F2 Flashcards
Revenue, AJE, Notes to FS, Sub, FV, SPF, Ratios (11 cards)
Pretax income adjustment when ending inventory is overstated and depreciation expense is understated.
Ending inventory:
Overstated means COGS is understated, net income is overstated, so must deduct from pretax income.
Depreciation expense:
Understated means net income is overstated, so must deduct from pretax income.
Depreciation not recorded in prior year. Adjust CY accumulated depreciation or depreciation expense? Gross amount or net of tax?
Depreciation expense should reflect the appropriate expense amount for the CURRENT YEAR and should NOT be used to fix prior period errors.
Accumulated depreciation (and original depreciation expense) are booked at a gross level (prior to accounting for any tax impact), so the correct adjustment will include a credit to accumulated depreciation (GROSS).
A contract contains multiple service-related performance obligations. All of the following criteria below will lead to the treatment of each service as a distinct obligation except:
The buyer can benefit from each service when combined with her other available resources.
The promise to deliver each service is separately identifiable from the other services.
The services are all similar in nature and provided in the same manner.
The buyer is able to benefit from each service independently.
When the services are all very similar in nature and can be provided to the buyer in a similar manner, this would indicate that the services can be combined into a single performance obligation. When the buyer can benefit from each service independently or in conjunction with her own available resources and when the promise to deliver each service is separately identifiable from the other services, then the performance obligation overall can be split apart into distinct components.
On April 15, Year 3, Landon Co. signed a contract that entailed providing a piece of scientific equipment for $215,000 to Jacobs Inc., with delivery expected to occur on August 31, Year 3. Per the terms of the contract, Jacobs will pay Landon for the full amount on July 31, Year 3. Landon’s cost to produce the equipment is $175,000. Assuming delivery occurs as expected, the August 31 journal entry for Landon will involve which of the following debits/credits?
Debit to unearned sales revenue of $215,000.
Credit to cost of goods sold of $175,000.
Debit to inventory of $175,000.
Credit to cash of $215,000.
The journal entries for this transaction for Landon are as follows:
April 15, Year 3: No entry.
July 31, Year 3:
Debit (Dr)
Cash
215,000
Credit (Cr)
Unearned sales revenue
215,000
August 31, Year 3:
Debit (Dr)
Unearned sales revenue
215,000
Credit (Cr)
Sales revenue
215,000
Debit (Dr)
Cost of goods sold
175,000
Credit (Cr)
Inventory
175,000
For Year 1, Pac Co. estimated its two-year equipment warranty costs based on $100 per unit sold in Year 1. Experience during Year 2 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reported
In Year 2, as income from continuing operations. The effect of the new estimate of warranty costs (from $100 to $110) is a change in estimate and will be reported in Year 2 income from continuing operations.
Rule: Changes in estimates affect only the current and subsequent periods (not prior periods and not retained earnings).
Conn Co. reported a retained earnings balance of $400,000 at December 31, Year 1. In August, Year 2, Conn determined that insurance premiums of $60,000 for the three-year period beginning January 1, Year 1, had been paid and fully expensed in Year 1. Conn has a 30% income tax rate. What amount should Conn report as adjusted beginning retained earnings in its Year 2 statement of retained earnings?
Beginning balance - RE 12-31-Year 1
$400,000
Add: Prior period adjustment, Net of tax:
$60,000 3-year insurance policy 1-1- Year 1 to 1-1- Year 4
Expensed in Year 1, 2/3 prepaid at
1-1- Year 2 ($60,000 x 2/3 = $40,000 x 70% net of tax)
28,000
Adjusted balance - RE 1-1- Year 2
$428,000
Holt Co. discovered that in the prior year, it failed to report $40,000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 20 percent. How should Holt report the correction of error in the current year?
As an increase in accumulated depreciation of $32,000.
As an increase in depreciation expense of $32,000.
As an increase in accumulated depreciation of $40,000.
As an increase of depreciation expense of $40,000.
Depreciation expense should reflect the appropriate expense amount for the current year and should not be used to fix prior period errors. Accumulated depreciation (and original depreciation expense) are booked at a gross level (prior to accounting for any tax impact), so the correct adjustment will include a credit to accumulated depreciation of $40,000.
Mill Co. reported pretax income of $152,500 for the year ended December 31. During the year-end audit, the external auditors discovered the following errors:
Ending inventory
$30,000 overstated
Depreciation expense
$64,000 understated
What amount should Mill report as the correct pretax income for the year ended December 31?
The pretax income of $152,500 is too high as a result of both errors.
Ending inventory that is overstated by $30,000 implies that cost of goods sold (COGS) is understated by the same amount. $30,000 should be added to COGS, which will reduce pretax income.
Depreciation expense is understated by $64,000. Adding in this expense will also reduce pretax income.
$152,500 − $30,000 − $64,000 = $58,500.
Arno Co. did not record a credit purchase of merchandise made prior to year-end. However, the merchandise was correctly included in the year-end physical inventory. What effect did the omission of reporting the purchase of merchandise have on Arno’s balance sheet at year-end?
Assets Liabilities
No effect Understated
Because the actual inventory amount was correct as of year-end due to a physical count, there is no effect to assets as a result of not recording the credit purchase. However, not recording the purchase results in an understated accounts payable balance, thereby understating liabilities overall.
Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, Year 5, the effective date of the policy. At March 31, Year 5, Roro’s unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro’s financial statements for the three months ended March 31, Year 5?
The prepaid insurance reflected in the unadjusted trial balance would be fully expensed ($300) and one month (March 1 through March 31) of the renewed policy cost would be expensed. Insurance expense equals $500 ($300 plus $7,200/36 months). Prepaid insurance equals $7,000 ($7,200 × 35/36). The $300 was the last remaining amount from a previous policy that needed to be expensed. When the $7,200 was paid, it was recorded as a debit to Insurance Expense. However, it should have been recorded as a debit to Prepaid Insurance and amortized over the 36 months. Therefore, one month’s expense ($200) will remain in the expense account, and the remaining 35 months of expense will be moved to Prepaid Insurance ($7,000).
Rice Co. salaried employees are paid biweekly. Advances made to employees are paid back by payroll deductions. Information relating to salaries follows:
12/31/Year 1 12/31/Year 2 Employee Advances
24,000 36,000
Accrued Salaries Payable
40,000 ?
Salaries Expense During the Year
420,000
Salaries Paid During the Year (Gross)
390,000
In Rice’s December 31, Year 2, balance sheet, accrued salaries payable was:
$70,000 accrued salaries payable at Dec 31, Year 2.
Accrued
Salaries
Payable
Beginning balance 12/31/Year 1
40,000
Add: Salaries expense during the year
420,000
Sub Total 460,000
Less: Salaries paid during the year (gross)
(390,000)
Ending balance 12/31/Year 2
70,000
