FAR 15 Flashcards Preview

FAR > FAR 15 > Flashcards

Flashcards in FAR 15 Deck (12):
1

The following information pertains to Camp Corp.'s issuance of bonds on July 1, 20x5:

Face amount $800,000
Term 10 years
Stated interest rate 6%
Interest payment dates Annually on July 1
Yield 9%
At 6% At 9%
Present value of 1 for 10 periods 0.558 0.422
Future value of 1 for 10 periods 1.791 2.367
Present value of ordinary annuity of 1 for 10 periods 7.360 6.418
What should be the issue price for each $1,000 bond?

A. $1,000
B. $864
C. $807
D. $700

C. $807

[1000* (P.V of 1 for 10 periods) (9% interest) .422]+(.06*1000)*6.418 P.V)

- Present value of Bonds payable and interest payments

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

2

Which of the following funds should be reported as part of the local government's governmental activities column in its government-wide statements?
A. Debt Service.
B. Agency.
C. Private-Purpose Trust.
D. Pension Trust.

A. Debt Service.

Governmental activities reported in the Government-Wide Financial Statements pertain to the Governmental Fund types: General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds. The other three choices in this question are all Fiduciary Fund Types that are not reported in the Government-Wide Financial Statements since the government acts as a fiduciary and has no ownership interest. Fiduciary Funds are reported in the fund-level financial statements of the Comprehensive Annual Financial Report (CAFR).

3

Inco, Inc., a U.S. entity, has elected to prepare financial statements in accordance with IFRS to provide to its foreign suppliers. Inco has the following information concerning an investment in the bonds of Tryco, Inc., as of December 31, 2011:
Par value $100,000
Original cost 108,000
Current premium 3,500
Fair value 105,000
Inco normally does not invest in debt but made this investment with the expectation that it could profit from short-term decreases in the market interest rate. Which one of the following is the amount at which Inco should report its investment in Tryco in its December 31, 2011 IFRS-based Statement of Financial Position?

A. $100,000
B. $103,500
C. $105,000
D. $108,000

$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.

4

For accounting purposes, which of the following are forward contracts?

Foreign Currency Forward Exchange Contracts Foreign Currency Option Contracts
Yes Yes
Yes No
No Yes
No No


Foreign Currency Forward Exchange Contracts Foreign Currency Option Contracts
Yes Yes
Both foreign currency forward exchange contracts, which establish an obligation to exchange currencies, and foreign currency option contracts, which give the right (but not an obligation) to exchange currencies, are forward contracts for accounting purposes.

5

What information about estimates is not required to be disclosed?
A. That estimates involve assumptions about future events
B. Possible material financial statement effects of estimate changes
C. That estimates are required in preparing financial statements
D. The old and new estimate in quantitative terms

Incorrect:

C. That estimates are required in preparing financial statements

Firms are required to communicate the use of estimates in the preparation of financial statements.

Correct:

D. The old and new estimate in quantitative terms

The actual numerical estimates typically are not disclosed. Rather, it is the effect of the change which is of interest to financial statement users.

6

Which of the following is generally associated with payables classified as accounts payable?
Periodic payment of interest Secured by collateral
No No
No Yes
Yes No
Yes Yes

Periodic payment of interest Secured by collateral
No 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.

7

East Corp., a calendar-year company, had sufficient retained earnings in 20x3 as a basis for dividends, but was temporarily short of cash.

East declared a dividend of $100,000 on April 1, 20x3 and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, 20x3, had a maturity date of March 31, 20x4 and an interest rate of 10%.

How should East account for the scrip dividend and related interest?

A. Debit retained earnings for $110,000 on April 1, 20x3.
B. Debit retained earnings for $110,000 on March 31, 20x4.
C. Debit retained earnings for $100,000 on April 1, 20x3, and debit interest expense for $10,000 on March 31, 20x4.
D. Debit retained earnings for $100,000 on April 1, 20x3, and debit interest expense for $7,500 on December 31, 20x3.

B. Debit retained earnings for $110,000 on March 31, 20x4.


This is incorrect because this amount includes interest in the dividend. Retained earnings is reduced only by the amount of the dividend otherwise payable in cash, in this case $100,000. The excess of total payments under the note and the $100,000 dividend is interest. In addition, 3/31/04 is much too late to recognize the dividend, and even most of the interest. Three-fourths of the interest should be accrued by the end of 20x3.


D. 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.

8

Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values.
The exchange lacks commercial substance.
As a result of the exchange, Slate should recognize

A. A gain equal to the difference between the fair value and the carrying amount of the land given up.
This answer would be correct if there were commercial substance to the exchange. However, without commercial substance, Slate's recognized gain is limited to the percentage of its asset "sold" for cash.
B. 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.
C. A loss in an amount determined by the ratio of cash received to total consideration.
D. Neither a gain nor a loss.

Incorrect:

A. A gain equal to the difference between the fair value and the carrying amount of the land given up.


This answer would be correct if there were commercial substance to the exchange. However, without commercial substance, Slate's recognized gain is limited to the percentage of its asset "sold" for cash.


Correct:
B. 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.

9

On February 5, 2005, an employee filed a $2,000,000 lawsuit against Steel Co. for damages suffered when one of Steel's plants exploded on December 29, 2004.
Steel's legal counsel expects the company will lose the lawsuit and estimates the loss to be between $500,000 and $1,000,000. The employee has offered to settle the lawsuit out of court for $900,000, but Steel will not agree to the settlement.

In its December 31, 2004, balance sheet, what amount should Steel report as liability from lawsuit?

A. $2,000,000
B. $1,000,000
C. $900,000
D. $500,000

Incorrect:

B. $1,000,000
When a range of losses is possible for a recognized contingent liability, with no one point in the range more probable than the others, the lower limit of the range is the amount recognized. This answer indicates the high limit of the range.

(IFRS recognizes the medium, and GAAP recognizes the least)


Correct:
D. $500,000
This is a recognized contingent liability because it is probable that a loss has occurred. When a range of losses is possible, with no one point in the range more probable than the others, the lower limit of the range is the amount recognized.

10

During the current year, the local humane society, a nongovernmental not-for-profit organization, received a $100,000 permanent endowment from Cobb. Cobb stipulated that the income must be used to care for older horses that can no longer race. The endowment reported income of $8,000 in the current year. What amount of unrestricted contribution revenue should the humane society report for the current year?
A. $108,000
B. $100,000
C. $8,000
D. $0

0$

Because the income from the endowment account is still restricted for a purpose.

11

2016 Exam: In its first four years of operations ending December 31, 20x2, Alder, Inc.'s depreciation for income tax purposes exceeds its depreciation for financial-statement purposes. This temporary difference is expected to reverse in 20x3, 20x4, and 20x5.
Alder's 20x2 balance sheet should include

A. A non-current contra asset for the effects of the difference between asset bases for financial-statement and income tax purposes.
B. Both current and non-current deferred tax assets.
C. A current deferred tax liability only.
D. A non-current deferred tax liability only.

Incorrect:

B. Both current and non-current deferred tax assets.


The future temporary differences are taxable and give rise to a deferred tax liability only. Also, because depreciable assets are non-current assets, the related deferred tax account is also classified as non-current.

Correct:

D. A non-current deferred tax liability only.


The classification of deferred tax accounts is based on the classification of the underlying account giving rise to the deferred tax effect.
In this case, depreciable assets are non-current assets, therefore the deferred tax account is also classified as non-current. Because the future temporary differences are taxable (future tax depreciation will be less than book depreciation, causing future taxable income to exceed pre-tax accounting income), the deferred tax account is a liability. Future taxable temporary differences give rise to deferred tax liabilities.

12

Grim Corporation operates a plant in a foreign country. It is probable that the plant will be expropriated. However, the foreign government has indicated that Grim will receive a definite amount of compensation for the plant.
The amount of compensation is less than the fair market value but exceeds the carrying amount of the plant.
The contingency should be reported:

A. As a valuation allowance as a part of stockholders' equity.
B. As a fixed asset valuation allowance account.
C. In the notes to the financial statements.
D. In the income statement.


Incorrect:
B. As a fixed asset valuation allowance account.


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.


Correct:
C. 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.