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Flashcards in FAR 16 Deck (19):
1

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

C. As a reduction in the total cost of Guard stock owned.
C is not correct. Total cost of the investment does not change; only the cost per share of stock decreases.


D. 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.

2

Which of the following are not measured at the expected cash to be paid or received?
A. Notes payable.
B. Equipment in use.
C. Unrecorded patent.
Unrecorded intangibles, including a patent are measured at the amount expected from the disposal of the asset.
D. Equipment held for sale.

Correct:

A. Notes payable.

Liabilities are to be measured using existing GAAP and not written down based on "expectations" unless legally forgiven

Incorrect:

C. Unrecorded patent.
Unrecorded intangibles, including a patent are measured at the amount expected from the disposal of the asset.

3

On December 31, 2005, Ott Co. had investments in marketable equity securities as follows:

Cost Market value Lower of cost or market
Man Co. $10,000 $ 8,000 $ 8,000
Kemo, Inc. 9,000 11,000 9,000
Fenn Corp. 11,000 9,000 9,000
$30,000 $28,000 $26,000
====== ====== ======
Ott's December 31, 2005 Balance Sheet should report the marketable equity securities as:

A. $26,000
B. $28,000
C. $29,000
D. $30,000

Incorrect:

A. $26,000
This answer applies the LCM method to the valuation of the investment. The LCM method is no longer applicable to investments.

Investments in available-for-sale securities are reported at market value under the fair value method. The reported value can be greater or less than the original cost.

Correct:
B. $28,000
Investments in available-for-sale securities are reported at market value under the fair value method ($28,000). The LCM method is no longer applicable to investments.

4

Zeta Co. reported sales revenue of $4,600,000 in its Income Statement for the year ended December 31, 20X1. Additional information is as follows:

12/31/00 12/31/01
Accounts receivable $1,000,000 $1,300,000
Allowance for uncollectible accounts (60,000) (110,000)
Zeta wrote off uncollectible accounts totaling $20,000 during 20X1. Under the cash basis of accounting, Zeta would have reported 20X1 sales of:

A. $4,900,000
B. $4,350,000
C. $4,300,000
D. $4,280,000

Sales Revenue: 4,600,000

Allowance A.R
__________ _______
Cr. 60 Dr. 1000
Dr. 20 (?) 320
Cr. 70 Cr. 20
End Bal : 110 End Bal: 1300

4,600 - 320 (increase in A.R) = 4280

BECAUSE IT'S CASH BASIS AND YOU DON"T INCLUDE A.R that hasn't been collected while working with CASH BASIS!

5

On January 1, 20x5, Park Co. signed a 10-year operating lease for office space at $96,000 per year.
The lease included a provision for additional rent of 5% of annual company sales in excess of $500,000. Park's sales for the year ending December 31, 20x5 were $600,000.
Upon execution of the lease, Park paid $24,000 as a bonus for the lease.
Park's rent expense for the year ending December 31, 20x5 was

A. $98,400.
B. $101,000.
C. $103,400.
D. $125,000.

You did:

96+24+5 (100*.05) = 125

It's 24/10=2.4

96+2.4+5= 103.4

CHECK CALCULATION TWICE! LOOK AT WORK
Rent expense on an operating lease is recognized on a straight-line basis unless another basis is more appropriate based on the benefits to the lessee.
In this case, the $96,000 annual amount is recognized each year, on the assumption of equal benefits of the basic lease provisions each year. The same holds for the bonus because this amount was paid to secure the lease.

$2,400 is included in the rent expense each year ($24,000 total bonus/10-year term). However, the portion of the rent based on annual sales is recognized based on sales figures for each year. For 20x5, this amount is .05($600,000 - $500,000) or $5,000. Adding the three amounts yields rent expense for 20x5: $96,000 + $2,400 + $5,000 = $103,400.

6

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

A. 3
B. 4
C. 7
D. 0

A. 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.

7

Cott Co.'s four business segments have revenues and identifiable assets expressed as percentages of Cott's total revenues and total assets as follows:
Revenues Assets
Ebon 64% 66%
Fair 14% 18%
Gel 14% 4%
Hak 8% 12%
100% 100%
Which of these business segments are deemed to be reportable segments?

A. Ebon Only
B. Ebon and Fair only
C. Ebon, Fair, and Gel only
D. 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.

A. Ebon only
All four are reportable because each meets at least one of the criteria for a reportable segment. These criteria are based on 10% of revenues, profits, and assets. Even Gel and Hak, which are the smallest of the four, meet one of the criteria. Only one of the three criteria needs to be met in order for a segment to be a reportable segment.


D. 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.

8

Ian Co. is calculating earnings per share amounts for inclusion in the Ian's annual report to shaeholders. Ian has obtained the following information from the controller's office as well as shareholder services:

Net income from January 1 to December 31 $125,000


Number of outstanding shares:
January 1 to March 31 15,000
April 1 to May 31 12,500
June 1 to December 31 17,000

In addition, Ian has issued 10,000 incentive stock options with an exercise price of $30 to its employees and a year-end market price of $25 per share. What amount is Ian's diluted earnings per share for the year ended December 31?

A. $4.63
B. $4.85
C. $7.35
D. $7.94


Number of outstanding shares:
January 1 to March 31 15,000 (3/12)
April 1 to May 31 12,500 (2/12)
June 1 to December 31 17,000 (7/12)
= 15,750


125000/15750= 7.94

Weighted average shares outstanding for basic EPS = 15,000(3/12) + 12,500(2/12) + 17,000(7/12) = 15,750. Basic EPS = $125,000/15,750 = $7.94.

The stock options are antidilutive because the exercise price exceeds the average market price of the stock. Such options would not be assumed exercised. Under the treasury stock method, assuming exercise would result in more shares being purchased for the treasury than issued upon assumed exercised. The result is a decrease in the denominator of diluted EPS causing diluted EPS to exceed basic EPS. Therefore, in this case, diluted and basic EPS are equal.

9

The treasury stock method of entering stock options into the calculation of diluted EPS:

A.
Is used only for dilutive treasury stock.

B.
Computes the increase in common shares outstanding from assumed exercise of options to be the number of shares under option.

C.
Is called the treasury stock method because the proceeds from assumed exercise are assumed to be used to purchase treasury stock.

D.
Assumes the treasury shares are purchased at year-end.

C.
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.

10

A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?
A. Cumulative 8%, $50 par preferred stock.
B. Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.
C. Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.
D. Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.

C. Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.

This security is dilutive. The numerator effect is $49 saving in interest ($1,000 x .07 x (1-.3)), and the denominator effect is 40 more shares outstanding. 49 / 40 = $1.225, which is less than the BEPS of $1.29, so the security is dilutive.

11

A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?
A. Cumulative 8%, $50 par preferred stock.
B. Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.
C. Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.
D. Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.

C. Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.


This security is dilutive. The numerator effect is $49 saving in interest ($1,000 x .07 x (1-.3)), and the denominator effect is 40 more shares outstanding. 49 / 40 = $1.225, which is less than the BEPS of $1.29, so the security is dilutive.

12


A firm with a net income of $30,000 and weighted average actual shares outstanding of 15,000 for the year also had the following two securities outstanding the entire year: (1) 2,000 options to purchase one share of stock for $12 per share. The average share price during the year was $20, (2) cumulative convertible preferred stock with an annual dividend commitment of $4,500. Total common shares issued on conversion are 2,900. Compute diluted EPS for this firm.

A.
$1.70

B.
$1.60

C.
$1.55

D.
$1.61

B.
$1.60

The options and convertible preferred stock are potential common stock (PCS). First compute basic EPS as the basis for diluted EPS, and also as a benchmark for determining whether the two potential common stock securities are dilutive. Basic EPS = ($30,000 - $4,500)/15,000 = $1.70. The preferred dividend is subtracted from income because the preferred is cumulative. Then determine the numerator and denominator effects of the PCS to enter them into diluted EPS in the order of lowest ratio of numerator to denominator effect (n/d) first. 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 x $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.

13

Units Unit$ Total$ UonH
Balance on 1/1 2,000 $1 $2,000 2,000
Purchased on 1/8 1,200 3 3,600 3,200
Sold on 1/23 1,800 1,400
Purchased on 1/28 800 5 4,000 2,200

Nest uses the LIFO method to cost inventory. What amount should Nest report as inventory on January 31 under each of the following methods of recording inventory?

Perpetual Periodic
A. $2,600 $5,400
B. $5,400 $2,600
C. $2,600 $2,600
D. $5,400 $5,400

B. $5,400 $2,600

* DONOT DETERMINE THE COGS, DETERMINE THE REMAINDER OF THE INVENTORY

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

14

Oak Co., a newly formed corporation, incurred the following expenditures related to land and building:
County assessment for sewer lines $ 2,500
Title search fees 625
Cash paid for land with a building to be demolished 135,000
Excavation for construction of basement 21,000
Removal of old building $21,000 less salvage of $5,000 16,000

At what amount should Oak record the land?
A. $138,125
B. $153,500
C. $154,125
D. $175,625

C. $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

15

Plant assets are occasionally acquired by means other than by paying cash. Choose the correct statement about such acquisitions.
A. If equipment is acquired with 100% debt financing, the equipment is capitalized at the sum of all interest and principal payments on the debt.
B. 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.
C. If land is received by a firm as a donation, no amount should be recorded for the land because there is no cost to the firm.
D. If land is acquired as one component of a group of plant assets for a discounted aggregate price, the amount capitalized for the land is its market value.

B. 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.

* They confused me by talking about the stock prices

16

Immediately after a note payable was signed, its present value was $30,000. This note and $20,000 cash were used to acquire a used plant asset at the beginning of the current year. The interest rate implied in the note is 6%. Total interest payments due on the note over its term amount to $4,000. The term exceeds one year. No payments on the note are due during the current year. What amount of interest expense is recognized for the first year (current year) on this note, and what amount is capitalized to the plant asset account?
Interest Expense Capitalized Amount
$1,800 $50,000
$3,000 $50,000
$4,000 $30,000
$0 $50,000

Interest Expense Capitalized Amount
$1,800 $50,000

1. The note payable = 30,000
Interest Rate is .06

Interest Expense = 1,800 for the total year

Cash paid was: 20,000

Total amount relating to the building was 50,000.

Though no payments were made, the interest expense still has to be paid.

CPA:
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.

17

Young Corp. purchased equipment by making a down payment of $4,000 and issuing a note payable for $18,000. A payment of $6,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of an ordinary annuity factor for three years at 8% is 2.58, and the present value for the future amount of a single sum of one dollar for three years at 8% is .735. Shipping charges for the equipment were $2,000, and installation charges were $3,500. What is the capitalized cost of the equipment?

A.
$19,480

B.
$21,480

C.
$24,980

D.
$27,500

C.
$24,980

So, my beautiful unicorn made of roses and daisies and who has the light of venus on a November evening.

Is it just me... or did you try to capitalize an interest expense.

ARE YOU A DUMB HOOKER WITH TWO LEFT FEET, A CAMEL TOE, and A LAZY EYE!

STOP.

NO YOU STOP!

4000+6000(2.58)+2000+3500=24980.

Don't do that shit again.

Dumb bitch.

18

A plant asset under construction by a firm for its own use was completed at the end of the current year. The following costs were incurred:
Materials $60,000
Labor 30,000
Incremental overhead 10,000
Capitalized interest 20,000
The asset has a service life of 10 years, estimated residual value of $10,000, and will be depreciated under the double declining balance method. At completion, the asset was worth $105,000 at fair value. What amount of depreciation will be recognized on the asset in total over its service life?

A. $105,000
B. $120,000
C. $95,000
D. $90,000

C. $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.

19

On April 1, 20x4, Hill Corp. issued 200 of its $1,000 face value bonds at 101 plus accrued interest. The bonds were dated November 1, 20x3, and bear interest at an annual rate of 9% payable semiannually on November 1 and May 1. What amount did Hill receive from the bond issuance?
A. $194,500
B. $200,000
C. $202,000
D. $209,500

D. $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) december- april]($200,000)(.09) [original price]
7,500

Equals bond proceeds
$209,500