FAR 1 Flashcards

Question

Which one of the following is not an other comprehensive basis of accounting?

Answer 1

Pure accrual basis accounting is not an other comprehensive basis of accounting. The concept of “other comprehensive basis” means a comprehensive basis of accounting other than pure (or full) accrual accounting.

Answer 2

The amount of the rental expense error made in the tax return (and financial statements) of the prior period would be reported as a prior period adjustment in Alco's 2012 financial statements.

Answer 3

The variable interest rate on the interest rate swap and the variable interest rate on the hedged borrowing are linked to the same index. To qualify for simplified hedge accounting, one of the criteria is that both the swap and the hedged borrowing are linked to the same index.

Answer 4

Apply the new standard on a prospective basis. Adoption of a private company standard is done on a prospective basis.

Answer 5

Financial Reporting Releases (FRR). The main pronouncements published by the SEC are the Financial Reporting Releases (FRR) and the Staff Accounting Bulletins (SAB).

Answer 6

Form 10-K.

Answer 7

Form 8-K is used to report significant events that effect the company such as a business combination or bankruptcy.

Answer 8

Form 10-Q is the quarterly report filed with the SEC.

Answer 9

Form S-1 is filed with the SEC in a public offering.

Answer 10

A nonaccelerated filer is defined by the SEC as an entity with less than $75 million in public market value.

Answer 11

Form 10-Q is the form for quarterly filing by a public entity with securities listed in the United States.

Answer 12

The proxy statement is the form by which management requests the right to vote through proxy for shareholders at meetings.

Answer 13

Product market share. The market share of the company's product is not a required disclosure. The company may chose to voluntarily present this information, but it is not a required disclosure.

Answer 14

Regulation S-X Regulation S-X governs the form and content of financial statements and financial statement disclosures for publicly traded entities

Answer 15

Sarbanes Oxley enhances corporate governance to mitigate financial accounting abuses.

Answer 16

Regulation S-K governs the form and content of non-financial statement disclosures.

Answer 17

Discussion of risks and uncertainties. The SEC requires that the MD&A provide a "discussion and analysis" on operating results, liquidity, and capital resources, trends, and risks and uncertainties. Where there are significant increases in sales, management must discuss the extent that price, volume, or new products contributed to the increase.

Answer 18

40 days A large accelerated filer is a company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more. A large accelerated filer must file its 10Q within 40 days after quarter end.

Answer 19

``` Net Sales COGS =Gross Margin +Operating Expenses =Operating Margin -Interest Income +Interest Expense - Other Rev, Gains, Expenses, & Losses =Pretax income from Continuing Operations +Income Tax Expense -Income from continuing operations -Income from discontinued operations (next tax) =Net Income ``` EPCS Income from continuing operations: Income from continuing operations: Net income:

Answer 20

Under GAAP, only consolidated financial statements may be issued as the primary form of public disclosure for a parent and its subsidiaries. Parent only statements and separate parent and subsidiary statements may not be issued in lieu of consolidated financial statements.

Answer 21

A parent may use the cost method, the equity method, or any other method on its books to carry an investment in a subsidiary that it will consolidate. The method that is used on its books will affect the consolidating process, but the final consolidated financial statements will be the same regardless of the method the parent uses on its books.

Answer 22

Since Aceco owns controlling interest in Placo (60%) and in Simco (100%), each would be consolidated with Aceco. Kapco would not be consolidated, because Aceco does not have controlling interest in Kapco. In Aceco's consolidated financial statements, Kapco would be shown as an investment.

Answer 23

Consolidated statements should be prepared by Star, the parent, and not by Sun, the subsidiary. Star has an investment in and control of Sun, which is the basis for preparing consolidated statements; Sun does not have an investment in, or control of, Star. Thus, there is no basis for Sun to prepare consolidated statements.

Answer 24

Both book values and fair values of a subsidiary's assets and liabilities will need to be determined at the date of acquisition in order to prepare consolidated financial statements after a business combination.

Answer 25

Consolidation used for both Sell and Vane. If one looked just at Penn's interest in Vane's result of 45% (75% × 60%), one might say that the equity method would be appropriate. However, because Sell owns 60% of Vane, it controls Vane and would need to consolidate Vane. Because Penn owns 75% of Sell, it controls Vane and would need to consolidate Sell, which consolidated Vane. Thus, all three would be consolidated, making this response correct.

Answer 26

50+% If an investor owns 50+% (up to and including 100%) of an investee, it will normally carry the investment on its books using the cost method, the equity method, or some other method, but it will report the investment in its financial statements as a consolidated subsidiary. The method used on the investor's books will be different than the method used to report the investment in financial statements.

Answer 27

The subsidiary is in bankruptcy. Currently, the only reasons allowable for not consolidating a majority-owned subsidiary is where control does not reside with the majority owner, making this the correct response.

Answer 28

In order to prepare consolidated financial statements, the parent needs the book values and fair values of a subsidiary's assets and liabilities at the date of the business combination as well as the Parent's cost of its investment in the subsidiary.

Answer 29

In the preparation of financial statements, economic substance takes precedence over legal form. The preparation of consolidated financial statements is based on the concept that economic substance takes precedence over legal form. In form, the corporations are separate legal entities, but in substance, they are under the common economic control of the parent's shareholders.

Answer 30

Inventories The difference between (fair) market value and book value of inventories would be recognized by adjusting inventories to fair value on the consolidated balance sheet.

Answer 31

Goodwill is the difference between the purchase price of $3,750,000 (250,000 × $15.00) and the fair value of the net assets ($3,000,000 + $400,000) or $350,000.

Answer 32

Plant and Equipment The excess of (fair) market value over book value of equipment would be recognized by writing up plant and equipment to fair value on the consolidated balance sheet.

Answer 33

$1,250,000 On the date of a business combination using acquisition accounting, the consolidated stockholders' equity will exactly equal 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.

Answer 34

Dividends declared by Pride 90% Dividends declared by Simba 0% Subsidiary dividends are never considered part of consolidated dividends. They are either eliminated in the consolidation entries or allocated to reducing noncontrolling interests. In this problem, 80% of Simba's dividends will be eliminated as intercompany, and 20% will be allocated to reducing noncontrolling interest. In addition, since 10% of the dividends of Pride never go outside the consolidated entity, they are not considered dividends of the consolidated entity either.

Answer 35

$-0- All intercompany receivables and payables should be eliminated in the preparation of a consolidated balance sheet so that no intercompany receivables/payables are reported. In this question, an eliminating entry should be made that eliminates (credits) Rowe's receivable from Cowan against (debits) Cowan's payable to Rowe, both for $100,000. Since the receivable/payable is between the affiliated entities, 100% (not 80%) of the intercompany amount should be eliminated.

Answer 36

$200,000 A 90% owned subsidiary will be consolidated, and any intercompany receivables such as these are eliminated from both parties' books in the consolidating process. Therefore, the $300,000 receivable from Winn will not appear on the consolidated balance sheet at all. The $200,000 from Carr is a receivable from an affiliate (20% owned) and will need to be reported as such.

Answer 37

$550,000 The consolidated financial statements should reflect 100% of the assets and liabilities of the subsidiary less any intercompany balances. Therefore the balance on the consolidated balance sheet should be: $450,000 + 200,000 − 100,000 = $550,000.

Answer 38

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.

Answer 39

$50,000 discount The premium or discount on a bond investment is the difference between the par value of the bonds and the price paid for the bonds in the market. If the price paid is more than par value, there is a premium on the bond investment. If the price paid is less than par value, there is a discount on the bond investment. In this case, the price paid for the investment ($200,000) is less than the par value of the bonds ($250,000) by $50,000. Therefore, there is a $50,000 discount on Pico's investment.

Answer 40

$1,100,000 A premium on a bond liability results from the sale of the bonds at a price in excess of par (face) value. Therefore, a premium would be added to par value to get net carrying value. Sico's premium on its bond liability ($100,000) should be added to the par (or face) value of its bond liability ($1,000,000) to determine the net carrying value of the liability. Thus, the answer should be $1,000,000 par value + $100,000 premium = $1,100,000 net carrying value.

Answer 41

$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.

Answer 42

DR: Bonds Payable Premium on Bonds Payable Discount on Bond Investment CR: Investment in Bonds Gain on Constructive Retirement The Investment in Bonds (a debit balance, so it will be credited) and the Bonds Payable (a credit balance, so it will be debited) will be eliminated against each other at par value ($250,000). The Discount on Bond Investment $50,000 (a credit balance, so it will be debited) and the Premium on Bonds Payable $25,000 (a credit balance, so it will be debited) will be eliminated resulting in a Gain on Constructive Retirement of $75,000, a credit balance.

Answer 43

Companies under common management: Yes Commonly controlled companies: Yes Combined financial statements are used (when consolidated statements are not appropriate) to show the aggregate results both for companies under common management and for companies under common control (and for unconsolidated subsidiaries).

Answer 44

$56,000 Since all the goods have been sold outside the combined entity, income recognition is correct. However, sales and cost of goods sold have been recorded at two different points (i.e., the sale from Webb to Twill and the sale from Twill to outsiders). To the combined entity, Webb's cost of merchandise (the original cost to the combined entity) is what is needed for cost of goods sold, and Twill's sales (the amount the merchandise was sold for outside the combined entity) is needed for sales. This means that the sale from Webb to Twill and the cost of goods recorded by Twill need to be eliminated. That amount is $56,000 (computed as $40,000 cost to Webb × transfer price to Twill of 140% of cost = $56,000).

Answer 45

Minority Interest: Same Foreign Operations: Same Different Fiscal Periods: Same According to ASC 810, if problems associated with minority interest, foreign operations, different fiscal periods, or income taxes occur in the preparation of combined financial statements, they should be treated in the same manner as in the preparation of consolidated financial statements. Therefore, all three items should be treated in the same manner as in consolidated statements.

Answer 46

The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. In general, the dividends subtracted in computing basic EPS are (1) the annual dividend commitment on cumulative preferred whether or not declared or paid, and (2) declared dividends on noncumulative preferred whether paid or not. The firm has negative income. This answer means that the dividends reduce the numerator further - beyond the loss. The final numerator amount is less than (more negative than) the loss. Also, arrear dividends are never included in EPS because they were subtracted in computing EPS in a previous year.

Answer 47

$7.36 One year of preferred stock dividends is subtracted from income in the numerator of EPS because the stock is cumulative. The amount of dividends declared does not affect the calculation. The bonds are not relevant because basic EPS does not assume conversion of the bonds. The calculation is: Basic EPS = [$200,000 - (8,000 × $20 × .10)]/25,000 = ($200,000 − $16,000)/25,000 = $7.36.

Answer 48

$9.00 Earnings per share is: (net income - preferred dividends)/common shares outstanding. Preferred stock dividends are $100 × 10% × 20,000 shares = $200,000. Earnings per share is (2,000,000-200,000)/200,000=$9 per share.

Answer 49

139,008 More than one approach is available to compute WA (each yields the same answer) but perhaps the easiest is to weight each item separately going forward to the end of the year. This approach yields 139,008 = [100,000(12/12) + 30,000(9/12) + 36,000(7/12)](1.05) - 35,000(4/12). The beginning shares are outstanding the entire year (12/12). The next two items are weighted for the fraction of the year they are outstanding. Stock dividends and splits are retroactively applied to all items before their issuance - hence the multiplication by 1.05. The treasury shares are removed from the average for 4/12 of the year - these shares already reflect the stock dividend.

Answer 50

702,000 Weighted average shares outstanding are weighted by the number of months the shares were outstanding during the year. The easiest way to do this is to take each change in common stock and multiply by the number of months remaining - add the shares that increased shares outstanding and subtract shares that reduced shares outstanding. ``` Shares Months Wtd avg 700,000 12/12 700,000 - 20,000 9/12 - 15,000 +40,000 6/12 +20,000 -36,000 1/12 - 3,000 702,000 ```

Answer 51

Year 2 $ 1.78 Year 1 $ 1.75 For EPS purposes, stock dividends and splits are retroactively applied to all periods presented, and to all share changes within the year of the split or dividend. For reporting in Year 2: Weighted average shares, Year 1 = 100,000(2) = 200,000. EPS, Year 1 = $350,000/200,000 = $1.75. Weighted average shares, 2006 = [100,000 + 20,000(9/12)]2 = 230,000 EPS, 2006 = $410,000/230,000 = $1.78.

Answer 52

Pack's 2003 EPS - Yes Young's 2003 EPS - Yes 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.

Answer 53

$1.09 Basic earnings per share (EPS) is net income available to common shareholders divided by the weighted average shares outstanding. This question provided the net income so the task is to compute the weighted shares outstanding. The beginning shares outstanding are 1,500,000 plus the shares issued during the year of 500,000 × 8/12 (333,333), or 1,833,333. Therefore, basic EPS is $2,000,000 ÷ 1,833,333 = $1.09.

Answer 54

1,575,000 The weighted average shares outstanding are calculated as follows: ({[400,000+(200,000×9/12)]×3}−300,000×3/12)=1,575,000(1,574,999rounded)

Answer 55

$2.20 Earnings per share (EPS) is calculated on net income available to the common stockholders, $130,000 − $20,000, or $110,000, divided by weighted average shares of common stock outstanding, 50,000. The EPS = $110,000 / 50,000 = $2.20

Answer 56

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.

Answer 57

Preferred stock dividends are subtracted from the earnings for the period in the calculation of earnings per share. Earnings per share (EPS) is calculated on net income available to the common stockholders, divided by weighted average shares of common stock outstanding. The preferred dividends must be subtracted from the net income, as that amount is not available to the common stockholders.

Answer 58

$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.

Answer 59

Income before discontinued operations. Earnings per share (EPS) is calculated on income before discontinued operations, and net income.

Answer 60

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.

Answer 61

$1.60 Basic EPS = ($30,000 – $4,500)/15,000 = $1.70 The option's numerator effect is zero; the denominator effect = 2,000 – (2,000)$12/$20 = 800. 2,000 shares would be issued upon exercise but under the treasury stock method the firm is assumed to apply the proceeds from exercise (2,000 × $12) and purchase shares of the firm's stock for $20 each. Thus, the n/d for options = 0/800 = 0. The n/d for the convertible preferred stock is the ratio of dividends that would not have been declared if the stock converted, to the common shares assumed issued on conversion. n/d = $4,500/2,900 = $1.55. Enter the options into diluted EPS first, because the options have the lower n/d. DEPS tentative = ($30,000 − $4,500)/(15,000 + 800) = $1.61. The convertible preferred is dilutive because its n/d ratio of $1.55 is less than $1.61, the tentative or first-pass amount for diluted EPS. DEPS final = ($30,000 – $4,500 + $4,500)/(15,000 + 800 + 2,900) = $1.60.

Answer 62

126,500 The stock dividend is considered to be outstanding since the beginning of the year. The weighted average is therefore: 100,000+24,000+ (5,000X6/12) = 126,500.

Answer 63

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.

Answer 64

The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues. This is one of the disclosures required in FAS 131. The identity of the customer does not need to be disclosed, but the segment reporting the revenue must be identified. Such a segment would meet one of the three quantitative thresholds for reporting segment information. The three thresholds are 10% of revenue, income, and assets.

Answer 65

Publicly traded enterprises FAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments.

Answer 66

Sales to unaffiliated customers - YES Intersegment sales - 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.

Answer 67

Five Using the three quantitative thresholds (tests) from FAS 131 (Disclosures about Segments), the five following segments are reportable operating segments: A, B, C and E meet the test: Reported revenue, including external and internal, is 10% or more of the combined revenue of all reported operating segments. 10% of $32,750,000 is $3,275,000. The revenues of A, B, C and E all exceed this amount. D meets the test: Its assets (here $7,500,000 for D) are 10% or more of the combined assets of all operating segments (here $6,750,000 = .10 × $67,500,000). F meets none of these tests. Note: Some of the above segments meet more than one test. Only one needs to be met for a segment to be reportable.

Answer 68

Ebon, Fair, Gel, and Hak FAS 131, issued in 1997, uses the term "operating segments" rather than business segments. All four meet at least one of the three criteria for a reportable segment. A segment needs to meet only one of these criteria to be reportable (that is, required to report income and other data separately). The three criteria are (summarized): segment revenue is 10% or more of total revenue for all reported operating segments, segment profit or loss is 10% or more of total profit for those segments reporting a profit, or 10% of total loss for those segments reporting a loss, whichever is greater in absolute amount, and segment assets are 10% or more of total assets of all operating segments. Thus, each segment meets at least one of the three criteria.

Answer 69

$5,000,000 Under FAS 131 (1997), if revenues from transactions with a single customer amount to 10% or more of a firm's total revenue, that fact must be disclosed, along with the total revenues from each such customer. For this firm with revenues of $50,000,000, 10% of total revenues is $5,000,000.

Answer 70

Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales between geographical areas. Segment disclosure requires that companies disclose the amount of sales to unaffiliated customers by geographical region. They also require disclosure of intracompany sales between geographical areas. These cannot be aggregated but must be reported separately.

Answer 71

Lion, Monk, and Nevi Under FAS 131, a segment is reportable if its sales (including intersegment sales) are at least 10% of total combined revenues (including intersegment sales) for all segments. Total combined sales are $150,000. Thus, all three segments are reportable because the combined sales of each exceed $15,000.

Answer 72

Recognize $90,000 in the third quarter. The worker's compensation claim should be reported in the period incurred, the third quarter. This is a transaction that occurred in the third quarter and does not impact other quarters.

Answer 73

$95,000 Interim reporting treats each interim period as an integral part of the annual period. The two expenditures, in this problem, benefit more than one quarter. Thus, the expenses are recognized in the periods benefited, rather than only in the period of expenditure. The property taxes benefit all four quarters; therefore, $15,000 ($60,000/4) is recognized each quarter. The repair benefits three quarters; therefore, $80,000 ($240,000/3) is recognized each quarter. The sum of the two amounts is $95,000 to be recognized in quarter three.

Answer 74

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.

Answer 75

$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.

Answer 76

$360,000 Unless temporary, declines in the market value of inventory should be recognized in full in the interim period in which they occur. They should not be deferred to a later period. In this way, the quarterly financial statement reports a significant event for that quarter. This is an example of an exception to the overall view adopted by the APB with regard to interim reports: that interim reports should be an integral part of the annual period.

Answer 77

$120,000 The disposal loss cannot be allocated to interim periods. It does not relate to any interim period other than the one in which it occurred. Thus, it is recognized completely in the earnings for the six month period ended June 30. The property tax is allocated to interim periods based on time expired. The $40,000 tax relates to the entire year of 20X5. With half of the year elapsed at June 30, half of the tax should be recognized in expense. The sum of the amounts to be recognized at June 30 is $120,000 ($100,000 + $20,000).

Answer 78

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.

Answer 79

$72,500 One-fourth of the property taxes should be recognized for the second quarter income statement: $22,500 = $90,000/4. Although the entire annual amount was paid in the first quarter, only 1/4 of the total annual amount should be recognized in each quarter. This allocation is based on benefits received (the benefits that flow from payment of property taxes). It is reasonable to assume that each quarter benefits the same amount. The repair cost benefits three quarters on an equal basis because it was paid at the beginning of the second quarter. Therefore, 1/3 of the cost, or $50,000, should be reported in the income statement for the second quarter. Thus, the total expense to be recognized in the second quarter is $72,500 ($22,500 + $50,000).

Answer 80

In the fourth quarter only. Temporary declines in inventory value are not recognized in the interim period in which they occur. This decline was expected to be temporary, i.e. it was expected to reverse. Therefore, it is not recorded until the fourth quarter, at which time the normal annual LCM valuation is applied because the decline had not reversed. Had the decline in the second quarter been deemed permanent, it would have been recognized in the second quarter.

Answer 81

Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 20X4. To ensure the most current information, an estimate of the applicable tax rate for the entire year is made at the end of each quarter. Also at the end of each quarter, the tax for the entire portion of the year elapsed is computed, including previous quarters of that year. Finally, the previous quarters' tax is subtracted, yielding the income tax for the latest quarter.

Answer 82

As reporting for an integral part of an annual period. The fundamental principle underlying interim reporting is that interim reports should be considered an integral part of the annual reporting period. This has important implications for interim reporting. There are exceptions to this principle, however.

Answer 83

Favorable - Yes Unfavorable - Yes "Purchase price variances or volume or capacity cost variances that are planned and expected to be absorbed by the end of the annual period, should ordinarily be deferred at interim reporting dates." The reason for the deferral is that, from the point of view of the entire reporting year, there will be no volume variance. The Opinion requires the integral view of interim reporting for most items - that an interim period is an integral part of the annual period. Recognizing, rather than deferring, the variance in the first quarter would cause the reporting of the first quarter results to be unrepresentative of the annual period of which it is a part.

Answer 84

$91,000 The gain from discontinued operations should be recognized entirely in the second quarter. There is no meaningful basis on which to allocate the gain. It is a one-time occurrence. The cumulative effect is not recognized in income. The firm's treatment of the property tax cost is correct. The cost relates to the entire year. Therefore, each quarter should bear 1/4 of the cost. Third quarter net income = $91,000 = $111,000 − $60,000/3.

Answer 85

Both I and II. The modified cash basis of accounting employs some elements of accrual accounting (Statement I) and the modifications to cash basis must have substantial support in practice (Statement II). Both statements are correct.

Answer 86

Pure accrual basis. Pure accrual basis accounting is not an other comprehensive basis of accounting. The concept of “other comprehensive basis” means a comprehensive basis of accounting other than pure (or full) accrual accounting.

Answer 87

As a prior period adjustment. The amount of the rental expense error made in the tax return (and financial statements) of the prior period would be reported as a prior period adjustment in Alco's 2012 financial statements.

Answer 88

Nontaxable Income - YES Nondeductible Expenses - YES Both nontaxable income items (e.g., life insurance proceeds from the death of an officer) and nondeductible expenses (e.g., premium cost of life insurance on an officer) would be recognized in financial statements prepared using an income tax basis of accounting.

Answer 89

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.

Answer 90

The variable interest rate on the interest rate swap and the variable interest rate on the hedged borrowing are linked to the same index. To qualify for simplified hedge accounting, one of the criteria is that both the swap and the hedged borrowing are linked to the same index.

Answer 91

Apply the new standard on a prospective basis. Adoption of a private company standard is done on a prospective basis.

Answer 92

Goodwill amortization. The PCC allows private companies to amortize goodwill over a period to not exceed 10 years.

Answer 93

45,000 The weighted average shares outstanding for this firm for Year 1 is: 45,000 = [20,000(2) + 10,000(1/2)]. The split affects only the shares issued before date of the split. The July 1 issuance is weighted only by 1/2 a year because the shares were outstanding only 1/2 a year. EPS is computed only on common stock outstanding. The preferred shares have no effect on the computation.

Answer 94

$3.79 Basic EPS = Net Income - Preferred Dividends / Weighted shares outstanding. The numerator is $236,000 - preferred dividends [($60 × 10,000) × .04 = 24,000] = $212,000. The denominator is 50,000 (12/12) + 8,000 (9/12) = 56,000 shares. $212,000 / 56,000 = $3.786 or $3.79.

Answer 95

To qualify as a segment, a component must meet one of the three criteria. For all three criteria, the segment must account for 10% or more of the combined amount for all operating segments. Reporting to the company-wide chief operating decision maker is also a requirement of an operating segment.

Answer 96

Only Bix and Dil. To meet the revenue test, an operating segment must have total sales (including intersegment sales) of 10% or more of the combined segment sales (including intersegment sales). $83,000 is the test number. Only Bix with $12,000 of total sales and Dil with $59,000 have sales in excess of $8,300 (.10 × $83,000).

Answer 97

Inventory losses generally should be recognized in the interim statements. Only temporary losses expected to be recovered are not recognized in interim periods. Because most inventory losses are permanent.

Answer 98

Use the same accounting principles followed in preparing its latest annual financial statements. Interim financial statements generally should reflect the same accounting principles used in preparing annual financial statements. Interim periods are considered an integral part of the annual period, with some exceptions.

Answer 99

Extinguishment loss - $ 70,000 Insurance expense - $ 25,000 In large measure, accounting principles for interim periods are the same as for annual periods. The extinguishment loss is a one-time event and is recognized entirely in the first quarter. The insurance payment covers an annual period. Thus, only 1/4 of the payment, or $25,000 ($100,000 × .25), is allocated to the first quarter.

Answer 100

Cash Basis - YES Accrual Basis - YES A modified cash basis of accounting would contain items (accounts) measured under both the cash basis of accounting and the accrual basis of accounting. The modified cash basis of accounting uses cash basis accounting modified to incorporate accrual basis accounting for certain types of transactions/events. Modifications must be logical and consistent with accrual basis accounting under U.S. GAAP.

Answer 101

Included in the expense category in the determination of income. Despite the fact that these expenses are not deductible for tax purposes, they are still business expenses and need to be included in the determination of income on the financial statements. In addition, the income tax return requires information on the total meals and entertainment expense in order to calculate the deductible amount.

Answer 102

Yes. Under a strict cash basis of accounting, revenues and expenses are recorded only when cash is received or paid. Under a modified cash basis of accounting, certain accruals and/or deferrals are recorded for financial-statement purposes. The most common modifications are the capitalization and amortization of long-lived assets and the accrual for income taxes (recognition of income tax expense and related liability).

Answer 103

$225,000 Current assets are those assets expected to be consumed or realized in cash within one year of the balance sheet date. There is no overdraft because the checks were not sent as of the balance sheet date. Thus, the balance sheet should disclose $20,000 in cash ($30,000 − $10,000). The land held for resale is a current asset because it is expected to be sold in the next year (and the corroboration of this expectation was known before the issuance of the financial statements). ``` Cash $ 20,000 Net accounts receivable 35,000 Inventory 58,000 Prepaid expenses 12,000 Land held for resale 100,000 Total current assets $225,000 ```

Answer 104

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.

Answer 105

$13,800 The correct cash balance is the balance per the checkbook ($12,000) plus the $1,800 check written to the vendor, for a total of $13,800. This check reduced the balance in the checkbook but was not mailed. Thus, the amount remains in Grey's cash balance at the end of the year. The bank statement balance is not the correct balance because information about transactions affecting cash near the end of the month, recorded by Grey, did not reach the bank by the cutoff date.

Answer 106

$1,400,000 The first three items in the list are included in cash and cash equivalents. If no restrictions apply, cash in checking accounts ($350,000) is always included in cash. Per ASC Topic 305, cash equivalents are short-term, highly liquid investments that are readily convertible into cash and have maturities of three months or less from the date of purchase by the entity. Common examples are Treasury bills, commercial paper, and money market funds. In this case, the cash equivalents are the money market account ($250,000) and the Treasury bill ($800,000). Therefore, total cash and cash equivalents is $1,400,000 ($350,000 + $250,000 + $800,000). The maturity of the Treasury bond was at least 12 months (3/1/X4 to 2/28/X5) from the date of purchase; therefore, it should not be reported in cash and cash equivalents. The reason for the three-month rule is to minimize price fluctuations due to interest rate changes. A security with a fluctuating price is not “equivalent” to cash. One year is too long a time to expect interest rates to remain stable.

Answer 107

$27,200 The cash balance is $20,200: the sum of the checking account balance and the petty cash. Because it has a maturity of less than three months, the only cash equivalent is the $7,000 of commercial paper. The final sum of these two accounts is $27,200.

Answer 108

$32,192 ``` The reconciliation should be as follows: Book balance $32,300 Less bank fees (15) Less NSF check (120) Plus deposit transposition error (285 – 258) 27 Corrected book balance $32,192 ```

Answer 109

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.

Answer 110

$53,050 The reconciling items that need to be adjusted to the bank balance are: checks outstanding (−1,500) and deposit in transit (+350). The net cash after the reconciliation is: Bank balance $54,200 − 1,500 + 350 = $53,050. The bank service charge and insufficient funds are already reflected in the bank balance. The error is on Hilltop's books, not on the bank statement, and therefore it does not need to be included in the reconciliation.

Answer 111

$2,944 $5,000(1 - .30)(1 - .20)(.98) + $200 = $2,944. The chain trade discounts are applied to each successive net amount as shown in the calculation, and the cash discount of 2% is then applied to the final invoice amount. The cash discount applies because the payment was made within 15 days of purchase. The goods were shipped FOB shipping point. Therefore, title transferred to Burr at the shipping point, meaning Burr bears the shipping charges. Because Pitt prepaid them as an accommodation, Burr must reimburse Pitt for the $200, the last term in the calculation leading to $2,944.

Answer 112

For cash receipts after the discount period, discounts not taken must be credited for $750. Under the net method, sales are initially recorded net of discounts. Payments received after the discount period total $37,500 ($150,000 × 25%), and the amount of discounts forfeited is $750 ($37,500 × 2%). Under the net method, the entry to record these receipts is Dr Cash 37,500 Cr. AR 36,750 Cr. Discounts not taken 750

Answer 113

$192,000 The first step is to determine sales for year 1. The cost of goods sold in year 1 is $280,000 ($350,000 purchases less $70,000 ending inventory). Note that beginning inventory is zero because the company began operations in year 1. Since all merchandise was marked to sell at 40% above cost, year 1 credit sales are $392,000 ($280,000 cost of goods sold × 140%). The second step is to determine the ending balance in accounts receivable. A/R Dr. Beg 0 Dr. Credit Sales $392,000 Cr. Collections $ 200,000 End Balance 192,000

Answer 114

Accounts receivable - No Effect Allowance for uncollectible accounts - Increase When an account is written off, the journal entry is debit the allowance for uncollectible accounts and credit accounts receivable. If the account is subsequently collected, an entry is made to reinstate the account receivable by debiting accounts receivable and crediting the allowance for uncollectible accounts. A second entry is made for the cash collection which involves debiting cash and crediting accounts receivable. Therefore, there is no change in accounts receivable when a previously written-off account is collected; accounts receivable is debited for the reinstatement, and credited for the payment. However, when the previously written-off account is collected, there is an increase in the allowance for uncollectible accounts.

Answer 115

Increase the allowance for doubtful accounts. The solutions approach is to determine the journal entries necessary to (1) reestablish and (2) collect the account receivable. The entry to reestablish the account would be Accounts receivable xx Allowance for doubtful accounts xx The entry to record collection would be Cash xx Accounts receivable xx The net effect is an increase in a current asset account, cash, and an increase in a contra asset account, allowance for doubtful accounts.

Answer 116

$1,085,000 The question is asking for the gross accounts receivable balance, before allowances for future sales returns, allowances, and uncollectible accounts: AR 1/1 + Credit sales - Sales returns - Write-offs - Collections = AR 12/31 $650,000 + $2,700,000 − $75,000 − $40,000 − $2,150,000 = $1,085,000

Answer 117

Affects neither net income nor working capital. The entry is: Allowance for uncollectible accounts xxxx Accounts receivable xxxx The allowance is contra to accounts receivable and thus the entry does not affect net accounts receivable. The entry does not affect current assets, working capital, or income. However, the entry does reduce gross accounts receivable. Thus, the answer "affects neither net income nor working capital" is the only possible correct answer. The answer "affects neither net income nor accounts receivable" is incorrect if "accounts receivable" is interpreted as gross accounts receivable.

Answer 118

$2,500,000 The cash basis revenue in the tax return is the amount of rent collected for tax purposes. beg. rent receivable + accrual revenue - collections -write-offs = end. rent receivable $800,000 + accrual revenue - $2,210,000 - $30,000 = $1,060,000 accrual revenue = $2,500,000

Answer 119

Net income - No Effect Total assets - No Effect Under the allowance method for uncollectible accounts there is no impact on the balance sheet or net income when the receivable is written off. The estimated uncollectible is recognized at the time of the sale; therefore, when the account is written, off the allowance and the accounts receivable are both reduced resulting in no effect on the income statement or balance sheet.

Answer 120

$2,140,000 Under the cash basis of accounting, sales equals cash collected from customers. An equation or T account may be used to determine this amount: AR, beginning + Sales - Write-offs - customer collections = AR, ending $500,000 $2,300,000 $10,000 ? = $650,000 Solving for the unknown (?) amount, customer collections equals $2,140,000. This is the amount collected from customers, and is the amount that would be reported as sales under the cash basis method of accounting.

Answer 121

Accounts written off - Deduction Increase in accounts receivable balance - Deduction Under the direct write-off method, write-offs are credited directly to accounts receivable (AR). No allowance account is used. Under the terms of the question, accounts receivable increased during the year. Increase in AR = sales - cash collections - write-offs cash collections = sales - increase in AR - write-offs.

Answer 122

$10,000 Beginning allowance balance + uncollectible accounts expense - write-offs + recoveries = ending allowance balance $28,000 + uncollectible accounts expense − $23,000 + $5,000 = ($270,000 − $250,000) Uncollectible accounts expense = $10,000 Under the aging method, the ending allowance balance equals the difference between gross accounts receivable ($270,000) and net realizable value of accounts receivable ($250,000). Write-offs decrease the allowance balance, and uncollectible accounts expense increases the allowance. Recoveries also increase the allowance because the amount by which the allowance was decreased when the account was written off is reinstated on recovery.

Answer 123

$94,000 Only the first three items are included in net receivables: Trade accounts receivable $93,000 Allowance for uncollectible accounts (2,000) Claim against shipper for goods lost in transit (Nov. 2005) 3,000 Net receivables $94,000 The claim for lost goods is a definite receivable. The firm has a current claim on another entity. The goods on consignment should be included in Mann's inventory at cost, not in accounts receivable at sales value. They have not been sold. The security deposit is not included in current receivables because the firm will likely not receive this deposit back during the next fiscal year.

Answer 124

$2,000 The term "accrued interest receivable" refers to the cash amount of interest due. The cash amount of interest due is based on the contractual interest rate and face value. The loan origination fee is a way of increasing the effective interest but it does not affect the cash interest component. The $2,000 accrued interest = (.12)(1/12)($200,000).

Answer 125

$8,000 As of June 30, 2005, only one payment has been received (July 1, 2004). Thus, $100,000 of principal balance has been outstanding for an entire year as of the balance sheet date. Interest receivable on June 30, 2005 is thus $8,000 (.08 × $100,000).

Answer 126

$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.

Answer 127

($30,000) loss. The proceeds on sale are measured as the present value of the note because there is no established market value for the equipment. The loss on sale is computed as: Carrying amount $480,000 Less proceeds on sale: $600,000(.75) = 450,000 Equals loss on sale $ 30,000 The proceeds do not reflect the entire $600,000, because the difference between the note's face value of $600,000 and its present value is interest to be recognized over the term of the note.

Answer 128

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

Answer 129

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

Answer 130

$62,500 The note receivable should be reported at the present value of the nine remaining payments. The first payment was made at the date of the sale. The remaining nine payments comprise an ordinary annuity as of December 31, 2005 because the next payment is due one year from that date. Therefore, the present value and reported note value on that date is 6.25($10,000) = $62,500.

Answer 131

Alpha - $ 10,000 Omega - $ 8570 The note from Alpha Co. is a short-term asset. It is reported at the face value of $10,000. The note from Omega is discounted as a single sum for two time periods at 8% to be reported at $10,000X.857=$8,570.

Answer 132

$4,800 The sum of the products of the AR amounts and uncollectible percentages yield the required ending allowance balance (the third AR category's estimated uncollectible has already been computed): $60,000(5%) + $4,000(10%) + $1,400 = $4,800.

Answer 133

$56,000 The balance in the allowance for uncollectible accounts before the 2005 adjustment is: $42,000 beginning balance − $46,000 write-offs = -$4,000 (debit balance). The desired ending balance under aging is $52,000. Therefore, the required increase to the account is $56,000, and this amount is uncollectible accounts expense. The aging method first determines the required ending balance in the allowance account based on the age of receivables, and THEN adjusts the allowance account to that balance. The $40,000 provision is based on credit sales, and is thus to be ignored in the question.

Answer 134

$11,000 This question requires a determination of the pre-adjustment balance in the allowance account, and the ending balance. The difference between these two amounts is the increase in the account needed, which is also the amount recognized as bad debt expense. The aging method first determines the required ending balance in the allowance account, and then places the amount needed to increase the account to this required balance into the allowance account. The pre-adjustment allowance balance = Beginning balance - Write-offs + Recoveries = $30,000 − $18,000 + $2,000 = $14,000 The ending allowance balance = $350,000 ending gross AR − $325,000 ending net value of AR = $25,000 Therefore, bad debt expense is the amount needed to bring the allowance balance up to the ending balance of $25,000. The increase needed is $11,000 ($25,000 − $14,000).

Answer 135

$172,000 Beginning allowance balance $24,000 Less write-off (96,000) Equals pre-adjustment allowance balance (72,000) (debit) The allowance balance normally is a credit. For the ending balance in the account after adjustment to be $100,000 credit, the account must be increased $172,000 by recognizing uncollectible accounts expense. Under the aging method, uncollectible accounts expense equals the amount required to increase the allowance balance to the indicated total based on the aging of receivables.

Answer 136

$20,000 The credit sales method does not adjust the allowance balance to a required ending amount, but rather simply places the appropriate percent of sales into uncollectible accounts expense and the allowance account. 2% × $1,000,000 = $20,000.

Answer 137

$140,000 The amount of the adjustment to get the $50,000 debit balance to a $90,000 (3% × $3,000,000) credit balance is $140,000.

Answer 138

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.

Answer 139

$5,560 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.

Answer 140

$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 $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.

Answer 141

$190,000 Six months remain in the note term at the date of discounting. Maturity value of note: $200,000 Less discount: $200,000(.10)(6/12) (10,000) Equals proceeds on note $190,000

Answer 142

Factor the receivables outstanding. Factoring is a sale of receivables. This allows Red Co. to sell the receivables and receive cash immediately upon sale.

Answer 143

$20,500 The firm is contingent for the maturity amount, which for a noninterest-bearing note is the face value. If the maker of the note fails to pay the bank or financial institution with whom Davis discounted the note, Davis would be called on to pay the entire maturity amount.

Answer 144

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

Answer 145

$68,000 The net cash received when the receivables were factored was $80,000 × .85 (100% - 10% - 5%) = $68,000.

Answer 146

1 - Yes 2 - Original Effective Rate A loan impairment is recorded by reducing the net book value of the receivable to the present value of probable future cash inflows, discounted at the original rate in the receivable. The original rate is used because the loan continues to exist. The loss to the firm is measured at the rate existing when the original loan was created. The difference between the book value and present value, at the date of recognizing the impairment, is recorded as an expense or loss. There is no reason to report overstated assets.

Answer 147

Interest Method - YES Cost Recovery Method - YES The interest method recognizes interest revenue each year until the note is collected because the note was written down to present value when the impairment was recorded. The estimated future cash flows to be received include interest, which is recognized over the remaining term of the note. The cost recovery method recognizes interest revenue only after cash equal to the new carrying value is collected. During Year 3, total collections surpassed the $25,000 new carrying value. $3,000 of interest revenue is recognized under this method in Year 3 ($28,000 − $25,000).

Answer 148

The smallest group of assets that generates independent cash flows from continuing use. A CGU is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.

Answer 149

A loss or expense is recognized as equal to the difference between the note carrying value and the present value of the cash flows expected to be received. A note is considered to be impaired if the present value of remaining cash flows is less than book value, using the rate in the note. This is caused by an expected delay in timing of cash flows or reduction in amount of cash flows compared with the original agreement. The creditor makes the determination that the note is impaired and writes the note down to present value. A loss is recorded for the decline in carrying value to present value.

Answer 150

$155,000 Since there is no beginning or ending inventory, the cost of goods sold equals the cost of materials used ($50,000), the direct labor costs ($75,000), and the ($30,000) or $155,000. The other costs, advertising, staff salaries, and bad debt expense, are not part of cost of goods sold.

Answer 151

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.

Answer 152

$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.

Answer 153

$14,400 This is a chain discount and the correct recorded cost is $20,000(1 - .20)(1- .10) = $14,400. Each successive discount in a chain discount is applied to the previous net amount.

Answer 154

$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.

Answer 155

$408,000 Merchandise purchased for resale $400,000 Freight-in 10,000 Purchase returns (2,000) Total inventoriable cost $408,000 Freight-out is a delivery expense. It is not inventoried because the goods have reached salable condition before incurring this cost. Only costs that contribute to preparing inventory for sale are inventoried.

Answer 156

$50,000 Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs. Even the shipping costs are borne by the seller because the terms are FOB destination. This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr's recorded cost is $50,000.

Answer 157

$43,000 The merchandise out on consignment is included in inventory at selling price. But inventory must be measured at cost. $40,000 = cost + .40($40,000). Thus, cost = $24,000. Therefore, inventory should be reduced by the $16,000 of markup on the merchandise out on consignment. The goods held on consignment should be removed from the inventory because these goods do not belong to Opal. Hence, the total reduction from inventory is $43,000 ($16,000 + $27,000). The goods in transit are properly included in inventory because they were shipped FOB shipping point, which means the goods belong to Opal when the goods reach the common carrier at the shipping point.

Answer 158

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

Answer 159

$150,000 ``` Beginning inventory $ 90,000 Plus purchases 124,000 Less write-off (34,000) Less ending inventory (30,000) Equals cost of goods sold $150,000 The write-off cannot be counted in cost of goods sold because it is a decrease in inventory not associated with sales. ```

Answer 160

$118,220 Cost of goods sold is determined (in a periodic inventory system) as: Beginning Inventory $ 30,840 + Net Purchases $107,940 = Goods Available for Sale $138,780 - Ending inventory 20,560 = Cost of Goods Sold $118,220 Note net purchase is computed as + Purchases $102,800 - Net Purchases 107,940 = Goods Available for Sale $138,780 - Purchases Discounts (10,280) + Freight-in 15,420 Net Purchases includes any purchase discounts (or allowances) and other cost of getting the goods in place and condition for resale, including freight-in. Freight-out (to customers) is a selling cost. Therefore, Azur Co.'s cost of goods sold would be:

Answer 161

$910,000 The correct answer is $910,000: ``` Raw materials purchased $430,000 Plus decrease in raw materials 15,000* Direct labor 200,000 Factory overhead 300,000 Less finished goods increase (35,000) ** Cost of goods sold $910,000 ``` *The decrease in raw materials is added to the amount purchased resulting in the cost of materials incorporated into production. In other words, $15,000 of materials purchased in 2005 were placed into production in 2005. The total cost of materials brought into production in 2005 equals $445,000. ** The increase in finished goods represents costs incurred in the current period to finish inventory that was not sold in the current period. Therefore, these costs must be removed in determining cost of goods sold. Freight-out is not a manufacturing cost but rather is a distribution cost. Therefore, freight-out is not inventoried. There is no change in work-in-process inventory to affect the calculation.

Answer 162

$850 The perpetual method recognizes each purchase and sale at the time it occurs. The total value of cost of sales using perpetual LIFO is ((6 × $55) + (2 × $50) + (7 × $60)) = $850, as shown in the table below. Trees remaining Cost of trees sold Begin Inv 10 @ $ 50 10 @ $50 March 4 purchased 6 @ 55 10 @ $50 6 @ 55 March 12 sold 8 @ 100 8 @ 50 6 @ $55 = $330 2 @ $50 = 100 March 20 purchased 9 @ 60 8 @ 50 9 @ 60 March 27 sold 7 @ 105 8 @ 50 2 @ 60 7 @ $60 = 420 March 30 purchased 4 @ 65 8 @ 50 2 @ 60 4 @ 65 Total cost = $850

Answer 163

Under the LIFO (last-in, first-out) inventory method, goods sold are assumed to be the most recently acquired goods (at their related costs). Therefore, goods remaining (ending inventory) are assumed to be the earliest acquired goods (at their related costs). If the perpetual LIFO inventory method is used, when goods are sold, they are assumed to be the goods acquired just prior to the sale. Thus, Nest's sale of 1,800 units on 1/23 would have consisted of the 1,200 units acquired 1/8 and 600 units (of the 2,000) in beginning inventory. Ending inventory on January 31 would be: 1,400 units of beginning inventory @ $1 each = $1,400 800 units purchased 1/28 @ $5 each = 4,000 2,200 units in ending inventory reported @ = $5,400 If the periodic LIFO inventory method is used, ending inventory (and cost of goods sold) are determined only at the end of the period. Therefore, Nest's sale of 1,800 units on 1/23 would have consisted of (by assumption at the end of the period) 800 units acquired on 1/28 and 1,000 units (of the 1,200) acquired on 1/8. Ending inventory on January 31 would be: 200 units of the 1,200 purchased 1/8 @ $3 = $ 600 2,000 units (all) of beginning inventory @ $1 = 2,000 2,200 units in ending inventory reported @ = $2,600

Answer 164

FIFO - Yes LIFO - No Under a perpetual inventory system, the cost of goods sold (COGS) is determined at the time of each sale. In a perpetual FIFO inventory system, the cost of each sale (COGS) would be based on the cost of the earliest acquired goods on hand at the time of the sales. The cost of the most recently acquired goods would remain in ending inventory. In a perpetual LIFO inventory system, the cost of each sale (COGS) would be based on the cost of goods acquired just prior to the sale. The cost of the earlier acquired goods would remain in inventory. Under a periodic inventory system, the costs of goods sold (COGS) and ending inventory are determined only at the end of the period. In a periodic FIFO inventory system, the cost of sales for the period (COGS) would be based on the cost of the earliest acquired goods available during the period. The cost of the most recently acquired goods would remain in ending inventory. In a periodic LIFO inventory system, the cost of sales for the period (COGS) would be based on the last goods acquired during the period. The cost of the earliest acquired goods would remain in ending inventory. The above descriptions can be summarized as follows for determination of COGS: Inventory System/Method Cost of goods sold determined using FIFO Cost of goods sold determined using LIFO Perpetual Earliest goods acquired Latest goods acquired prior to each sale Periodic Earliest goods acquired Latest goods acquired during the period Since cost of goods sold for the period would be the same under both perpetual FIFO and periodic FIFO, ending inventory would be the same under both perpetual FIFO and periodic FIFO. Cost of goods sold (and ending inventory) would not be the same under perpetual LIFO as under periodic LIFO because the perpetual system recognizes cost of goods sold based on the cost of goods acquired just prior to each sale, whereas the periodic system recognizes cost of goods sold based on cost of goods acquired prior to the end of each period.

Answer 165

$9.20 Units beginning inventory remaining at year-end (3,200 − 1,600)$8 = $12,800 Plus 1/22 purchase: 4,800($9.60) = 46,080 Ending inventory $58,880 Ending unit cost: $58,880/6,400 = $9.20 The moving average method costs issues at the unit cost of goods on hand at that point. Thus, the issue was costed at $8.00 per unit. The cost per unit changes with each purchase.

Answer 166

Cost of goods sold - 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.

Answer 167

The same as in a periodic inventory system. FIFO produces the same results for periodic and perpetual systems. FIFO always assumes the sale of the earliest goods acquired. Therefore, unlike LIFO periodic, goods can never be assumed sold before they are acquired. Cost of goods sold and ending inventory are the same under FIFO for both a periodic and a perpetual system.

Answer 168

Ending inventory - Decrease Net income -Decrease Ending inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO. The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.

Answer 169

FIFO FIFO assumes the sale of the earliest goods first. With rising prices, the earliest goods reflect the lowest prices. Therefore, cost of goods sold under FIFO is the lowest of the cost flow assumptions. With the lowest cost of goods sold, gross margin and income are the highest among the available cost flow assumptions (LIFO and average being the others).

Answer 170

$410,000 The price level index for 2006 is 1.1 ($440,000/$400,000). Ending 2006 DV LIFO inventory equals the beginning inventory DV LIFO plus the increase in inventory at base-year dollars converted to 2006 prices: Ending DV LIFO = Beginning DV LIFO + (increase at base-year dollars)(1.1) = $300,000 + ($400,000 − $300,000)(1.1) = $410,000.

Answer 171

$83,000 Beginning inventory of $50,000 is at base-year dollars and the current year increase of $30,000 is also at base-year dollars. The current year layer must be converted to current year costs ($30,000 × 1.10) = $33,000. Ending dollar value LIFO is the beginning dollar value LIFO (in this case it was adopted in January so the beginning inventory must be $50,000) plus the current year layer of $33,000 or $83,000. Note that the sentence "The designated market value of Stitch's inventory exceeded its cost at year end" is a distracter. It is simply stating that there is not an issue with the lower of cost or market since cost is lower.

Answer 172

1.33 The question provides the ending inventory for 2007 at current cost by layer. The sum of the current cost column ($200,000) is the current cost of the entire inventory at the end of 2007. The sum of the base-year cost for the three years is $150,000. Hence, under this assumption, the ratio of current cost for the total inventory at the end of 2007 to the base-year cost is 1.33 ($200,000/$150,000). This index is then multiplied by the 2007 layer in base-year dollars to derive the increment to DV LIFO ending inventory.

Answer 173

$66,000 The ending inventory is used to construct the internal price index. At the end of 2004, the ratio of current cost to base-year cost for ending inventory is $80,000/$60,000 = 1 1/3 or 4/3. This ratio is applied to the 2004 layer at base-year cost, yielding $20,000 ($15,000 × 4/3). This amount is the increase to DV LIFO. Therefore, ending 2004 DV LIFO is $66,000 ($46,000 + $20,000).

Answer 174

The gross profit method can be used to estimate interim inventory, and the gross profit method is a periodic inventory system.

Answer 175

$55,000 The gross margin method of estimating inventory is used to solve this problem. The cost of inventory lost cannot be identified by count but it can be estimated. First, an estimate of cost of goods sold is subtracted from the cost of goods available on the date of the flood yielding the total amount of inventory that would have been present on May 1. Second, the amount of inventory not lost is subtracted from the May 1 estimated total inventory. The result is an estimate of the amount lost. With gross profit being 40% of sales, cost of goods sold must be 60% of sales, on average. Therefore, the estimate of cost of goods sold is $150,000 (.60 × $250,000). Beginning inventory ($35,000) + Purchases ($200,000) = Goods available = $235,000. Subtracting $150,000 of cost of goods sold yields $85,000 of inventory on May 1 ($235,000 − $150,000). With $30,000 of inventory still accounted for, the amount of lost inventory at cost is $55,000 ($85,000 − $30,000).

Answer 176

$364 When items are purchased as a group, the total cost of the group is allocated to the individual items based on fair value. Replacement cost is the appropriate value to use in this case. The total replacement cost of the items is $1,100 ($400 + $700). Therefore, Item A is allocated 4/11 of the purchase cost, or $364 = ($400/$1,100)$1,000.

Answer 177

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.

Answer 178

$480,000 The gross margin method estimates the cost of inventory at the time of the fire as follows: Beginning inventory $200,000 + $1,000,000 Purchases = Ending inventory + Cost of goods sold. The estimate of cost of goods sold is found by multiplying the cost to sales ratio and sales. The gross margin percentage plus the cost to sales ratio is 1; therefore, cost/sales is .60 (= 1 - .40). Estimated cost of goods sold is $720,000 (= .60($1,200,000)). The equation is Beginning inventory $200,000 + Purchases $1,000,000 = Ending inventory + Cost of goods sold $720,000. Solving for ending inventory yields $480,000.

Answer 179

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.

Answer 180

$1,169 Ending inventory at retail = $567 (= $467 + $2,000 + $100-$300-$1,700). The cost-to-retail ratio includes both the beginning inventory amounts, purchases and net markdowns. C/R = $300 + $1,200/($467 + $2,000 + $100) = .5843. Ending inventory at cost = $567(.5843) = $331. Cost of goods sold = $300 + $1,200 - $331 = $1,169.

Answer 181

$19,200 The cost to retail ratio under FIFO is: [$12,000 + $60,000/($30,000 + $110,000 + $10,000)] = .48. Ending inventory at retail is $30,000 + $110,000 + $10,000 − $20,000 − $90,000 = $40,000. Ending inventory at cost, therefore, is .48($40,000) = $19,200.

Answer 182

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.

Answer 183

Beginning Inventory - No Net Markdowns - YES DV LIFO retail uses the FIFO (not LCM) cost-to-retail ratio. Under LIFO, a layer added during a period should reflect only the cost and retail amounts pertaining to that period. Thus, beginning inventory amounts are not used in calculating the ratio. Also, because LIFO may contain inventory layers for several preceding periods, excluding net markdowns is not an effective way to accomplish the LCM valuation objective. Thus, net markdowns are included in the cost to retail computation.

Answer 184

$4,232 EI retail, current index = $2,000 + $40,000-$28,000 = $14,000 EI retail, base = $14,000/1.6 = $8,750 Increase in EI retail, base = $8,750-$1,600 = $7,150 Increase in EI retail, current = $7,150(1.6) = $11,440 C/R (use FIFO, not LCM) = $12,000/$40,000 = .30 Increase in EI, cost = .30($11,440) = $3,432 EI, cost = $800 + $3,432= $4,232

Answer 185

$164 The DV LIFO retail process applies the DV LIFO method to retail dollars, and then deflates the retail layer added, now reflecting current prices, to cost, using the cost-to-retail ratio. The calculations are: Ending inventory, retail, at base = $450(1.00/1.15) = $391 Increase in retail, current = $111(1.15/1.00) = $128 Increase in cost = $128(.42) = $54 Ending inventory at cost = ($80 + $30) + $54 = $164

Answer 186

$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.

Answer 187

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).

Answer 188

The original cost is greater than replacement cost - YES The net realizable value, less a normal profit margin, is greater than replacement cost - 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.

Answer 189

$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.

Answer 190

Net realizable value. 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.

Answer 191

Replacement cost The easiest way to answer a question like this is to make up simple numbers. The following simple numbers were made up to fit the abstract information in the question. Lower of cost or market states you record the inventory at the lower of original cost or market value (replacement cost) within the range of a ceiling and a floor. The numbers below show that replacement cost is lower than original cost and within the floor and ceiling. Replacement cost is the correct answer. Original cost $10 Net realizable value 9 Replacement cost 8 NRV less normal PM 7

Answer 192

A prior period adjustment is recorded if the error is discovered in year two. Counterbalancing simply means that the effect of the inventory error in the second year is opposite that of the first year. Discovery in year two provides an opportunity for the firm to correct year two beginning retained earnings, which is overstated by the error in year one. The overstatement of inventory in year one caused cost of goods sold to be understated and income overstated in year one. The prior period adjustment, dated as of the beginning of year two, is a debit to retained earnings for the after-tax effect of the income overstatement in year one. Inventory is credited for the amount of the overstatement. This allows year two to begin with corrected balances.

Answer 193

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.

Answer 194

Understated by $78,000. The effect of the beginning-inventory error is to understate cost of goods sold $26,000. The effect of the ending-inventory error is to understate cost of goods sold $52,000. The total effect then is to understate cost of goods sold $78,000. These effects are analyzed by using the equation: Beginning inventory + Purchases-Ending inventory = Cost of goods sold For example, if beginning inventory is understated, then the right hand side of the equation (cost of goods sold) must also be understated by the same amount.

Answer 195

The contractual cost of the inventory in an irrevocable purchase contract exceeds the current cost. Both qualities are required for a loss to be recognized. The firm must honor a contract in a later period by paying more than current cost and, thus, is in a loss position at the end of the current year.

Answer 196

The 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.

Answer 197

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.

Answer 198

A liability of $3,000 is reported in the Balance Sheet. The firm has committed to a purchase for a total cost of $26,000, but at year-end, the value of the item to be received is $3,000 less. The firm cannot postpone the loss and liability recognition because the reduction in the firm's earnings and net assets has already occurred. The economic events causing the loss have occurred as of the Balance Sheet date.

Answer 199

$75 Under IFRS, the inventory would be carried at the lower of cost or NRV. The NRV at the end of Year 2 is $75.

Answer 200

Debit inventory for $20 and credit expense for $20. Under IFRS, inventory is carried at the lower of cost or net realizable value. Recovery of previous write-downs is allowed. Therefore, in year 2, the company can recover the previous write-down of $20 ($100 – 80) but cannot write the inventory above the original cost. The entry to record the recovery is a debit to inventory and credit to expense or cost of goods sold for $20.

Answer 201

$900 IFRS reports inventory at lower of cost or net realizable value. Net realizable value is the selling price less the cost to complete or dispose of the inventory. The net realizable value is the selling price of $1,000 less the cost to complete of $100, or $900. Net realizable value is less than the cost ($910) so the inventory is reported at $900.

Answer 202

February 1, Year 2 Depreciation expense should begin on the date that the asset is placed into service and therefore, contributing to the generation of revenues. The depreciation expense should begin on February 1, Year 2.

Answer 203

$1,020,000 The costs capitalized to the land are all costs to get the land ready for use (development). Those costs are: the cost of the land, the real estate taxes in arrears, and the attorney fee for the title search. debt issue costs are a financing cost

Answer 204

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. GAAP does not allow the gain or loss on the sale of the old asset to adjust the cost of the new asset. The sale of a single asset is not a segment of the business; therefore, the warehouse is not a discontinued operation. The FASB eliminated the category for extraordinary gains and losses.

Answer 205

$200,000 This response includes all the costs to get the equipment ready for use. The rearrangement costs and the wall removal costs were needed to put the equipment into use. The rearrangement costs made the production more efficient.

Answer 206

$332,000 The correct answer, $332,000, equals: $300,000 + $25,000-$4,000 + $5,000 + $6,000. The net cost to raze the old building ($21,000) is capitalized to land because it is a cost necessary to bring the land into its intended condition. The legal fees and title guarantee cost, likewise, must be incurred to avoid future legal problems, and thus contribute to the value of the land.

Answer 207

$138,000 Every cost listed is a cost necessary to place the asset into its intended condition and location. This is the general rule for capitalizing costs to plant assets. Thus, all four costs are capitalized to the machine yielding a final capitalized value of $138,000 ($126,000 + $3,000 + $4,000 + $5,000).

Answer 208

Building modification costs - YES Production line rearrangement costs - 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.

Answer 209

The amount is increased by the excess of the replacement forestland's cost over the condemned forestland's carrying amount. The two transactions are not related. The land account is decreased by the book value of the land condemned and increased by the cost of the land purchased. The relative magnitudes of the book values are shown below: award > book value of condemned land cost of new land > award Therefore: cost of new land > book value of condemned land Thus, the land is increased by the net amount: cost of new land-book value of old land

Answer 210

$464,000 ``` Land purchase price $400,000 Plus demolition of old building 50,000 Less salvage proceeds (8,000) Plus title insurance 12,000 Plus legal fees 10,000 Equals recorded land cost $464,000 ``` The net demolition cost is included in land because it is a cost required to prepare the land for its eventual use.

Answer 211

$155,000 All three costs are included for a total of $155,000. Both the shipping and testing costs are necessary to place the asset into its intended location and condition for use. This is the criterion for capitalizing costs on acquisition of plant assets.

Answer 212

$154,125 The amounts necessary to get the land ready for its intended purpose attach themselves as a part of the total cost of the land. This would be the: $2,500+625+135,000+16,000=$154,125

Answer 213

$95,000 The sum of the four listed costs is $120,000, which exceeds fair value of $105,000. Therefore, the asset is capitalized at $105,000, the lesser of the two amounts. Subtracting the $10,000 residual value yields $95,000 depreciable cost-the total depreciation over the life of the asset.

Answer 214

Interest Expense - $ 1,800 Capitalized Amount - $ 50,000 The interest expense recognized for the first year is .06($30,000) = $1,800. Although no interest is paid, interest is accrued, increasing the carrying value of the note. The asset is capitalized at $50,000, the sum of cash down payment and present value of the note. The interest over the note term is not capitalized because it does not assist in the process of placing the asset into its intended condition and location.

Answer 215

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. When debt is incurred to purchase a plant asset, only the principal value of the debt (its present value) is capitalized. The interest subsequently paid is not considered part of the cost of the equipment because it does not contribute to the asset's value in use.

Answer 216

$8,190 Average accumulated expenditures is $156,000 = $40,000 + $120,000(10/12) + $96,000(2/12). This method uses the average interest rate on all interest bearing debt, weighted by principal. That rate is the quotient of the interest on all the debt divided by the principal on all the debt. The rate = ($3,600 + $3,600 + $5,400)/$240,000 = .0525. Interest capitalized = (.0525)$156,000 = $8,190.

Answer 217

both (1) and (2). 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.

Answer 218

Debt for purchase - Expensed Debt during construction - Capitalized Interest on debt incurred when purchasing a plant asset, is incurred after the asset has reached its intended condition and location. Therefore, it is expensed as incurred. Debt incurred during the construction of plant assets is considered avoidable and also incurred before the asset has reached its intended condition and location. Therefore, it is capitalized to the asset in the same way material, labor, and overhead are capitalized. The interest is expensed as part of depreciation during the service life of the asset.

Answer 219

Land - $ 75,000 Building - $ 35,000 Papa should record the land and building on its books at the appropriately determined fair value at the date of the transaction. The prior carrying values on Sonny's books are not relevant to the amounts at which Papa should record the assets on its books, but are relevant to the amounts that should be reported in the consolidated financial statements.

Answer 220

$72,500 First calculate the Average Accumulated Expenditures (AAE). This gives you the amount of borrowing from which to calculate avoidable interest ($625,000). Next calculate avoidable interest ($72,500) and actual interest (($500,000 × 12%) + ($800,000 × 10%) = $140,000). The amount that can be capitalized is the lesser of the avoidable interest or actual interest. The amount that can be capitalized is $72,500. ``` AAE 200,000 12/12 200,000 600,000 8/12 400,000 300,000 1/12 25,000 625,000 ``` Avoidable interest 500,000 12% 60,000 125,000 10% 12,500 72,500

Answer 221

Interest incurred for machinery for own use - Interest incurred after completion Interest incurred for machinery held for sale - 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.

Answer 222

$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.

Answer 223

$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.

Answer 224

$11,666 Interest is capitalized on the project's average expenditures times the interest during that period. Key here is to use the 5% annual interest over the three months (April, May, and June). Average expenditures: 500,000 + 800,000 + 1,500,0003 = 933,333 Interest rate for 3-month period: .05 × 3/12 × .0125 Capitalized interest: 11,666

Answer 225

$160,000 All four costs should be capitalized because they result in an increase in the productivity of the asset. Costs that increase EITHER the life OR productivity are capitalized. Either type of increase results in enhanced asset values. $160,000 is the sum of the four costs listed.

Answer 226

(1) NO (2) YES (3) YES Post-acquisition expenditures, which increase the useful life (assuming normal maintenance) or the utility (usefulness or productivity) of the asset, are capitalized. Such expenditures provide value for more than one year. The original useful life of an asset assumes regular maintenance. Therefore, regular maintenance does not increase the intended useful life of the asset.

Answer 227

$100,000 The disposal of the old boiler and purchase of the new boiler are separate transactions. The loss on disposal has no effect on the capitalized cost of the new boiler, which is recorded at its $100,000 purchase cost.

Answer 228

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).

Answer 229

Straight-line method Service hours method Units of output method

Answer 230

Systematic and rational allocation of | capitalized asset cost to time periods

Answer 231

(Cost − Salvage value) / Useful life

Answer 232

Manufacturing assets

Answer 233

Depreciation rate × Service hours used Depreciation rate = (Cost − Salvage value) / Estimated hours

Answer 234

Original cost less accumulated | depreciation to date

Answer 235

$500 gain The gain or loss on the disposal of an asset is the difference between the net book value (NBV) and the selling price. The annual depreciation of the machine is $9,000 ($90,000/10 years). The asset was held for 9.5 years, so accumulated depreciation is $85,500. NBV is $4,500 ($90,000 less accumulated depreciation of $85,500). The sale is a gain of $500 because the selling price is greater than the NBV ($5,000 − $4,500).

Answer 236

$2,800 This is a change in estimate and is handled currently and prospectively by allocating the remaining book value at the beginning of year 6 over the revised estimate of remaining years at that point. Through the beginning of year 6, the asset has been used five years. Therefore, seven years remain in the original book value. The book value at the beginning of year 6 is 7/12 × $48,000 or $28,000. The remaining useful life of seven years is extended to 10. Therefore, depreciation expense for year 6 is $28,000 × 1/10 or $2,800.

Answer 237

Straight-line method - YES Production or use method - YES When salvage value is excluded from the computation of depreciation, excessive depreciation is recognized each year under BOTH methods. Therefore, income is understated for both methods. Annual depreciation under straight-line is: (1/n)(cost-salvage) where n is the number of years in the useful life. Annual depreciation under the production method is: (current year production/tot.est.production)(cost-salvage) In both cases, if salvage value is excluded from the computation, depreciation is overstated because cost, rather than depreciable cost, is used as the basis for depreciation.

Answer 238

$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).

Answer 239

Total units to be produced can be estimated. Without an estimate for total units to be produced, depreciation could not be computed. Annual depreciation under this method is: [(Cost-salvage value)/(Total estimated production)](units produced each year). The quantity in square brackets is the rate of depreciation per unit.

Answer 240

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.

Answer 241

An asset's service potential declines with use. This method is most appropriate when the service potential of an asset can be estimated reliably in terms of a physical variable, such as miles to be driven, or number of units of output that can be produced by the asset. Over time, as more units are produced, the service potential of the asset declines because the total number of units that can be produced is finite. Over time, the number of units that can be produced by the asset in the future declines. The primary causative agent for depreciation under the units of production method is, thus, the actual use of the asset in production.

Answer 242

$10,500 The capitalized cost of the equipment is $110,000, not the total of the cash payments to be made. The latter amount includes interest. Thus, annual depreciation is $10,500: ($110,000-$5,000)/10.

Answer 243

$31,000 Net equipment at end of 20X4: $344,000-$128,000 = $216,000 Equipment purchase 50,000 Book value of equipment sold (9,000) Depreciation in 20X5 ? Equals net equipment at end of 20X5: $379,000-$153,000 = $226,000 Solving for depreciation yields $31,000 depreciation for 20X5.

Answer 244

Double-declining balance

Answer 245

``` Straight-line rate: Number of years divided into 1 (i.e., if 5 years, 1 / 5 = 20%). Twice the straight-line rate: 20% × 2 = 40% ```

Answer 246

When the inventory items are smaller homogeneous groups of assets and individual records for the assets are not maintained

Answer 247

The straight-line method to groups rather than individual assets

Answer 248

Acquisition Exploration Development

Answer 249

All costs of exploring for the resource are capitalized to the natural resources account.

Answer 250

Refers to the allocation of the cost of the natural resource to inventory

Answer 251

Successful efforts | Full costing

Answer 252

(Natural resources account balance − residual value)/(Total estimated units)

Answer 253

Only the costs of successful exploration efforts are capitalized to the natural resources account.

Answer 254

Non current asset

Answer 255

Book value > Recoverable cost

Answer 256

It is impaired when book value exceeds its fair value less cost to sell at the end of the reporting period.

Answer 257

The amount by which the carrying value of the asset exceeds its market value

Answer 258

Fair value less cost to sell

Answer 259

Assets are grouped at the lowest possible organizational level where cash flows can be identified.

Answer 260

Report the loss as part of ordinary income and also disclose: The asset impaired. The events leading to impairment. The amount of the impairment loss. The method of determining fair value, including interest rate.

Answer 261

Sum net future cash flows from asset (recoverable cost) If sum > book value, no impairment If sum < book value, impairment

Answer 262

At the "cash-generating unit" | level

Answer 263

Yes, they are allowed.

Answer 264

Any impairment loss would be classified out of other comprehensive income and into earnings.

Answer 265

$102,000 Depreciation in 20X4 = $200,000(1.50/5) = $ 60,000 Depreciation in 20X5 = ($200,000-$60,000)(1.50/5) = 42,000 Accumulated depreciation balance at the end of 20X5 $ 102,000 The declining balance class of depreciation method does not deduct salvage value when computing depreciation although care must be taken not to depreciate the asset below salvage value. Also, the rate of depreciation applied to book value is the percentage of the method (150% in this case) divided by the useful life of the asset. Double declining balance, for example, is 200%/n or 2/n where n = useful life.

Answer 266

$180,000 $180,000, the correct answer, equals $300,000[(5 + 4)/(5 + 4 + 3 + 2 + 1)]. Two full years of depreciation have been recorded, and the SYD method uses the number of years left at the beginning of each year as the numerator of the fraction used in depreciation. At the beginning of the first and second years, five and four years of the asset's life remained, respectively. The denominator is the sum of the digits up to the asset's useful life (5).

Answer 267

Gain - Decrease Loss - Increase Under SYD, total depreciation through the first two years is [(5 + 4)/(1 + 2 + 3 + 4 + 5)]Cost = (9/15)Cost. Therefore, book value remaining is (6/15)Cost = .4Cost. Depreciation, year one = (2/5)Cost = .4Cost Depreciation, year two = (2/5)(Cost-Depreciation, year one) = (2/5)[Cost-(2/5)Cost] =.4[Cost-.4(Cost)] = .4(.6Cost) = .24 Cost Total depreciation for the two years is therefore .4(Cost) + .24(Cost) = .64(Cost). Book value remaining is (1-.64)Cost = .36 Cost. The asset has a larger book value under SYD after two years. For a given amount of proceeds on disposal, the larger book value under SYD causes any gain on disposal to be smaller than under DDB and any loss greater than under DDB. In other words, the gain decreases and the loss increases, relative to DDB.

Answer 268

$3,800 The carrying amount (book value) of a depreciable asset is its original cost less accumulated depreciation. Under sum-of-the-years' digits method of calculating depreciation expense (and, therefore, accumulated depreciation), the net depreciable cost (original cost less estimated salvage value) is multiplied by a factor consisting of: Numerator = the number of years the current year is from the end of the life of the asset Denominator = the sum of numbers (digits) for each year in the life of the asset For Spiro, the net depreciable cost is $20,000-$2,000 = $18,000. Since the equipment has an estimated useful life of four years, the sum of the digits for each year would be 1 + 2 + 3 + 4 = 10, the denominator for calculating each year's depreciation. Depreciation for the four years would be: Thus, at the end of 20X5 the carrying amount is $3,800, which also can be calculated as salvage value 2,000 + (1/10 × $18,000) = $2,000 + $1,800 = $3,800.

Answer 269

Straight-line - NO Double-declining balance - NO Salvage value is the portion of the asset's cost not subject to depreciation. Total depreciation, under any method, is limited to depreciable cost (cost less salvage value). The declining balance methods do not subtract salvage when computing depreciation. Care must be taken to avoid depreciating an asset beyond salvage value.

Answer 270

$38,400 Depreciation in 2004 = $240,000(2/10) = $48,000 Depreciation in 20X5 = ($240,000-$48,000)(2/10) = $38,400 The DDB method's rate is always twice the straight-line rate, or 2/useful life. The method does not subtract salvage value when computing depreciation, but it also does not reduce book value below salvage value. The depreciation in any year is the rate times the beginning net book value of the asset.

Answer 271

Straight-line. The asset was sold when 1/2 of its useful life was expired. (The asset was used 5 years and had an original useful life of 10 years.) If an asset is sold at a loss, then the book value at the date of sale exceeds the proceeds from sale by the amount of the loss. Let C = original cost, and BV = book value at date of sale. Then BV-proceeds = loss Proceeds = .50C according to the question data. Thus, BV-.50C = loss. Thus, BV must exceed 50% of the original cost because BV-.50C is a positive number. The only method from among those listed in the answer alternatives that leaves a BV greater than 50% of original cost after 50% of the useful life has expired is the SL method. The book value after the fifth year under SL is C-(C-.2C)(5/10) = .6C. DDB's book value after five years is much less than 50% of original cost because it is an accelerated method. The same holds for SYD. And under composite methods of depreciation, individual assets do not have a separately recorded book value. When sold, accumulated depreciation is debited for the difference between original cost and proceeds. No gain or loss is recognized. Thus, the composite method could not apply in this question.

Answer 272

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.

Answer 273

$22.5 million The depletion rate = [$40 + (.25)($100) + $60]/20 = $6.25/ton. Depletion = 2,000,000($6.25/ton) = $12,500,000. Because all the ore removed was sold, cost of goods sold includes the entire amount of depletion and the extraction costs. Cost of goods sold = $12,500,000 + $10,000,000 = $22,500,000. Note, that extraction costs is included in inventory (and therefore, cost of goods sold), but not in the deposit (and therefore, not in depletion).

Answer 274

$20 million The depletion rate = ($40 + $100 + $60)/20 = $10/ton. Depletion = 2,000,000($10/ton) = $20,000,000. Depletion for a period is the cost of the deposit allocated to the inventory removed for the period. In this case, the entire amount is included in cost of goods sold because there is no ending inventory. However, if there had been ore left at the end of the period, the $10/ton rate would have been applied to the units remaining. That would not change the answer to the question, however.

Answer 275

$530,000 The sum of the carrying value ($520,000) and removal/cleanup cost ($10,000) is the amount to compare to the insurance proceeds when computing the loss. The fire caused the latter costs to be incurred; therefore, the cleanup costs should be included in the loss. The fair value of the property would not figure into the recorded loss because the building account does not reflect this amount.

Answer 276

$300 The gain of $300 is the difference between the insurance proceeds and the sum of the carrying value of the van plus the cost of the new engine. The repair cost is expensed. It does not increase the value of the van. $300 = $3,500 − $2,500 − $700.

Answer 277

$100,000 The post-impairment carrying value is $175,000 at the beginning of 20X4. This amount is the new basis for depreciation. Depreciation in 20X4 is $75,000 [($175,000 − $25,000)/2]. The revised salvage value is used. After deducting the 20X4 depreciation expense of $75,000 from the $175,000 beginning book value, the ending 20X4 book value is $100,000.

Answer 278

The test for impairment for an asset in use is whether the carrying value (book value) is less than its recoverable cost. An asset's recoverable cost is the sum of its estimated net cash inflows projected for its remaining life. When book value > recoverable cost, the carrying value is not recoverable. In other words, the asset is booked at more than the sum of its future net cash inflows. For example, if an asset's carrying value is $100 and its recoverable cost is $80, then its carrying value is not recoverable (only $80 is recoverable). The AMOUNT of the loss recognized is the difference between carrying value and fair value, but that difference is not used for TESTING whether an asset is impaired. That difference is not the condition leading to the impairment loss.

Answer 279

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

Answer 280

$20,000 The net book value of the asset at the time of impairment was $150,000: $250,000 cost less $100,000 accumulated depreciation (4 years of depreciation at $25,000 a year). After the impairment of $30,000, the net book value is $120,000 ($150,000 − 30,000). The remaining life is 6 years and annual depreciation is $20,000.

Answer 281

$20,000,000 Determination of impairment for an asset held in use is a two-step process. First the carrying value (CV) is compared to the recoverable cost (undiscounted cash flows). Since the CV is more than the recoverable cost, the second step must measure the impairment loss. The impairment loss is measured as the difference between CV and fair value (FV). The CV is $100 million and the FV is $80 million so the impairment loss is $20 million.

Answer 282

Held for use - YES Held for disposal - YES Under IFRS the impairment loss can be recovered if the asset is held for use or disposal.

Answer 283

The greater of fair value less cost to sell or value in use. The greater of fair value less cost to sell or value in use is the recoverable amount according to IFRS.

Answer 284

1. The proportional method | 2. The reset method

Answer 285

``` Accumulated depreciation is reset to zero by closing it to the building account, and then the building is adjusted for the revaluation. ```

Answer 286

It is expensed or capitalized.

Answer 287

It is reported in equity.

Answer 288

Yes, revaluation is allowed

Answer 289

Companies have to review the | policies annually

Answer 290

Gross profit

Answer 291

Specific identification

Answer 292

Moving average

Answer 293

Weighted average

Answer 294

Dollar-value LIFO

Answer 295

Current-year income - Understate Ending retained earnings balance, current year - Understate Income of next year - Overstate Ending retained earnings balance, next year - No Effect

Answer 296

Current-year income - Overstate Ending retained earnings balance, current year - Overstate Income of next year - Understate Ending retained earnings balance, next year - No Effect

Answer 297

Current-year income - Understate Ending retained earnings balance, current year - Understate Income of next year - Overstate Ending retained earnings balance, next year - No Effect

Answer 298

Current-year income - No Effect Ending retained earnings balance, current year - No Effect Income of next year - No Effect Ending retained earnings balance, next year - No Effect

Answer 299

$9,961 The adjusted cash balance is computed as $10,012 − corrected #101 amount ($95 − $59) + $35 interest − $50 service charge = $9,961. Check #101 was recorded for $59 but should have been recorded for $95.

Answer 300

Increase the allowance for uncollectible accounts. The entries are: DR: Accounts receivable CR: Allowance for uncollectibles DR: Cash CR: Accounts receivable The first entry reinstates the amount of allowance used up when the account was originally written off. The normal balance in the account is a credit. The first entry increases the account.

Answer 301

Specific uncollectible account is written off. The allowance account is increased when estimated uncollectible accounts expense is recognized. The allowance records the expected reduction in net accounts receivable until accounts are written off. Then, when accounts actually become uncollectible and are written off, the allowance is decreased because it is no longer needed. The identity of the specific uncollectible account is known and that account is also decreased.

Answer 302

Decreases both accounts receivable and the allowance for uncollectible accounts. The entry is: DR: Allowance for uncollectible accounts XXXX CR: Accounts receivable XXXX Both accounts are decreased. The entry identifies the specific accounts receivable written off. That reduction takes the place of the earlier estimate, which created the allowance account in the first place.

Answer 303

$20,000 To determine the amount of uncollectible expense (bad debt expense) use T accounts. Solve for ?? = 20,000 Allowance for uncollectible accounts 70,000 Beg balance Write-offs 35,000 Bad debt expense 55,000 End balance

Answer 304

Risk of accounting loss - 230,000 Off-balance sheet risk - 0 This question requires an understanding of two accounting concepts: 1. Risk of accounting loss on accounts receivable (credit risk). This is the risk of loss resulting from not collecting amounts due from sales made on credit, and is the total amount of loss that Butler would suffer if those who owe it failed to make any payments and the receivables proved to be of no value. Since Butler's net carrying value of accounts receivable is $230,000 ($250,000 − $20,000), that is the amount of risk of accounting loss. 2. Off-balance sheet risk: This is the amount of risk of loss that does not show on the balance sheet. Since all of Butler's net accounts receivable show on the balance sheet, there is no off-balance sheet risk associated with the accounts receivable.

Answer 305

Allowance - YES Direct write-off - NO The allowance method recognizes the estimate of bad debt expense (uncollectible accounts expense) in the year of sale. This is an example of accrual accounting, which measures expenses when incurred and revenues when earned. The direct write-off method recognizes bad debt expense in the year of write-off, which may be after the year of sale. The direct write-off method is not consistent with accrual accounting.

Answer 306

$9,000 The data on write-offs and recoveries is not relevant. The aging method computes a required ending allowance balance based on the aging schedule. That required ending balance is the sum of the products of the receivables in each age category and the uncollectible percentage: $120,000(.01) + $90,000(.02) + $100,000(.06) = $9,000. The write-offs and recoveries do affect the preadjustment allowance balance and therefore the amount of uncollectible accounts expense to recognize. In this case, the preadjustment balance is $19,000 ($22,000 − $7,000 + $4,000), which means no uncollectible accounts expense would be recognized in 2004 because the preadjustment balance is more than sufficient (exceeds the $9,000 required balance).

Answer 307

$244,000 Corrected total current assets is computed as follows: $250,000 − $26,000 + $26,000/1.30 = $244,000. The only adjustment needed is to remove the unrecognized gross margin on the unsold inventory out on consignment. Although the cost of the inventory of $20,000 ($26,000/1.30) is incorrectly classified in accounts receivable, that misclassification does not affect the total for current assets because accounts receivable is part of current assets. Subtracting the $26,000 removes the inventory at selling price. Adding the $26,000/1.30 term adds the cost of the inventory back to current assets. Inventory is reported at cost, not selling price, because the items are unsold. Including them at selling price would imply profit recognition before sale.

Answer 308

$86,000 The preadjusted ending 2003 allowance balance is a $36,000 debit ($12,000 cr. beginning balance − $48,000 dr. from write-offs). When accounts are written off, the allowance is debited and accounts receivable is credited. The aging schedule indicates that a $50,000 ending credit allowance balance is required. Therefore, $86,000 of uncollectible accounts expense must be recognized to change the allowance balance from $36,000 dr. to $50,000 cr. An equation or T account approach also can be used to analyze the allowance account: Beginning balance $12,000 - write-offs $48,000 + uncollectible accounts expense (?) = Ending balance $50,000. Solving for uncollectible accounts expense yields $86,000.

Answer 309

Has no effect on net income The entry is DR: Allowance for uncollectible accounts XX CR: Accounts receivable XX This entry decreases the allowance because the purpose for which the account was created has now been realized (an uncollectible account). The entry has no effect on income because neither account in the entry is an income account.

Answer 310

$1,000 Only the accounts in the 0 − 15 day age category can take the discount, because the discount period ends 15 days after the sale (2/15, n30). The discount percentage is 2% (2/15, n30). One-half of the customers take the discount. Therefore, the expected discounts to be taken after December 31 are: (.5)($100,000)(.02) = $1,000. This expected discount amount reduces net sales and net accounts receivable for the current year because it is based on current-year sales.

Answer 311

Accounts receivable - No Effect Allowance for uncollectible accounts - Increase The collection reverses the reduction in the allowance account when the specific account was written off. There is no net change in gross accounts receivable because the account was collected. The two journal entries often given for this transaction are: (1) dr. Accounts receivable, cr. Allowance; (2) dr. Cash; cr. Accounts receivable. The first entry reinstates the allowance. The offsetting debits and credits for accounts receivable in both two entries provide an internal record of the transaction.

Answer 312

$40,000 When uncollectible accounts are based on receivables, the adjustment is the amount needed to bring the allowance up to the required amount based on those receivables. With $3,000,000 in receivables, the required ending allowance balance is $90,000 (.03 × $3,000,000). There is $50,000 in the allowance account before adjustment. Therefore, $40,000 must be added. That is the amount debited to bad debt expense, and credited to the allowance account.

Answer 313

Interest receivable. The note was received one month into its term. Like a bond issued between interest dates and which collects accrued interest from the bondholder since the most recent interest payment date, this note is recorded with interest receivable for one month. Benet earns only three months of interest revenue because that is the length of time it will hold the note.

Answer 314

Hart - 10,000 Maxx - 7820 The 9-month note is reported at face value ($10,000) because current notes need not be measured at present value. The 5-year note is reported at $7,820, the present value of the future cash flows. The five years of interest is payable at maturity. $7,820 = [$10,000 + $10,000(.03)(5 years)](.680)], which is the present value of the note plus the present value of the 3% interest.

Answer 315

Principal is due August 31, Year 2. Interest is due August 31, Year 1 and August 31, Year 2. Although the question does not indicate when the principal is due, the candidate must choose one of the answer alternatives. This answer is the only possible answer. Accrued interest for eight months at April 30 indicates that the end of the twelfth month is August 31. Under this answer alternative, interest is payable at least once per year, thus interest is due August 31, Year 1, four months after the balance sheet date, and again in one year. Generally, the principal amount of a note is due when the last interest payment is due. Therefore, because the note is classified noncurrent, the principal would be due on an August 31 at least one year after April 30, Year 1, the date of the current balance sheet. Thus, this answer is a possible answer. None of the other answers are possible.

Answer 316

The present value of the remaining monthly payments discounted at 12%. The question does not specify the exact meaning of the term "note receivable balance." When the term "gross" is not applied, it is safe to assume that the balance referred to is the net balance, that is, net of interest yet to be recognized. Notes are reported at present value, which is the amount net of interest yet to be recognized. However, note balances under the installment method include deferred gross margin yet to be realized, because deferred gross margin is subtracted as a separate line item. Thus, the question is referring to the notes receivable balance exclusive of interest yet to be recognized, but inclusive of deferred gross margin yet to be realized. The note's balance is the present value of the remaining payments. This is a two-year note. Therefore, valuation at present value is required. The note's valuation is the present value of the remaining payments at the original discount rate.

Answer 317

Dollar-value LIFO. DV LIFO is based on price level indices. The ending inventory is determined at current cost, and then reduced to the price level existing at the base-year (the year LIFO was adopted). The ending inventory measured in base-year dollars is compared to beginning inventory measured in base-year dollars. The difference is the increase in inventory measured in base-year dollars. This difference is then raised to the current-year price level and added to beginning inventory DV LIFO, yielding ending inventory DV LIFO. Thus, price-level changes are used throughout this method. Price-level changes are used as a means of estimating the ending inventory. Individual item costs are not maintained or used in the valuation of inventory.

Answer 318

$52,000 This amount represents the amount of the minimum guaranteed amount ($60,000 {200,000 units a year × 3 years × $.10}) less what was already purchased ($8,000 {80,000 units × $.10}) = $52,000.

Answer 319

$90,000 Since historical cost is greater than any of the other values, the question is to what value should the inventory be marked down? This answer is correct because it is the net realizable value and the IFRS requires the lower of cost or net realizable value.

Answer 320

$191,000 Inventory under IFRS is reported at the lower of cost or net realizable value (NRV) where NRV is the selling price less the cost to complete or dispose. The table below calculates the NRV for each inventory item. NRV Cost Lower of Cost or NRV Blades 50,000 − 2,000 = 48,000 41,000 41,000 Towers 54,000 − 4,000 = 50,000 52,000 50,000 Generators30,000 − 2,000 = 28,000 20,000 20,000 Gearboxes120,000 − 12,000 = 108,00080,000 80,000 Total 191,000

Answer 321

6.00 IFRS requires that inventory be reported at the lower of cost or net realizable value. Net realizable value is defined by IAS 2 as "the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale." In this question, NRV is lower than cost, therefore the inventory should be reported at NRV of 6.00.

Answer 322

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.

Answer 323

By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income. Under IFRS an increase in an assets fair value above original cost are recorded in a revaluation surplus account and any decreases in an assets fair value below the original cost are recorded as losses to the income statement. Therefore, the 10,000 decrease in year 1 would have been recorded as a loss to the income statement and the 15,000 increase in year 2 would be recorded as a 10,000 gain to the income statement and 5,000 gain in revaluation surplus (OCI).

Answer 324

$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 ```

Answer 325

$7,000 ``` Under component depreciation, the asset is separated into component parts, and each part is depreciated over its useful life. The bus would be separated into three parts and depreciated as follows: Bus 65,000 ÷ 20 years = 3,250 Engine 25,000 ÷ 10 years = 2,500 Seats 10,000 ÷ 8 years = 1,250 Total 100,000 7,000 ```

Answer 326

$60,000 When there is commercial substance to the exchange, the acquired asset is measured at fair value. In this case, the value is $60,000 as given in the problem. This amount also equals the fair value of assets given up in the exchange. The implied fair value of the asset exchanged is $60,000 + $30,000 cash received, or $90,000. The fair value of assets given up is therefore $90,000 less $30,000 cash received, or $60,000. The full journal entry for the exchange is: dr. plant asset 60,000; dr. accumulated depreciation, 40,000; debit cash 30,000; credit plant asset 100,000; credit gain, 30,000. The gain equals the difference between the fair value of the asset exchanged (90,000) and its book value (60,000).

Answer 327

$30,000 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.

Answer 328

A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price. The loss recognized on the exchange equals the book value of the asset transferred less its fair value at the time of the exchange. The fair value is less than book value. The amount recorded for the asset acquired is its fair value, or the fair value of the asset transferred plus or minus cash paid or received, whichever is more reliably determinable. By using the lower fair value of the asset transferred to measure the value of the asset acquired, the asset acquired will not be overstated above its fair value.

Answer 329

It recognizes gains and losses immediately. Gains and losses from nonmonetary exchanges that have commercial substance are recognized immediately.

Answer 330

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).

Answer 331

$0 There is a $1,000 gain inherent in the transfer of the old (Beam's) inventory item (fair value of $21,000 - carrying amount of $20,000). If Beam's item were sold, gross profit of $1,000 would result. However, under GAAP, exchanges of inventory made to facilitate sales are an exception to fair value measurement. Therefore, no gain or loss is recognized and the inventory received is valued at the book value of the inventory given up plus cash paid, for a total of $21,000. This amount is $1,000 less than the new inventory's fair value because the $1,000 gain is disallowed.

Answer 332

$0 This exchange was made to facilitate a sale of inventory to customers. Under FAS 153, this is one of the exceptions to measuring exchanges of nonmonetary assets at market value. In this case, the exchange is measured at book value; no gain or loss is recognized. The oil received by Zaro would be measured (debited) at book value ($126,000) less cash received ($30,000), or $96,000. Cash would be debited for $30,000. The oil exchanged would be credited for $126,000. No gain or loss is recognized.

Answer 333

$80,000. The patent is valued at the market value of the stock exchanged, which is $80,000 ($40 × 2,000 shares). In general, the recorded value of purchased intangibles is the value of the consideration given or the value of the intangible, whichever is more reliable. The book value of the seller is not a reliable substitute for market value. There is no reliable amount given for the market value of the patent.

Answer 334

$30,000 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.

Answer 335

$20,000 The gain on the exchange would be the difference between the carrying value of the asset exchanged and the fair value of that asset. Bayberry's carrying value is $80,000 and the fair value is $100,000; therefore, the gain to Bayberry is $20,000.

Answer 336

1. The proportional method | 2. The reset method

Answer 337

Accumulated depreciation is reset to zero by closing it to the building account, and then the building is adjusted for the revaluation.

Answer 338

It is expensed or capitalized.

Answer 339

It is reported in equity.

Answer 340

Yes, revaluation is allowed.

Answer 341

Companies have to review the policies | annually.

Answer 342

Fair value of acquired asset = Fair value of asset | exchanged + Cash paid

Answer 343

The amount of cash paid or received on exchange is significant in relation to the fair value of the assets exchanged. The functions of the assets exchanged are different.

Answer 344

An asset that does not have a fixed nominal or stated value, as is the case with cash, accounts receivable, and other monetary assets

Answer 345

Fair value of either asset is not determinable. Exchange is made to facilitate a sale. Exchange lacks commercial substance.

Answer 346

The fair value of assets given in the exchange

Answer 347

List price should not be used for fair value | because they are notoriously inflated.

Answer 348

Fair value of acquired asset = Fair value of asset | exchanged – Cash received

Answer 349

Neither a gain nor a loss. Solen has an implied gain given that the fair value of its asset exceeds its book value. But when there is no commercial substance, such gains are recognized only when cash is received. Solen paid cash on the exchange.

Answer 350

$140,000 The entry is: Asset (new) 140,000 Asset (old book value) 40,000 Cash 100,000 Slad has no gain because the fair value and carrying value of its asset (old) are the same. Slad has given up total consideration worth $140,000 at fair value, for an asset worth $140,000. There is no unrecognized gain on similar assets to diminish the recorded value of the new asset. The entry is the same regardless of whether the exchange has commercial substance because the fair value of assets exchanged equals their book value in total ($140,000). There is no implied gain or loss.

Answer 351

May - YES Sty - YES The fair value of each asset is less than book value implying that both firms have a loss. Losses are recognized in full regardless of whether there is commercial exchange.

Answer 352

$15,000 There is an implied gain of $8,000, the difference between the $20,000 fair value of the old asset and its $12,000 book value. Because the proportion of cash received is 25% ($5,000/$20,000), the entire gain is recognized and the acquired asset is recognized at fair value ($15,000). Note that the answer would be the same had there been commercial substance.

Answer 353

A loss equal to the cash given up. The fair value of the new asset equals the old asset's book value. Because cash was paid, the fair value of the old asset is less than the fair value of the new asset. Therefore, the fair value of the old asset is also less than the old asset's book value resulting in a loss. Using dollar amounts, assume the fair value of the new asset is $10. The book value of the old asset is also $10 by assumption. Assume Transit paid $2 cash. Then the fair value of the old asset is $8 implying a loss of $2, the amount of cash paid. Even without commercial substance, losses are recognized in full.

Answer 354

A gain in an amount determined by the ratio of cash received to total consideration. When commercial substance is lacking, gains are recognized in proportion to the amount of cash received.

Answer 355

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).

Answer 356

Have a useful life of at least three years. A useful life of at least three years is NOT a requirement for classification of a plant asset. The plant asset must have a useful life extending more than one year beyond the Balance Sheet date.

Answer 357

Range of useful lives of plant assets. Depreciation methods of plant assets. Accumulated depreciation related to plant assets. All items listed are required disclosures: useful life, depreciation methods, and the accumulated depreciation of plant asset. Read through select disclosures of the financial statements of real companies-this will help reinforce the disclosure requirements and jog your memory because you will remember reading about the disclosure.

Answer 358

Insurance on machine while in transit. - YES Testing and preparation of machine for use. - YES Both costs should be capitalized because they are costs necessary to place the asset into its intended use and location. Neither should be expensed as incurred.

Answer 359

$3,700 When a transaction lacks commercial substance and cash is paid, the new asset is recorded at the book value of the old asset plus any cash given. Campbell has the same economic position as before the exchange - a different truck used in the same manner and $700 less cash. The new truck is the BV of the old asset ($3,000) plus the cash paid ($700) or $3,700.

Answer 360

$0 This is an exchange with no commercial substance because the exchange was one truck for another. When cash is given and there is no commercial substance, a gain is not recognized. This transaction is an even exchange in value. Charm gave the old truck with a net book value of $3,000 ($10,000 – 7,000) plus $2,000 in cash, or a total of $5,000. The consideration given of $5,000 equals the fair value of the new truck, $5,000.

Answer 361

$15,000 This response is the difference between carrying value and recoverable amount. According to IFRS the recoverable amount is the greater of fair value less cost to sell ($105,000) or value in use ($100,000). Value in use is the discounted cash flows. Therefore, this asset is has an impairment of $15,000 because the recoverable amount is $105,000 and the carrying value is $120,000.

Answer 362

$0 The recoverable cost (expected future cash flows) of $130,000 exceeds the $120,000 book value. Therefore, the asset is not impaired, and no loss is recorded. Although both the market value and present value of the future cash flows are less than book value, as long as the nominal sum of future cash flows ($130,000) exceeds book value, no impairment is recorded. The firm is expected to recover its book value.

Answer 363

Held for use - No Held for disposal -Yes If an asset is held for disposal, previous losses can be recovered. The logic is that the recovery will be realized in the near future if the asset is in the process of being disposed. In contrast, an asset held for use CANNOT recover previous impairment because there is no certainty regarding the ultimate realization of those losses.

Answer 364

Part of continuing operations. The excess of proceeds over the carrying value increases the net assets of the firm, is recorded as an ordinary gain, and is included in income from continuing operations. The purchase of the new warehouse is an unrelated transaction.

Answer 365

$16,000 The 200% declining balance depreciation method is also called the double declining balance method or DDB. Because this is a declining balance method, the book value at the beginning of 20X3 must be computed, and that is affected by depreciation in 20X2. For 20X2, depreciation under DDB is 2/10 × $100,000 or $20,000. Note that salvage value is not subtracted when computing depreciation because the "declining balance" is book value. For 20X3, depreciation is 2/10 × ($100,000-$20,000) = $16,000 because the book value at the beginning of 20X3 is reduced by 20X2 depreciation.

Answer 366

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.ca When the portion of an asset that is removed from a larger asset has identifiable costs and accumulated depreciation amounts, those amounts are removed from the books. The difference between these two amounts is the carrying value of the damaged portion of the larger asset. There is no insurance. Therefore, the carrying value of the damaged portion is written off as a loss. The replacement assets are capitalized at cost. The entries are: Portion removed New materials Loss Asset Accumulated depreciation Cash Asset

Answer 367

Warehouse - YES Land - No The average accumulated expenditures for purposes of capitalizing interest during construction of the warehouse includes the land cost, but the interest is capitalized to the warehouse only. The land is not under construction.

Answer 368

8.57% Neither debt issuances were identified as the construction loan. Therefore, the interest rate must be determined based on the weighted average of the interest on all of the debt outstanding during the year. The calculation is as follows: $6,000,000 × .08 = $480,000 $8,000,000 × .09 = $720,000 Totals $14,000,000 $1,200,000 $1,200,000 / $14,000,000 = 8.57%

Answer 369

$120,000 The purchase price of the asset acquired less its salvage value is the asset's depreciable cost. In this case, total depreciation on the asset is limited to $120,000 ($135,000 purchase price-$15,000 salvage value). The cost to the seller and the previous salvage value are not relevant to the new owner.

Answer 370

$581,000 The total value to be compared to the amount received from the government in computing the gain: Carrying amount $575,000 Plus appraisal fees to support a $750,000 value 2,500 Plus attorney fees for the closing with the state 3,500 Equals total cost to compare to $750,000 received from state $581,000 The second and third items in the above list essentially reduce the net proceeds from the state and thus decrease the gain. The $3,000 and $4,000 amounts pertaining to the replacement property are not associated with the existing property and do not affect the gain on its condemnation.

Answer 371

Land - $ 60,000 Building - $ 50,000 Even though there was no profit or loss on the intercompany transaction, it resulted in amounts being redistributed between the depreciable asset office building and the non-amortizable asset land, which would result in different amounts of depreciation expense than if the transaction had not occurred. Therefore, the intercompany transaction must be "eliminated" so that the consolidated statements would show land at $60,000 and buildings at $50,000. (Sonny also would need to assess the building for possible impairment.)

Answer 372

$24,980 The capitalized cost is the sum of the down payment, present value of the note payments, and the shipping and installation charges. $4,000 + $6,000(2.58) + $2,000 + $3,500 = $24,980. The present value of the three payments required on the note is capitalized, which excludes the interest included in those payments. The two charges are capitalized because they were incurred to place the asset into its intended condition and location.

Answer 373

Deducted from the cost of the land. The proceeds from the building removed and sold reduce the cost of the land to the buyer. Had the building been razed, the net razing cost would be added to the land. Compared to the latter situation, the case in the problem results in a cost savings.

Answer 374

Treat as a subsidiary and consolidate investee with investor (consolidated financial statements)

Answer 375

The nature and extent of ownership

Answer 376

The nature and extent of ownership rights

Answer 377

The nature of the investment The extent of the investment Management's intent

Answer 378

``` Whether the investment is a debt or equity security Whether there is readily determinable fair value Management's intent on how long the investment will be held ```

Answer 379

1. Not significant 2. Significant influence but not control 3. Control

Answer 380

Securities representing the right of the creditor to receive from the debtor a principal amount at a specified future date and to receive interest as payment for providing use of funds

Answer 381

Securities representing ownership or the right | to acquire ownership interest

Answer 382

``` The investment is: In debt securities; In nonvoting stock; Temporary in nature; Less than 20% ownership of voting stock. ```

Answer 383

Redeemable preferred stock Redeemable preferred stock is not considered an equity security for investment accounting purposes. Redeemable preferred stock, also known as callable preferred stock, may be reacquired by the issuing corporation under prescribed conditions.

Answer 384

The investor owns more than 50% of the voting common stock of an investee. When an investor owns more than 50% of the voting common stock of an investee, in the absence of constraining conditions (e.g., investee in bankruptcy), the investor has controlling interest in the investee.

Answer 385

The method of payment used to acquire the investment The method of payment used to acquire an investment does not help determine the correct accounting treatment of the investment. While the method of payment determines what will be "credited" upon acquisition of the securities, it will not enter into the subsequent accounting treatment of the investment.

Answer 386

Bond investment - No Common stock investment - Yes An investment in the bonds of another entity does not give the investor an ownership interest, but an investment in the common stock of another entity does give the investor an ownership interest. An investment in the bonds of another entity establishes a debtor-creditor relationship, not an ownership relationship.

Answer 387

20% The minimum level of voting ownership considered to give an investor significant influence over an investee is 20%. In the absence of other relevant factors, an investor is considered to have significant influence over an investee if it owns 20%–50% of the voting securities of the investee.

Answer 388

II only. An investor may elect to use fair value to account for or measure some investments that otherwise would be accounted for using the equity method (Statement II). However, an investor is not required to use fair value to account for all equity investments (Statement I).

Answer 389

When there is no significant influence and fair | value is readily determinable

Answer 390

``` 1. Prices or bid-and-ask quotations are currently available on a securities exchange or in the over-the-counter (OTC) market if the OTC prices are publicly reported. 2. Prices or quotations are in a foreign market that has the breadth and scope of the U.S. markets. 3. Prices or quotations for investments on the fair value per share is published based on current transactions. ```

Answer 391

Any security that represents ownership interest or the right to acquire or dispose of ownership interest.

Answer 392

Look-through means that the investor would “look through” the form of the investment to the nature of the securities held by the investee. Look through is not allowed in determining the nature of the investment

Answer 393

Row B Dr.Investment Swedberg $4,280 Cr.Cash $4,280 The investment in Swedberg is initially measured and recorded at the price paid for the shares including the brokerage fees. The subsequent measurement of an equity investment is at fair value.

Answer 394

A debit to cash for $115,775.

Answer 395

Prices must be estimated based on similar securities in inactive markets. Prices estimated based on similar securities in an inactive market are an indication that the fair value of the security is not readily determinable.

Answer 396

$28,000. Investments in equity securities are reported at fair value ($28,000).

Answer 397

Dividend income. When there is no influence over the investee and the equity investments carried at fair value, cash dividends are recorded as dividend income.

Answer 398

The carrying amount of the investment would change when there is an observable transaction for a similar or identical security.

Answer 399

Fair value is not readily determinable

Answer 400

In the income statement

Answer 401

As dividend income

Answer 402

The costs associated with gathering data on similar investments, researching valuation methodologies, and the cost to hire a valuation consultant The costs associated with determining fair value are not taken into consideration when assessing whether fair value is readily determinable. The costs listed in this response are the typical and reasonable costs that the entity would incur to determine fair value.

Answer 403

In current earnings Impairment losses on equity investments carried at cost are recognized in current earnings.

Answer 404

There are no bid-and-ask quotations available on a securities exchange or in a publicly reported over-the-counter market. If there are no sources of fair value quotations, including no bid-and-ask quotations in an exchange of over-the-counter markets, then the entity can elect the practicability exception and use the cost method.

Answer 405

Row D. The impairment loss of $4,000 would be recognized in Year 2, and the gain for recovery of $5,000 in Year 3 would also be recognized. If there are observable transactions from which to determine fair value, then that information should be used to measure the investment.

Answer 406

$27,000. Investments in equity securities are reported at fair value if the control is not significant and there is a readily determinable fair value. If the control is not significant and there is not a readily determinable fair value, then the entity may elect to use the cost method. In this situation, only the investment in Kemo Inc. qualifies to be reported using the cost method.

Answer 407

``` 1. Recognize investor's share of investee's net income/loss. 2. Recognize investor's share of investee's dividends declared. 3. Recognize adjustment to share of investee's net income/loss for "depreciation/amortization" of amount allocated to excess of fair value over book value. ```

Answer 408

When an investor owns 20% to 50% of the voting equity securities of an investee and there are no impediments to the investor exercising its voting rights to influence the investee's operating and financial policies. Investments in nonvoting equity securities (e.g., preferred stock) or in debt securities do not convey influence

Answer 409

At the time of investment, the investor must determine: Book value of assets and liabilities of investee. Fair value of assets and liabilities of investee. Allocation of any difference between cost of investment and fair value of investee's assets and liabilities

Answer 410

The investment must be carried on the investor's books and reported in the investor's financial statements using the equity method of accounting.

Answer 411

``` As an adjustment to the investee's assets and liabilities to fair value, then If cost of investment > fair value of investee's net assets, to goodwill; or If cost of investment < fair value of investee's net assets, to gain. ```

Answer 412

The investor must cease using the equity method of accounting and begin accounting for the investment at fair value if fair value is readily determinable. The investment will be adjusted to fair value at the date significant influence is lost, and any difference between fair value and the prior equity-based carrying amount will be recognized as a gain or loss in current income

Answer 413

Equity investments - Yes Debt investments - NO An investment in equity securities of another entity gives the investor an ownership interest and, therefore, the ability to vote in corporate elections. An investment in the debt of another entity does not give the investor an ownership interest or the right to vote in corporate elections. An investment in the debt of another entity establishes a debtor-creditor relationship, not an ownership relationship.

Answer 414

Book values of assets & liabilities - YES Fair values of assets & liabilities - YES At the time an investor acquires sufficient voting stock of an investee to give it significant influence over the investee, it must "capture" both the book values and fair values of the investee's assets and liabilities in order to apply the equity method of accounting to the investment.

Answer 415

October 1–December 31, 200X - Fair Value January 1–December 31, 200Y - Equity Method Because Catco owned only 12% of Dexco's common stock during the period October 1–December 31, 200X, it would not have been able to exercise significant influence over Dexco and would have used the fair value method. Because the purchase of an additional 18% of Dexco's common stock would have given it a total of 30%, in the absence of other factors, it would be presumed to have significant influence over Dexco and, therefore, would have used the equity method during the period January 1–December 31, 200Y.

Answer 416

Investor is a manufacturing firm that owns 25% of the voting stock of a consulting firm. An investor that owns 25% of the voting stock of an investee, in the absence of evidence to the contrary, is presumed to be able to exercise significant influence over the investee. The fact that the investor and the investee are in different lines of business generally does not mitigate the influence the investor is able to exercise.

Answer 417

$250,000 Larkin's investment in Devon at year-end would be computed as the carrying amount of the investment at the beginning of the year ($200,000) + Larkin's share of Devon's reported net income for the year ($600,000 × .25 = $150,000)–Larkin's share of Devon's dividends paid during the year ($400,000 × .25 = $100,000), or $200,000 + $150,000 = $350,000-$100,000 = $250,000, the correct answer.

Answer 418

The company's accounting policy for the investment The 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.

Answer 419

$12,000 $12,000 = .30($40,000). Under the equity method, the investor recognizes its share of investee earnings in its own income. The equity method is used because Lee has significant influence over Polk. The $7,500 amount is incorrect because it is Lee's share of Polk's dividends (.30 × $25,000). Under the equity method, dividends are a return of capital to the investor. nificant influence over Polk.

Answer 420

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

Answer 421

Goodwill amortization related to purchase - NO Cash dividends from investee - NO Under the equity method of accounting for an investment, neither amortization of goodwill nor dividends from the investee affect the investor's investment income. Goodwill resulting from an investment in another entity (i.e., the excess of the cost of the investment over the investor's share of the fair value of the investee's identifiable assets) is not amortized. Dividends from the investee are not recognized as income; rather, they reduce the investment account.

Answer 422

$42,000 This is a question on the full equity method. Goodwill on the purchase = price of investment - 40% (fair value of Adams' net assets) = $400,000 -.40($900,000 + $90,000 + $10,000) = $400,000 - $400,000 = 0 (there is no goodwill to amortize) Investment income: 40% of Adams' income: .40($120,000) $48,000 Less 40% of excess of fair value of inventory over book value at acquisition. The inventory is sold, and therefore, the cost of goods sold of the investor must be increased by this amount: .40($10,000) (4,000) Less depreciation on 40% of the excess of fair value over book value of equipment: .40($90,000)/18 (2,000) Equals amount Sage reports as investment income $42,000

Answer 423

The total receivable should be disclosed separately. Although the equity method is often called a "one-line" consolidation, intercompany receivables remain separate from the investment account. Intercompany profit or loss is eliminated but that affects the income recognized by Pulham, not the receivable.

Answer 424

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

Answer 425

Fair Value method, and only a portion of Ima's 2004 dividends represent earnings after Pal's acquisition. The portion of the dividend reducing the investment carrying value is a liquidating dividend. A liquidating dividend occurs when the investee pays more income than was earned during the period the investor owned the shares of the investee. For example, assume that Pal held 1% of Ima's outstanding stock from January 1-December 31 of 2004 only. Ima earned $40,000 during 2004 but paid $50,000 in dividends ($10,000 coming from earnings before 2004). Pal would receive $500 dividends in total (1%), but only $400 are attributable to earnings during the period Pal was a shareholder. Thus, $100 of the dividend is attributable to income earned by Ima before Pal became an investor. From Pal's viewpoint, this is a return of a portion of Pal's investment, a liquidating dividend. Under the cost method, liquidating dividends are treated as a reduction in the investment account whereas normal dividends are treated as income. The wording of the question implies that dividends are otherwise treated as income. Thus, the equity method could not be the method used by the firm. Under the equity method, all dividends are treated as a reduction in the investment account. No dividends received are treated as income under the equity method.

Answer 426

$10,000 This answer is correct because it includes the King and Bow dividend.

Answer 427

Held-for-trading - No Equity method - No A dividend never increases the investment account under any accounting method. Under the cost method, the dividend is recorded as revenue. Under the equity method, the dividend is recorded as a decrease in the investment account.

Answer 428

$200,000 Once the investor has acquired a sufficient percentage of the stock to use the equity method, it is prospectively applied. In this question, the equity method becomes the required method only at the very end of the year, and Pare would begin applying the equity method beginning on December 31. The ending balance of the investment account is: $50,000 (original investment) + $150,000 (second investment).

Answer 429

$24,000 Grant uses the equity method because it has significant influence over South. Under the equity method, the investor recognizes its share of the investee earnings in its own income. Thus, Grant will recognize $24,000 (.30 × $80,000) as equity in the earnings of South in its own income.

Answer 430

Any debt investments not classified as either held-to-maturity or held-for-trading. The available-for-sale category is the default category if an investment in debt does not meet the requirements of either held-tomaturity or held-for-trading

Answer 431

Recognize interest income. Amortize discount or premium, if any, on debt securities. Adjust investment to fair value at balance sheet date with any gain/loss reported as an item of other comprehensive income.

Answer 432

At fair value as either current or noncurrent | assets (based on the entity's policy).

Answer 433

``` The gain or loss recognized on the sale of an available-for-sale investment includes The difference between the carrying value of the investment and its selling price; and Any unrealized gain or loss in accumulated other comprehensive income related to the securities sold. ```

Answer 434

Purchase price of the debt security Directly related cost of acquisition (e.g., brokerage fee, transfer fee, etc.)

Answer 435

1. Applies to investments in debt securities. 2. Investor buys for the purpose of selling in the near term.

Answer 436

At fair value, with changes in fair value reported | in current income

Answer 437

``` In income (income statement) as part of income from continuing operations ```

Answer 438

The unrealized loss should be credited to the other comprehensive income account. The unrealized loss would be credited to the other comprehensive income account to reclassify the holding loss as a realized loss in the income statement for Year 2. For purposes of illustration, assume the available-for-sale (AFS) securities were originally purchased for $5 and that the loss during Year 1 was $1. The related entries would be: Purchase: DR. AFS Securities $5 CR. Cash $5 Year 1 DR. OCI (holding loss) $1 CR. AFS Securities $1 Year 2: DR. Cash $4 CR. AFS Securities $4 DR. Loss on AFS Securities $1 (Income Statement) CR. OCI (holding loss) $1 (B/S, Accumulated OCI) The last entry (above) reclassifies the holding loss to recognize a realized loss on sale.

Answer 439

$1,020,000 For investments in debt securities other than those intended to be held-to-maturity, the fair value method is applied. $1,020,000 is the fair value of the investment in bonds and is the appropriate amount for reporting the investment.

Answer 440

Row D The security cannot be classified as available-for-sale because the unrealized gains and losses are recognized in the Income Statement. Unrealized gains and losses on available-for-sale securities are recognized in owners' equity, not earnings. The second part of the question is somewhat ambiguous. The 2016 price decline could exceed or be exceeded by the 2017 price recovery. The loss in the first year is not related in amount and does not constrain the realized gain in the second year. The way to answer the question is to read the right column heading as implying that the earlier price decline must exceed the later price recovery. With that interpretation, the correct answer is no. For example, assume a cost of $10 and a market value of $4 at the end of the first year. An unrealized loss of $6 is recognized in earnings. During the second year, the security is sold for $12. A realized gain of $8 is recognized—the increase in the market value from the end of the first year to the sale in the second year. Thus, the market decline in the first year did not exceed the recovery in Year 2. (It could have exceeded the recovery in Year 2, but there is no requirement that it must.)

Answer 441

Row C The $25,000 decline in value (unrealized loss) on trading securities is recognized in earnings for the year. The $35,000 decline in value (unrealized loss) on securities available-for-sale is recognized in owners' equity, bypassing earnings. The reason for the difference in accounting treatment is that trading securities are held for short-term price appreciation. If the value of the trading portfolio increases or decreases, that gain or loss should be recognized in earnings consistent with the purpose for holding the investments. Securities available-for-sale are held for purposes other than short-term price appreciation. Thus, the increases and decreases in the portfolio market value may not be indicative of the intent of holding the securities. Recognition in earnings each year may cause unwarranted volatility in earnings.

Answer 442

II only Only realized gains (from sale or reclassification) on available-for-sale securities are recognized in income for the period. The unrealized changes in fair value are recorded in owners' equity.

Answer 443

$22,000 The book value at the date of sale was $8,000 below face value ($10,000 original discount – $2,000 amortization). The fair value of the bonds at date of sale was $14,000 above face value ($14,000 premium). Thus, the difference between the price of the bonds at sale and the book value was $22,000 ($8,000 + $14,000). That difference is the gain on sale.

Answer 444

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

Answer 445

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

Answer 446

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.

Answer 447

Cook will report an unrealized gain on securities for $6,000 on the Year 2 income statement. The fair value option may be elected on an instrument-by-instrument basis. Therefore, it is permissible for Cook to elect the fair value option for its investment in Company R. The investment in Company R would be revalued to fair value at the end of the period, and the resulting unrealized gain or loss would be recognized in earnings for Year 2. The investment in Company S is a trading security, and any unrealized gain is also recognized in earnings for the period. Therefore, Cook would report an unrealized gain of $2,000 for the investment in Company R and $4,000 for the investment in Company S, for a total gain of $6,000 on the Year 2 income statement. The unrealized gain on Investment T security would be reported under the provisions of ASC Topic 320 and included in other comprehensive income for the period.

Answer 448

The investment is a debt security Investor has intent to hold to maturity. Investor has ability to hold to maturity

Answer 449

The sale is near enough to the maturity date so that interest rate risk is substantially eliminated. The sale occurs after the investor has collected a substantial portion (at least 85%) of the principal outstanding at acquisition date.

Answer 450

Purchase price of security Directly related cost of acquisition (e.g., brokerage fee, transfer fee, etc.) Accrued interest, if any, is not included in the cost of the investment.

Answer 451

At amortized cost

Answer 452

The effective interest method or straight-line | method if not materially different

Answer 453

Reported as another income item in the income | statement

Answer 454

As an investing activity

Answer 455

The premium is amortized to the earliest call | date.

Answer 456

More than the face amount of the bond. The amount paid by buyer would have been more than the face amount of the bond and would include the premium and the interest accrued since the last interest date.

Answer 457

$468,000 A held-to-maturity (HTM) investment purchased at a discount increases in value as maturity approaches, at which time the book value of the investment must be the face value of the investment. During the life of an HTM investment, the investor carries and reports the investment at amortized cost. The interest and amortization entries for the two years 2014 and 2015 that lead to the correct ending balance at December 31, 2015, are: December 31, 2014: DR: Interest receivable .08($500,000) 40,000 DR: Discount on HTM bonds 5,620 CR: Interest revenue .10($456,200) 45,620 December 31, 2015: DR: Interest receivable .08($500,000) 40,000 DR: Discount on HTM bonds 6,182 CR: Interest revenue .10($456,200 + $5,620) 46,182 Thus, the ending net investment balance at December 31, 2015, is $456,200 + $5,620 + $6,182 = $468,002, or $468,000 (rounded to the nearest $100 as required by the problem).

Answer 458

$212,000. Held-to-maturity investments in bonds are reported at amortized cost. The discount or premium at purchase is amortized during the term of the bonds so that the carrying value is equal to face value at maturity. This is the amount to be received at maturity. The purchase price, exclusive of accrued interest, is $215,000 ($220,000 – $5,000). Accrued interest is not included in the investment carrying value. The premium paid on the bonds is $15,000 because the face value of the bonds is $200,000 (200 × $1,000). The term of holding the bonds is from October 1, 2014, to January 1, 2021, a period of six years and three months, or 75 months. The period from purchase to the December 31, 2015, balance sheet is 15 months. Amortization of the premium reduces the investment carrying amount because only face value, which is less than the amount paid for the investment, will be received at maturity. Therefore, the ending 12/31/15 investment carrying value is $212,000 = $215,000 – ($15,000 × 15/75 = $3,000).

Answer 459

Row B. 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.

Answer 460

$911,300 Initial investment cost: $946,000 – $40,000 = $906,000 Interest revenue for 2014: $906,000(.10)(1/2 year) = $45,300 Less cash interest for 6 months: $1,000,000(.08)(1/2) = (40,000) Equals amortization of discount (increases investment) 5,300 Investment in bonds balance at the end of 2014 $911,300 The initial investment cost or balance excludes accrued interest. The bonds were purchased at the halfway point in the interest period. York must pay for half a year's interest and will receive a full year's interest on January 1, 2015. The interest revenue for the year is based on the effective yield of 10%. The difference between interest revenue and the cash interest earned for the second half of 2014 is the growth in the value of the bond over time. The book value of the bond investment at maturity will be $1,000,000. Thus, the discount amortization increases the investment carrying value each year until it reaches $1,000,000.

Answer 461

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.

Answer 462

II and III This answer is correct because both II and III should be reported on the income statement. Unrealized gains and losses on held-to-maturity securities are not reported. Gains on securities sold always should be included as realized gains in the income statement of the applicable period. A permanent decline in value requires that the impaired security be written down to fair value. The amount of such a write-down is included in earnings as a realized loss.

Answer 463

A footnote or parenthetical disclosure only. 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.

Answer 464

$21,800. When the interest method of amortization is used, interest revenue is computed directly, and the amount of discount amortization is computed indirectly as follows: Interest revenue – Stated or cash interest = Discount amortizations In this case, the interest revenue cannot be computed directly because the effective or yield rate is not given. However, the stated or cash interest can be computed ($500,000 × 8% × 6/12 = $20,000), and the discount amortization is given ($1,800). Thus, the interest revenue can be computed indirectly, as indicated below. Interest revenue – $20,000 = $1,800 Interest revenue = $20,000 + $1,800 Interest revenue = $21,800

Answer 465

East Company Since East Company owns the bonds on December 31, it is the investor. North Company, the issuer of the bonds, is the investee. Since South Company did not issue the bonds and does not own the bonds on December 31, it is neither an investor nor an investee.

Answer 466

North - YES South - No East - No North is the investee because it issued the bonds, but neither South nor East is an investee. Since East owns the bonds on December 31, it is the investor. Since South did not issue the bonds and does not own the bonds on December 31, it is neither an investor nor an investee.

Answer 467

The carrying value of the investment at the time the rights are received is allocated between the shares of stock and the newly acquired rights based on the relative market value of each set (total share and total rights). The amount allocated to the total rights is then divided by the number of rights received to get the value of each right

Answer 468

An entry is made to transfer some of the cost of the investment in the stock that "earned" the rights to an account for the rights. The entry is: DR: Security Stock Rights CR: Investment

Answer 469

The investor adjusts the per share cost, not total cost. Original cost is divided by the new total number of shares (after the stock dividend) to get the new per share cost.

Answer 470

The investor adjusts the per share cost, not the total cost. Original cost is divided by the new total number of share (after the split) to get the new per share cost.

Answer 471

The investor writes off the stock rights and recognizes a loss. The entry is: DR: Loss on Expiration of Stock Rights CR: Security Stock Rights

Answer 472

$4,000 The original stock investment cost is allocated to the stock and the rights based on their relative market values. Total market value of the stock is $95,000 and of the rights is $5,000. The original cost of the stock is $80,000. Thus the investment in stock rights is reported at [$5,000/($5,000 + $95,000)]$80,000 = $4,000.

Answer 473

$18,000 Cobb has 10,000 + 2,000 or 12,000 shares at the time of the dividend. The 2,000 shares were received from the stock dividend. Thus, dividend income is 12,000($1.50) = $18,000. The stock dividend itself is not included in dividend income; rather, decreases the cost per share of the investment. However, the stock dividend does raise the number of shares that receive the cash dividend, which is recognized as income.

Answer 474

$8,000. Only the $8,000 dividend is included in dividend revenue. The dividend on the Brill stock is accounted for under the equity method, which treats all dividends as a reduction in the investment account. The stock dividend is not revenue. Rather, it reduces the per share cost of the investment in Paul stock. No entry is recorded on receipt of a stock dividend.

Answer 475

$24,000 Because Plack Co. owns only 2% of Ty Corp. stock, it does not have significant influence over Ty and will use fair value to account for its investment. Plank's dividend will be determined by the number of shares of Ty that it owns multiplied by the amount of dividend per share. The calculation is: 2/14 Purchase 10,000 shares 4/30 Stock dividend 2,000 shares 12/15 Total shares owned 12,000 Dividend rate $ 2 Total Dividend income $24,000 The stock dividend would be recorded by Plack as a memorandum entry to adjust the per-share original cost, so it is based on the total 12,000 shares now owned.

Answer 476

As a memorandum entry, reducing the unit cost of all Guard stock owned 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.

Answer 477

Cost - No Equity - No Stock dividends are not recognized in the accounts at receipt, at fair value or any other value. Rather, they reduce the cost per share under both methods. The original cost is spread over more shares. The investor's percentage of the firm has not changed as a result of the stock dividend, but the investor has more shares (as do all investors). When the shares received as a dividend are sold, the reduction in cost basis increases the gain or reduces the loss.

Answer 478

$21,000 If Clarion does not elect the fair value option for valuing its financial assets, the rules of ASC Topic 320 apply. Both the Company X stock investment and the Company Y bond available-for-sale security investment would be reported at fair value. However, only the $21,000 unrealized gain associated with the Company X stock trading security investment would be reported in earnings of the period. The unrealized gain of $5,000 on the Company Y bond available-for-sale security investment would be reported in other comprehensive income (OCI). The Company Z bond held-to-maturity security investment would be reported at amortized cost.

Answer 479

$9,000 Cook elects to use the fair value option. Cook will value both its trading securities and available-for-sale securities at fair value and record the unrealized gains in earnings for the period. The gain is equal to $96,000 ($32,000 + $46,000 + $18,000) minus $87,000 ($30,000 + $42,000 + $15,000), or $9,000.

Answer 480

$29,000 ASC Topic 320 requires that held-to-maturity securities be carried at amortized cost and that available-for-sale and trading securities be carried at fair value (FV). Therefore, Ott's investment portfolio is reported at 12/31/Y1 at the following amounts: ``` Bond Amount reported Mann Co. $10,000 cost Kemo, Inc. 10,000 FV Fenn Corp. 9,000 FV $29,000 ```

Answer 481

Held-to-maturity to held-for-trading - YES Held-for-trading to held-to-maturity - YES Both transfers from held-to-maturity to held-for-trading classifications and from held-for-trading to held-to-maturity classifications can occur in the accounting for debt investments.

Answer 482

Fair value Fair value is the valuation basis used when debt investments are transferred between classifications. Conceptually, the existing carrying value is written off and the current fair value is written on in the new classification, with any difference being an unrealized gain or loss.

Answer 483

Fair value, regardless of whether the decline in fair value below cost is considered permanent or temporary Reclassifications between the two investment categories are always recorded at fair value. The reclassification is treated as if the security in the old classification was sold and the security in the new classification was purchased. Fair value reflects a brand-new valuation and is treated as original cost from then on for the purpose of the annual year-end revaluation adjustment.

Answer 484

$0 The requirement is to determine the amount of loss on investments to be reported in Sun's Year 2 income statement. This transfer is accounted for at fair value, and any holding gains or losses on securities that are transferred to held-to-maturity from available-for-sale are reported as accumulated other comprehensive income. This amount is then amortized over the remaining life of the security as an adjustment to yield. Since cost is greater than fair value by $75,000 at 12/31/Y1 ($650,000 cost − $575,000 fair value), the following entry would be recorded: Unrealized loss 75,000 Marketable debt securities 75,000 Then on June 30, Year 2, when Sun decides to hold the investments to maturity, an additional $45,000 will be recorded in the valuation account ($575,000 value on books − $530,000 FV) to reflect the change in FV. The following entry would be recorded: Unrealized loss 45,000 Marketable debt securities 45,000 Each year the unrealized loss would be reported as other comprehensive income that would be closed to accumulated other comprehensive income.

Answer 485

$ 85,000 An election can be made to use the fair value option when financial assets cease to qualify for fair value treatment due to specialized accounting rules. On June 30, Year 2, the trading securities were reclassified to the held-to-maturity category, and an election was made to report them at fair value. On June 30, Year 2, the held-to-maturity securities were valued at $530,000, and Jill would recognize a loss of $45,000 ($575,000 − $530,000). At December 31, Year 2, the securities declined in value an additional $40,000. Therefore, the total loss recognized in Year 2 was $85,000 ($45,000 + $40,000).

Answer 486

$435,000 Ownership of less than 20% leads to the presumption of no substantial influence unless evidence to the contrary exists. Well's position as Rea's largest single shareholder and the presence of Well's officers as a majority of Rea's board of directors constitute evidence that Well does have significant influence despite less than 20% ownership. Therefore, the equity method is used. The investment account had a beginning balance of $400,000 (purchase price). This amount is increased by Well's equity in Rea's earnings (10% ownership × $500,000 income = $50,000) and decreased by Well's dividends received from Rea (10% share × $150,000 total div. = $15,000), resulting in a balance of $435,000.

Answer 487

The carrying amount of the investment would change when: Fair value becomes readily determinable or there is an observable transaction for a similar instrument. The investor buys additional shares of the subsidiary or sells some of the shares it already owns.

Answer 488

Credit held to maturity at unamortized cost. Debit trading at fair value. Recognize unrealized holding gain/loss in net income.

Answer 489

Credit held-to-maturity at unamortized cost. Debit available-for-sale at fair value. ``` Recognize unrealized (holding) gain or loss to other comprehensive income. ```

Answer 490

Credit trading at recorded fair value. Debit held-to-maturity or available-forsale at current fair value. Recognize unrealized holding gain/loss in net income

Answer 491

Credit available-for-sale at recorded fair value. Debit held-to-maturity at current fair value. Keep unrealized holding gain/loss in accumulated other comprehensive income in shareholders' equity. Unrealized holding gain/loss at date of transfer is amortized over remaining life of debt.

Answer 492

Under IFRS No. 9, the two categories of investments (and other financial assets) are: 1. Debt investments measured at amortized cost 2. All other investments, including debt instruments not at amortized cost and all equity investments

Answer 493

An investor can elect to measure a debt investment that would otherwise be measured at amortized cost at fair value when the use of fair value would eliminate or significantly reduce a measurement or recognition inconsistency that results from an accounting mismatch. An accounting mismatch occurs when assets or liabilities, or recognizing gains or losses on them, are measured on different bases

Answer 494

If the investor does not hold an equity investment for trading purposes, the investor may elect to report changes in fair value through other comprehensive income rather than through profit and loss (net income). The election must be made when the investment is first recognized, and it cannot be changed subsequently

Answer 495

Two conditions must be met: 1. Business model test—where the entity intends to hold the investment to collect the contractual cash flows, not to sell the instrument prior to its contractual maturity to realize changes in fair value 2. Cash flow characteristic test—where the contractual terms of the investment give rise to cash flows on specific dates that are solely payments of principal and interest

Answer 496

I only. Statement I is correct; Statement II is not correct. Only investments in debt securities may be transferred between categories; equity securities may not be transferred between categories (Statement I). When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must be restated (Statement II).

Answer 497

$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.

Answer 498

Amortized cost to fair value - YES Fair value to amortized cost - 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.

Answer 499

In profit/loss (Income Statement) - YES In other comprehensive income - YES Under IFRS, changes in fair value may be reported in profit/loss or in other comprehensive income, depending on whether or not the investment is held for trading purposes or not. If an investment in equity securities is held-for-trading purposes (i.e., to make a profit on price appreciation), changes in fair value will be reported through profit/loss. If an investment in equity securities is not held-for-trading purposes, the investor may elect to report changes in fair value through other comprehensive income.

Answer 500

$105,000 Under IFRS No. 9, investments in debt securities that are not made under an entity's business model plan to make and hold such investments solely to receive cash flow from interest and principal repayment should be reported at fair value. Thus, this investment should be reported at the fair value, $105,000.

Answer 501

II only Statement II is correct; Statement I is not correct. The business model test used in evaluating debt instruments for classification purposes is concerned with the investor's intent. Specifically, did the investor make the investment to collect cash flows from interest and return of principal, rather than to make a profit on sale of the investment (Statement II)? While there is a single category for equity investments (at fair value), there are two categories for debt investments (at amortized cost and at fair value) (Statement I).

Answer 502

Definite-life intangibles Indefinite-life intangibles

Answer 503

Debit amortization expense and credit the intangible asset (There is no accumulated amortization contra account as with tangible assets.)

Answer 504

Impairment of an indefinite- or definite-life | intangible cannot be recovered.

Answer 505

When (1) the entity has a commitment from a third party to purchase the intangible asset at the end of its useful life; or (2) the residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset's useful life.

Answer 506

Long-term operational assets that lack physical substance or presence but are currently used in the operation of a business and have a useful life extending more than one year from the balance sheet date

Answer 507

Only external costs can be capitalized. Examples are registration of patent, successful legal defense of the patient, legal and accounting fees, and design costs.

Answer 508

1. The book value (BV) of the definite-life intangible is compared to the recoverable cost (RC) of the intangible asset. If BV > then RC, then 2. BV is compared to fair value (FV). If BV > FV, then impairment loss = BV − FV.

Answer 509

One step: Book value (BV) compared to fair value (FV). If BV > FV, then impairment loss = BV − FV.

Answer 510

Straight line, unless another systematic | method can be shown as more appropriate

Answer 511

Cost of patent registrations Once a project reaches technological feasibility, then the research and development cost can be capitalized. The costs of registering a patent can be capitalized as an intangible asset because if the entity is registering the patent, most likely the project has reached technological feasibility.

Answer 512

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.

Answer 513

$4,000 Unless there is evidence otherwise, amortization is on a straight-line basis. This intangible has a 10-year life and has a residual value. The annual amortization is 4,000 per year (50,000 – 10,000 = 40,000 / 10 years).

Answer 514

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.

Answer 515

Johan - YES Abco - NO The intangible asset has a definite life and is amortized. Goodwill has an indefinite life, and is not amortized but is tested for impairment.

Answer 516

Costs of start-up activities, including organization costs, should be expensed as incurred. Start-up costs are expensed as incurred.

Answer 517

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.

Answer 518

$0 When the intangible asset can be renewed indefinitely, and the company has the positive ability and intent to continuously renew, then the intangible asset is an indefinite life intangible. Indefinite life intangibles are not amortized, but are tested for impairment on an annual basis.

Answer 519

$115,500 The capitalizable costs for an intangible asset under IFRS 38 are essentially the same as U.S. GAAP. The cost of the asset is the cash paid to acquire the asset, including the cost to obtain legal title and control of the asset. This cost will include the purchase price ($100,000), the taxes ($5,000), and the legal costs to register the asset ($10,500).

Answer 520

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.

Answer 521

$15,000 The appropriate amortization period for the leasehold improvements is eight years because renewal is uncertain. $120,000/8 = $15,000. This is the amount in accumulated amortization because the property has been leased only one year. The office furniture and equipment are not included in leasehold improvements because they belong to the lessee.

Answer 522

$1,600 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.

Answer 523

$504,000 The remaining lease term at the end of 20X2 is nine years (the 12-year lease term began January 1, 20X0). The eight-year option is added to the term at that point to yield a revised lease term of 17 years (9 + 8). Leasehold improvements are amortized over the shorter of lease term (17 years) or useful life (15 years) because leasehold improvements revert to the lessor. Thus, the amortization of the leasehold improvements is $36,000 ($540,000/15). At the end of 20X2, the carrying value of the leasehold improvement is $504,000 ($540,000-$36,000). A full year of amortization is warranted in 20X2 because the improvements were completed in January.

Answer 524

$11,200 Twenty years is the estimated useful life. After one year, the accumulated amortization is $11,200 = $224,000/20. The purchase cost is capitalized. The book value of the previous owner is not relevant to Hull.

Answer 525

$798,000 The building is a leasehold improvement because it reverts to the lessor at the end of the lease. The residual value belongs to the lessor and is not relevant to the lessee. The building was completed at the beginning of the second year of the lease. Therefore, the total cost to the lessee of $840,000 is amortized over 20 years, not 21. The carrying value of the leasehold improvement at the end of 20X5, the first year of the building's life but the second year of the lease, is $798,000 = $840,000(19/20).

Answer 526

$19,000 In computing life insurance expense, the increase in cash surrender value is subtracted from the annual premium because the net cost to the firm is the premium less the increase in that investment. The investment is property of the insured firm. The cash surrender value (an investment account) increased $21,000 during 20X5 ($108,000-$87,000). This increase is treated as a direct reduction in the current year's insurance premium. Therefore, insurance expense is $19,000 ($40,000-$21,000) for 20X5. What makes this question difficult is realizing that the dividends are not treated as a separate revenue; rather, they are treated as an offset against insurance expense. The reason is that the dividends are directly related to the policy. The investment aspect of whole life insurance is an integral part of the life insurance policy.

Answer 527

$210,000 The revenue recognized in 20X4 is $210,000, the difference between the proceeds of $300,000 and the surrender value. The build-up in surrender value has been recognized in previous years' earnings as a reduction in insurance expense. The increase in surrender value in any year is treated as a deduction from the premium in computing insurance expense for the year. Thus, of the $300,000, $210,000 has not been recognized in earnings before 20X4.

Answer 528

Perform a recoverability test on the carrying amount of the division's assets. Once the lowest level of identifiable cash flows is identified for a division or unit, the next step would be to test the recoverability of the carrying amount of the division's assets. This is done by comparing the fair value of the unit to the carrying amount to determine if further steps are necessary.

Answer 529

Any time during the fiscal year, provided that it is performed at the same time every year. For public business entities, goodwill is not amortized; rather, it is tested for impairment at least annually or when factors indicate a potential impairment. There is no requirement as to the timing of the impairment testing other than that the testing be completed at the same time every year.

Answer 530

Decline in the implied goodwill by using a discounted cash flow model. This is a quantitative measure of the implied goodwill. The question asked which of the responses is not a qualitative factor used in the pre-step for goodwill impairment. This response is incorrect also because implied goodwill is determined by comparing the fair value of the reporting unit to the fair value of the identifiable assets - not by using a discount model.

Answer 531

Perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. Goodwill impairment testing permits a qualitative "pre-step" test to determine if it is more likely than not that the goodwill is impaired. This pre-step can result in considerable savings to companies who do not have to complete the quantitative tests associated with testing and measuring goodwill impairment.

Answer 532

$7,191 With the information provided, goodwill can be computed directly as the present value of excess earnings. Goodwill is then added to the market value of net identifiable assets to yield the purchase price. Excess earnings is the difference between B's earnings and the expected earnings in B's industry for a firm the size of B, based on market value of net assets. Given B's size, B is expected to earn $350 per year (.10 × $3,500). Excess earnings = $900 − $350 = $550. Goodwill = present value of excess earnings = $550(6.71008) = $3,691. The implied purchase price = $3,500 + $3,691 = $7,191.

Answer 533

$5 The market value of Small's net assets is $6 ($9 − $3). Goodwill ($5) is the difference between the purchase price of $11 and the market value of Small's net assets of $6. Goodwill is the portion of the purchase price not attributable to identifiable assets.

Answer 534

$300 In general, goodwill is impaired when factors and circumstances indicate that the fair value is less than the current recorded value. This generally occurs when the market value of the unit previously purchased has declined because of economic factors and events. In this question, the market value of B has declined significantly in one year. Goodwill is re-estimated the same way that it was when B was purchased, as the difference between unit market value and the market value of net identifiable assets. The new value for estimated goodwill is $1,200 (= $3,200 − $2,000). The goodwill originally recorded is $1,500 (= $4,000 − $2,000 − $500). The impairment loss is the decline in goodwill, or $300 (= $1,500 − $1,200).

Answer 535

The other asset group should be tested for an impairment loss before goodwill is tested. When conducting goodwill impairment testing in a reporting unit, one must first determine the fair value of the identifiable net assets (assets minus liabilities). The fair value of the identifiable net assets is used to calculate implied goodwill to test recorded goodwill for impairment. The measurement of the fair value of the identifiable net assets is essentially measuring (and recognizing) any impairment in that asset group before the impairment testing for goodwill is completed.

Answer 536

A patent. The recoverability test is applied to definite-life intangible assets. The patent is the only definite-life intangible asset listed. The first step of the impairment test of a definite-life intangible is to compare the asset's book value (BV) to the recoverable cost. Recoverable cost is the sum of the net cash flows attributable to using the asset and from the ultimate disposal. If the BV is greater than the recoverable costs, then the asset is potentially impaired. The second step is to compare the BV to the fair value (FV). If the BV is greater than the FV, the asset is written down to FV. The impairment loss equals BV – FV. report a content error

Answer 537

Capitalize development costs.

Answer 538

Laboratory research Conceptual formulation and design of products or process alternatives Modification of current design Design, construction, and testing of preproduction prototypes and models Design of tools, jigs, molds, and dies involving new technology Design of a pilot plant

Answer 539

Engineering follow-through Quality control and routine testing Troubleshooting Adaptation of existing capability to customer's needs Routine design of tools, jigs, molds, and dies Legal work in connection with patent applications

Answer 540

Expense costs as incurred

Answer 541

Depreciation related to the time period is | included in R&D expense.

Answer 542

Expense research costs.

Answer 543

The entire cost is expensed as R&D | immediately.

Answer 544

The attempt to discover new knowledge aimed at the development of new products, services, processes, or techniques, or the significant improvement in an existing product.

Answer 545

They are capitalized and depreciated to R&D | expense.

Answer 546

Redesign of a product prerelease. Redesign of a product prerelease would be considered R&D because it is discovering new technology, process, or function of the product. Legal work on patent applications means that the research has reached technological feasibility and is no longer part of research and development (R&D) expense. At this point the R&D costs would be capitalized. Redesign of a product prerelease would be considered R&D. Routine design of tools, jigs, molds and dies are not discovery of new knowledge and not part of research and development (R&D). Redesign of a product prerelease would be considered R&D. Periodic design changes are not discovery of new knowledge and not part of research and development (R&D). Redesign of a product prerelease would be considered R&D.

Answer 547

Development or improvement of techniques and processes R & D is the pursuit of new knowledge and the translation of that knowledge to new products and processes. Improvement in techniques and processes is also "new" in that sense and is included in R & D. Natural resource activities are specifically excluded from the purview of R & D. Research performed for other parties is normal business for the firm doing the research. The activities are for the benefit of another party and as such are R & D to the receiving party but not for the party doing the work. Many firms do not have the expertise to perform research in all the areas they deem relevant to their business and employ other firms to do that work. The receiving firm records R & D expense; the firm performing the work ultimately records contract revenue and expense. Market research is specifically excluded from the list of activities constituting R & D under ASC 730 .

Answer 548

$650,000 The salaries for lab employees and the design, testing, and construction of the prototype qualify for classification of R & D.

Answer 549

$ 20,000 Under U.S. GAAP, all research and development costs are expensed as incurred. Therefore, the cost of equipment for current projects and the salaries would be expensed in the current year. The equipment that can be used in future years would be depreciated over its useful life. Depreciation expense reclassified as research and development would be $100,000 / 5 years = $20,000.

Answer 550

Expense all costs in the year incurred. Under U.S. GAAP, all research and development costs are expensed as incurred.

Answer 551

Capitalized and depreciated over its estimated useful life. Equipment that is used in research and development activities and has alternative future uses should be depreciated over its estimated useful life. During the time that the equipment is used for R&D activities the depreciation will be recorded as R&D expense.

Answer 552

$150,000 Research costs are associated with the discovery of new knowledge or the development of new products, services, processes or techniques. Development costs are the translation of the research into a plan or design. The costs included in R&D are $75,000 + 22,000 and the depreciation associated with the equipment used in R&D ($150,000 / 5 years = $30,000) and the R&D services paid to a third party $23,000 = $150,000. The receipt of payment from a third party is not netted against the R&D costs.

Answer 553

$1,015,000. R & D expense includes three of the four costs listed. Only routine design of tools, jigs, molds, and dies is excluded from R & D expense because it is not aimed at discovery of new knowledge or translation of knowledge into new products and processes or improvements in existing products and processes. The other three costs meet this definition of R & D expense and sum to $1,015,000. R & D expense includes the cost of R & D services performed by other firms. The cost to Vest is conceptually the same whether Vest's employees perform the research on facilities acquired by Vest or another firm provides the service. Either way, Vest is paying for R & D.

Answer 554

$41,000 Only the legal fees and other registration costs are capitalized to the patent account. These costs are paid to outside parties. The research and development costs are expensed under ASC 730. All research and development is expensed as incurred.

Answer 555

$285,000. Only the first two costs are research and development costs. R & D involves the search for new knowledge and translation of that knowledge toward new products and processes and improvements in existing products and processes. The first two items are listed in ASC 730 as being included in R & D. The last two are listed as specifically being excluded from R & D because they are routine activities or do not involve essentially new products and processes. The total R & D expense is therefore $285,000 ($125,000 + $160,000).

Answer 556

$1,380,000 The contract work performed for the government is not research and development expense to Ball but rather is normal contracting cost that will be applied against contract revenue in computing contract profit. Research and development for Ball includes efforts aimed at discovering and translating new knowledge toward new products and services that Ball will produce and market. All four costs in the question are included in research and development. The sum of $1,380,000 is the firm's research and development expense for 2005 ($300,000 + $700,000 + $200,000 + $180,000).

Answer 557

$460,000 Each of the costs is appropriately included in research and development. The sum of the three costs is $460,000 ($150,000 + $125,000 + $185,000). Each activity represented contributes either to the discovery of new knowledge or to the translation of that new knowledge. The last two costs listed are found verbatim in the ASC 730 list of items that are included in research and development. The first cost represents purchased services. When those services are for research and development, then they are included in this category of expense.

Answer 558

$525,000 All three listed costs are included in research and development expense. Their sum is $525,000. The first is the cost of payments to an outside party to perform R & D. This cost is as much R & D as internally incurred costs - their objective is the same. The second and third costs meet the definition of R & D costs incurred internally. R & D includes costs of efforts to discover new knowledge and to translate that new knowledge into new products, processes, and services.

Answer 559

Expense $1,100,000 as incurred. All costs related to research and development are expensed as incurred. The costs associated with developing and testing a prototype are considered research and development.

Answer 560

Expense as incurred.

Answer 561

Book value at beginning of year / Number of years remaining in product sales life at beginning of year

Answer 562

When the program model or working model of | the software is complete

Answer 563

Capitalize to inventory and expense as cost of | goods sold.

Answer 564

IFRS treats software costs the same as research | and development.

Answer 565

Capitalize as computer software costs and | amortize.

Answer 566

Expense as incurred.

Answer 567

$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.

Answer 568

$450,000 Costs incurred (after technological feasibility has been established) in developing software for sale, lease, or licensing are capitalized and subsequently amortized. Annual amortization is the greater of: 1. The percentage of expected total revenues earned during the period multiplied by total capitalized amount, OR 2. Straight-line amortization based on expected life. For reporting purposes, capitalized cost less accumulated amortization cannot exceed net realizable value. The calculation for Byte Co. for 2005 would be: 1. Percentage of expected total revenues = .10 × $600,000=$ 60,000 amortization 2. Straight-line = 1 year/ 4years = .25 × $600,000= $150,000 amortization The greater is $150,000, the amount to amortize for 2005. For reporting purposes: Capitalized cost = $600,000 Less: Amortization = 150,000 Net book value =$450,000 less than $480,000 net realizable value Since amortized cost is less than net realizable value, no further write down is required and Byte would report net capitalized cost at $450,000.

Answer 569

$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.

Answer 570

$6,050,000 There are three expenses to be recognized: (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.

Answer 571

I. and III. Both option I. and III. are the criteria for determining if the cloud computing arrangement contain a software license. Option II. is not a criterion for the cloud computing arrangement to contain a software license.

Answer 572

$59,000 Only software development costs incurred after the point of technological feasibility is reached are capitalized as an intangible and amortized. Technological feasibility is the point at which the firm makes the decision to continue the product development with the expectation that a workable product is possible. Costs of duplication and packaging are all product costs and, although capitalized, are debited to inventory rather than to software development costs. The capitalized software costs for this firm are: Other coding costs after establishment of technological feasibility $24,000 Other testing costs after establishment of technological feasibility 20,000 Costs of producing product masters for training materials 15,000 Total amount subject to amortization $59,000

Answer 573

$300,000 Research and development (R&D) costs are expensed until the point the project reaches technological feasibility, at which point the costs can be capitalized. Therefore, all costs prior to July 31 are expensed as R&D. This software coding and testing ($200,000 and $100,000) should be expensed as R&D.

Answer 574

Amortized cost or fair market value

Answer 575

Property, plant, and equipment Identifiable intangible assets Financial assets including investments and financial instruments

Answer 576

The recovery of an impairment loss is limited to the carrying value had the impairment not occurred.

Answer 577

Under U.S. GAAP, goodwill impairment is tested at the reporting-unit level. Under IFRS, goodwill impairment is tested at the cash-generating unit

Answer 578

The smallest identifiable group off assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets

Answer 579

The greater of fair value less cost to sell or value in use. The greater of fair value less cost to sell or value in use is the recoverable amount according to IFRS.

Answer 580

It is allowed when events and circumstances change. Under IFRS impairment losses associated with identifiable intangibles are recoverable. Impairment losses associated with goodwill are NOT recoverable.

Answer 581

The item is identifiable and lacks physical substance. IAS 38 defines an intangible asset as a nonmonetary asset without physical substance that is identifiable. Identifiable means that the asset is 1) separable or capable of being separated or divided from the entity and can be sold or transferred and 2) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity. This definition is essentially the same as under U.S. GAAP.

Answer 582

An active market exists for the intangible asset. An active market will provide a relevant and reliable reference to the assets value. Therefore, just like with PPE, revaluation to fair value is permitted. IAS 38 defines an active market as one that the items traded in the market are homogeneous, there are willing buyers and sellers, and prices are available to the public.

Answer 583

Capitalize Freight charges are directly connected with bringing the goods to the place of business of the buyer.

Answer 584

Capitalize Insurance charges are directly connected with bringing the goods to the place of business of the buyer.

Answer 585

Expense Only interest costs related to continued assets constructed for internal use or assets produced as discrete products for sale or lease should be capitalized. The informational benefit of capitalization does not justify the cost of the accounting for the interest as a product cost.

Answer 586

Capitalize Direct cost of bringing the equipment to the buyer.

Answer 587

Capitalize Direct cost of converting the equipment to a usable condition.

Answer 588

Expense Does not relate to bringing the equipment to the buyer or putting it into a usable condition.

Answer 589

False Intangible assets that have indefinite lives are not amortized.

Answer 590

True The recorded values of intangibles are impaired if they are above fair value.

Answer 591

False The impairment test for goodwill can be performed anytime during the year, but it must be performed at the same time every year.

Answer 592

False Interest earned on temporary investments from borrowed funds used to finance construction projects should be recognized as interest revenue and not netted against interest expense during the period.

Answer 593

False A company may not capitalize interest on funds borrowed to finance routinely produced inventory.

Answer 594

False Recognition of gain is required unless the transaction lacks commercial substance.

Answer 595

False Losses on nonmonetary exchanges are recognized.

Answer 596

False In a nonmonetary exchange, if the fair value is unknown and no gain can be computed, the asset is recorded at the book value of the asset given up.

Answer 597

False Capital expenditures are amortized over the useful life of the asset.

Answer 598

False Expenditures to improve capital assets should be capitalized.

Answer 599

$365,000 Correct. All deferred tax assets and liabilities are reported as noncurrent. The computation is: 80,000 + 300,000 − 15,000 = $365,000.

Answer 600

$900,000 The $50,000 advance is not related to accounts payable, even though it was made to a supplier for which Acme would have accounts payable. It is a prepayment. Removing the $50,000 debit increases the accounts payable balance by that amount. The $45,000 shipment is not part of the inventory of Acme as of December 31 nor is it a liability (accounts payable) because title to the goods did not transfer to Acme until January 2. FOB destination means that title does not transfer until goods reach their destination. Acme treated this item correctly because it was recorded January 2. Therefore, the correct accounts payable balance is $900,000 ($850,000 before adjustment + $50,000).

Answer 601

$286,000 This question requires you to think about how liabilities are accrued. If Hemple is holding funds for a mortgage company, it is a liability for Hemple. The liability would be increased when escrow monies are deposited and decreased when there is payment made on behalf of customers. The funds are also earning interest and 10% of that interest is charged as a maintenance fee to the customer. A T-Account will help demonstrate this: ``` Beg Bal $ 0 + Receipts 1,200,000 -Taxes 1,450,000 Interest + 40,000 10% - $ 4,000 ```

Answer 602

Accrued liabilities - Understated Retained earnings - No Effect Accrued liabilities are understated because the insurance costs were incurred but not paid. The firm has an obligation for coverage received. The omitted journal entry is: DR: Work in process CR: Accrued payables Retained earnings is unaffected because no expense has been incurred. The omission of the above entry has no effect on expenses or retained earnings. Work in process is an asset. When work in process is completed and sold, this part of the total cost of work in process will be expensed.

Answer 603

$990,000 The correct answer, $990,000, is the balance in the AP account at year-end, which equals: $900,000 (bal. before adjustment) + $50,000 (in transit, FOB shipping point) + $40,000 (checks not sent as of Dec. 31). The $50,000 amount is included in AP at 12/31 because the title passed to Kemp at 12/29. The title to goods shipped FOB shipping point passes to the buyer when the goods reach the common carrier. Therefore, Kemp owned the goods and incurred a liability on 12/29. The $25,000 amount is not included in AP at 12/31 because the title did not pass to Kemp until the goods reached the destination, which occurred after 12/31. The title of the goods shipped FOB destination passes to the buyer at the destination. The $40,000 amount is included in AP at 12/31 because the checks were not sent as of 12/31. Kemp did not extinguish this amount of its debt as of 12/31 and should make an adjusting entry to increase both cash and AP at 12/31.

Answer 604

$1,450,000 Preadjusted balance in accounts payable $900,000 Plus checks not sent to creditors until Jan. 10 (this amount was debited to accounts payable and must be reversed because the checks have not been sent - accounts payable has not been reduced as of December 31) 400,000 Plus goods received Dec. 28, at net: .98($153,061)(the firm records purchases at net of 2% discount) 150,000 Equals ending accounts payable $1,450,000 There is no liability at December 31, 20X4 for the goods shipped FOB destination because title does not pass until the goods reach the destination, which did not occur until January. The firm must include the Dec. 28 receipt of goods in accounts payable because the firm has received the goods.

Answer 605

Periodic payment of interest - No Secured by collateral - No Accounts payable is also labeled: accounts payable, trade. The accounts payable account is used only for routine trade payables, typically for purchases of inventory and supplies. Interest accrued is recorded in accrued interest payable, and secured debt is recorded in other specifically-labeled liability accounts.

Answer 606

$2,170,000 Preadjusted balance $2,200,000 Plus cost of goods in transit. The goods became the property of Kew at the shipping point (FOB shipping point). Kew owes the vendor for the goods. 40,000 Less credit for returned goods shipped back to vendor before year-end (70,000) Total accounts payable $2,170,000 The goods in transit FOB destination are not yet the property of Kew because the title does not pass until the goods reach the destination.

Answer 607

$13,475 Portion of the $500 advertising bill relating to December 20X2 $375 Lease rental ($1,200 × 1/2 of December) $600 Additional rental based on sales (.05)($550,000 − $300,000) $12,500 Total current liabilities $13,475

Answer 608

$65,000 ``` Accounts payable $19,000 Bonds payable, due 20X6 34,000 Discount on bonds payable (2,000) Dividends payable on 2/15/X6 5,000 Income tax payable 9,000 Current liabilities at 12/31/X5 $65,000 ``` Deferred taxes are classified as non-current.

Answer 609

$29,800 Only the discounts still available on accounts yet to be paid can be deducted from the accounts payable balance, which now stands at gross. The firm owes $30,000 at gross, which means that if none of the cash discounts available are taken, the firm will pay $30,000. The net counterpart of that amount is $29,800 ($30,000 − $200). If the firm pays all its remaining accounts within the cash discount period, it would pay only $29,800. That is the assumption underlying the net method.

Answer 610

$45,000 Each item in the list, except the notes payable, due more than one year from the Year 3 balance sheet should be included in current liabilities. Except the notes payable, each item is due within one year of the Year 3 balance sheet. The discount reduces the net bond liability. Thus, current liabilities total $45,000 = $15,000 + ($25,000 − $3,000) + $8,000.

Answer 611

$32,000 An analysis of the accrued interest payable account leads to the correct ending balance: Beginning balance + Interest expense - Interest payments = Ending balance $15,000 + $85,000 - $68,000 = $32,000

Answer 612

1. Present obligation to transfer assets or provide services. 2. The obligation is unavoidable. 3. Result of past transactions or events.

Answer 613

Normally recorded at face value

Answer 614

The represent outsider claims to a firm's assets or enforceable claims for services to be rendered by the firm.

Answer 615

The classification of this note is current.

Answer 616

Payable in services or nonmonetary assets

Answer 617

Prepaid property taxes

Answer 618

Account recognized for sales tax collected from | customers

Answer 619

$5,000 in sales tax payable The ending liability balance is calculated as follows: Beginning balance $4,500 Collections of sales tax ($800,000 × .05) 40,000 Less sales tax remitted (39,500) Ending balance $5,000

Answer 620

$ 50,000 Only the bonus is a liability of the firm as of 12/31/Year 1. That amount was earned and granted in Year 1 and thus is recognized in the Year 1 balance sheet because it is not due for payment until Year 2. Dividends are not liabilities until declared. There is no unpaid declared dividend at 12/31/Year 1.

Answer 621

$360,000 The partially secured creditors receive payment from the assets pledged for partially secured creditors. Any remaining claims fall under the unsecured non-priority category. The correct computation is: Free assets $320,000 Assets pledged with fully secured creditors $370,000 Less payments to fully secured creditors (260,000) Equals pledged assets available for unsecured claims 110,000 Total cash available for unsecured claims 430,000 Less priority claims (70,000) Equals amount available to pay unsecured non-priority claims $360,000 The partially secured creditors receive payment from the assets pledged for partially secured creditors. Any remaining claims fall under the category of unsecured non-priority.

Answer 622

Sales taxes - $39,000 Occupancy taxes - $8,200 Sales taxes payable at the end of 20X4 are .15($110,000 + $150,000) = $39,000 because November and December sales taxes were not yet paid as of 12/31/X4. Occupancy taxes payable are $2(1,100 + 1,200 + 1,800) = $8,200 because the fourth quarter taxes were not paid as of 12/31/X4.

Answer 623

$13,500 This question has two costs that occurred during the year. You are asked how much of these costs would be recognized in year 1. The $15,000 of maintenance cost is for a 1 year period beginning March 1. The maintenance cost would be allocated 1/12 evenly over the life of the service period or $1,250 a month × 10 months in year 1 = 12,500. The $5,000 modification to the software has increased its functionality and therefore should be capitalized and amortized over the life of the software $5,000 / 5 years = $1,000/year. The total expense recognized in year 1 would be $12,500 + 1,000 = $13,500.

Answer 624

State and federal unemployment taxes are paid | only by employer.

Answer 625

Federal Insurance Contributions Act (FICA) tax Medicare

Answer 626

Gross pay + Employer payroll taxes + Employer | portion of employee fringe benefits

Answer 627

The basis is accrual.

Answer 628

Benefits carry over to future periods although | there may be limits.

Answer 629

When it is probable that benefits will be paid, | and the amount is estimable

Answer 630

Sick pay benefits

Answer 631

Increase in expense in the period of payment

Answer 632

When not all earned benefits are expected to | be paid

Answer 633

$683,000. Total compensation expense should include the two adjusting items. Therefore, the total expense is $490,000 + $18,000 + $175,000 = $683,000. The two adjusting items are not included in the expense account balance because the adjustments have not yet been made. The accrued, but unpaid, salaries, as well as the bonuses, relate to 20X4. Officer bonuses are another form of employee compensation.

Answer 634

$31,500 The total vacation pay expense for 2005 is $31,500. This is the sum of two amounts: (1) the amount earned in 2005, plus (2) the increase in cost from earlier periods owing to wage increases in 2005. These two amounts are: (1) $30,000 as given in the problem; this amount is already updated for the most current rate (2) $1,500 = ($35,000 − $20,000).10 = the amount of vacation pay yet to be disbursed on benefits earned before 2005; the liability for this amount is increased by the 10% pay increase. The increase in pay rate on the pre-2005 benefits is treated as an estimate change. Therefore, it is handled in current and future years. Retroactive application does not apply in this case.

Answer 635

$6,200 This question asks for the ending payroll tax liability. This amount is the employer's share of FICA at 7% and the unemployment tax at 3%. Both have maximum wage limits. The $6,200 ending payroll tax liability is computed as $80,000(.07) + $20,000(.03).

Answer 636

$1,600 Only Ryan's vacation rights vest or accumulate and cause a liability to be reported. This amount is $1,600 (two weeks vacation × $800). Todd's rights do not vest or accumulate and therefore fail to meet the criteria of FAS 43. These criteria require accrual of the liability if the benefits accumulate or vest, the benefits are earned, and the payment is probable and estimable. Ryan's rights meet the criteria. From the firm's point of view, because Todd's rights do not vest or accumulate (carry over to a future year), then Todd loses those rights. The firm has no obligation to pay those benefits, and therefore no liability or expense is accrued at the end of 2005 for Todd.

Answer 637

Accumulated - YES Vested - YES When compensated absences either accumulate OR vest, then the liability should be accrued. Benefits accumulate if they can be carried over to future years. For example, assume an employee earns four weeks' vacation per year, but does not take a vacation for two years. If the employee can take an eight-week vacation in the third year, the benefits are said to accumulate (firms usually place restrictions on the total time that can be accumulated). Benefits vest if they are no longer contingent on continued employment. This means that if an employee retires, he or she will receive their vested vacation pay. Either way, through accumulation or vesting, it is probable that the vacation compensation will be paid. Therefore, a liability has been incurred as of the balance sheet date.

Answer 638

$15,000 The liability must be accrued only for the vacation pay, because it is probable that paid vacations will be taken. Therefore, the liability is $15,000 (150 days × $100 per day). The firm may, but is not required to, accrue a liability for sick days. If the employees were routinely paid for sick days not taken, then sick days would be required to be accrued. For this firm, there is no payment for sick days not taken, therefore there is no requirement to accrue this cost. It may be argued that illness is the condition that mandates payment of sick pay. Illness cannot be predicted and therefore is not required to be accrued.

Answer 639

$290,000 Both adjustments are included in compensation expense because they are costs of services rendered by employees in 20X4. The firm has incurred a liability and therefore an expense as of 12/31/X4 for each of these items. $290,000 = $224,000 + $3,500 + $62,500.

Answer 640

Accrued if attributable to employees' services already rendered. Only costs that are attributable to employee service already rendered can be accrued. The firm has received no benefit for services that employees have not yet rendered. The firm owes employees nothing for future services and therefore has no liability for these amounts and no cost or expense should be recognized.

Answer 641

$1,000 The wage limit on unemployment tax is $10,000. Thus, the total accrued liability, which is also the unemployment tax amount, is 5($10,000)(.02) = $1,000.

Answer 642

Prepaid property taxes

Answer 643

Depletion - $6,772,450 Accretion expense - $231,735 Asset retirement obligation beginning balance = [$6,000,000(.30) + $4,000,000(.70)](0.83962) = $3,862,252. This is the present value of the expected future cost of reclaiming the property. The risk-adjusted rate of return is used because the probabilities account for the uncertainty of the cash flow amounts. This beginning balance is added to the $30 million figure for a total of $33,862,252 capitalized depletion base. Depletion is 20% of that amount or $6,772,450. Accretion expense is the growth in the asset retirement obligation for the year or .06($3,862,252) = $231,735.

Answer 644

Liability -YES Depletion base - YES 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.

Answer 645

1 - $ 3.5 2 - $ 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.

Answer 646

Liability, $9,000,000; expense, $0 There is liability recorded for dismantling the platform on the day the asset is placed in service. At the time an obligation is probable and estimable, it is accrued as a liability. No expense is recognized at on the day the asset is placed into service. The accretion of the $9 million liability to $20 million is recognized as an expense over the assets 10-year life.

Answer 647

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.

Answer 648

Based on professional judgment, the probability of occurrence is considered to be very low or as the word implies, remote.

Answer 649

Based on professional judgment, the probability of occurrence is considered very high or a near certainty.

Answer 650

An existing condition (at the balance sheet date) involving uncertainty as to a possible gain or loss that will be resolved when a future event occurs or fails to occur

Answer 651

Record loss and liability. If only a range is estimable, must recognize the liability for the lowest amount in the range

Answer 652

Can be disclosed in footnotes but is not | required

Answer 653

Probable Reasonably possible Remote

Answer 654

Disclose in footnotes

Answer 655

Disclose in footnotes.

Answer 656

Based on professional judgment, the probability of occurrence is neither very high nor remote.

Answer 657

The liability should only be disclosed in the notes to the financial statements. A loss that is probable to occur but cannot be reasonably estimated is disclosed in the notes to the financial statements.

Answer 658

$88,000 The beginning warranty liability in year 1 is $100,000 (1,000 units × $100) less the first year warranty costs of $12,000, equals the first year ending balance $88,000.

Answer 659

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.

Answer 660

$0 A contingent liability is recognized only when occurrence is probably and estimable. This class-action suit is reasonably possible (a 50/50 chance) but not probable (a higher threshold). Therefore, a liability for the class-action suit would not be accrued. Contingent assets are not recognized until the amount is actually received, even if the outcome is probable and estimable. Therefore, no asset is accrued for the suit where Martin may be awarded damages.

Answer 661

$35 million Under U.S. GAAP, impairment testing is a two step process. The first step compares the assets' carry value (CV) to its undiscounted cash flows (UCF). In this problem the CV > UCF; therefore the asset is potentially impaired and we must go to the second step. The second step compares the assets CV to its fair value (FV). In this problem the FV < CV and the asset is written down to its FV. $170 million − $135 million = $35 million impairment loss.

Answer 662

Disclosed but not accrued as a liability. A reasonably possible loss contingency is disclosed in the footnotes, but not recognized as a liability. Only when the contingent loss is both probable and estimable is the loss accrued (recognized).

Answer 663

$120,000 Warranty expense is recognized in the year of sale under the accrual accounting system. Warranties are a part of the selling effort, and the associated expense should be recognized when the liability is probable and estimable (in 2005). The actual repairs reduce the liability recognized when the expense was recorded (in the year of sale). The $120,000 of warranty expense in 2005 = .04(sales in 2005) = .04($3,000,000). The relevant entries for 2005 are: Warranty expense 120,000 Warranty liability 120,000 Warranty liability 67,500 Cash, parts, etc. 67,500

Answer 664

Reasonably possible. Remote contingent losses may be disclosed in the footnotes, but there is no requirement to do so. Probable contingent losses are accrued. Certain losses are no longer contingent losses. When a loss is reasonably possible, it is footnoted. It is most likely that the loss is reasonably possible when a range of losses is disclosed.

Answer 665

$14,250 At Dec. 31, 2005, the total warranty liability accrued for the two years is 6% of sales (2% + 4%). This total is $24,000 (.06 × $400,000). Subtracting $9,750 of actual warranty expenditures to the end of 2005 yields the $14,250 ending warranty liability.

Answer 666

$ -0- This is a gain contingency. These items are not recognized in the financial statements until the contingency is removed. Thus, no income is recognized in 2003.

Answer 667

Asset - $ 0 Liability - $ 0 The contingent liability at the end of 2003 no longer exists. It is not probable, given the facts in the question, that Halsey will be required to make any payment in the lawsuit. The favorable judgment indicates a contingent gain (asset). Contingent gains are not recognized in the accounts, but only footnoted.

Answer 668

In note disclosure only. This is a gain contingency. Gain contingencies are footnoted at most, not accrued. To recognize gain contingencies in the accounts would violate the conservatism constraint.

Answer 669

Conservatism. A contingent loss has not occurred as of the balance sheet date, but since it is probable and estimable, and would result in lower income and net assets, the loss should be recognized. A contingent gain that also is probable and estimable is not recognized. Thus, it is only the direction of the effect of the item that causes the accounting treatment to be different. This can only be explained by conservatism: under conditions of uncertainty, report lower earnings and net assets. Uncertain gains are not allowed to be recognized because they may raise the expectations of investors unnecessarily. Uncertain gains may not be realized.

Answer 670

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.

Answer 671

Fair value, with holding gains and losses included in earnings. Trading securities are debt securities purchased and held principally for the purpose of generating gains on resale. Trading securities should be reported on the balance sheet at fair value, with holding gains and losses included in earnings.

Answer 672

Securities that represent the right of the holder to receive from the issuer a principal amount at a specified future date and to receive interest as payment for providing use of funds A debt security provides the right for the holder to receive principal and interest from the issuer.

Answer 673

Unrealized gains and losses related to available-for-sale securities are reported in earnings. This response is not true. Only debt securities can be classified as trading, available-for-sale, or held-to-maturity; equity securities cannot be placed in one of these classifications. The unrealized gains and losses of available-for-sale securities are recorded in OCI.

Answer 674

$400,000 This answer is correct because an enterprise's financial statements should not be adjusted for changes in market prices with respect to marketable equity securities when such changes occur after the date of the financial statements but prior to their issuance. The question does not indicate the level of economic influence of these holdings. However, equity securities should be reported at fair value whenever it is readily determinable. Thus, the fair value at 12/31/Y1 of $400,000 is reported.

Answer 675

$300,000. Grade Company will account for this investment at fair value. This method is used because fair value is readily determinable and Grade owns less than 20% of Medium and cannot exercise significant influence over the company.

Answer 676

a credit to gain on the sale of investments for $15,775. The entries related to the investment in Pear are as follows: DR: Investment in Pear 150,000 CR: Cash 150,000 (to record the purchase of Pear ($25 × 6,000) DR: Cash 2,400 CR: Dividend income 2,400 (to record dividend income ($0.40 × 6,000)) DR: Cash 115,775 CR: Investment in Pear 100,000 CR: Gain on sale 15,775 (to record the sale of 4,000 shares of Pear at $29 per share) Cash = (($29 × 4,000) – 225 = 115,775) Investment in Pear = ($25 × 4,000 = 100,000) Gain = (115,775 – 100,000 = 15,775)

Answer 677

Change in market value of investee's common stock - No Cash dividends from investee - No Under the equity method of accounting, changes in the market value of the investee's common stock are ignored. Further, cash dividends received by the investor from the investee are not recognized as investment income; rather they are recognized as a debit to cash and a reduction in (credit to) the investor's investment in investee account.

Answer 678

$ 75,000 Anchor Co. would report 75% of Main's dividend on its noncumulative preferred stock as dividend income. That calculation would be: .75 × $100,000 = $75,000. Anchor Co. would not report 40% of Main's dividend on its common stock as dividend income because, since it can exercise significant influence over Main's operations, it must account for its common stock investment in Main using the equity method of accounting. Under the equity method, common stock dividends received from an investee are recognized as a reduction in the investment in the investee. So, Anchor's entry to recognize the $80,000 (.40 × $200,000) common stock dividend from Main would be: DR: Cash $80,000 CR: Investment in Main $80,000

Answer 679

$12,000 $12,000 = .30($40,000). Under the equity method, the investor recognizes its share of investee earnings in its own income. The equity method is used because Lee has significant influence over Polk.

Answer 680

$42,000 This is a question on the full equity method. Goodwill on the purchase = price of investment - 40%(fair value of Adams' net assets) = $400,000 -.40($900,000 + $90,000 + $10,000) = $400,000 - $400,000 = 0 (there is no goodwill to amortize) Investment income: 40% of Adams' income: .40($120,000) $48,000 Less 40% of excess of fair value of inventory over book value at acquisition. The inventory is sold, and therefore, the cost of goods sold of the investor must be increased by this amount: .40($10,000) (4,000) Less depreciation on 40% of the excess of fair value over book value of equipment: .40($90,000)/18 (2,000) Equals amount Sage reports as investment income $42,000

Answer 681

The total receivable should be disclosed separately. Although the equity method is often called a "one-line" consolidation, intercompany receivables remain separate from the investment account. Intercompany profit or loss is eliminated but that affects the income recognized by Pulham, not the receivable.

Answer 682

$200,000 Once the investor has acquired a sufficient percentage of the stock to use the equity method, it is prospectively applied. In this question, the equity method becomes the required method only at the very end of the year, and Pare would begin applying the equity method beginning on December 31. The ending balance of the investment account is: $50,000 (original investment) + $150,000 (second investment).

Answer 683

$70,000 The loss realized from an other-than-temporary decline in the market value of available-for-sale securities is measured as the difference between their cost and market value on the balance sheet date of the reporting period for which the assessment is made. 1/10/Y1 Carrying value 5,000 shares × $60 = $300,000 12/31/Y1 Market value 5,000 shares × $46 to be recognized = 230,000 Realized loss to be recognized $ 70,000

Answer 684

$60,000 The amount by which an available-for-sale (AFS) portfolio's aggregate carrying value exceeds its fair value should be recognized as an unrealized loss and shown as other comprehensive income. Note that at the end of each year, the unrealized gain (loss) is closed to accumulated other comprehensive income, not retained earnings. In future years, the portfolio's aggregate fair value increases, the unrealized loss is removed from the accumulated other comprehensive income account, and eventually an unrealized gain may be established. Lark Corp's journal entries for Year 1 and Year 2 were ``` Year 1: Unrealized loss on AFS 20,000 Investment in AFS 20,000 Year 2: Investment in AFS 60,000 Unrealized gain in AFS 60,000 ``` Therefore, the unrealized gain (loss) account would increase by $60,000 in Year 2 for the recovery in fair value of the previously recognized unrealized loss of $20,000 in Year 1 plus the additional $40,000 increase in fair value above cost.

Answer 685

$ 1,000. Since these equity securities were not purchased with the intent to sell them in the near term for a quick profit, they must be classified as available-for-sale securities. Any unrealized gain or loss on available-for-sale securities is to be reported net as a separate component of stockholders’ equity entitled “Accumulated other comprehensive income.” However, in the case of impairment, the security is written down to fair value and the amount of the write-down is reported in earnings as a realized loss. Thus, the $10,000 loss on Security B would go to the income statement while the $1,000 ($3,000 loss on A − $2,000 gain on C) unrealized loss on the remaining portfolio would appear separately in the stockholders’ equity section of Anthony's balance sheet at 12/31/Y1.

Answer 686

$150,000 Since these securities were not purchased with the intent to sell in the near term for a quick profit, they must be classified as available-for-sale securities. A realized gain on the disposal of such securities equals the excess of the proceeds (5,000 × $100 = $500,000) over the carrying value before recognition of any unrealized gains or losses (which equals cost) of the investment [5,000 × $70 = $350,000]. Therefore, the realized gain is $150,000 ($500,000 − $350,000). Note that the tax rate (40%) is not used; components of income from continuing operations are reported gross with income tax expense deducted from the total income from continuing operations.

Answer 687

North - YES South - NO East - NO North is the investee because it issued the bonds, but neither South nor East is an investee. Since East owns the bonds on December 31, it is the investor. Since South did not issue the bonds and does not own the bonds on December 31, it is neither an investor nor an investee.

Answer 688

$4,500 and $600 Hilltop purchased the bonds on July 1, so it should recognize interest receivable and bond amortization only for the last 6 months of the year. The interest receivable (cash interest to be received) for a half-year is ($100,000 × 9% × 6/12) = $4,500. The bond discount is $100,000 – $95,200, or $4,800. Since the bonds will be outstanding 48 months from the date of purchase, the bond discount amortization for the 6 months of Year 7 in which Hilltop held the investment is ($4,800 × 6/48) = $600.

Answer 689

$461,820 Held-to-maturity investments should be reported at amortized cost on the balance sheet. The carrying value of long-term investments on December 31, Year 1, will be the carrying value on January 1, Year 1, plus the discount amortization. Discount amortization is the difference between interest revenue and interest receivable. Interest revenue is the book value of the bonds times the yield rate of interest ($456,200 × .10 = $45,620). Interest receivable is the face value of the bonds times the face rate of interest ($500,000 × .08 = $40,000). The adjusting entry on December 31, Year 1, will be Interest receivable 40,000 Bond investment (long term) 5,620 Interest revenue 45,620 Thus, the carrying value of the bonds on December 31, Year 1, is $461,820 ($456,200 + $5,620). The above entry assumes that the bonds were recorded net when purchased. If a discount of $43,800 was recorded, the $5,620 debit would be to the discount account.

Answer 690

$8,000 Unrealized losses on trading securities are reported in the income statement. The amount of the unrealized loss at 12/31/Y2 is determined by comparing the total carrying value of the portfolio at 1/01/Y2 to its total market value at 12/31/Y2. The carrying value at 1/01/Y2 is its cost of $132,000 ($24,000 + $36,000 + $72,000), and the market value at 12/31/Y2 is $124,000 ($26,000 + $33,000 + $65,000). Therefore, $8,000 total unrealized loss on trading securities is recognized in income. The unrealized gain or loss on trading securities on the date that they are transferred from that category will have already been recognized in earnings and shall not be reversed.

Answer 691

Row C There is a readily determinable fair value for Red Banner, and there is no significant influence. Therefore, Red Banner is accounted for at fair value. The investment in Star is accounted for using the equity method, and it is not adjusted for changes in the fair value of the stock. Therefore, an increase in the fair value of Red Banner would require an increase in the investment, and there is no effect on the investment in Star under the equity method.

Answer 692

The fair value at date of transfer, regardless of its cost. Any transfer of securities between categories of investments should be accounted for at fair value. In addition, any unrealized holding gain or loss on securities transferred from available-for-sale to held-to-maturity continues to be reported as "Accumulated other comprehensive income" in stockholders’ equity but is amortized over the remaining life of the security.

Answer 693

Available-for-sale - YES Held-to-maturity - YES Realized gains and losses shall be included in the determination of net income of the period in which they occur for both available-for-sale and held-to-maturity securities.

Answer 694

Decreasing annual insurance expense. A portion of the premium is allocated to the cash surrender value, which is an asset to the insured firm. Thus, the insurance expense is reduced by the amount of the premium so allocated. For example, if the annual premium is $4,000, and the increase in cash surrender value is $800 for the year, insurance expense is $3,200 for the year.

Answer 695

25 years This copyright has a definite life; the question is what is the length of that life? The life assigned to the intangible asset is the shorter of its legal and useful life. The useful life is shorter than the legal life, so this copyright is amortized over 25 years.

Answer 696

$14,000 The shorter of the lease term and useful life of the leasehold improvements is used for amortization because leasehold improvements revert to the lessor at the end of the lease term. A 10-year lease term is used because renewal is uncertain. The leasehold improvements were capitalized at the beginning of 20X5. Annual amortization (and therefore amortization for 20X6) is $14,000 ($47,000 + $75,000 + $18,000)/10. Ten years is used for each asset because each has a useful life of at least 10 years and the lease term is 10 years as of the beginning of 20X6. The assets cannot be amortized over a period greater than 10 years because the lease will be concluded in 10 years.

Answer 697

Decrease goodwill by $13,000. Under IFRS goodwill impairment is measured in a one-step process. The carrying value of the CGU is compared to the recoverable amount. If the CV > recoverable amount the goodwill is impaired. The impairment loss is the recoverable amount - the CV. In this case $32,000 − $45,000 = ($13,000) loss.

Answer 698

$34,000 Only the last two costs in the list are inventoried. The software development is complete when the product masters are produced. The duplication costs ($25,000) and packaging costs ($9,000) are debited to inventory for a total of $34,000. These are costs necessary to bring the asset into salable condition. This cost is expensed when product is sold. All the costs listed above the last two are aimed at developing the software. These costs are not debited to inventory. There is no product in which to inventory these costs until the development is complete.

Answer 699

Disclose in a footnote.

Answer 700

Additional loss in the period of lawsuit resolution (estimated loss was recognized previously)

Answer 701

Disclose in a footnote.

Answer 702

Unasserted claim

Answer 703

Premium liability

Answer 704

Year of sale

Answer 705

Disclosing in a footnote is not recommended

Answer 706

Disclosed only. In the interest of conservatism and disclosure, the guarantee should be disclosed. It is not required to be accrued because the probability is remote that the firm will have to pay the note.

Answer 707

As a footnote disclosure indicating the possible loss of $250,000. This contingent liability is not probable but only reasonably possible. Only probable contingent liabilities are accrued. Reasonably possible contingent liabilities are footnoted. The estimated loss is only $250,000 because the policy easily covers the estimated loss. Only the deductible of $250,000 would have to be paid by Sims.

Answer 708

$ -0- This is a gain contingency. Gain contingencies are not accrued in the accounts. At most they are footnoted. This is an example of conservatism. Probable and estimable contingencies are recognized in the accounts if they are losses, but not if they are gains.

Answer 709

An increase in both expenses and liabilities. The information about self-insurance (which means no insurance) is irrelevant to the problem except that if the firm loses the lawsuit, there will be no insurance coverage. This is a contingent liability. It is probable, and the amount is estimable. Therefore, expenses (or a loss) and a liability are recognized for $190,000.

Answer 710

Dollis' gain - 2004 Brooks' loss - 2003 Both the gain and loss are contingent items at the end of 2003. Contingent losses are recognized when probable and estimable—2003 in this case. Contingent gains are not recognized until realized— 2004 in this case.

Answer 711

In the notes to the financial statements. This is a gain contingency. The possible gain is the difference between the compensation amount and the carrying value of the plant. However, the gain is contingent on receipt of the compensation. Gain contingencies are reported only in the notes and are not recognized in the financial statements.

Answer 712

$400,000 When a contingent loss is both probable and estimable, it must be accrued. When only a range of amounts can be estimated, rather than a point estimate, the lowest amount in the range is accrued. In this case, the low end of the range is $400,000, and that amount is accrued. The footnotes will describe the entire range to indicate the firm's maximum exposure to loss. The actual settlement offer amount was unknown before the statements were issued.

Answer 713

Disclosure by footnote only. Contingent gains are gains that are dependent on the outcome of a future event. This is a contingent gain because the outcome of the suit is not yet known. Contingent gains are not recognized in the accounts, but rather are footnoted at most.

Answer 714

$ -0- This is a contingent asset or gain. Contingent assets are not recognized in the accounts. This is a classic case of conservatism. If all the data were the same except that a loss was expected, a loss would be accrued in the accounts.

Answer 715

As a disclosure of a contingent gain of an undetermined amount in the range of $75,000 to $150,000. Contingent gains are not recognized in the accounts. At most, footnote disclosure is considered acceptable reporting. This is the best answer because no amount in the range of possible values is more likely than any other. The $100,000 amount was not known when the financial statements were published.

Answer 716

$250,000 The retooling costs are not part of the liability, but are rather a response to changing business conditions. They most likely would be capitalized and amortized over their useful life. The liability is a contingent liability. The amount depends on the outcome of the bankruptcy proceedings. When a range of values is estimated with no one value being more probable than the others, the lowest amount is accrued. Thus, $250,000 is accrued as of the end of 2004.

Answer 717

Midpoint of the range

Answer 718

Greater than 50%

Answer 719

Warranty liability | Premium liability

Answer 720

Liability that is uncertain in terms of timing and | amount but is not of uncertain existence

Answer 721

They are not recognized.

Answer 722

A provision that has a reasonably possible chance of requiring the outflow of benefits is treated as a contingent liability. A provision is a present obligation. This is one of the ways a liability can be treated as a contingent liability under international standards. If the provision involved a probable outflow, then it would be recognized, but would not be a contingent liability.

Answer 723

Obligation to provide rebates to customers, 90% probability of occurring. For international accounting standards, this is a recognized provision. For U.S. standards, it is a recognized contingent liability.

Answer 724

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.

Answer 725

International - 40 U.S. - 20 International accounting standards recognize the midpoint, whereas U.S. standards recognize the low point.

Answer 726

Face value divided by the annuity factor for the | term of the note and the stated rate on the note

Answer 727

Product of the effective rate at date of issuing the note and the principal balance at the beginning of the period

Answer 728

The yield rate is less than the stated rate.

Answer 729

The amount of interest revenue recognized | over the term of the note

Answer 730

Product of the effective rate at date of issuing the note and the principal balance at the beginning of the period

Answer 731

1. Time period is usually extended. | 2. Notes have an interest element.

Answer 732

Installment notes, and when the yield and | stated rates are greatly different

Answer 733

1. Gross method | 2. Net method

Answer 734

Total payments less amount borrowed

Answer 735

Present value of remaining cash flows | discounted at the effective rate

Answer 736

Present value of the face amount discounted at | the yield rate on the note

Answer 737

1. Effective interest method | 2. Straight-line method

Answer 738

The yield rate is greater than the stated rate.

Answer 739

Face value less unamortized discount

Answer 740

Product of the periodic payment and the annuity factor for the term of the note and the yield rate on the note

Answer 741

A note in which the interest element is explicitly | stated

Answer 742

$ 4,875 The interest payable is comprised of the following: $100,000, 12% note (100,000 × .12 × 3/12) $3,000 $75,000, 10% note (75,000 × .10 × 3/12) 1,875 $4,875 There is no interest accrued on the noninterest bearing note because it is for less than one year.

Answer 743

$758,300 The first payment included interest of $22,500 (.09 × .25 × $1,000,000). Note that interest rates are always expressed for an annual period. Only 25% of year elapsed from Sept. 30 to the end of the year. The rest of the payment ($241,700 = $264,200 − $22,500) is principal. The note payable balance at Dec. 31 therefore is $758,300 ($1,000,000 − $241,700). Expanded explanation: The note payable has a stated interest rate of 9%, payments are made quarterly, first payment was issued after 3 months on December 30 in the amount of $264,200, and the question is asking for the note payable amount to be recorded on the balance sheet on December 31 of the same year. The payment made on December 30 is part interest, part principal. The amount to be recorded on the balance sheet on December 31 is principal only. Interest for quarter 1 = $1,000,000 × 9% × ¼ = $22,500 Payment of $264,200 = $22,500 interest + x principal Solve for principal amount = $241,700 Remaining note to be shown on balance sheet on December 31 is $1,000,000 ‒ $241,700 principal payment = $758,300 The next payment would be calculated in a similar manner; however, interest would be paid on the remaining principal balance of $758,300.

Answer 744

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%.

Answer 745

$30,000 The $30,000 answer is correct and equals ($1,200,000 − $400,000)(.15)(3/12). On 10/1/year 2, the first $400,000 principal payment was made. That left $800,000 of principal balance remaining on 10/1/year 2. The interest on that amount is computed as shown above.

Answer 746

$94,240 The note payable balance at the end of 2005 is the present value of a $20,000 ordinary annuity for seven periods. The first payment reduced the liability immediately by the amount of the payment because it was due at the date the liability originated. The remaining seven payments begin one year from the December 31, 2005 balance sheet, making the annuity an ordinary annuity. Thus, the liability balance on that date is: $20,000(4.712) = $94,240.

Answer 747

$15,000 Bankruptcy law specifies that secured creditors are to be satisfied before any assets are paid to unsecured creditors. Hale is a secured creditor for the $5,000 liquidation value. A liquidation value is paid at the liquidation of the firm and thus acts as a secured debt. The remaining claim of $25,000 ($30,000 − $5,000) is unsecured and at the 40% rate yields an additional claim of $10,000, for a total amount to be realized of $15,000.

Answer 748

$180,000 On October 1, 20X3, the first payment was made. This payment included all interest due to that point, as well as the first $1,200,000 principal payment. Thus, on that date, the liability balance is $2,400,000 (the remaining two principal payments). June 30, 20X4 is 9 months after this first payment date. The accrued interest for 9 months is $180,000 = $2,400,000(.10)(9/12).

Answer 749

$540 First loan: Interest expense included in the $1,500 = $5,000(.12) = $600 Interest expense that should have been included in 20X5 interest expense = $5,000(.12)(10/12) = 500 Overstatement of 20X5 interest expense = $100 Second loan: (no error because the term is completely within 20X5 so the interest recognized equals the interest paid) Third loan: Interest expense included in the $1,500 = $0 (the loan and therefore the interest was not paid in 20X5) = 0 Interest expense that should have been included in 20X5 interest expense = $8,000(.12)(8/12) = 640 Understatement of 20X5 interest expense = $640 Net understatement = $540

Answer 750

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.

Answer 751

12/31/X4 retained earnings - No 12/31/X4 interest payable - YES Interest expense on notes should reflect the market interest rate at the date of issuing the note. This firm is recording interest expense at the 16% stated rate rather than the 11% market rate. Thus, interest expense is incorrectly recorded. Also, the merchandise and note should have been recorded at the present value of the note using the market interest rate. Thus, cost of goods sold is incorrectly measured. The result of these two effects is that income and retained earnings are misstated. However, interest payable reflects the stated rate which determines the cash amount to be paid. Interest payable is correctly stated.

Answer 752

$36,000 Although the question is not completely clear, interest is paid at the time each principal payment is made. Thus, on 9/1/X4, after the principal payment of $450,000 (and interest as well) is made, the remaining note balance is $900,000 ($1,350,000 − $450,000). Note that only the principal payment reduces the note balance. Interest for four months to 12/31/X4 is recorded in accrued interest payable: $36,000 ($900,000 × .12 × 1/3 year).

Answer 753

Imputed interest on noninterest-bearing note A noninterest-bearing note actually causes interest to be paid by the maker. The term noninterest-bearing means that the note carries no stated rate of interest. The face value of the note includes interest however, and exceeds the principal amount of the note (the amount borrowed). For example, a firm might borrow $4,000 and sign a $5,000 noninterest-bearing note. When the firm pays the $5,000 at maturity, it will be paying $1,000 in interest. The term "imputed" interest means that in computing interest expense, the amount of interest implied in the note (difference between face value and principal) is used to compute the interest rate for recognizing interest expense over the term of the note.

Answer 754

$2,320 The accrued interest covers the period from the borrowing to 12/31/X5 because no interest has yet been paid. The interest is also compounded (this is a stumbling point easily missed). The 20X5 ending balance in accrued interest payable therefore includes interest on 20X4's accrued interest: 20X4: $10,000(.12)(10/12) $1,000 20X5: ($10,000 + $1,000)(.12)(12/12) 1,320 Total accrued interest payable, December 31, 20X5 $2,320

Answer 755

1. Initially recorded at the present value of future cash flows. 2. Interest and amortization are recognized at the market interest rate on the date the liability was established. 3. Interest expense equals the liability balance at the beginning of the period times the market rate of interest the date the liability was recorded.

Answer 756

A financial debt instrument that typically calls for the payment of periodic interest (although a zero-coupon bond pays no interest), with the principal being due at some time in the future

Answer 757

The first possible issuance date

Answer 758

The date the bonds are actually issued

Answer 759

The date the maturity value is paid, the end of | the bond term

Answer 760

Bonds that have a claim to specific assets

Answer 761

Bonds that mature at regular or staggered | intervals

Answer 762

When stated rate > market rate

Answer 763

When stated rate < market rate

Answer 764

Effective interest method

Answer 765

Face value of the bonds at the beginning of the period by the contractual interest rate. The amount of interest paid each period on a bond issue is the product of the total face value and the contractual rate. A 4%, $1,000 bond pays $40 interest per year, for example. This answer is the same regardless of the amortization method used.

Answer 766

$360,000 The carrying value of the bonds after the first interest payment is $363,600 which reflects $3,600 of discount amortization. Because discount amortization increases the carrying value of the bond by reducing the discount, the carrying value (and amount received at issuance) must have been $3,600 less or $360,000 ($363,600 − $3,600). As discount is amortized, the carrying value gradually increases to the maturity (face) value over the bond term.

Answer 767

$21,247 Interest expense = $354,118(.12/2) = $21,247 The yield rate is applied to the beginning book value of the bonds. The interest expense is for 1/2 a year. This requires that 1/2 of the yield rate be applied. The beginning book value is used because that is the debt 6 months before the interest is recognized. Interest is defined as the true yield rate multiplied by the debt balance at the beginning of the interest period.

Answer 768

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.

Answer 769

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.

Answer 770

$388,000 The net book value of the bonds on the issuance date is $388,000 (.97 × $400,000). The three months of accrued interest collected on issuance increases the proceeds but does not affect the net bond liability. Accrued interest is reported separately from the net bond liability.

Answer 771

Price. The bond price is the present value of the future cash payments to be paid by the issuer over the bond term. These payments are (1) the face value paid at maturity and (2) the interest payments. Each interest payment is the product of the coupon rate for the appropriate portion of a year (usually six months) and the face value. The stream of interest payments is an annuity. Both the single payment (face value) and the annuity are discounted at the yield or market rate of interest. The result is the bond price.

Answer 772

$807 The issue price for one $1,000 face value bond is the present value of all future payments discounted at the yield rate of 9%. Issue price = $1,000(.422) + .06($1,000)(6.418) = $807

Answer 773

$90,064 The bonds were issued at a discount because the market interest rate exceeds the stated rate. The net liability at the end of year 1 reflects the issue price at the beginning of the year plus the discount amortization for year 1. Discount is a contra bond payable account. When it is amortized, the contra account is reduced, thus increasing the net bond liability. The bond price is $100,000(.68058) + .05($100,000)(3.99271) = $88,022. Interest expense for year 1 is .08($88,022) = $7,042. The journal entry for the first interest payment is: dr. Interest expense 7,042; cr. Discount 2,042; cr. Cash 5,000. Net liability at end of year 1 = $88,022 + $2,042 = $90,064.

Answer 774

$23,709 The initial balance of the premium is $28,700 ($728,700 issue price – $700,000 total face value). The premium balance is a credit because the premium is an adjunct account adding to the total bond liability. The journal entry for the first interest payment is: Debit: Interest expense 728,700(.07) 51,009 Debit: Premium (derived amount) 4,991 Credit: Cash 700,000(.08) 56,000 The debit to the premium is a reduction in the balance. The firm recognizes less interest expense than the amount paid because the premium is not returned to the bondholders. The issuing firm pays only face value at maturity. The balance in the premium account after this payment is $23,709 (= $28,700 – $4,991).

Answer 775

Number of months between the most recent | interest payment date and the date of issuance

Answer 776

The costs of printing, registering, and | marketing the bonds

Answer 777

The are treated as a direct reduction from the debt carrying value and amortized to interest expense over the term of the bonds.

Answer 778

Rate listed on the bond and used to calculate | accrued interest and cash interest payments

Answer 779

Period of time from issuance date to maturity | date

Answer 780

The sum of the bond price and any accrued | interest

Answer 781

$304,500 The amount received is the price of the bonds plus interest from April 1, the bond date, to July 1, the issue date: Amount received = .99(300)($1,000) + .10(3/12 year)(300)($1,000) = $304,500 The second term in the above calculation uses 3/12 of a year, which is the portion of a year between April 1 and July 1.

Answer 782

Seven months. The bonds have been outstanding seven months by the end of year 1. The firm has borrowed money for seven months. Therefore, seven months' interest should be recognized in year 1. Only six months of interest was PAID in year 1 because the bonds were issued after April 1 (one of the two interest payment dates per year), but that is not what the question asks.

Answer 783

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

Answer 784

$9,000 The interest payable is for the period July 1-September 30 (Year 4), a three-month period, or 1/4 of a year. Thus, the accrued interest payable is $9,000 ($300,000 × .12 × 1/4). The interest payment on June 30 paid all accrued interest to that date.

Answer 785

Seven months. Interest expense is recognized only during the bond term, which began June 1 when the bonds were issued. The bonds were outstanding 7 months in 20X5. Seven months of interest is recognized in 20X5.

Answer 786

$185,000. Legal and accounting fees $ 45,000 Printing of the prospectus 55,000 Underwriting fees 85,000 Total bond issue costs $185,000 Bond issue costs are those costs incurred to facilitate the issuance of the bonds. All of the above costs contribute to that effort.

Answer 787

$240 There are four years and seven months in the bond term (5 years less the 5 months from April 1 to August 31) or a total of 55 months. Thus, the 20X5 amortization of bond issue costs, is $240 [(4/55)$3,300]. The bonds were outstanding four months in 20X5.

Answer 788

$24,000. As of 12/31/Year 2, the first $300,000 principal installment has been paid, along with interest. This payment was made 9/1/Year 2. The remaining principal outstanding on that date is $600,000 ($900,000 − $300,000). Thus, accrued interest on 12/31/Year 2 is $24,000 = 600,000(.12)(4/12).

Answer 789

$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).

Answer 790

$16,000 One month of accrued interest was collected from the bondholders at issuance for the period October 1—November 1, and interest for the next two months to December 31 was accrued. Total accrued interest is $16,000 = $800,000(.08)(3/12).

Answer 791

$209,500 The total proceeds on the bond issue equal the total bond price plus accrued interest. The latter amount is the cash interest between the bond issuance date (April 1, 20X4), and the most recent interest payment date before the bond issuance date (November 1, 20X3), a period of 5 months. The most recent interest payment date in this case is the bond date. Total bond price: 200($1,000)(1.01) $202,000 Plus accrued interest (5/12)($200,000)(.09) 7,500 Equals bond proceeds $209,500

Answer 792

$212,500 The bond term is 10 years. At 6/30/05, 8 1/2 years remain in the bond term. Thus, $212,500 [$250,000(8.5)/10] remain unamortized.

Answer 793

$609,000 The total amount received, which is called proceeds on the bond issue, is: .99($1,000)(600) + .10(3/12)(600)($1,000) = $609,000. The first factor is the total bond price, exclusive of accrued interest. The second factor is the accrued interest since 4/1/Y5. When bonds are issued between interest dates, the cash interest since the most recent past interest payment date must be collected from the bondholders because a full six months' interest is paid on the following interest date.

Answer 794

The option is limited to liabilities that are part of a group with financial assets managed together.

Answer 795

Report liability at fair value.

Answer 796

Sum of the cash interest column less sum of | amortization of premium column

Answer 797

Multiply one-half the yield rate at date of issuance by the book value of the bond issue on the line above the current line.

Answer 798

Recognize gain or loss for the change in the fair value adjustment of the liability during the period.

Answer 799

Reduction in the proceeds from the debt (same | as U.S, standards).

Answer 800

It is an option (not required) and can be applied | to any and all financial liabilities.

Answer 801

E2+D3 This question is a basic discount amortization scenario. The carrying amount of the bond will increase by the amount of the discount amortization each period until the carrying amount is $100,000 at maturity. Adding cells E2+D3 together will add the discount amortized for the period to the carrying amount of the bond, giving the new carrying amount at the end of the period.

Answer 802

$1,260 gain Interest expense can be measured using various methods. In this situation, Southern recognized interest expense by debiting interest expense for $12,000 and crediting cash for $12,000, which represents the coupon interest paid on the bond. Therefore, interest expense was recognized on the income statement as a separate line item. The change in fair value from January 1, year 2, to December 31, year 2, would, therefore, be recognized as a gain or loss to revalue the bond's carrying value to fair value. The change in value is calculated as beginning of year carrying value of $107,720 less end of year carrying value of 106,460, or $1,260. Since the value of the liability decreased, this indicates a gain of $1,260 that would be recognized on the year 2 income statement.

Answer 803

Interest Expense - $ 5,000 Note Payable - $ 97,500 Gain (Loss) - $ 2,500 If the fair value option is elected for reporting financial liabilities, the liability would be reported on the balance sheet at its fair value of $97,500, with a resulting gain of $2,500 ($100,000 − $97,500) on the income statement. The interest expense for the period would be calculated as $100,000 × 10% × 6/12 = $5,000.

Answer 804

I and III only. IFRS provides that financial liabilities may be reported at amortized cost or at the fair value through profit or loss (FVTPL). If FVTPL is elected, the resulting gain or loss is recognized in profit or loss for the period.

Answer 805

The intent must be proven, possibly in the form | of board of directors' meeting minutes.

Answer 806

1. Actually refinance before issuance of the financial statements. 2. Enter into a noncancelable refinancing agreement supported by a viable lender. 3. Issue equity securities replacing the debt.

Answer 807

The intent to refinance the short-term obligation must be proven. The firm must demonstrate the ability to refinance the obligation.

Answer 808

$16,000 Only the principal portion of the mortgage note is current. The short-term debt has been refinanced and reclassified as noncurrent. The deferred tax liability relating to depreciation is noncurrent.

Answer 809

The combined aggregate of $17,500,000 of maturities and sinking fund requirements detailed by year should be disclosed. FASB accounting standards require the disclosure of the aggregate amount of maturities and sinking fund requirements for all long-term debt for each of the five years following the balance sheet date. The detail for each year is disclosed by the amount of both the sinking fund requirement and the maturity.

Answer 810

$250,000 The portion of the note paid between the balance sheet date and the date of issuing the financial statements is classified as current because current assets were used to retire that part of the note. Even though proceeds from the bond issue may be used to replenish these funds, the $250,000 payment nonetheless reduced current assets. The remainder of the note is classified as noncurrent because the firm fully intends to refinance the remaining $500,000 with a long-term liability, and has shown its ability to do so by actually issuing bonds for the purpose of refinancing before issuing the financial statements. Thus, the requirements for reclassifying the remaining $500,000 portion of the current note payable as noncurrent have been met.

Answer 811

As a noncurrent liability, with separate disclosure of the note refinancing The note was refinanced (replaced) with a long-term liability (bonds) between the balance sheet date and the balance sheet issuance date. This is one of the conditions under which a current liability can be reclassified as long term at the balance sheet date. Another is to enter into an irrevocable refinancing agreement. The details of the refinancing must be disclosed in the notes. The note is not to be classified as a current liability because it will cause no reduction in current assets or increase in current liabilities during the coming period.

Answer 812

$0 Current liabilities that are refinanced before the issuance of the financial statements can be reclassified as noncurrent provided they meet the requirements. Essentially, as long as the firm actually refinances the liability on a noncurrent basis before issuing the financial statements, or it enters into a non-cancelable agreement to do so (again before issuing the financial statements), then the liability can be reclassified. Thus, both listed liabilities will be classified as noncurrent in the 20x4 balance sheet.

Answer 813

Current liabilities of $30,000, long-term liabilities of $100,000 The accounts payable is a current liability. The refinancing resulted in reclassifying the construction loan (which would otherwise also be current) as a noncurrent liability. The replacement of the loan with a noncurrent liability (bonds) took place before the financial statements were issued, thus meeting the requirements for refinancing on a long-term basis.

Answer 814

Short term - $ 20,000 Long term -$ 480,000 Ames has successfully refinanced a short-term note on a long-term basis before the issuance of the 20x2 financial statements. The borrowings on a long-term basis are limited to $480,000 (.80 × $600,000 collateral provided by Ames). Thus, $480,000 of the note is reclassified as long term, and the remaining $20,000 of the note is classified as current.

Answer 815

A long-term liability. This is a short-term note that is scheduled to mature within one year. This type of note is excluded from current liabilities and shown as a long-term liability if both the following conditions are met: 1) The company intends to refinance and, 2) The company demonstrates an ability to refinance. One way a company can demonstrate the ability to refinance is by entering into a financing agreement that permits the company to refinance on a long term basis. Taylor has entered in to such an agreement.

Answer 816

$100,000 There is no net use of current assets to liquidate the $400,000 amount of the liabilities because the stock issuance provided the necessary cash. Only the remaining $100,000 is classified as current.

Answer 817

As a current liability because the lender is not expected to be financially capable of honoring the agreement. This is a short-term note that is scheduled to mature within one year. This type of note is excluded from current liabilities and shown as a long-term liability if both the following conditions are met: 1) The company intends to refinance and, 2) The company demonstrates an ability to refinance. The financial statements were issued after Paxton was informed that the financial institution would not be capable of honoring the commitment. Therefore, there is no intention or ability in existence when the financial statements were issued. As a result, this would be shown as a current liability.

Answer 818

$1,250,000 The $1,000,000 loan was successfully refinanced on a long-term basis and therefore was moved to the noncurrent liability category. The refinancing took place before the financial statements were issued, thus meeting the requirements for reclassification on a long-term basis. The remaining items are all current: $750,000 accounts payable + $400,000 short term borrowings + $100,000 current portion of mortgage payable = $1,250,000 total current liabilities.

Answer 819

Debtor pays creditor and is relieved of obligation. Debtor is legally released from being primary obligor.

Answer 820

Recognized as components of income from | continuing operations

Answer 821

``` Record interest, amortization of discount/premium, issue costs to date of retirement. Remove debt and related accounts. Record gain or loss. ```

Answer 822

Gain/Loss = Reacquisition price - Net Carrying | Amount

Answer 823

``` Reacquisition items to be accounted for: Debt issue costs Any unamortized discount/premium Difference between debt's face value and reacquisition amount ```

Answer 824

Carrying amount. The proceeds of the second bond issue, which equal the second issue's carrying value and face value, were used to retire the first issue at that same amount. However, the first issue has a lower carrying value than the face value because of the unamortized discount. Therefore, the net increase in long-term debt is the amount of the unamortized discount, which also equals the difference between the carrying values of the two issues.

Answer 825

$8,000 gain The portion of the bond term that remains is 4 1/2 years as of July 1, year 6, because the bonds have been outstanding for 5 1/2 years as of that date. Therefore, the book value of the bonds on July 1, year 6 equals the face value of the bonds ($1,000,000) plus the unamortized bond premium of $18,000 = (4.5/10)$40,000, for a total of $1,018,000. The gain on the bond extinguishment is the difference between the book value and the amount paid to extinguish the bonds: $1,018,000 − 1.01($1,000,000) = $8,000. The gain results because it cost Fox less to retire the bonds than the book value of the bonds.

Answer 826

Recognized in income from continuing operations in the period of extinguishment. The gain or loss on retirement of debt is included in income from continuing operations.

Answer 827

$1,910,000 The journal entry for retirement: ``` Dr. Bonds payable 2,000,000 Cr.Bond discount 70,000 Cr.Bond issue costs 20,000 Cr.Cash .94($2,000,000) 1,880,000 Cr.Gain 30,000 ``` The gain is the difference between (1) the net bond liability less the unamortized bond issue costs and (2) the amount paid to retire the bonds: Net bond liability: $2,000,000 − $70,000 $1,930,000 Less unamortized bond issue costs (20,000) Net carrying amount to use in computing gain or loss $1,910,000 Less amount paid to retire bonds (1,880,000) Gain $30,000 The correct answer is $1,910,000.

Answer 828

$248,000 The question asks for the book value amount to be compared to the price paid for the bonds retired when the gain or loss on retirement is computed. The net book value includes the unamortized bond issue costs. The amount of unamortized issue costs relating to the portion of the bond issue retired increases the loss or decreases the gain. The remaining portion of the bond term for the portion of the bond issue retired is the period for which the bond issue costs were not amortized. Number of semiannual periods in bond term: 15(2) = 30 Number of semiannual periods remaining at 6/2/year 6 = 10(2) = 20 Remaining unamortized bond issue costs: $6,000(20/30) = $4,000 Net amount to compare to price paid for bonds, to determine gain or loss on retirement, on one-half the bond issue: (1/2)($500,000 − $4,000) = $248,000. A journal entry recording the retirement of one-half the issue helps show why $248,000 is the correct answer. ``` Bonds payable 250,000 Bond issue costs 2,000 Cash .98($250,000) 245,000 Gain 3,000 The gain equals the net value of two accounts removed from the books ($248,000) less the amount paid to retire the bonds. ```

Answer 829

$16,000 The journal entry for retirement: Dr. Bonds payable 500,000 Dr. Loss 16,000 Cr. Bond Discount 2,000 .02($500,000) (3/15) Cr. Bond Issue Costs 4,000 $20,000(3/15) Cr. Cash 510,000 $500,000(1.02) The bond term is 15 years. Retirement is 3 years before maturity. Therefore, under the straight-line method, 3/15 of both the total bond discount and bond issue costs would remain unamortized at the retirement date. These amounts are removed along with the face value of the bonds (bonds payable account). The original discount was 2% of $500,000. The bond issue costs are removed because they no longer have any future benefit.

Answer 830

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

Answer 831

$53,000 gain Book value of bonds retired $600,000 + $65,000 $ 665,000 Less total market value of bonds retired 600($1,000)(1.02) (612,000) Equals gain on retirement $ 53,000 The unamortized premium is a component of the book value at retirement. A premium increases the net book value of the bonds because more was paid in than the face value when the bonds were originally issued. When a liability is retired for less than its book value, a gain is recorded because the firm reduces its liabilities more than the reduction in its cash or other assets used for retirement.

Answer 832

Rate that equates the book value of the original debt with the present value of restructured cash flows

Answer 833

``` Gain = Book value of debt + Unpaid accrued interest – Market value of consideration transferred Gain/loss on disposal of assets transferred Remove debt from books. Record any stock issued at market value. ```

Answer 834

Difference between the sum of restructured cash flows and the book value of the original debt

Answer 835

Creditor makes a concession, and debtor must | be in financial difficulty.

Answer 836

They are all treated as principal payments.

Answer 837

No interest is recognized; all payments are | considered principal payments.

Answer 838

1. Significant modification | 2. Not significant modification

Answer 839

Same as U.S. accounting but is considered an | extinguishment

Answer 840

The total future cash payments In a troubled debt restructuring involving only a modification of terms, the debtor will recognize a gain only if the total undiscounted future cash payments for principal and interest under the new terms are less than the current amount payable for principal and accrued interest. When the future payments under the new terms are less than the current obligation, the debtor writes down the carrying amount of the liability by the amount of the difference and thus recognizes a gain.

Answer 841

No gain is recognized. Although the debtor has an economic gain (the creditor is making a concession), GAAP requires that the debtor compute the new rate of interest based on the restructured cash flows and recognize interest expense over the note term. No gain is recognized by the debtor.

Answer 842

28,000 The sum of restructured flows (2 × $196,270) exceeds $350,000, which requires that a new interest rate (m) be computed, as follows: $350,000 = $196,270(pva, m, 2). $350,000/$196,270 = (pva, m, 2) = 1.78326. The new rate (m) corresponds to 8%. Interest expense at the end of 20x2 is computed as .08($350,000) = $28,000.

Answer 843

($10,000) The real estate transferred in settlement of the debt is worth $10,000 less than its carrying value. Thus, an ordinary loss is recognized on the transfer. It is as if Knob first sold the real estate for $90,000 causing a loss of $10,000, and then used the cash for settlement of the debt.

Answer 844

($4,000) The net loss listed is the difference between the carrying amount of the liability and the carrying amount of the machine. Nu has a gain of $9,000 on the note settlement, which is the difference between the liability carrying value ($105,000) and the fair value of the consideration given to extinguish the debt ($96,000). Nu also has a disposal loss on the machine. An ordinary loss of $13,000 is recognized and equals the difference between the machine's carrying value ($109,000) and its fair value ($96,000).

Answer 845

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.

Answer 846

$60,000 The gain on debt restructure recognized by the debtor Knob is the difference between the book value of the debt ($150,000) and the market value of the asset transferred in settlement ($90,000). Thus, the gain equals $60,000. It represents the increase in net worth, measured at market value, from extinguishing debt at less than its carrying value. The carrying value of the asset transferred is not relevant to the determination of the restructuring gain.

Answer 847

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.

Answer 848

$3,000 The gain is the difference between the debt book value of $28,000 and the fair value of the equity interest transferred ($25,000) or $3,000.

Answer 849

$800,000 The market value of the stock issued to the creditors is $100,000 (80,000 × $1.25). The fair value of consideration paid to settle the debt therefore is $500,000 ($400,000 cash + $100,000 of stock). The gain on settling the debt therefore is $700,000 ($1,200,000 − $500,000 total consideration). The gain increases owners' equity by way of net income. The issuance of stock is recorded at market value, $100,000. Thus, the total owners' equity increase is $800,000 ($700,000 + $100,000). Note that this amount is also the difference between the amount of debt retired ($1,200,000) and cash paid ($400,000).

Answer 850

$330,000 Gain = book value of note plus interest − cash paid Gain = $1,000,000 + $150,000 − $820,000 = $330,000.

Answer 851

Restriction on debtor and possible responses | by creditor

Answer 852

Loan with less stringent restrictions

Answer 853

Current liability

Answer 854

Noncurrent liability

Answer 855

Steps taken by a debtor to meet the restriction | and reporting such compliance

Answer 856

Current if it is possible the debt will be called; noncurrent if a remote chance exists of calling the debts

Answer 857

Require the debtor to pay the debt or refinance | the debt.

Answer 858

Minimum current ratio | Maximum debt to equity ratio

Answer 859

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. It must be at least possible that the liability will be called in order for the classification to be downgraded to current. It must be probable that the violation will be cured for the classification to be noncurrent. Whether to call the debt is the option of the creditor in this case. If the violation is waived (forgiven), then the debt will not be called and the liability can remain in the noncurrent category. Liabilities may be callable on demand only if the debtor violates a debt covenant, for example.

Answer 860

Retire a different loan by issuing common stock. This transaction reduces total liabilities and increases OE by the same amount. The numerator of the ratio is reduced and the denominator is increased. Both factors cause the ratio to decrease below the maximum. A deferred tax liability increase causes the numerator of the ratio to increase, thus increasing the ratio. It can also be argued that an increase in the deferred tax liability is associated with an increase in income tax expense, which decreases earnings, retained earnings, and owners' equity. The decrease in the denominator also serves to increase the ratio. Any treasury stock purchase reduces the total OE by the amount paid. There is no effect on debt. The denominator of the debt to equity is reduced, causing the ratio to increase.

Answer 861

1 and 2 Both actions are appropriate. Refinancing current debt on a long-term basis reduces current liabilities (increases noncurrent debt) and increases the current ratio. Appropriating retained earnings is an action that typically signals a future reduction in dividends, albeit on a temporary basis. As a result, total retained earnings is maintained at a higher level. However, declaring cash dividends increases current liabilities, decreases the current ratio, and reduces retained earnings. Both quantitative measures used in the covenant deteriorate as a result. However, purchasing treasury stock reduces current assets and the current ratio.

Answer 862

Changing to the successful efforts method of accounting for natural resource exploration costs. This accounting change would cause earnings to be reduced, possibly significantly. The successful efforts method expenses the cost of all unsuccessful exploration efforts immediately. Full costing capitalizes the cost of all efforts of expensing that take place when the resource is sold. Thus, the full costing method is the method of choice. This firm should use accounting methods that increase earnings. Higher earnings improve several quantitative measures used in debt covenants, including any measure of earnings, owners' equity balances, debt to equity ratio, and rates of return such as return on assets and return on equity. Straight-line depreciation consistently results in the highest annual earnings. This is the reason most firms use some form of this method. This choice causes earnings to be reduced the least amount, thus reducing the risk of noncompliance. For most firms, FIFO yields the lowest cost of goods sold, and therefore the highest earnings. Increasing earnings reduces the risk of noncompliance for this firm. The specific method first capitalizes the interest on specific debt. With interest rates on the decline, interest on lower rate debt is capitalized and more is expensed, relative to the weighted average method, which capitalizes at the average rate over all debt. The weighted average method would capitalize more interest on older (higher interest) rate debt, thus reducing the current amount of interest expense and increasing earnings. Increasing earnings reduces the risk of noncompliance for this firm.

Answer 863

Declare cash dividends. This transaction increases current liabilities, thus reducing the current ratio. The current ratio is current assets divided by current liabilities. There is no effect on current assets. This transaction increases current assets and therefore the current ratio. The current ratio is current assets divided by current liabilities. There is no effect on current liabilities. This transaction reduces both current assets and current liabilities by the same amount. Because current liabilities are less than current assets, the denominator of the current ratio decreases by a larger percentage causing the ratio to increase. The current ratio is current assets divided by current liabilities. Both current assets and liabilities (dividends payable) are reduced by the amount paid, but current liabilities are reduced a greater percentage, which causes the current ratio to increase.

Answer 864

When they are obligations to repurchase equity shares and require the issuer to settle the obligation by transferring assets

Answer 865

The classification is equity.

Answer 866

The fixed dollar value agreed upon by the | parties

Answer 867

Fair value of shares at the time of agreement

Answer 868

The classification is liability.

Answer 869

The aspect is debt

Answer 870

The classification is liability

Answer 871

Recognizes a $3,000 loss. Shifter paid $5,000 more for the treasury stock than its fair value: 1,000 shares × ($20 − $15). The $2,000 fee (1,000 × $2) offsets that loss yielding a net loss of $3,000.

Answer 872

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.

Answer 873

When the value of shares to be issued is fixed, the number of shares to be issued is variable. The value of the shares to be issued is the value of the contract or the agreed-upon value of the goods and services for the two parties. If the stock price changes between the time of contracting and the delivery of the goods or services, the number of shares changes in order to provide that fixed value.

Answer 874

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

Answer 875

Increases contributed capital in excess of par $10,000. The total owners' equity increase of $20,000 (2,000 shares × $10) is recorded at signing. Of that amount, the common stock account will receive $10,000 (2,000 shares × $5 par). Therefore, the remainder ($10,000) is allocated to contributed capital in excess of par. Subsequent changes in stock price do not change the total amount of OE recorded.

Answer 876

1. Earned | 2. Contributed

Answer 877

1. Soleproprietorship 2. Partnership 3. Corporation

Answer 878

It is equal to the number of shares currently | held by stockholders.

Answer 879

Unpaid dividends for a particular year on | cumulative preferred stock

Answer 880

The par value of the stock or the stated value of | the stock issued

Answer 881

The total number of shares that may be issued

Answer 882

The historical value of direct investments made | in the firm by investors

Answer 883

``` Preferred stock Common stock Additional paid-in capital, preferred Additional paid-in capital, common Retained earnings Treasury stock Accumulated other comprehensive income ```

Answer 884

Voting Dividend Preemptive

Answer 885

It establishes the minimum investment. It provides protection for creditors. (Dividends may not be paid from legal capital.)

Answer 886

Number of shares ever issued by the firm but not retired = Number of outstanding shares + Number of treasury shares

Answer 887

It represents the residual interest in the net assets of an entity that remains after deducting its liabilities.

Answer 888

Nonvoting Dividend preferences Liquidation preferences

Answer 889

It is equal to the number of shares purchased | by the issuing firm and not yet reissued.

Answer 890

Shares Issued - 375,000 Shares Outstanding - 334,000 Issued shares include outstanding shares and treasury shares. Treasury shares are issued but not outstanding. Stock splits are applied to all outstanding and treasury shares because a split reduces the par value of each share of issued stock, and increases the number of shares in inverse proportion. Assume the stock has a par value of $3 before the split. After the 3-for-1 split in this question, the par value is $1, but the number of shares is tripled. Treasury shares must be adjusted for splits because treasury shares typically are reissued. No shares were retired. Therefore, the number of issued shares at the end of the year is three times the number at the beginning of the year: 125,000(3) = 375,000 shares issued at December 31, 20X5. Number of shares outstanding at December 31, 20X5 = (100,000 + 13,000)3 − 5,000 = 334,000. Only 100,000 shares were outstanding at the beginning of the year because the 125,000 issued shares includes the 25,000 in the treasury. The split took effect after 13,000 of the 25,000 treasury shares at the beginning of the year were issued. The 5,000 treasury shares purchased at December 1 already reflect the split and are not adjusted further.

Answer 891

105,000 A 5% stock dividend increases outstanding shares by 5%, and a 2-for-1 split doubles outstanding shares. The number of outstanding shares at year-end therefore is 105,000 = 50,000(1.05)(2). Each subsequent dividend or split compounds the previous change.

Answer 892

$9,000 The debit to estate equity is the additional expense and loss that had not been previously recorded. This amount is $9,000 ($1,000 repair cost + $8,000 loss on the truck). The $8,000 loss is the difference between the $20,000 carrying amount and the $12,000 proceeds.

Answer 893

560,000 Stock dividends and splits increase the number of shares outstanding on the date of distribution by the percentage effect implied by the dividend (10%) or split (100% or multiply by 2). The number of shares outstanding at 12/31/Year 1 = [300,000(1.10) - 100,000 + 50,000]2 = 560,000. Treasury shares reduce the number of shares outstanding, and reissuance increases the number of shares outstanding. The total number of shares outstanding just before the split (280,000) is doubled in a 2-for-1 split.

Answer 894

235,000 The number of shares outstanding at the end of year 2 = (100,000 + 15,000 + 2,500)2 = 235,000. The beginning outstanding shares of 100,000 is augmented by the issuance of previously unissued stock, and by the reissuance of treasury stock. Stock splits are applied retroactively to all changes in outstanding shares occurring before the split. The split is a nonsubstantive change in shares. Each share after the split is worth half of one share before the split.

Answer 895

Holiday pay expense for administrative employees is misclassified as manufacturing overhead. This error reduces expenses because part of the holiday pay will be held back in ending inventory, which is a current asset. Thus, net income, and therefore OE are overstated, as well as ending inventory, which is a current asset. An understatement of accrued sales expenses. This error understates expenses and current liabilities. OE is overstated but current assets are unaffected. Noncurrent note receivable principal is misclassified as a current asset. This error overstates current assets, but OE is unaffected. Annual depreciation on manufacturing machinery is understated. This error overstates OE, but current assets are unaffected.

Answer 896

$18,000 The change in total owners' equity for the year is $124,000, which equals the difference between the increase in assets and liabilities for the year ($178,000 − $54,000). Contributed capital increased $132,000 ($120,000 + $12,000). The firm paid dividends of $26,000. Thus: $132,000 + net income − $26,000 = $124,000 net income = $124,000 − $132,000 + $26,000 = $18,000

Answer 897

Shares Issued -220,000 Shares Outstanding - 212,000 Treasury shares are considered issued, but not outstanding. At December 31, 20X5: Number of shares issued = [100,000 (beginning) + 10,000 (new issuance)]2 = 220,000. Number of shares outstanding = [95,000 (beginning) + 1,000 TS reissuance + 10,000 (new issuance)]2 = 212,000.

Answer 898

Contract stating: Specifying share price Number of shares Payment dates

Answer 899

Stated value | No par value

Answer 900

Fair value of stock or consideration, whichever | is more reliable

Answer 901

Contra owners' equity (contra common stock | subscribed)

Answer 902

Contributed capital in excess of stated value | common

Answer 903

The minimum legal issue price for capital stock in most states; this value appears on the stock certificate.

Answer 904

DR: Cash DR: Subscription Receivable CR: Common Stock Subscriptions CR: Additional Paid in Capital (contract pricepar).

Answer 905

Fair value of individual stocks in the basket

Answer 906

DR: Cash | CR: Subscriptions Receivable

Answer 907

Common stock - $5,000 Preferred stock - $15,000 Additional Paid-in capital - $92,500 Common stock: 5,000($1) = $5,000 (only par is recorded in common stock) Preferred stock: 1,500($10) = $15,000 (only par is recorded in preferred stock) Additional paid-in capital: Common: 5,000($15 − $1) = $70,000 Preferred: 1,500($25 − $10) = 22,500 Total additional paid-in capital $92,500

Answer 908

Additional paid-in capital when the subscription is recorded This is one of the few examples of a recognized executory contract. Given that collectability is not an issue, the recording of a stock subscription is essentially the same as the entry for issuing stock for cash, except that a receivable stands in place of cash, and common stock subscribed stands in place of common stock. Common stock subscribed is an owners' equity account that is replaced by common stock upon issuance. Any additional paid-in capital is recorded when the contract is signed or recorded, just as if cash were received at that point.

Answer 909

$65,000 The amount of the proceeds allocated to the stock is $70,000 ($110,000 − $40,000). When only one of the two securities has a known market value, that value is allocated to that security and the remaining proceeds are allocated to the security without a known market value. The total par value of 1,000 shares of $5 par stock is $5,000. Therefore, $65,000 ($70,000 − $5,000) is recorded in additional paid-in capital on common stock.

Answer 910

$48,000 The total proceeds are allocated to the two securities based on relative market values. Market value of common: 1,000($36) = $36,000 Market value of preferred: 2,000($27) = 54,000 Total market value $90,000 Allocation of proceeds to preferred = ($54,000/$90,000)$80,000 = $48,000

Answer 911

Common stock - $20,000 Preferred stock - $60,000 Additional paid-in capital - $820,000 Common stock: 20,000($1) = $20,000. Only par value is credited to common stock. Preferred stock: 6,000($10) = $60,000. Only par value is credited to preferred stock. Additional paid-in capital (the amount received on issuance in excess of par): Common: 20,000($30 − $1) = $580,000 Preferred: 6,000($50 − $10) = 240,000 Total $820,000

Answer 912

Credit paid in capital in excess of par on common, $400 The net effect of the transactions is to receive cash of $1,200 and issue stock for that amount at $15/share; $1,200/$15 = 80 shares fully paid. Required net changes in balances are (1) common stock, 80($10) = $800, (2) PIC-CS, 80($15 − $10) = $400, (3) cash $1,200. The share purchase contract receivable account is opened and then closed for the same amount. There is no ending balance in that account.

Answer 913

Total Owners' Equity - No Retained Earnings - No When a firm retires preferred stock, cash is paid to the shareholders reducing total owners' equity. Retained earnings can never be increased when shares are retired, redeemed, or converted into another class of stock.

Answer 914

Cr. paid in capital in excess of par, common $1,500. The contributed capital accounts for the preferred are closed and the total amount is transferred to the common stock accounts resulting from issuance upon conversion. The total par value of common stock is first credited to the common stock account. If there is a credit remainder, it is recorded in paid in capital in excess of par, common. If there is a debit remainder, retained earnings is debited. In this case, there is no remainder. The journal entry is: DR: Preferred stock 500($100) 50,000 DR: PIC-preferred 500($103 − $100) 1,500 CR: Common stock 500(20)($5) 50,000 CR: PIC-common 1,500

Answer 915

Cr. paid in capital from retirement of preferred stock, $1,000. The $2 difference multiplied by 500 shares yields $1,000 paid in capital kept by the firm. The journal entry is: DR: Preferred stock 500($100) 50,000 DR: PIC-preferred 500($103 − $100) 1,500 CR: PIC-retirement of preferred 1,000 CR: Cash 500($101) 50,500

Answer 916

Preferred stock - $25,000 Additional paid-in capital - ($2500) Retained earnings - 0 The journal entry for retirement: Preferred stock 2,000(.25)($50) 25,000 Additional paid-in capital, preferred stock $30,000(.25) 7,500 Additional paid-in capital from retirement of preferred stock 10,000 Cash 22,500 The additional paid-in capital from retirement of preferred stock is the net difference between the other amounts in the entry. When preferred stock is retired, the par value of the stock retired is removed from the preferred stock account, and the pro-rata share of the additional paid-in capital from original issuance is removed. If the total of these two amounts exceeds the amount paid to redeem and retire the stock, as is the case here, additional paid-in capital from retirement of preferred stock is credited. The net effect on additional paid-in capital is an increase of $2,500 ($10,000 − $7,500). Retained earnings is unaffected.

Answer 917

``` Preferred stock accounts are transferred to common stock accounts. If total preferred stock value is less than common stock par value, retained earnings are debited. ```

Answer 918

Total recorded value of preferred stock is less | than par value of common stock on conversion.

Answer 919

``` All related owner's equity accounts are removed Debit differences go to retained earnings Credit differences go to contributed capital ```

Answer 920

Amount recorded from original issuance.

Answer 921

There is no effect.

Answer 922

1. Treasury stock is debited at par; 2. Additional Paid in Capital (APIC) is debited by amount credited when stock was originally issued; 3. Cash is credited.

Answer 923

The effect on the treasury stock account is an | increase for the par value of the stock received.

Answer 924

Treasury stock Paid-in capital in excess of par-common Paid-in capital from treasury stock Retained earnings

Answer 925

The effect on the treasury stock account is an | increase for the fair value of the stock received.

Answer 926

Retained earnings can be decreased (as a last | resort) but never increased.

Answer 927

Purchases are debited at cost Reissuances debit cash, credit treasury stock at cost, and contributed capital from treasury stock is plugged.

Answer 928

Treasury stock is credited at par. The remainder of the entry is treated like a stock issuance.

Answer 929

It is reported as a subtraction from the common stock account, at par, in the balance sheet.

Answer 930

Cost method | Par value method

Answer 931

When treasury stock is reissued for less than | cost

Answer 932

Treasury stock is subtracted at the very bottom of the owners' equity section of the balance sheet.

Answer 933

When treasury stock is purchased for less than | the original issue price

Answer 934

They are equal, although certain components of owners' equity would show different balances.

Answer 935

Owners' equity is increased by the difference in | purchase cost and reissuance price.

Answer 936

$0 Income is not affected by treasury stock transactions. When a firm transacts with its owners acting as owners, it cannot profit or report a negative income. In this case, the $3 difference between the $10 reissue price of the treasury stock and its $7 cost is credited to an owners' equity account as paid-in capital from treasury stock transactions. The firm's net worth has increased as a result of its treasury stock purchase and reissuance, but the "gain" is not recognized as earnings.

Answer 937

Additional paid-in capital is decreased Additional paid-in capital is reduced when stock is retired because the additional paid-in capital from treasury stock transactions is closed. The other three alternative answers cause income to change or retained earnings to increase. Retained earnings can never be increased through transactions with owners, nor can income be affected by such transactions.

Answer 938

Net common stock - Decrease Additional paid-in capital - Decrease Retained earnings - Decrease Under the par value method, when treasury stock is purchased and retired at a price exceeding the original issue price, the following entry is made. No additional paid-in capital from treasury stock transactions exists. Therefore, retained earnings is debited. Common stock par Additional paid-in capital original issue price - par Retained earnings acquisition price - original issuance price Cash acquisition price. Thus, all three accounts listed in the question are decreased.

Answer 939

$415,000 When treasury stock is cancelled (retired), the common stock account is reduced by the par value of the common stock cancelled. The ending common stock account balance is $415,000 = $540,000 − 50,000($2.50).

Answer 940

Treasury stock - $ 108,000 Additional paid-in capital - $ 42,000 Retained earnings - $ 0 Common stock - $ 0 Under the cost method, when treasury stock is reissued at a price in excess of its cost, additional paid-in capital from treasury stock is credited for the difference. Treasury stock is credited for cost. The journal entry is: DR: Cash 3,000($50) 150,000 CR: Treasury stock 3,000($36) 108,000 CR: Additional paid-in capital from treasury stock transactions 42,000

Answer 941

Retained earnings - Decrease Additional paid-in capital -No Effect Under the cost method, additional paid-in capital from treasury stock transactions is credited when treasury stock is reissued at a price in excess of cost. This account is to be debited before retained earnings when the opposite occurs: reissue treasury stock at less than cost (as happened in the question). However, only one treasury stock reissuance has occurred. Therefore, there is no additional paid-in capital from previous treasury stock transactions to draw on so the $4 difference between the purchase price and reissuance price is debited to retained earnings (a decrease). There is no effect on additional paid-in capital. The entry for reissuance is: DR: Cash $12(30,000) 360,000 DR: Retained earnings 120,000 CR: Treasury stock $16(30,000) 480,000

Answer 942

$0 The shares are considered donated treasury shares. Treasury stock and a gain or revenue account are increased by the market value of the stock received in donation (FAS 116). The increase in the treasury stock account decreases the owners' equity, but the gain or revenue increases the owners' equity by the same amount. Therefore, there is no net effect on the owners' equity.

Answer 943

DR: Dividends Payable | CR: Cash or Asset

Answer 944

A dividend in the form of an interest bearing | note payable

Answer 945

Declaration date

Answer 946

DR: Retained earnings | CR: Scrip dividend payable

Answer 947

DR: Retained Earnings (at FV at declaration date) DR: Asset (FV – Book value) CR: Dividends Payable (FV) CR: Gain on Disposal (FV – Book value)

Answer 948

DR: Retained Earnings (or Dividends) CR: Dividends Payable DR: Dividends Payable CR: Cash

Answer 949

A return of capital rather than a return on capital Reduces contributed capital account instead of retained earnings

Answer 950

Those dividends involving a distribution of | assets

Answer 951

DR: Scrip dividend payable DR: Interest expense CR: Cash

Answer 952

Market value at date of declaration. The date of declaration is the date on which the firm has made the commitment to pay the dividend. The market value on this date is the value that was considered when the board made the decision to distribute a property dividend and thus is the appropriate measure of the sacrifice to the firm.

Answer 953

Decreased on May 8. It is at declaration that a dividend has its effect on the value of the firm and on working capital. Retained earnings are decreased (or a holding account called Dividends, which is closed to retained earnings, may be recorded), and dividends payable are increased. Dividends payable are a current liability, causing working capital to decrease. Working capital equals current assets, less current liabilities. The payment of a dividend does not affect working capital, because both cash and the dividend payable are reduced. Both current assets and current liabilities are reduced by the same amount.

Answer 954

Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $7,500 on December 31, 20X3. Retained earnings is reduced only by the amount of the dividend otherwise payable in cash, in this case $100,000. Interest on the notes is recognized as interest expense, not as a part of the dividend. 12/31/X3 is three-fourths of the way into the note term. Thus, .75(.10)($100,000) or $7,500 of interest expense should be recognized on this date.

Answer 955

Declaration. A legal liability comes into existence at declaration. The firm has committed itself to paying resources to shareholders from retained earnings on that date.

Answer 956

Paid-in capital - YES Retained earnings - No A liquidating dividend is a return of capital. Its source is not earnings, and, therefore, it is not retained earnings. The firm is liquidating part of its permanent capital. The usual account to debit for a liquidating dividend is additional paid-in capital.

Answer 957

$6,000 When a property dividend is distributed, any unrealized holding gain or loss on the property is first recognized. The distribution of the property is a disposal and thus calls for the recognition of any holding gain or loss in earnings. The market value exceeded the carrying value of the investment in Plasti stock by $3.00 per share ($4.50 − $1.50) on the distribution date. This is the gain recognized per share of stock distributed. With 2,000 shares distributed, the total gain is $6,000 ($3.00 × 2,000). The gain that is recognized on the distribution of the property dividend is the same as that which would have resulted had Mio first sold the Plasti stock for a $6,000 gain and then distributed the proceeds from the sale of the stock as the dividend. The net effect on shareholders' equity would be the same either way.

Answer 958

$20,000 The property dividend is recorded at market value, with a debit of $25,000 to retained earnings at declaration. A gain of $5,000 on the securities is recognized as a gain on disposal (as if it were sold). The net effect is a decrease in retained earnings of $20,000.

Answer 959

$6.75mn Instead of paying $4.5mn in dividends at declaration, the firm decided to issue notes due in five years, calling for the principal amount ($4.5mn), plus five years of simple interest to be paid. The note does not call for compounding. Therefore, the amount due at maturity is $4.5mn + (5 years)(.10)($4.5mn) = $6.75.

Answer 960

Disclosure of $20,000. The annual preferred stock dividend is $15,000 (3,000 × $100 × 5%). Total dividends in arrears at the end of 2005 are therefore $20,000 (2 years × $15,000 − $10,000 paid). Dividends in arrears are footnoted only. They are not recognized as a liability until they are declared.

Answer 961

Capitalize retained earnings or paid-in capital | at par value.

Answer 962

No accounting entry is needed.

Answer 963

Capitalize retained earnings at market price.

Answer 964

Percentage of dividend is less than 20% to25%

Answer 965

Percentage of dividend is greater than 20% to | 25%

Answer 966

Declaration date

Answer 967

A distribution by a firm of its stock to its shareholders in proportion to their existing holdings

Answer 968

$45,800 Small 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. The total amount capitalized (debited) to retained earnings, therefore, is $15,000 for the 10% stock dividend (fair value), plus $30,800 for the 28% stock dividend (par value) for a total of $45,800.

Answer 969

Additional paid-in capital - Increase Retained earnings - Decrease The stock dividend is a "small" stock dividend because it is less than 20% - 25%. Small stock dividends are capitalized at market value, which exceeds par in this case. Retained earnings is reduced by the market value of the shares issued, common stock is increased by the par value of stock issued, and additional paid-in capital is increased by the difference between market value and par value times the number of shares issued.

Answer 970

$550,000 Treasury stock transactions do not affect shares issued, because treasury shares are included in issued shares. The only event during the year affecting the total par value of common stock issued is the July 9 issuance of shares that were not issued before. The stock split does not change total par of shares issued, because par is cut in half and the number of shares is doubled. Treasury shares are protected, meaning they are also doubled and have their par cut in half. The total par of issued common stock at year-end is $550,000: $500,000 from January 1 Plus $50,000 from July 9 issuance: 10,000 × $5 Equals $550,000 total par of issued shares.

Answer 971

Retained earnings is debited for $300. 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.

Answer 972

$24,000 The annual preferred dividend commitment is $120,000 (20,000 × $100 × .06). The amount paid in 20X5 ($240,000) covers both 20X5, and 20X4 (dividends in arrears). Wood owns 10% of Arlo's preferred stock and, therefore, received $24,000. This amount is recognized as revenue in 20X5. Dividends in arrears are not recognized until received. The stock dividend is not treated as revenue, but rather reduces the cost per unit of Wood's investment in Arlo's common stock.

Answer 973

$100,000 Total shares receiving a dividend equal 200,000, which is twice the number of shares at the beginning of the year. The stock split doubled the number of shares outstanding. Therefore, the total cash dividend is $.50(200,000) = $100,000. This amount will appear in the statement of stockholders' equity as dividends declared.

Answer 974

$2,100 This question is difficult, because authoritative sources and textbooks disagree as to the market value that should be used to value stock dividends. Small stock dividends (less than 25%) are measured at the market value of the stock issued. But the market value can be measured at declaration or at issuance. The answer listed as correct uses the market value on the declaration date. The journal entry to record the dividend assuming the declaration and distribution occurred in the same fiscal period: ``` Dr. Retained earnings .10(3,000)($9) 2,700 Cr.Common stock .10(3,000)($2) 600 Cr.Additional paid-in capital 2,100 ```

Answer 975

Additional paid-in capital - No Change Retained earnings - Decrease A 100% stock dividend is a "large" stock dividend because it exceeds 20% - 25%. Large stock dividends are capitalized at par value. Retained earnings is reduced by the par value of the shares issued, and common stock is increased by the par value of stock issued. There is no effect on additional paid-in capital because the entire decrease in retained earnings is recorded in common stock. A large stock dividend permanently capitalizes the par value of the issued shares into common stock.

Answer 976

There is no additional participation.

Answer 977

The remainder of dividends after the basic preferred percentage is provided to common, is multiplied by the ratio: total preferred par value to total par value of both classes of stock.

Answer 978

Preferred stock dividends in arrears

Answer 979

1. Preferred: Any dividends in arrears 2. Preferred: Current-period dividends 3. Common: Preferred percentage × Total par outstanding 4. Preferred: Additional percentage 5. Common: Remainder

Answer 980

1. Preferred: Dividends in arrears (if cumulative) 2. Preferred: Current-period dividend 3. Common: Remainder

Answer 981

1. Dividends in arrears 2. Current p/s dividend 3. Preferred stock receives up to an additional percentage

Answer 982

$40,000 Participating dividends are allocated according to total par value after each class of stock receives the preferred dividend percentage. Total par value of preferred stock outstanding is $300,000 (30,000 × $10), and total par value of common stock outstanding is $200,000 (200,000 × $1). Total par value of all stock outstanding is therefore $500,000. Preferred is three-fifths of total par value outstanding ($300,000/$500,000) and common is two-fifths ($200,000/$500,000) of total par value outstanding. 20X5 preferred requirement: 30,000(.05)($10) = $15,000 Preferred percentage to common: .05(200,000)($1) = 10,000 --> $10,000 Subtotal $25,000 Remaining dividends: $100,000 − $25,000 = $75,000 Participation to preferred, based on total par value: $75,000(3/5) = $45,000 Participation to common, based on total par value: $75,000(2/5) = 30,000 ---------------------> 30,000 Total common dividends $40,000

Answer 983

$4,400 Preferred represents one-fifth of total par value outstanding ($10,000/$50,000). To Preferred Arrearage .08(2)($10,000) = $1,600 Current year .08($10,000) = 800 To Common Matching .08($40,000) = $3,200 Dividends remaining = $7,100 − $1,600 − $800 − $3,200 = $1,500, which is insufficient to provide 4% participation to both classes of stock [.04($50,000) = $2,000]. The remainder is allocated according to total par value. To Preferred Participation 1/5($1,500) = 30 To Common 4/5($1,500) = 1,200 Total PS$2,700 CS $4,400

Answer 984

$27,200 Preferred represents one-fifth of total par value outstanding ($10,000/$50,000). To Preferred Arrearage .08(2)($10,000) = $1,600 Current year .08($10,000) = 800 To Common Matching .08($40,000) = $3,200 Dividends remaining = $30,000 − $1,600 − $800 − $3,200 = $24,400, which exceeds .04($50,000), so there is enough for both classes of stock to participate at 4%. To Preferred Participation .04($10,000 = 400 To Common Remaining $24,400 − $400 = 24,000 Total PS$2,800 CS$27,200

Answer 985

$22,720 Preferred represents one-fifth of total par value outstanding ($10,000/$50,000). To Preferred Arrearage .08(2)($10,000) = $1,600 Current year .08($10,000) = 800 To Common Matching .08($40,000) = $3,200 Dividends remaining = $30,000 − $1,600 − $800 − $3,200 = $24,400, which is allocated according to total par value. To Preferred Participation one-fifth($24,400) = 4,880 To Common four-fifths($24,400) = 19,520 Total PS$7,280 CS $22,720

Answer 986

Record an expense and an owners' equity account equal to the difference between the market price and exercise price times the number of shares under option.

Answer 987

Retained earnings appropriations have no | effect on assets.

Answer 988

Management's formal communication that a portion of retained earnings has been declared off-limits for dividends

Answer 989

Stock rights

Answer 990

External constraints placed on a certain portion | of retained earnings by an external party

Answer 991

Financial planning Legal requirement Contractual obligation

Answer 992

They should be disclosed in footnotes.

Answer 993

Record the stock issuance at the exercise price and remove the OE account credited at issuance of the rights.

Answer 994

$1,680,000 This response is correct because each item listed belongs in owners' equity. The treasury stock and net unrealized loss on the AFS debt securities are negative items (debits), but the rest are positive items (credits). Therefore, total owners' equity is $1,680,000 = $600,000 + $800,000 − $50,000 − $20,000 + $150,000 + $200,000.

Answer 995

$12,000 The dividend did not affect total OE, because no resources were expended or received. The payment of $0.10 per right reduces OE by a total of 120,000($0.10) = $12,000, because this amount of cash was paid.

Answer 996

$24,000 None of the rights was exercised. The net effect on stockholders' equity is the $24,000 of cash paid to the shareholders: 240,000($.10).

Answer 997

$2.11mn The retained earnings balance in an adjusted trial balance does not reflect earnings for the year. Retained earnings are not adjusted for net income until the accounts are closed, which occurs after the trial balance is prepared. Therefore, the retained earnings accounts listed in the trial balance do not reflect current earnings. Retained earnings per trial balance ($900,000 + $160,000) $1.06mn Plus earnings, less costs and expenses $6.68mn − $5.18mn − $450,000 (tax) 1.05mn Total ending retained earnings $2,110,000 The trial balance does not reflect the income tax expense. This amount was listed as prepaid taxes, but must be reclassified to income tax expense. When firms make estimated tax payments, the debit should be to income tax expense. Income tax has not been recorded. The estimated payments approximately cover the tax liability for the year that has ended. Therefore, the taxes cannot be said to be prepaid.

Answer 998

Retained earnings - Not Affected Additional paid-in capital - Increased The exercise is treated as would be any issuance of stock. The exercise price determines the total proceeds, the common stock account is credited for the total par of stock issued, and additional paid-in capital is credited for the remainder. The exercise price exceeds par value, so additional paid-in capital is increased. Retained earnings are unaffected.

Answer 999

Additional paid-in capital - Increased in 20X4 Net income -No effect The issuance of warrants to shareholders does not require a journal entry, because no resources are expended or received. Therefore, in 20X3, there is no effect on owners' equity. When the warrants are exercised in 20X4, the shareholders pay $30 per share for the stock purchased under the warrants. This issuance is recorded as a normal issuance at $30, even though that is not the market price at the date of issuance. Additional paid-in capital is increased by $10, the difference between the $30 exercise price and $20 par. Issuing warrants or stock has no effect on earnings. A firm does not profit on transactions with owners.

Answer 1000

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.

Answer 1001

$1.33mn Retained earnings at December 31, 20X5 would be the sum of the beginning retained earnings of $630,000 and the net income. Net income is revenue ($3.6mn) - expense ($2.6mn) or $1mn. However, this did not include taxes. Taxes on $1mn (at the 30% tax rate) are $300,000. This is exactly the same as the pre-paid taxes, so no additional liability exists. The pre-paid just need to be transferred to an expense category. This makes income $700,000 and ending retained earnings $1.33mn. No adjustment need be made for the accounts receivable, unless Trey is handling this transaction differently for tax (installment method) than for book purposes, which is contrary to the facts presented in the problem.

Answer 1002

Total owner's equity after preferred dividend | claims are removed

Answer 1003

Common stockholders' equity per share of outstanding common stock at the end of the period

Answer 1004

Decrease in book value per share.

Answer 1005

Increase in book value per share

Answer 1006

$7.00 Book value per share of common stock is the portion of owners' equity that would remain for common shareholders after the preferred claim was paid, divided by the number of common shares outstanding. The preferred dividend claim includes the liquidation preference ($50,000 premium above par, plus par value) and the $25,000 dividends in arrears. All preferred stock dividends in arrears must be paid on liquidation before common shareholders receive any cash. Total owners' equity is $1.025mn, the sum of the four items taken from the owners' equity section of the balance sheet ($250,000 + $350,000 + $125,000 + $300,000). Book value per share of common stock = $7.00 = ($1.025 − $250,000 − $50,000 premium − $25,000 dividends in arrears)/100,000.

Answer 1007

Fair value. 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.

Answer 1008

Total stockholders' equity - Decrease Book value per share - Increase The purchase of treasury stock at any price decreases total owners' equity under the cost method because treasury stock is a contra OE account. When the purchase price per share is less than book value per share, then the denominator decreases by a greater percentage than does the numerator, and book value per share increases. For example, assume for simplicity that there is only common stock outstanding. Total owners' equity and number of shares before the treasury stock purchase is $40,000 and 4,000, respectively. Book value per share then is $10. The firm purchases 200 shares of treasury stock for $8 (less than book value). The new book value per share is: ($40,000 − $1,600)/(3,800) = $10.11. Book value per share has increased.

Answer 1009

$13.00 Book value per share of common stock is common stockholders' equity per share of common stock. The portion of owners' equity allocated to preferred stock for this ratio is measured as the liquidation value per share. Therefore, the book value per share equals the net assets of the corporation per share that would be distributed to common shareholders on liquidation of the company, if the market value equaled book value for all assets and liabilities. The preferred shareholders would be paid the liquidation value per share first. This firm has 1,000 shares of preferred stock outstanding: $100,000/$100 par; and 30,000 shares of common stock ($300,000/$10 par). It also has total owners' equity of $495,000 ($100,000 + $300,000 + $95,000). For this firm, book value per share is $13.00 = [$495,000 − 1,000($105)]/30,000. Had there been dividends in arrears, they would also be subtracted from total owners' equity in the numerator. However, the preferred stock is non-cumulative, so there could be no dividends in arrears.

Answer 1010

$190,000 Reducing the par value to $5 creates $250,000 of additional paid-in capital: ($30 − $5)10,000 shares = $250,000. The common stock account is now $50,000: ($5)10,000. Additional paid-in capital now stands at $400,000 ($150,000 + $250,000). After absorbing the deficit in retained earnings, $190,000 remains in additional paid-in capital: ($400,000 − $210,000). Retained earnings are now zero.

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