Day 14-28

Question 1

An investor purchased a bond classified as a held-to-maturity investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than the:

Cash paid to seller (yes/no)

Face amount of bond (yes/no)

Answer 1

No/No

Correct! When a bond is purchased at a discount, the price paid is less than face value. Any cash paid to the seller for accrued interest is debited to interest receivable, not to the bond investment. Thus, the carrying value is the portion of the total amount paid attributable to the total bond price, exclusive of accrued interest. The carrying value must be less than the cash paid to the seller, which includes accrued interest.

Question 2

The credit losses associated with the impairment of debt securities are separated in which of the following circumstances?

• When the entity has the positive ability and intent to sell the impaired security
• When the entity has the positive ability and intent to hold the impaired security
• When the entity has positive ability and intent to hold the impaired security and expects to recover the entire cost basis of the impaired security
• When the entity has positive ability and intent to hold the impaired security and does not expect to recover the entire cost basis of the impaired security

Answer 2

When the entity has positive ability and intent to hold the impaired security and does not expect to recover the entire cost basis of the impaired security

When the entity has positive ability and intent to hold the impaired security and does not expect to recover the entire cost basis of the impaired security, the credit losses are recognized in earnings.

Question 3

Zinc Company does not elect to use the fair value option for reporting financial assets. An unrealized gain, net of tax, on Zinc’s held-to-maturity portfolio of marketable debt securities should be reflected in the current financial statements as

• An extraordinary item shown as a direct increase to retained earnings.
• A current gain resulting from holding marketable debt securities.
• A footnote or parenthetical disclosure only.
• A valuation allowance and included in the equity section of the statement of financial position.

Answer 3

An unrealized gain on held-to-maturity securities is disclosed only in the notes to the financial statements. Gains are reflected in the financial statements only when they are realized (i.e., upon sale or for other than temporary declines in value). The year-end financial statements would present the held-to-maturity portfolio at cost. Parenthetical or footnote disclosure would indicate their market value.

Question 4

Which, if either, of the following statements concerning the transfer of investments between categories under IFRS No. 9 is/are correct?

I. Only investments in debt securities may be transferred between categories.

II. When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must not be restated.

Answer 4

1 only

Question 5

Inco, Inc., a U.S. entity, has elected to prepare financial statements in accordance with IFRS to provide to its foreign suppliers. Inco has the following information concerning an investment in the bonds of Tryco, Inc., as of December 31

Par value	$100,000
Original cost	108,000
Current premium	3,500
Fair value	105,000
Inco's business model is to regularly invest in debt to receive the cash flow provided by interest and the repayment of principal on maturity. The bonds are not associated with any other asset or liability. Which one of the following is the amount at which Inco should report its investment in Tryco in its December 31 IFRS-based Statement of Financial Position?

Answer 5

103,500

Under IFRS No. 9, investments in debt securities made under an entity’s business model plan to make and hold such investments solely to receive cash from interest and principal repayment, and when there is no accounting mismatch, should be reported at amortized cost. Amortized cost is par value ($100,000) plus the unamortized premium ($3,500), or $100,000 + $3,500 = $103,500, the correct answer.

Question 6

Which, if any, of the following transfers between categories is possible under IFRS No. 9 for investments in debt securities?

Amortized cost to fair value (yes/no)

Fair value to amortized cost (yes/no)

Answer 6

yes/yes

Under IFRS No. 9, investments in debt securities may be (1) transferred from amortized cost (when the investment originally meets both the business model test and the cash flow characteristic test) to fair value when the investment fails to continue to meet both the business model test and the cash flow characteristic test and (2) transferred from fair value to amortized cost when an investment that originally fails to meet both the business model test and the cash flow characteristic test subsequently meets both tests.

Question 7

Which of the following is a pair of values that are compared to determine the amount of a possible impairment loss on an intangible asset, with an indefinite life, other than goodwill?

• Fair value, present value.
• Carrying value, book value.
• Future value, carrying value.
• Fair value, carrying value.

Answer 7

Fair value, carrying value

A possible impairment of an indefinite life intangible other than goodwill is determined by comparing the carrying value and the fair value of the asset.

Question 8

Wind Co. incurred organization costs of $6,000 at the beginning of its first year of operations. How should Wind treat the organization costs in its financial statements in accordance with GAAP?

• Never amortized.
• Amortized over 60 months.
• Amortized over 40 years.
• Expensed immediately.

Answer 8

expensed immediately

In the past, firms capitalized and amortized organization costs. However, now, organization costs are expensed immediately. Such costs are internally generated. Typically, only costs paid to outside entities are capitalized to intangible assets, and only those intangibles with definite lives are amortized.

Question 9

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct?
It is prohibited.
It is required when the reversal is considered permanent.
It must be disclosed in the notes to the financial statements.
It is encouraged, but not required.

Answer 9

it is prohibited.

All intangibles are subject to impairment, but the resulting impairment losses cannot be reversed. Although impairment losses on plant assets held for disposal can be reversed to the extent of previous losses, this is not the case for intangibles.

Question 10

Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs?

• Litigation costs would be capitalized regardless of the outcome of the litigation.
• Litigation costs would be expensed regardless of the outcome of the litigation.
• Litigation costs would be capitalized if the patent right is successfully defended.
• Litigation costs would be capitalized only if the patent was purchased rather than internally developed.

Answer 10

Litigation costs would be capitalized if the patent right is successfully defended.

Litigation costs can be capitalized only if the defense of the patent was successful.

Question 11

On January 2, 20X4, Beal, Inc. acquired a $70,000 whole-life insurance policy on its president. The annual premium is $2,000. The company is the owner and beneficiary.

Beal charged officer’s life insurance expense as follows:

20X4	$2,000
20X5	1,800
20X6	1,500
20X7	1,100
Total	$6,400

In Beal’s December 31, 20X7 Balance Sheet, the investment in cash surrender value should be:

$0
$1,600
$6,400
$8,000

Answer 11

1600

The $1,600 ending cash surrender value is the difference between the total premiums paid ($8,000 = 4 × $2,000) and the total amount charged to insurance expense ($6,400). An increasing portion of the premiums on life insurance are allocated to the investment feature of life insurance each year.

Question 12

tandard Co. spent $10,000,000 on its new software package that is to be used only for internal use. The amount spent is for costs after the application development stage. The economic life of the product is expected to be three years. The equipment on which the package is to be used is being depreciated over five years.

What amount of expense should Standard report on its income statement for the first full year?

Answer 12

3,333,333

The cost of developing software for internal purposes is expensed up to the “application development stage” at which point the effort appears to be leading to a useable application. After that point, costs are capitalized. With a three-year useful life and $10 million capitalized cost, the amortization expense is one-third, or $3.33 million.

The useful life of the product is used rather than the useful life of the equipment because new software can be developed after three years for use on that equipment.

Question 13

ellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage and the package was only to be used internally. The package was completed during the year and is expected to have a 4-year useful life.

Yellow has a policy of taking a full-year’s amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program.

What amount should Yellow report as an expense for the current year?

Answer 13

6,050,000

(1) software development costs incurred before the application development stage was reached, $4,000,000;
(2) amortization of capitalized software development costs incurred after the application development stage was reached, $8,000,000/4 = $2,000,000;
(3) $50,000 training costs.

The sum of these is $6,050,000.

Training costs are expensed as incurred. The application development stage is the point after which there is sufficient evidence of a product that software development costs are capitalized and amortized. Such costs will benefit future periods.

Question 14

In what cases are software development costs capitalized as intangible and amortized?

Answer 14

when they occur after the point of technological feasibility.

Question 15

A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code, and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized?

Answer 15

200,000

The only costs that can be capitalized is the cost of software development; the $200,000 to write the code. The investigation of the feasibility and the administrative costs for training and maintenance must be expensed.

Question 16

Under IFRS, the test for asset impairment is to compare the carrying value of the intangible 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 16

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

Question 17

When selling shares and there is a brokerage fees involved should you debit brokerage fees?

Answer 17

yes… don’t debit “brokerage fees or anything”

Question 18

Choose the best description of accretion expense associated with an asset retirement obligation.

• Interest expense
• Finance charge
• Growth in asset retirement obligation
• Depletion expense

Answer 18

Growth in asset retirement obligation.

Accretion expense is simply the increase in the asset retirement obligation over time. The asset retirement obligation is initially recorded at present value or fair value, and over time grows with interest until it reaches its future value—the amount due. Accretion expense is similar to the interest cost component of pension expense—the growth in projected benefit obligation. It is caused by the fact that the asset retirement obligation is recorded at present value but not paid until later.

Question 19

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 19

yes/yes

Question 20

A firm’s natural resource exploitation site will require an expenditure of $5 million to reclaim the site for environmental purposes. That expenditure is expected to be made five years from now. The present value today of that amount is $3.5 million. Because of this obligation, by what amount will (1) total depletion on the site increase and (2) how much accretion expense will be recognized, over the five years (in millions)?

Answer 20

3.5……..1.5

The natural resources account is increased by the asset retirement obligation, which is the present value of the $5 to be paid later, or $3.5. Therefore, total depletion over the venture’s life increases by that amount. The growth in the obligation over time is the accretion expense. The $3.5 amount will grow to $5 in five years, at which time the expenditure of that amount is made. The journal entry to record the asset retirement obligation is a debit to the natural resources account of $3.5 and a credit to asset retirement obligation of $3.5.

Question 21

Which of the following information about threatened litigation should not be considered to determine whether an accrual is appropriate prior to an issuance of a company’s financial statements?

• The period in which the underlying cause of the threatened litigation occurred.
• The degree of probability of an unfavorable outcome.
• The ability to make a reasonable estimate of the amount of loss.
• The period in which the threatened litigation became known to management.

Answer 21

The period in which the threatened litigation became known to management.

This question is stated in the null form (what is not considered). So, let’s review what must be considered to determine if an accrual is appropriate. A contingency is accrued if it is probable to occur, estimable, and an event or transaction has occurred. This response refers to the period that management becomes aware of the litigation. This is not one of the factors we would take into consideration to determine if an accrual is necessary, therefore this is the correct response.

Question 22

Vadis Co. sells appliances that include a three-year warranty. Service calls under the warranty are performed by an independent mechanic under a contract with Vadis. Based on experience, warranty costs are estimated at $30 for each machine sold.

When should Vadis recognize these warranty costs?

Answer 22

When the machines are sold

At the point of sale, Vadis has committed to service the products it sells. The firm has incurred a recognized obligation at that point because it is both probable and estimable (FAS 5).

The cost of the warranty, therefore, is recognized in the year of sale. The cost (expense) is the temporary account that measures the reduction in net assets from operations (earnings) caused by the increase in the obligation.

A less acceptable explanation is that the warranty cost or expense should be matched against the sales it helped to produce. Either explanation leads to the same result, however.

Question 23

Which of the following is not a contingent liability under international accounting standards?

• A provision with a 60% chance of requiring an outflow of benefits, amount is estimable.
• A provision with a 40% chance of requiring an outflow of benefits, amount is estimable.
• A provision with a 90% chance of requiring an outflow of benefits, amount not estimable.
• A possible obligation.

Answer 23

A provision with a 60% chance of requiring an outflow of benefits, amount is estimable

A probable (> 50%) outflow of benefits is implied, and the amount is estimable. This is a recognized liability for international accounting standards, not a contingent liability

Question 24

On October 1, 20X4, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise.

At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, 20X4.

Fleur’s 20X4 financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due on the note were paid February 1, 20X5.

As a result of Fleur’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly?

12/31/x4 Retained earnings?

12/31/x4 Interest payable?

Answer 24

Retained earnings, no….

Interest payable…. yes.

Interest expense should reflect market rate, but they were recording it at the stated rate, meaning that earnings/net income etc. would be incorrectly stated.

On the other hand, the interest payable reflects the stated rate which determines the cash amount to be paid. Interest payable is correctly stated.

Question 25

A company issued a short-term note payable to a bank with a stated 12 percent rate of interest . The bank charged a .5% loan origination fee and remitted the balance to the company. The effective interest rate paid by the company in this transaction would be Equal to 12.5%. More than 12.5% Less than 12.5%. Independent of 12.5%

Answer 25

More than 12.5% The .5% loan origination fee reduces the proceeds to the borrower AND increases the total interest to be paid by the same amount. The effect is to raise the interest rate above 12.5%. Assume the loan amount is $1,000 before the loan origination fee. Therefore, the net amount loaned is $995 [1 − .005($1,000)]. However, the full $1,000 must be paid at maturity. The total interest to be paid is thus increased by the $5 origination fee ($1,000 − $995). For simplicity, assume the loan is for a full year. Then total interest paid is: .12($1,000) + $5 = $125. The effective rate of interest for the year then is: $125/$995 = .1256. This exceeds 12.5%.

Question 26

On October 1, 2005, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note's market rate of interest was 11%. Fleur recorded the purchase at the note's face amount. All of the merchandise was sold by December 1, 2005. Fleur's 2005 financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due on the note were paid February 1, 2006. Fleur's 2005 cost of goods sold for the holiday merchandise was - Overstated by the difference between the note's face amount and the note's October 1, 2005 present value. - This is overstated by the difference between the note's face amount and the note's present value at October 1, 2005 plus 11% interest for two months. - Understated by the difference between the note's face amount and the note's October 1, 2005 present value. - Understated by the difference between the note's face amount and the note's October 1, 2005 present value plus 16% interest for two months.

Answer 26

Understated by the difference between the note's face amount and the note's October 1, 2005 present value. The note (and merchandise) should have been recorded at its present value using the market interest rate of 11%. This rate is lower than the stated rate of 16% implying that the present value of the note (face value and interest payments at 16%) using 11% exceeds the face value of the note. Thus, the merchandise was recorded at an amount which understated its market value. All the merchandise was sold before the end of the year causing cost of goods sold to be similarly understated.

Question 27

What type of bonds in a particular bond issuance will not all mature on the same date? Debenture bonds. Serial bonds Term bonds Sinking fund bonds

Answer 27

Serial bonds Serial bonds mature according to a schedule. For example, after 20 years, 10% of the bonds may be retired at the end of each of the next 10 years. The bond term ends at the end of the 30th year.

Question 28

A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date? - An interest expense that is less than the cash payment made to bondholders. - An interest expense that is greater than the cash payment made to bondholders. - A debit to the unamortized bond discount - A debit to the unamortized bond premium

Answer 28

An interest expense that is greater than the cash payment made to bondholders When the yield rate (effective interest rate) exceeds the stated or coupon rate, the bond sells at a discount. For example, the only way a 5% bond can yield 6% is to sell below face value. The discount represents interest expense over and above the periodic cash interest paid because the full face value is paid at maturity. The discount is recorded as debit contra account to bonds payable. This extra amount of interest is recognized by amortizing the discount recorded at issuance. The journal entry for periodic interest is: dr. Interest Expense, cr. Discount, cr. Cash. In this way, interest expense exceeds the cash interest paid at each interest payment date.

Question 29

On June 30, 20X5, Huff Corp. issued at 99, 1000 of its 8%, $1,000 bonds. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, 20X5, Huff should report the bond liability at $955,000. $990,000. $1,000,000. $1,025,000.

Answer 29

$955,000 This answer is correct. The $955,000 is the $1,000,000 face value less the $10,000 discount. The discount is computed as (1.00 − .99)($1,000,000) = $10,000, which is the face value less the bond price. The $990,000 is then reduced by the bond issue costs of $35,000. Another way to compute the net bond liability at issuance is to apply the unit bond price to the total face value: $990,000 = .99($1,000,000).

Question 30

Weald Co. took advantage of market conditions to refund debt. This was the fifth refunding operation carried out by Weald within the last four years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a(an) - Deferred credit to be amortized over life of new debt. - Part of continuing operations. - Part of other comprehensive income for the year. - Loss.

Answer 30

Part of continuing operations This gain is included in income from continuing operations, as would other gains and losses such as on equipment disposal

Question 31

A debtor and a creditor have negotiated new terms on a note. How can you determine whether the restructuring is a troubled debt restructure? - If the interest rate as stated in the restructuring agreement has been reduced relative to the original loan agreement - If the present value of the restructured flows using the original interest rate is less than the book value of the debt at the date of the restructure. - If the interest rate that equates (1) the book value of the debt at the date of the restructure and (2) the present value of restructured cash flows, exceeds the original interest rate - If the present value of the restructured flows using the original interest rate is less than the market value of the original debt at the date of the restructure

Answer 31

If the present value of the restructured flows using the original interest rate is less than the book value of the debt at the date of the restructure. This is one of the ways to determine if a restructuring is troubled. Under the terms of this answer, the creditor is receiving a stream of cash flows with a present value less than what is currently owed and is making a concession.

Question 32

# Choose the correct statement regarding the accounting treatment of troubled debt restructures (TDRs) under international accounting standards (IAS). - Settlements are treated the same way as under U.S. standards. - Modification of terms TDRs are treated the same way as under U.S. standards. - A significant modification of terms for IAS is treated as a modification of terms type II under U.S. standards. - A non-significant modification of terms for IAS is treated as a modification of terms type I under U.S. standards.

Answer 32

Settlements are treated the same way as under U.S. standards. Both sets of standards treat settlements as extinguishments with a gain to the debtor for the difference between debt book value and fair value of consideration paid

Question 33

# Choose the correct statement concerning the classification of a liability when a firm is subject to a debt covenant. - All liabilities callable on demand are classified as current in all circumstances. - If the liability is callable on demand, the covenant is violated, and the covenant is violated, then the liability is classified as current if the violation is waived by the creditor. - If the covenant includes a subjective acceleration clause and there is only a remote chance that debt will be called, then the liability is classified as noncurrent. - If a covenant grants a grace period during which it is possible that the violation will be cured, then the liability is classified as noncurrent.

Answer 33

If the covenant includes a subjective acceleration clause and there is only a remote chance that debt will be called, then the liability is classified as non-current. It must be at least possible that the liability will be called in order for the classification to be downgraded to current.

Question 34

Allam, Inc. contracted for services to be provided over a period of time with full payment in Allam's $2 par common stock when the service is completed. At the time of the agreement, Allam stock was trading at $20 per share. The agreed-upon total value of the contract is $20,000. When the service was completed, Allam's stock price was $25 per share. Therefore, Allam Recognizes $25,000 of expense. Increases the common stock account $1,600. Increases contributed capital in excess of par $23,000. Debits a liability for $25,000.

Answer 34

Increases the common stock account $1,600. The value of the stock to be issued is $20,000. At time of issuance, the stock price is $25. Therefore, 800 shares are issued ($20,000/$25). The par value of the stock is $2, requiring a credit of $1,600.

Question 35

A firm selling put options to sell the firm's stock - Increases owners' equity for the fair value of the options. - Does not recognize any change in its financial position at sale of the options. - Increases a liability for the fair value of the options. - Records an expense equal to the fair value of the options.

Answer 35

Increases a liability for the fair value of the options. The liability will be extinguished when the option is exercised or when it expires.

Question 36

Under IFRS, what methods can you use to report bonds?

Answer 36

Amortized cost, and fair value through profit or loss.

Question 37

Affect of a liquidating dividend on: Paid-in Capital Retained Earnings

Answer 37

PIC decreases | retained earnings doesnt change

Question 38

The following stock dividends were declared and distributed by Sol Corp: Percentage of common shares outstanding at declaration date Fair value Par value 10 $15,000 $10,000 28 40,000 30,800 What aggregate amount should be debited to retained earnings for these stock dividends? $40,800 $45,800 $50,000 $55,000

Answer 38

45,800 mall stock dividends (less than 25%) are capitalized at the fair value of stock issued and large stock dividends (greater than 25%) are capitalized at the par value of stock issued.

Question 39

A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend? - Treasury stock is debited for $300. - Additional paid-in capital is credited for $2,700. - Retained earnings is debited for $300. - Common stock is debited for $3,000.

Answer 39

This is a large stock dividend (> 25%); therefore retained earnings is debited for par value. The amount is the par value of the shares distributed in the dividend, or 1,000(.30)($1) = $300. The credit is to common stock for the shares issued.

Question 40

A retained earnings appropriation can be used to: - Absorb a fire loss when a company is self-insured. - Provide for a contingent loss that is probable and reasonable. - Smooth periodic income. - Restrict earnings available for dividends.

Answer 40

Restrict earnings available for dividends. The purpose of appropriations is to restrict dividends and communicate that restriction to users of the financial statements. It is merely a partitioning of retained earnings into two parts: (1) available for dividends, and (2) unavailable. A firm need not record an appropriation in order to restrict dividends. However, it helps alert stockholders to the possibility that dividends may be curtailed, and informs them of the reason for that curtailment.

Question 41

When a company goes through a quasi-reorganization, its balance sheet carrying amounts are stated at: - Original cost. - Original book value. - Replacement value. - Fair value.

Answer 41

Assets and liabilities are revalued to market or fair value to provide a fresh-start valuation. Usually, there are overvalued assets that have contributed to the operating losses and resulting retained-earnings deficit. The write-downs of overvalued assets further increase the retained-earnings deficit, but allow a new beginning for the firm. The contributed capital of the firm is reduced, permanently recording the losses, and retained earnings are increased to a zero balance.

Question 42

What method does a company use to determine the transaction price for a contract that includes variable consideration when the company has numerous other contracts with similar characteristics and there are more than two possible results? - Expected outcome method - Expected value method - Most likely value method - Most likely amount method

Answer 42

Expected value method Correct! A company should use the expected value method when there are more than two possible outcomes and the company has experience with contracts with similar characteristics. The company can use its experience to appropriately weight the probability of each outcome to calculate the expected value of the variable consideration.

Question 43

A company incurred costs to fulfill a contract that has a four-year life. The costs are a direct result of the contract and would not have been incurred had the contract not existed. How should the costs to fulfill the contract be accounted for? - Expensed in the period incurred because the company paid for the costs in the current period - Recorded as a liability and expensed in the period paid - Recorded as a liability and amortized over four years - Recorded as an asset and amortized over four years

Answer 43

Recorded as an asset and amortized over four years Correct! The costs to fulfill the contract are a direct result of the contract so they are considered incremental. Because the contract is for four years, the company will benefit from the costs for a period exceeding one year. The costs should be recorded as an asset and amortized over the contract period of four years.

Question 44

The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage of completion method includes the ratio of: - Costs incurred in year three to total billings. - Costs incurred in year three to total estimated costs. - Total costs incurred to date to total billings. - Total costs incurred to date to total estimated costs.

Answer 44

Total costs incurred to date to total estimated costs. The proportion of completion at the end of any year for a construction contract is the amount of work done, divided by the total amount of work required for the contract. Typically, cost is the measure of "work done." At the end of year three, the numerator is the cost incurred for all three years. The denominator is the total estimated cost of the project, which is the sum of (1) the cost incurred for all three years so far, plus (2) estimated costs to complete as of the end of year three. The percentage of completion changes each year, because both the numerator and denominator change. The gross profit to be reported for year three is the profit for all three years (using the proportion of completion just computed), less the profit already reported in the first two years.

Question 45

# Choose the correct statement regarding accounting methods for revenue recognition on long-term contracts, for international and US accounting standards. - Only US standards require recognition of an overall loss in the year it becomes known. - Both sets of standards allow the completed contract method when the percentage of completion method is not appropriate. - International standards require the cost recovery method when the percentage of completion method is not appropriate. - The percentage of completion method is allowed only under US standards.

Answer 45

International standards require the cost recovery method when the percentage of completion method is not appropriate. Contrary to US GAAP, international standards require a modified version of completed contract—the cost recovery method, when the percentage of completion method is not allowed.

Question 46

Multiple components comprise Net Periodic Pension Cost. The component reported as part of compensation expense and included in the subtotal for income from operations is: - Interest cost - Amortization of prior service cost - Corridor amortization - Service cost

Answer 46

Service cost Service cost is included in compensation expense reported for the employees with whom the pension benefits are associated. Because the service cost component is included in the compensation expense line item, the subtotal for income from operations includes its effect.

Question 47

# Choose the correct statement regarding the treatment of prior service cost (PSC) for defined benefit plans under international accounting. - Firms have an option to record PSC directly into other comprehensive income or in earnings. - The entire PSC amount, at present value, is recognized immediately in pension expense. - The entire PSC amount, at present value, is recognized immediately in other comprehensive income, as per U.S. standards. - The estimated nominal increase in benefits is recognized immediately in pension expense.

Answer 47

The entire PSC amount, at present value, is recognized immediately in pension expense. PSC is recognized immediately in pension expense and DBO.

Question 48

On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award? - Date of grant. - Date of restriction lapse. - Date of vesting. - Date of exercise.

Answer 48

-Date of grant. The fair value on the grant date is used for measuring compensation expense, because, on that date, the employer has given a resource of value to the employee.

Question 49

Under IFRS, what valuation methods are used for intangible assets? - The cost model or the fair value model. - The cost model or the revaluation model. - The cost model or the fair value through profit or loss model. - The revaluation model or the fair value model.

Answer 49

The cost or revaluation model.

Question 50

Assume a company does not elect the fair value option for reporting financial assets and liabilities. Which of the following is not classified as other comprehensive income? I. An adjustment to pension liability to record the funded status of the plan II. Subsequent decreases of the fair value of available-for-sale debt securities that have been previously written down as impaired III. Decreases in the fair value of held-to-maturity securities IV. None of the available choices

Answer 50

3 only. If the fair value option is not elected, held to maturity securities are reported at amortized cost. Any decreases or increases in fair value are reported neither in net income nor as part of other comprehensive income.

Question 51

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 51

When it is acquired by purchase.

Question 52

Helene, Corp. reports a net operating loss in year 1 of $20,000. In year 2, the company reports income of $10,000. What amount of year 2 income may be offset by the carryforward of the year 1 net operating loss?

Answer 52

$8,000 The 80% limitation

Question 53

On January 1, Year 3, a company changed its inventory costing method from LIFO to FIFO. The company's Year 3 financial statements contain comparative information for Year 2. How should the company present the Year 1 effect of the change in accounting principle in its Year 3 comparative financial statements? -As an adjustment to the beginning Year 2 inventory balance with an offsetting adjustment to beginning Year 2 retained earnings -As part of income from continuing operations in the Year 2 income statement - As an extraordinary item in the Year 2 income statement - As a note disclosure only

Answer 53

As an adjustment to the beginning Year 2 inventory balance with an offsetting adjustment to beginning Year 2 retained earnings

Question 54

Lore Co. changed from the cash basis to the accrual basis of accounting during 2005. The cumulative effect of this change should be reported in Lore's 2005 financial statements as a - Prior period adjustment resulting from the correction of an error. - Prior period adjustment resulting from the change in accounting principle. - Adjustment to retained earnings for an accounting principle change. - Component of income after extraordinary item.

Answer 54

Prior period adjustment resulting from the correction of an error.

Question 55

Which of the following statements is correct as it relates to changes in accounting estimates? - Most changes in accounting estimates are accounted for retrospectively. - Whenever it is impossible to determine whether a change in an estimate or a change in accounting principle occurred, the change should be considered a change in principle. - Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate. - It is easier to differentiate between a change in accounting estimate and a change in accounting principle than it is to differentiate between a change in accounting estimate and a correction of an error.

Answer 55

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate. When it is impossible to determine whether the change is an estimate or a change in accounting principle, the change should be considered a change in estimate and accounted for prospectively.

Question 56

Matt Co. included a foreign subsidiary in its 2008 consolidated financial statements. The subsidiary was acquired in 2002 and was excluded from previous consolidations. The change was caused by the elimination of foreign-exchange controls. Including the subsidiary in the 2008 consolidated financial statements results in an accounting change that should be reported - By footnote disclosure only. - Currently and prospectively. - Currently with footnote disclosure of pro forma effects of retroactive application. - By restating the financial statements of all prior periods presented.

Answer 56

By restating the financial statements of all prior periods presented. The elimination of foreign-currency controls would legitimately change the status of the foreign sub from non-consolidated to consolidated. This causes a change in the reporting entity, since both companies must now be reported together. A change in reporting entity utilizes the retrospective method.

Question 57

Under IFRS, if a long-term debt becomes callable due to the violation of a loan covenant - The debt may continue to be classified as long-term if the company believes the covenant can be renegotiated. - The debt must be reclassified as current. - Cash must be reserved to pay the debt. - Retained earnings must be restricted in the amount of the debt.

Answer 57

The debt must be reclassified as current.

Question 58

Excel City's museum board is appointed by the city council, which has agreed to subsidize the operating costs of the museum. In addition, the city is obligated to service the debt on general obligation bonds issued to construct a museum annex. The museum is - A joint venture. - A jointly governed organization. - A special-purpose government. - A component unit.

Answer 58

A component unit Excel City has appointment authority and has a financial burden relationship with the museum.

Question 59

Galaxy has a tax benefit and cash retained of $20,000 as a result of share-based payments to employees. How is this tax benefit disclosed in the financial statements? - As a component of other comprehensive income. - As a prior period adjustment. - As a current liability on the balance sheet. - As a cash inflow from financing activities on the statement of cash flows.

Answer 59

As a cash inflow from financing activities on the statement of cash flows. Cash retained as a result of excess tax benefits in connection with share based payments to employees should be recognized as cash inflow from financing activities in the statement of cash flows.

Question 60

The debt service fund of a governmental unit is used to account for the accumulation of resources to pay, and the payment of, general long-term debt Principal (yes/no) Interest (yes/no)

Answer 60

yes, yes

Question 61

An obligation of an acquirer to pay contingent consideration to the former owners of an acquired entity in a business combination can be recognized as which of the following? Liability? Equity item?

Answer 61

both. an obligation to pay contingent consideration in a business combination may be recognized by the acquirer as either a liability or as an equity item, depending on the nature of the obligation under the provisions of ASC 480- Distinguishing Liabilities from Equity.