the difference between the fair value of the asset given up and its book value. For example, assume the following values: new asset fair value 20, old asset fair value 26, cash received 6, old asset cost 30, old asset accumulated depreciation 9. The full entry is: dr. New Truck 20; dr. Accumulated Depreciation 9; dr. Cash 6; cr. Old Truck 30; cr. Gain 5. The gain equals the old asset's fair value of 26 and its book value of 21 (30 − 9).

Question 172

A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. Assuming that the transaction has commercial substance, what is the gain on the exchange?

Answer 172

The gain on an exchange of nonmonetary assets is based on the fair value and book value of the asset exchanged. The land with a fair value of $50,000 is given for machinery. The company is using the land as legal tender. The gain will be the difference between the book value and the fair value of the asset given or $50,000 − $20,000 = $30,000.

Question 173

May Co. and Sty Co. exchanged nonmonetary assets. The exchange did not culminate an earning process for either May or Sty (the exchange lacked commercial substance). May paid cash to Sty in connection with the exchange. The book value of the asset exchanged exceeded its fair value for both firms. Therefore, a loss on the exchange should be recognized by May? Sty? Both? None?

Answer 173

Both

Question 174

In a barter transaction where advertising services provided are exchanged for advertising services received, under which of the following situations can the advertising provider recognize revenue for the services performed? Assume the accounting is under IFRS guidelines. - When the advertising services in the exchange are similar - When the fair value of the advertising services received can be reliably measured - When there is a nonbarter transaction for similar advertising services that can be reliably measured with the same counterparty - When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty

Answer 174

When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty The fair value of the advertising services provided can be reliably measured by reference to a nonbarter transaction for similar advertising with a different counterparty (SIC Interpretation 31, para 5).

Question 175

Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be: - Classified as other income. - Deducted from the cost of the land. - Netted against the costs to clear the land and expensed as incurred. - Netted against the costs to clear the land and amortized over the life of the plant.

Answer 175

Deducted from the cost of the land.

Question 176

How is an impairment loss recognized on the financial statements for a cost method equity investment? - In other comprehensive income - In current earnings - Deferred until recoverable - Impairment losses are not recognized on cost method investments.

Answer 176

In current earnings.

Question 177

A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements? - The names and ownership percentages of the other stockholders in the investee company - The reason for the company's decision to invest in the investee company - The company's accounting policy for the investment - Whether the investee company is involved in any litigation

Answer 177

The company's accounting policy for theThe investor must disclose the accounting policy for the investee. It is possible for the investor to use equity method accounting or elect the fair value option to account for the investee. The users of the financial statement need to know the basis for the equity accounting and if the investment included intercompany profits or other items that could impact the carrying value. investment

Question 178

Which of the following is true with respect to impairment of available-for-sale securities? - If the decline in fair value is considered to be other-than-temporary, the unrealized losses in OCI are reclassified to earnings. - If the decline in fair value is considered to be other-than-temporary, the unrealized losses are recorded in OCI. - If the decline in fair value is not considered to be other-than-temporary, the unrealized gains in OCI are reclassified to earnings. - If the decline in fair value is not considered to be other-than-temporary, the unrealized gains are recorded in OCI.

Answer 178

If the decline in fair value is considered to be other-than-temporary, the unrealized losses in OCI are reclassified to earnings.

Question 179

A short-term marketable debt security was purchased on September 1, Year 1, between interest dates. The next interest payment date was February 1, Year 2. On the balance sheet at December 31, Year 1, the debt security should be carried at - Fair value plus the accrued interest paid. - Fair value. - Cost plus the accrued interest paid. - Cost.

Answer 179

Fair value. Correct! A short-term marketable debt security would be carried in a trading portfolio. Securities in trading portfolios are carried at fair value.

Question 180

Beach Co. determined that the decline in the fair value (FV) of an investment was below the amortized cost and permanent in nature (other-than-temporary). The investment was classified as available-for-sale on Beach's books. Beach Co. does not elect the fair value option to account for these securities. The controller would properly record the decrease in FV by including it in which of the following? - Other comprehensive income section of the income statement only - Earnings section of the income statement - Extraordinary items section of the income statement - Accumulated other comprehensive income section of the balance sheet only

Answer 180

Earnings section of the income statement An available-for-sale security is valued at fair value at the balance sheet date, and any temporary decline in value is recorded in other comprehensive income for the period. However, because the decline was permanent (not temporary in nature), the available-for-sale security should be written down to fair value, and the amount of the write-down should be recorded in the income statement as a loss. Subsequent increases in the fair value of the available-for-sale security would be included in other comprehensive income in the year of the increase.

Question 181

Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard? - As dividend revenue at Guard's carrying value of the stock - As dividend revenue at the market value of the stock - As a reduction in the total cost of Guard stock owned - As a memorandum entry, reducing the unit cost of all Guard stock owned

Answer 181

As a memorandum entry, reducing the unit cost of all Guard stock owned Correct! Under any method used to account for an investment in common stock, the investor records a stock dividend received by a memorandum entry to increase the number of shares owned. Since the cost of the investment does not change, the per share cost of the stock decreases.

Question 182

The recording of an asset retirement obligation for a natural resources development site increases which of the following for the firm involved in the site? Liability(yes/no) Depletion base(yes/no)

Answer 182

Yes/yes Correct! An asset retirement obligation is recorded when a firm has a probable and estimable future cost to reclaim the property exploited at the end of the project life. The amount is the fair value or present value of future cash payments to be made. The asset retirement obligation is recorded as a debit to the natural resources account (depletion base) and a credit to a liability.