FAR-2 Flashcards
(125 cards)
1
Q
The FASB is a(n):
A. Private sector body.
B. Governmental unit.
C. International organization.
D. Group of accounting firms.
A
A
The FASB has no official connection with the U.S. Government although the SEC, an agency of the federal government, can modify or rescind an accounting standard adopted by the FASB..
2
Q
The FASB has maintained that:
A. The interests of the reporting firms will be a primary consideration when developing new GAAP.
B. GAAP should have little or no cost of compliance.
C. New GAAP should be neutral and not favor any particular reporting objective.
D. GAAP should result in the most conservative possible financial statements.
A
C
One of the objectives of the FASB in setting standards is to develop rules that are unbiased. FASB statements generally do not reflect any reporting bias.
For example, the requirement to expense all research and development costs is uniform across all firms and does not favor one firm over another.
3
Q
Generally Accepted Accounting Principles may be described as:
A. The standards used in preparing financial statements.
B. The rules used in preparing tax returns.
C. Guidelines for establishing a strong system of internal control.
D. Guidelines for keeping a business entity profitable and solvent.
A
A
GAAP governs what is included in financial statements, and to a reasonable extent, how it is presented. GAAP is concerned with what accounts are included in financial statements, their amounts, and additional information that must be disclosed but which is not included in those accounts.
4
Q
In reference to proposed accounting standards, the term “negative economic consequences” includes:
A. The cost of complying with GAAP.
B. The inability to raise capital.
C. The cost of government intervention when not in compliance with GAAP.
D. The failure of internal control systems.
A
B
A proposed standard may cause firm earnings to fall, for example when they are adopted. Firms will be concerned that lower earnings may make it more difficult to sell stock or to secure loans.
As a result, negative economic consequences become a focal point for arguments against the proposed standard.
5
Q
Choose the correct statement about GAAP.
A. GAAP are laws.
B. Only publicly traded companies must comply with GAAP.
C. It is a violation of SEC regulations for publicly traded companies to depart from GAAP.
D. Firms may not restate financial statements previously issued.
A
C
The SEC requires that all registrants provide financial statements that comply with GAAP and will sanction firms and individuals involved in financial reporting that does not comply with GAAP.
Essentially, all companies that rely on external sources of capital require financial statements and, therefore, must comply with GAAP.
For example, a privately-held firm may require a loan. In order to obtain the loan, the firm must present audited financial statements.
6
Q
What is the primary protection for investors against fraudulent financial reporting by corporations?
A. Criminal statutes.
B. The requirement that financial statements be audited.
C. The fact that all firms must report the same way.
D. The integrity of management.
A
B
The audit of the financial statements by independent third parties is the primary protection. The auditors do not prepare the information, nor do they have employment ties with either the reporting firm or the intended audience of the financial statements.
However, even the audit of financial statements is not a perfect protection as indicated by the frequency of fraud and audit failure.
7
Q
A company records items on the cash basis throughout the year and converts to an accrual basis for year-end reporting. Its cash-basis net income for the year is $70,000. The company has gathered the following comparative Balance Sheet information:
Beginning of year End of year Accounts payable $ 3,000 $ 1,000 Unearned revenue 300 500 Wages payable 300 400 Prepaid rent 1,200 1,500 Accounts receivable 1,400 600 What amount should the company report as its accrual-based net income for the current year?
A. $68,800
B. $70,200
C. $71,200
D. $73,200
A
C
The general rule to convert from cash to accrual is to add the beginning liability balances and subtract the ending liability balances; also, subtract beginning asset balances and add ending asset balances.
8
Q
Young & Jamison's modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses? A. $125,000 B. $135,000 C. $165,000 D. $175,000
A
The approach on this question is to first calculate the cash-based operating expenses. Cash-based operating expenses are $150,000. The next step is to adjust the cash-based expense for the prepaid and accrued expenses. Beginning of the year prepaid expenses were paid in the prior year, but the expense was incurred (or consumed) in the current year, and end of the year prepaid expenses were paid this year but will be consumed next year. Therefore, you add the beginning of the year prepaid and subtract the end of the year prepaid expenses from the cash-based number.
Cash-based expenses will also be adjusted for the accrued expense. Beginnings of the year accrued expenses were not paid last year, but were last year’s expense item paid this year. End of the year accrued expenses were not paid this year, but are this year’s expense paid next year. Therefore, you subtract beginning of the year accrued and add end of the year accrued expenses to the cash-based number.
Cash-based operating expenses $150,000
Add the beginning of the year prepaid expenses, 10,000.
Subtract the end of the year prepaid expenses, (15,000).
Subtract the beginning of the year accrued expenses, ( 5,000).
Add the end of the year accrued expenses, 25,000.
Accrual-based operating expenses, $165,000
9
Q
Before 2001, Droit Co. used the cash basis of accounting. As of December 31, 2001, Droit changed to the accrual basis. Droit cannot determine the beginning balance of supplies inventory.
What is the effect of Droit’s inability to determine beginning supplies inventory on its 2001 accrual basis net income and December 31, 2001, accrual basis owners’ equity?
2001 net income 12/31/01 owner’s equity
No effect No effect
No effect Overstated
Overstated No effect
Overstated Overstated
A
C
Supplies expense for 2001 under the accrual method is: supplies expense = beginning supplies + purchases - ending supplies.
** If beginning supplies cannot be determined, then it is assumed to be zero and supplies expense is understated, causing 2001 income to be OVERSTATED. However, total supplies expense for the entire life of the business is unaffected by the inability to determine beginning supplies for 2001. Total supplies expense for the life of the business is total purchases less ending inventory in 2001. These two amounts are determinable, and thus, owners’ equity at the end of 2001 can be determined.
10
Q
Bird Corp.’s trademark was licensed to Brian Co. for royalties of 15% of the sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year.
Bird received the following royalties from Brian:
March 15 September 15
2004 $5,000 $7,500
2005 6,000 8,500
Brian estimated that the sales of the trademarked items would total $30,000 for July through December 2005.
In Bird’s 2005 Income Statement, the royalty revenue should be:
A. $13,000
B. $14,500
C. $19,000
D. $20,500
A
A
2005 royalty revenue is the amount earned in 2005, REGARDLESS of when it is received.
The September receipt of $8,500 accounts for the royalties earned the first half of 2005. Royalties for the second half are estimated to be .15($30,000) = $4,500. ***Although this is an estimate, if reliable, it provides relevant information. Waiting for the exact amount is not justified in this case. The small increase in reliability does not justify postponing recognition in 2005. Thus, total royalty revenue for 2005 is $13,000, which equals $8,500 + $4,500.
11
Q
On November 1, 2005, Key Co. paid $3,600 to renew its insurance policy for three years. At December 31, 2005, Key’s unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense.
What amounts should be reported for prepaid insurance and insurance expense in Key’s December 31, 2005, financial statements?
Prepaid Insurance Insurance expense
$3,300 $1,200
$3,400 $1,200
$3,400 $1,100
$3,490 $1,010
A
Prepaid insurance at year end is $3,400, which is the portion of the prepayment on November 1 that continues to the next three years.
Of the 36 months of coverage purchased, 34 months remain at December 31: $3,400 = (34/36)($3,600). Insurance expense includes three items: (1) the $90 of prepaid insurance remaining in the trial balance that has expired, (2) the $200 of insurance expense related to the November 1 purchase above ($3,600-$3,400 remaining prepaid), and (3) the expense portion of the $4,410 insurance expense amount in the unadjusted trial balance ($4,410-$3,600) = $810. This firm must have expensed the entire $3,600 November 1 purchase because it was not reflected in prepaid insurance. The difference of $810 reflects actual expense. Therefore, total insurance expense equals $1,100 = $90 + $200 + $810
12
Q
Which of the following would be reported as an investing activity in a company’s statement of cash flows?
A. Collection of proceeds from a note payable.
B. Collection of a note receivable from a related party.
C. Collection of an overdue account receivable from a customer.
D. Collection of a tax refund from the government.
A
B
Collection on a note receivable from a related party is an investing activity. The company is lending money to the related party and lending is not a primary business activity – the fact that the loan is in the form of a note implies that it is interest bearing.
13
Q
Which of the following statements includes the most useful guidance for practicing accountants concerning the FASB Accounting Standards Codification.
A.
The Codification includes only FASB Statements.
B.
The Codification is the sole source of U.S. GAAP, for nongovernmental entities.
C.
The Codification significantly modified the content of GAAP when it became effective.
D.
An accountant can be sure that all SEC rules are included in the Codification.
A
B
The Codification includes all authoritative GAAP for nongovernmental entities.
14
Q
Which of the following documents is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?
A. A proposed statement of position.
B. A proposed accounting standards update.
C. A proposed accounting research bulletin.
D. A proposed staff accounting bulletin.
A
B
Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).
15
Q
U.S. GAAP includes a very large set of accounting guidance. Choose the correct statement.
A.
The FASB Accounting Standards Codification includes guidance about items that are not under the purview of the Generally Accepted Accounting Principles, such as the income tax basis of accounting.
B.
Authoritative guidance from FASB Statements adopted before the FASB Accounting Standards Codification does not appear in the Codification.
C.
There is an implied hierarchy within the FASB Accounting Standards Codification, with FASB Statements assuming the top level.
D.
International accounting standards are not included in the FASB Accounting Standards Codification.
A
D
IFRS are not U.S. GAAP and thus are not included in the Codification.
Note:
There is no longer a hierarchy of GAAP. All Generally Accepted Accounting Principles are equally authoritative.
16
Q
Suppose Winston incorporated and had the following accounts. Indicate how each of the following is classified on the financial statements. Below is a list of classifications. If none of the listed classifications apply, answer NA.
Balance sheet classification Income statement classifications A. Current asset H. Revenue B. Noncurrent asset I. Expense C. Current liability J. Contra revenue D. Noncurrent liability E. Owner's equity F. Contra asset G. Contra equity ----------------------------------------------------------------------- Balance sheet classification Income statement classification 1. Bonds payable, due in year 8 2. Treasury stock 3. Accounts payable 4. Sales discounts 5. Notes payable, due in nine months 6. Inventory 7. Accounts receivable 8. Common stock 9. Cost of goods sold 10. Allowance for uncollectible accounts
A
BS IS
- Bonds payable, due in year 8 D NA
- Treasury stock G NA
- Accounts payable C NA
- Sales discounts NA J
- Notes payable, due in nine months C NA
- Inventory A NA
- Accounts receivable A NA
- Common stock E NA
- Cost of goods sold NA I
- Allowance for uncollectible accounts F NA
17
Q
Under East Co.’s accounting system, all paid insurance premiums are debited to prepaid insurance. For interim financial reports, East makes monthly estimated charges to insurance expense with credits to prepaid insurance.
Additional information for the year ended December 31, 2005, is as follows:
Prepaid insurance at December 31, 2004 $105,000
Charges to insurance expense during 2005 (including a year-end adjustment of 17,500) 437,500
Prepaid insurance at December 31, 2005 122,500
What was the total amount of insurance premiums paid by East during 2005?
A. $322,500
B. $420,000
C. $437,500
D. $455,000
A
D
Beginning prepaid balance $105,000
+ Premiums paid plug & answer
- Expense charges - $437,500
= Ending prepaid balance $122,500
Premiums paid = $455,000
18
Q
In financial statements prepared on the income-tax basis, how should the nondeductible portion of expenses, such as meals and entertainment, be reported?
A. Included in the expense category in the determination of income.
B. Included in a separate category in the determination of income.
C. Excluded from the determination of income but included in the determination of retained earnings.
D. Excluded from the financial statements.
A
A
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.
19
Q
The following trial balance of Trey Co. at December 31, 2005 has been adjusted except for income tax expense.
Dr. Cr. Cash $550,000 Accounts Receivable, net 1,650,000 Prepaid taxes 300,000 Accounts payable $ 120,000 Common stock 500,000 Additional paid-in capital 680,000 Retained earnings 630,000 Foreign currency translation adjustment 430,000 Revenues 3,600,000 Expenses 2,600,000 \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
$5,530,000 $5,530,000
Additional information: •During 2005, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between the financial statement and the income tax income, and Trey’s tax rate is 30%.
•Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer require payments in equal, semiannual installments of $125,000 every April 1 and October 1.
In Trey’s December 31, 2005 Balance Sheet, what amount should be reported as total current assets?
A. $1,950,000
B. $2,200,000
C. $2,250,000
D. $2,500,000
A
A
Current assets are assets that are collectible within one year. The sum of the stated current assets is $2,500,000 ($550,000+$1,650,000+$300,000). However, once the current tax bill is calculated, the prepaid taxes of $300,000 are transferred into a tax expense account to cover the $300,000 in current year tax expense. In addition, $250,000 of the special accounts receivable is not due for over one year and is, therefore, non-current.
Therefore, current assets should be $1,950,000 ($2,500,000-$300,000-$250,000).
20
Q
U Co. had cash purchases and payments on account during the current year totaling $455,000. U’s beginning and ending accounts payable balances for the year were $64,000 and $50,000, respectively. What amount represents U’s accrual-basis purchases for the year?
A. $441,000
B. $469,000
C. $505,000
D. $519,000
A
A
Using an equation, or a T-account, to analyze accounts payable (AP) yields accrual purchases: Beginning AP ($64,000) \+ Accrual purchases - Cash payments ($455,000) = Ending AP ($50,000).
Solving for accrual purchases yields $441,000.
21
Q
Reid Partners, Ltd., which began operations on January 1, 2003, has elected to use cash-basis accounting for tax purposes and accrual-basis accounting for its financial statements.
Reid reported sales of $175,000 and $80,000 in its tax returns for the years ended December 31, 2004 and 2003, respectively. Reid reported accounts receivable of $30,000 and $50,000 in its Balance Sheets as of December 31, 2004 and 2003, respectively.
What amount should Reid report as sales in its Income Statement for the year ended December 31, 2004? A. $145,000 B. $155,000 C. $195,000 D. $205,000
A
B
When converting from cash-basis sales to accrual-basis sales, sales must be adjusted for the net change in accounts receivable. There has been a net decrease in receivables of $20,000 over the course of the year from $50,000 to $30,000. Thus, accrual sales would decline by $20,000 as compared to cash sales (which included the additional receivables collected). Therefore, this response of $155,000 ($175,000-$20,000) is correct.
22
Q
Zeta Co. reported sales revenue of $4,600,000 in its Income Statement for the year ended December 31, 2001. 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 2001. Under the cash basis of accounting, Zeta would have reported 2001 sales of:
A. $4,900,000
B. $4,350,000
C. $4,300,000
D. $4,280,000
A
D
The question requires a solution for cash collected on accounts receivable. Using the information for accounts receivable, the collections amount can be found:
Beginning balance $1,000,000
+ sales + $4,600,000
- collections solving
- write offs - $20,000
= ending balance $1,300,000
collections = $4,280,000 Under the cash basis of accounting, sales equals cash collections.
23
Q
Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared to the accrual-basis method of accounting, Sanni’s cash-basis pretax income is:
A. Higher by $4,000.
B. Lower by $4,000.
C. Higher by $36,000.
D. Lower by $36,000.
A
C
The $20,000 AR decrease implies that cash received on account was $20,000 greater than accrual sales. Cash-basis income is, therefore, $20,000 greater than accrual income for this difference. The $16,000 accounts payable increase implies that more inventory was purchased and included in accrual cost of goods sold than was paid. Cash-basis income is, therefore, $16,000 more than accrual income for this difference. In total, cash-basis income is $36,000 greater than accrual income.
24
Q
Savor Co. had $100,000 in cash-basis pretax income for 1999. At December 31, 1999, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 1998, balances. Compared to the accrual-basis method of accounting, Savor's cash pretax income is: A. Higher by $4,000. B. Lower by $4,000. C. Higher by $16,000. D. Lower by $16,000.
A
cash-basis income is $100,000. The journal entries for an increase and a decrease in accounts payable respectively are:
DR: Accounts receivable 10,000
CR: Sales 10,000
————————
DR: Accounts payable 6,000
CR: Cash 6,000
The increase in accounts receivable should be ADDED to the cash income as it was not considered and is recognized as earned for accrual income. The decrease in accounts payable was subtracted for cash-basis income***. This is NOT a reduction in accrual income, and as a result, should be ADDED back to the cash income. The computation is: 100,000+10,000+6,000 = 116,000, or a $16,000 increase from cash to accrual. In other words, the cash-basis income is $16,000 LOWER than accrual income.
25
Young & Jamison's modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?
A. $125,000
B. $135,000
C. $165,000
D. $175,000
C
The approach on this question is to first calculate the cash-based operating expenses. Cash-based operating expenses are $150,000. The next step is to adjust the cash-based expense for the prepaid and accrued expenses. Beginning of the year prepaid expenses were paid in the prior year, but the expense was incurred (or consumed) in the current year, and end of the year prepaid expenses were paid this year but will be consumed next year. Therefore, you add the beginning of the year prepaid and subtract the end of the year prepaid expenses from the cash-based number.
Cash-based expenses will also be adjusted for the accrued expense. Beginnings of the year accrued expenses were not paid last year, but were last year's expense item paid this year. End of the year accrued expenses were not paid this year, but are this year's expense paid next year. Therefore, you subtract beginning of the year accrued and add end of the year accrued expenses to the cash-based number.
Cash-based operating expenses $150,000
Add the beginning of the year prepaid expenses, 10,000.
Subtract the end of the year prepaid expenses, (15,000).
Subtract the beginning of the year accrued expenses, ( 5,000).
Add the end of the year accrued expenses, 25,000.
Accrual-based operating expenses, $165,000
26
Under East Co.'s accounting system, all paid insurance premiums are debited to prepaid insurance. For interim financial reports, East makes monthly estimated charges to insurance expense with credits to prepaid insurance.
Additional information for the year ended December 31, 2005, is as follows:
Prepaid insurance at December 31, 2004 $105,000
Charges to insurance expense during 2005 (including a year-end adjustment of 17,500) 437,500
Prepaid insurance at December 31, 2005 122,500
What was the total amount of insurance premiums paid by East during 2005?
A. $322,500
B. $420,000
C. $437,500
D. $455,000
D
Beginning prepaid balance $105,000
+ Premiums paid Solving
- Expense charges -$437,500
= Ending prepaid balance $122,500
Premiums paid = $455,000
27
Accrual or Deferral ?
1. Depreciation expense xx
Accumulated deprecation xx
2. Interest receivable xx
Interest revenue xx
3. Rent expense xx
Prepaid rent xx
4. Unearned revenue xx
Rent revenue xx
5. Wage expense xx
Wages payable xx
Accrual/Deferral
1. Depreciation expense xx
Accumulated deprecation xx Deferral
2. Interest receivable xx
Interest revenue xx Accrual
3. Rent expense xx
Prepaid rent xx Deferral
4. Unearned revenue xx
Rent revenue xx Deferral
5. Wage expense xx
Wages payable xx Accrual
28
SFAC 5 provides guidance on measuring assets and liabilities. The following measurement methods are available to measure assets and liabilities, as shown in the list below. Identify the appropriate valuation method for each item.
```
Measurement methods
A. Historical cost or historical proceeds
B. Current cost
C. Current market value
D. Net realizable value or settlement rate
E. Present value of future cash flows
---------------------------------------
Account
1. Long-term receivables
2. Available for sale securities
3. Equipment
4. Warranty obligations
5. Short-term payables
6. Accounts receivable
7. Bonds payable, due in ten years
8. Trading securities
```
Account
1. Long-term receivable E. PV of future cash flows
2. Available for sale securities C.Current market value
3. Equipment A. Historical Cost/Proceeds
4. Warranty obligations D.NRV or Settlement rate
5. Short-term payables A. Historical Cost/Proceeds
6. Accounts receivable D.NRV or Settlement rate
7. Bonds payable, due 10 yrs E. PV of future cash flows
8. Trading securities C. Currrent market value
29
Terms
A. Recognition G. Gains
B. Comprehensive Income H. Net Income
C. Faithful representation I. Earnings
D. Revenues J. Realization
E. Predictive Value K. Replacement Cost
F. Comparability L. Current Market Value
1. Component of relevance. __
2. Increases in net assets from incidental or peripheral transactions affecting an entity. __
3. The process of converting noncash resources and rights into cash or claims to cash. __
4. Enhancing qualitative characteristic of relevance and faithful representation. __
5. The process of formally recording an item in the financial statements of an entity after it has met existing criteria and been subject to cost-benefit constraints and materiality thresholds. __
6. All changes in net assets of an entity during a period except those resulting from investments by owners and distributions to owners. __
7. Inflows or other enhancements of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing operations.__
8. The amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation. __
9. The quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events. __
10. A performance measure concerned primarily with cash-to-cash cycles. __
Rationale:
1. (E) SFAC 5 states that "Relevance is a primary qualitative characteristic. To be relevant, information about an item must have feedback value or predictive value (or both) for users and must be timely."
2. (G) SFAC 6 states that "Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners."
3. (J) SFAC 5 states that "Revenues and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash."
4. (F) SFAC 8 states that "Comparability, including consistency, is an enhancing quality that interacts with relevance and faithful representation to contribute to the usefulness of information."
5. (A) SFAC 5 states that "Recognition is the process of formally recording or incorporating an item into the financial statements of an entity as an asset, liability, revenue, expense, or the like." SFAC 5 continues the recognition concept by stating, "An item and information about it should meet four fundamental recognition criteria to be recognized and should be recognized when the criteria are met, subject to a cost-benefit constraint and a materiality threshold."
6. (B) SFAC 5 states that "Comprehensive income is a broad measure of the effects of transactions and other events on an entity, comprising all recognized changes in equity (net assets) of the entity during a period from transactions and other events and circumstances except those resulting from investments by owners and distributions to owners."
7. (D) SFAC 6 defines revenues as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations."
8. (L) SFAC 5 defines current market value as "the amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation."
9. (E) Predictive value is the quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events (SFAC 8).
10. (I) SFAC 5 states that "Earnings is a measure of performance during a period that is concerned primarily with the extent to which asset inflows associated with cash-to-cash cycles substantially completed (or completed) during the period exceed (or are less than) asset outflows associated, directly or indirectly, with the same cycles."
30
According to the conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called:
A. Confirmatory value.
B. Predictive Value.
C. Representational faithfulness.
D. Faithful representation.
B
Predictive value is the ingredient that helps users increase the likelihood of forecasting the outcome of events. Financial statement information is useful if it helps users make decisions about investing and extending credit. These decisions involve predictions of a firm's future financial performance, position, and cash flows.
31
Which of the following characteristics relates to both accounting relevance and faithful representation?
A. Free from material error.
B. Completeness.
C. Neutrality.
D. Comparability.
D.
Comparability is the quality of information that enables users to identify similarities and differences between sets of information. For information to be comparable, it must be both relevant (make a difference to a user) and reliable (be accurate and trustworthy).
Note :
Neutrality, or freedom from bias, is one of the three ingredients, or components, of faithful representation.
32
What is the conceptual framework intended to establish?
A. Generally Accepted Accounting Principles in financial reporting by business enterprises.
B. The meaning of "present fairly in accordance with Generally Accepted Accounting Principles."
C. The objectives and concepts for use in developing standards of financial accounting and reporting.
D. The hierarchy of sources of Generally Accepted Accounting Principles.
C
The concepts statements, also collectively called The Conceptual Framework, provide the general underpinnings for specific GAAP. In a way, it is a "constitution" for developing specific accounting principles. The concepts statements are not GAAP, however.
33
According to the conceptual framework, neutrality is an ingredient of:
Faithful representation Relevance
Yes Yes
Yes No
No Yes
No No
YES/NO
Neutrality is one of the ingredients of faithful representation, along with completeness and free from material error. Neutrality means lack of bias-that financial reporting does not have a preconceived objective or agenda
34
According to the FASB conceptual framework, which of the following is not an enhancing qualitative characteristic?
A. Comparability.
B. Confirmatory value.
C. Verifiability.
D. Timeliness.
B. Confirmatory value.
Confirmatory value is an ingredient of relevance. It does not relate to faithful representation. Faithful representation can be broken down into completeness, free from material error, and neutrality.
Note: Comparability.
Comparability, the quality of information that allows users to identify similarities and differences between different sets of data, is an enhancing characteristic of accounting information.
Comparability contributes to both relevance, the quality of information that makes a difference in decision-making, and faithful representation, the quality of information that renders it objective and unbiased.
Data that is comparable with other reported data is more useful for decision making and therefore more relevant. It also improves the faithful representation of the data. Data that is not comparable with other data sets may not be as faithful a representation as data that is comparable.
35
According to the FASB conceptual framework, predictive value is an ingredient of:
Relevance Faithful representation
No No
Yes Yes
No Yes
Yes No
YES/NO
Predictive value is one of the ingredients of relevance, one of the primary characteristics of accounting information. The other ingredient of relevance is confirmatory value.
Predictive value is not an ingredient of faithful representation. Faithful representation is the other primary characteristic of accounting information. Its three main ingredients are completeness, free from material error, and neutrality.
36
Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization?
```
A. Reliability.
B. Timeliness.
C. Neutrality.
D. Relevance.
The question is asking which of the following terms captures predictive value. Predictive value along with confirmatory value is a component of relevance.
```
D. Relevance.
The question is asking which of the following terms captures predictive value. Predictive value along with confirmatory value is a component of relevance.
37
On December 31, 2002, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, 2002, the net realizable value of the equipment was below historical cost.
What is the appropriate measurement basis for equipment included in Brooks' December 31, 2002, Balance Sheet?
A. Historical cost.
B. Current reproduction cost.
C. Net realizable value.
D. Current replacement cost.
C
When a firm is in liquidation, historical cost and entry values (replacement cost) are no longer relevant.
The going concern assumption supports the historical cost principle. The firm is no longer a going concern. The only amounts relevant are the amounts to be received on sale of the assets. Net realizable value is the net value to be received, after the costs of getting the asset ready for sale are deducted.
38
According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?
A. Replacement cost.
B. Current market value.
C. Historical cost.
D. Net realizable value.
A
Replacement cost is the amount to be paid for an item at the current time. This concept is used in the lower-of-cost-or-market inventory valuation procedure. Replacement cost is an example of an entry price-the amount required to be paid currently to obtain an asset already held.
39
```
Ande Co. estimates uncollectible accounts expense using the ratio of past actual losses from uncollectible accounts to past net credit sales, adjusted for anticipated conditions. The practice follows the accounting concept of:
A. Consistency.
B. Going concern.
C. Matching.
D. Substance over form
```
C
The matching principle requires that we recognize and match expenses with the revenues generated. For all sales in a given period, some will be uncollectible. The cost of those uncollectible accounts is matched in the period that the revenue is recognized.
40
The SEC defines a foreign private issuer as any issuer other than a foreign government, except an issuer that where more than 50% of the outstanding voting securities are directly or indirectly owned by residents of the U.S. and what other condition?
A. The business of the issuer is administered principally in the foreign country.
B. More than 50% of the assets of the issuer are located in the foreign country.
C. The majority of its executive officers or directors are U.S. citizens or residents.
D. All of the above.
C
A foreign private issuer is any foreign issuer other than a foreign government, except an issuer that meets the following conditions:
A. More than 50% of the outstanding voting securities are directly or indirectly owned by residents of the U.S., AND
Any of the following:
1.The business of the issuer is administered principally in the U.S.
2. More than 50% of the assets of the issuer are located in the U.S.
3.The majority of its executive officers or directors are U.S. citizens or residents.
Rule 205, Securities Act 1933
41
Even though the SEC delegates the creation of accounting standards to the private sector, the SEC frequently comments on accounting and auditing issues. The main pronouncements published by the SEC are:
A. Federal Reporting Updates (FRU).
B. Financial Reporting Releases (FRR).
C. Staff Auditing Bulletins (SAB).
D. Accounting Principles Opinions (APO).
B
The main pronouncements published by the SEC are the Financial Reporting Releases (FRR) and the Staff Accounting Bulletins (SAB).
Note:
The Accounting Principles Board (not associated with the SEC) issued Opinions, which were termed Accounting Principles Board Opinions. Many have been superseded by the pronouncements of the FASB.
42
The SEC is comprised of five commissioners, appointed by the President of the United States, and four divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts?
A. Division of Corporate Finance.
B. Division of Enforcement.
C. Division of Trading and Markets.
D. Division of investment management.
A
The Division of Corporate Finance oversees the compliance with the securities acts and examines all filings made by publicly held companies
43
For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, "Fair Value Measurement," least likely to apply?
A. Determination of the fair value to be assigned to land acquired in a business combination.
B. Determination of the fair value of a bond liability for applying the fair value option.
C. Determination of the fair value of legal services received in exchange for an entity's common stock.
D. Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred.
C
The guidance for determining fair value provided in the fair value framework is not appropriate for determining the fair value of legal services received in exchange for an entity's common stock. ASC 820 specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.
44
In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account all but which one of the following?
A. What is physically possible.
B. What is financially feasible.
C. How the reporting entity would use the asset.
D. What is legally permissible
C
In determining the fair value of a nonfinancial asset, how the reporting entity would use the asset would NOT be taken into account in assessing the highest and best use of the asset. The highest and best use is based on use of the asset by market participants, not by the reporting entity.
45
Which one of the following is not a purpose of the fair value framework as set forth in ASC 820, "Fair Value Measurement"?
A. Provide a uniform definition of "fair value" for GAAP purposes.
B. Provide a framework for determining fair value for GAAP purposes.
C. Establish new measurement requirements for financial instruments.
D. Establish expanded disclosures about fair value when it is used.
C
Establishing new measurement requirements for financial instruments, or for any other asset or liability, is NOT one of the purposes of the fair value framework. Measurement requirements or elections are determined by other pronouncements; the "Fair Value Measurement" pronouncement establishes standards to be followed in determining (measuring) fair value when it is used.
46
For which one of the following described assets does the guidance for determining fair value as provided in ASC 820, "Fair Value Measurement," not apply?
A. Accounts receivable.
B. Investments in debt securities to be held-to-maturity.
C. Investments in equity securities held for trading.
D. Inventory reported at lower of cost or market.
D
Inventory valuation under lower of cost or market is specifically exempt from the fair value measurement guidance provided by ASC 820, "Fair Value Measurement." The use of lower of cost or market valuation places upper ("ceiling") and lower ("floor") limits on the measurement of "market" that may not result in a true fair value measurement. Thus, the measurement of inventory at "market" is one of the few exceptions to the use of ASC 820 guidance for fair value measurement.
47
Which of the following statements concerning the determination of fair value is/are correct?
I. The determination of fair value is based on a hypothetical transaction.
II. The determination of fair value is based on an exit price.
III. The determination of fair value of a nonfinancial asset should be based on the intended use of the asset by the reporting entity.
A. I only.
B. II only.
C. I and II only.
D. II and III only.
C
Both Statements I and II are correct. The determination of fair value is based on a hypothetical transaction and on the use of a (hypothetical) exit price. Statement III is not correct. The determination of fair value of a nonfinancial asset should be based on the highest and best use of the asset by market participants, not based on the intended use by the reporting entity.
48
In determining the fair value of an asset in the most advantageous market, the market based exit price should be adjusted for
Transaction Cost Transportation Cost
Yes Yes
Yes No
No Yes
No No
NO/YES
In determining the fair value of an asset in the most advantageous market, the market based exit price would not be adjusted for transaction cost associated with executing the (hypothetical) transaction, but would be adjusted for transportation cost to get the asset to the principal or most advantageous market.
49
A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows
Quoted price of asset Transaction costs
Market A $1,000 $ 75
Market B 1,050 150
```
What is the fair value of the financial asset?
A. $ 900
B. $ 925
C. $1,000
D. $1,050
```
C
The fair value of the financial asset is $1,000, the quoted price in the most advantageous market, but without adjusting that price for transaction costs. Since there is no principal market for the financial asset, the most advantageous market must be used to determine fair value. The most advantageous market is the market that maximizes the amount that would be received to sell the asset (or minimizes the amount that would be paid to transfer a liability), after taking into account transaction costs and transportation costs. Thus, the most advantageous market is Market A, determined as:
Market A Market B
Quoted price of asset $1,000 $1,050
Transaction cost ( 75) ( 150)
Net Proceeds $ 925 $ 900
Even though transaction costs are considered in determining the most advantageous market, the price in the most advantageous (or principal) market used to measure the fair value of the asset (or liability) is not adjusted for transaction costs [ASC 820-10-35-9B]. Therefore, the quoted price of the asset in the most advantage market, unadjusted for the transaction costs, is fair value.
50
```
On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.'s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody's investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment?
A. $ 6,000
B. $10,000
C. $16,000
D. $18,000
```
C
Since Peabody has elected to report the investment in Newman using the fair value option, it should recognize its share of cash dividends received during the period (.30 x $20,000 = $6,000) and the increase in the fair value of the investment ($400,000 > $410,000 = $10,000), or $6,000 + $10,000 = $16,000.
51
```
Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?
A. Market.
B. Income.
C. Cost.
D. Observable inputs.
```
B
The income approach to fair value measurement of an asset measures fair value by converting future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.
52
To measure FV of an asset by converting future amounts to a single present amount . Discounting future cash flows - Is what approach ?
INCOME Approach
53
Alphaco has two subsidiaries, Betaco and Charlieco, both of which are consolidated by Alphaco. Alphaco and Betaco have elected to measure their respective investments held-to-maturity at fair value. Charlieco measures its investments held-to-maturity using amortized cost. In its consolidated financial statements, for which companies, if any, may Alphaco elect to report investment held-to-maturity at fair value?
A. Alphaco only.
B. Alphaco and Betaco only.
C. Alphaco, Betaco, and Charlieco.
D. None of the companies; all investments held-to-maturity must be measured and reported at amortized cost.
C
As the parent, Alphaco may elect to report all of the investments held-to-maturity at fair value in its consolidated statements (only), whether or not the fair value option was elected by its subsidiaries for their separate books and any separate reporting purposes.
54
In determining the fair value of an asset or liability, would the fair value of the asset or the fair value of the liability be determined using an entry price or an exit price?
Asset Fair Value Liability Fair Value
Entry price Entry price
Entry price Exit price
Exit price Entry price
Exit price Exit price
EXIT PRICE/ EXIT PRICE
The appropriate basis for determining the fair value of an asset or a liability is an exit price.
55
Which of the following valuation methods may be used to measure investments classified as held-to-maturity?
Amortized Cost Fair Value
No No
No Yes
Yes No
Yes Yes
YES/YES
Both amortized cost and fair value may be used to measure and report investments classified as held-to-maturity. Amortized cost is the traditional measurement method for investments held-to-maturity and would be used unless an entity elects to use fair value, which is permitted by the fair value option.
56
If a firm changes the valuation approach used to determine fair value, how would the amount of change in fair value resulting from the change in the valuation approach be reported?
A. As a change in accounting principle.
B. As an adjustment to beginning retained earnings of the period of change in approach.
C. As a change in accounting estimate.
D. As gain on the income statement for the period of change in approach.
C
The amount of change in fair value resulting from a change in the valuation approach used to determine fair value is reported as a change in accounting estimate. That means that the amount of the change, like the change in fair value resulting from market forces, will be reported in current income (as income from continuing operations).
57
When the fair value of an asset is determined as the amount that currently would be required to replace the service capacity of the asset, which one of the following valuation techniques has been used?
A. Income approach.
B. Cost approach.
C. Expense approach.
D. Market approach.
B
When fair value is determined as the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), the cost approach has been used.
58
On January 15, 2008, Able Co. made a significant investment in the debt securities of Baker Co., which it intends to hold until the debt matures. Able's fiscal year-end is December 31. If Able Co. intends to measure and report its investment in Baker Co. debt securities at fair value as permitted by FASB #159, "The Fair Value Option... ", on which one of the following dates must Able elect to implement the fair value option?
A. January 15, 2008
B. January 31, 2008
C. March 31, 2008
D. December 31, 2008
A
If Able Co. intends to elect to implement the fair value option for its investment in Baker's debt, it MUST make its election on the date it first recognizes the investment, which is January 15, 2008.
59
Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny's carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should the land and building be reported on Papa's consolidated statements prepared immediately after the transaction?
Land Building
$75,000 $35,000
$55,000 $55,000
$60,000 $50,000
$50,000 $60,000
Land 60,000 and 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.)
60
Which of the following statements concerning the determination of fair value at the date an asset is acquired or a liability is assumed is/are correct?
I. The exit price is conceptually different than the entry price.
II. The entry price and the exit price may be different amounts at the date an asset or liability is initially recognized.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
Both Statement I and Statement II are correct.
An exit price and an entry price are conceptually different (Statement I) and in practice an entry price and an exit price may be different amounts at the date an asset or liability is initially recognized (Statement II). Such a difference may come about, for example, because the entry price is based on a transaction between related parties or because the selling entity was under financial duress at the time of the sale.
61
Which one of the following financial items may not be measured and reported at fair value at the election of an entity?
A. Accounts receivable.
B. Investment in debt securities to be held to maturity.
C. Investment in a subsidiary that is to be consolidated.
D. Accounts payable.
C
A firm may not use fair value to measure and report an investment in a subsidiary that is to be consolidated. The financial asset "Investment in subsidiary" will be eliminated in the consolidating process and be replaced by the subsidiary's assets and liabilities (and possibly goodwill) on the consolidated balance sheet.
62
Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny's carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should Papa record the land and building on its books at the date of the transaction?
Land Building
$75,000 $35,000
$55,000 $55,000
$60,000 $50,000
$50,000 $60,000
75,000 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.
63
In which of the following circumstances, if any, would an auditor likely be especially concerned as to whether or not the price paid to acquire an asset was the fair value of the asset?
I. The asset was acquired from the acquiring firm's majority shareholder.
II. The asset was acquired in an active exchange market.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
A
If an asset was acquired from the acquiring firm's majority shareholder, an auditor likely would be especially concerned as to whether or not the price paid to acquire the asset was fair value of the asset because an entity and its majority shareholder are related parties. Related party transactions may not be at arms-length and, therefore, may require special attention of an auditor and special disclosures related thereto.
64
Which one of the following can be measured at fair value at the option of the reporting entity?
A. A liability under a lease contract.
B. An investment classified as held-for-trading.
C. An investment classified as held-to-maturity.
D. A liability under a pension plan
C
An entity may elect to measure and report an investment classified as held-to-maturity at fair value. Traditionally, investments classified as held-to-maturity would be measured and reported at amortized cost, but the provisions of the fair value option permit such investments to be measured and reported at fair value at the option of the reporting entity.
Note :
*Held-for - trading-MUST be measured at fair value
*liability under pension plans -May NOT use FV
65
Multico is a securities dealer whose principal market is with other securities dealers. To take advantage of a perceived opportunity, on December 31, the end of its fiscal year, Multico acquired a financial asset in a market other than its principal market for $50,000. At that date, the identical instrument could be sold in Multico's principal market for $50,100 with a $200 transaction cost. Which of the following amounts would constitute fair value to Multico for the financial asset at December 31?
A. $49,800
B. $49,900
C. $50,000
D. $50,100
Since fair value is based on an exit price, the amount at which Multico could have sold the asset in its principal market is its fair value to Multico. Since the asset could have been sold by Multico in its principal market for $50,100, that is its fair value to Multico. The transaction cost to execute the sale should not be deducted from the market price to get fair value.
66
Marco has an investment that is traded in two different markets, Front market and Side market. Marco has equal access to each market. In order to determine the fair value of its investment, Marco has obtained the following per share information for the securities as of the close of business December 31, the end of its fiscal year:
Front Market Side Market
Selling Price $52/sh $50/sh
Transaction Cost $ 6/sh $ 1/sh
If Front market is the principal market for the security for Marco, using the market approach, which one of the following would be the per share amount used for measuring the investment at fair value?
A. $52/sh
B. $50/sh
C. $49/sh
D. $46/sh
A
Since Front market is the principal market, fair value would be based on the price at which Marco could sell the investment in that market, or $52/sh. The market selling price would not be adjusted for the related direct transaction cost.
67
Which of the following is responsible for fund raising for entire operations involving the IASB?
A. IFRS Interpretations Committee.
B. IFRS Advisory Council.
C. IFRS Foundation.
D. Standard Advisory Council
C. IFRS Foundation.
The IFRS Foundation, as the legal entity of the entire organization, has the responsibility to ensure that the operations are sufficiently funded in order to ensure the fulfillment of the standard-setting objectives without compromising the independence and objectivity of the standard-setting process.
68
Which of the following is not a role of the trustees of the IFRS Foundation?
A. Appoint the members of the IASB and establish their contracts of service and performance criteria.
B. Appoint the members of the IFRS Interpretations Committee and the IFRS Advisory Council.
C. Approve the annual budget of the IFRS Foundation and determine the basis for funding.
D. Annually review the strategy of the IFRS Foundation and the IASB and its effectiveness, including the determination of the IASB's agenda.
D.
The Trustees do not determine the agenda of the IASB. Rather, the Trustees annually review the strategy of the IFRS Foundation and the IASB and its effectiveness, including the consideration, but not the determination, of the IASB's agenda.
69
The IFRS Foundation serves as the administrative umbrella for a group of bodies. Which of the following bodies are NOT included under the IFRS Foundation umbrella?
A. International Federation of Accountants (IFAC).
B. International Accounting Standards Board.
C. IFRS Interpretations Committee.
D. IFRS Advisory Council.
A
The International Federation of Accountants (IFAC) is a global organization for the accounting profession. Its members are accounting and auditing organizations throughout the world. It is an independent organization not under the IFRS Foundation umbrella, but it does support the activities of the IFRS Foundation by encouraging high-quality practices by the world's accountants and auditors.
70
Which of the following is a member of the Monitoring Board?
A. Global Accounting Technical Officer of the World Bank.
B. CEO of the Financial Executives International.
C. Chair of the CFA Institute.
D. Chair of the U.S. Securities and Exchange Commission.
D
The Chair of the U.S. Securities and Exchange Commission is a member of the Monitoring Board. The Monitoring Board provides a formal link between the Trustees and public authorities. The U.S. Securities and Exchange Commission is the primary overseer and regulator of the U.S. securities markets. Its mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
71
Which of the following is an objective of the IFRS Foundation?
A. To enforce the use and rigorous application of those standards.
B. To take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings.
C. To develop, in the public interest, a single set of high-quality, understandable, enforceable, and globally accepted financial-reporting standards (IFRSs) through its member associations.
D. To require adoption of international financial reporting standards (IFRSs) globally.
B
The objective of the IFRS Foundation is to take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings.
The objective of the IFRS Foundation is to develop, in the public interest, a single set of high-quality, understandable, enforceable, and globally accepted financial reporting standards based upon clearly articulated principles. These standards should require high-quality, transparent, and comparable information in financial statements and other financial reporting to help investors, other participants in the world's capital markets, and other users of financial information make economic decisions. There are no member associations of the IASB. Rather, representatives of many associations do partake in an advisory capacity, through the IFRS Advisory Council.
72
According to the IFRS for Small and Medium-sized Entities (IFRS for SMEs), the intended user is an SME. Which of the following, if any, is (are) included in the definition of that user?
* An entity that does not have public accountability.
* An entity that publishes general purpose financial statements for external users.
Yes Yes
Yes No
No Yes
No No
YES/YES
The IASB uses a broad definition of an SME. Rather than restrict it by revenue or number of employees, as other organizations, such as the World Bank and U.S. government, have done; the Board simply states that the entity does not have public accountability and that the entity publishes general purpose financial statements for external users, such as owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. IFRS for SME, para. 1.2
73
```
Which of the following best describes the term "public accountability" according to IFRSs and IFRS for SME?
I. Entity files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market.
```
II. Entity holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance entity, securities broker/dealer, pension fund, mutual fund, or investment banking entity.
A. I. only.
B. II Only.
C. Both I and II.
D. Neither I nor II.
```
C
Both statements are included in the definition of the term "public accountability." The entity files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market, and the entity holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance entity, securities broker/dealer, pension fund, mutual fund, or investment-banking entity. IFRS for SMEs, para. 1.3.
```
74
IASB's due process procedures includes the following steps.
•I. Analyze comments to the Exposure Draft;
•II. Issue the Exposure Draft;
•III. Prepare the Discussion Paper;
•IV. Add the item to the Working Agenda;
•V. Discuss the issue;
•VI. Issue the IFRS;
•and VII. Publish the Discussion Paper.
What is the correct ordering of the steps?
A. IV, II, III, V, VII, I, VI
B. IV, V, II, III, VII, I, VI.
C. IV, III, VII, V, II, I, VI.
D. IV, V, III, VII, II, I, VI.
```
D
The correct ordering is:
•1) Add the item to the Working Agenda (IV),
•2) Discuss the issue (V),
•3) Prepare the Discussion Paper (III),
•4) Publish the discussion paper (VII)
•5) Issue the Exposure Draft (II)
•6) Analyze comments to the Exposure Draft and (I)
•7) Issue the IFRS (VI)
```
Per the IASB Due Process Handbook
75
IAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors includes the IFRS hierarchy. What is the second-level, or the level after the initial level, addressing the requirements and guidance in IFRS?
A. The definitions, recognition criteria, and measurement concepts for assets, liabilities, comprehensive income, revenue, expenses, and gains and losses in the Framework.
B. The definitions, recognition criteria, and measurement concepts for assets, liabilities, revenue, and expenses in the Framework.
C. Pronouncements of other standard-setting bodies, other accounting literature, and accepted industry practices.
D. Pronouncements of other standard setting bodies using a similar conceptual framework, other accounting literature, and accepted industry practices.
B
The IFRS hierarchy, as presented in IAS 8, includes first, the requirements in IFRS dealings with similar or related issues; second, the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework; and lastly, the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature, and accepted industry practices, to the extent that these do not conflict with IFRS or the Framework. IAS 8, para. 12.
76
```
When referring to IFRS, which of the following are NOT included?
A. IASs.
B. SEC.
C. IFRICs.
D. IFRS Interpretations.
```
B
SEC is the abbreviation for the Securities and Exchange Commission, and as such, is not included in the definition of IFRS, International Financial Reporting Standards. IAS 8, para. 5
77
Identify which of the following is an assumption(s) underlying the preparation and presentation of financial statements under the IASB Framework.
Accrual Basis Going Concern
Yes No
Yes Yes
No Yes
No No
YES/YES
There are two assumptions underlying the preparation and presentation of financial statements: accrual basis and going concern. IASB Framework, para 22-23.
78
The purpose of IASB's Framework for the preparation and presentation of financial statements includes all of the following except:
A. Assist users of financial statements in interpreting the information contained in financial statements that are prepared in conformity with IFRSs.
B. Assist national standard-setting bodies in developing national standards.
C. Assist the IASB in the development of future IFRSs and in its review of existing IFRSs.
D. Assist the IASB in enforcing regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative treatments permitted by IFRSs.
D
Remember that the IASB has no enforcement authority. The enforcement is carried out by regulators, such as the SEC in the U.S., Central Banks, and governmental authorities. As such, the purpose of the IASB's Framework is not to assist in enforcing regulations, accounting standards, and procedures but, rather, to assist in promoting the harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative treatments permitted by IFRSs. IASB Framework, para. 1.
79
The following trial balance of JB Company at December 31, year five, has been adjusted except for income taxes. The income tax rate is 30%.
DR CR
Accounts receivable, net 725,000
Accounts payable 250,000
Accumulated depreciation 125,000
Cash 185,000
Contributed capital 650,000
Expenses 3,750,000
Goodwill 140,000
Prepaid taxes 225,000
Property, plant and equipment 850,000
Retained earnings, 1/1/Yr. 5 350,000
Revenues 4,500,000
5,875,000 5,875,000
During year five, estimated tax payments of $225,000 were paid and debited to prepaid taxes. There were no differences between financial statement and taxable income for year five.
Included in accounts receivable is $400,000 due from a loyal customer. Special terms were granted to this customer to make payments of $100,000 semi-annually every March 1 and September 1.
In JB Company's December 31, year five Balance Sheet, what amount should be reported as total retained earnings?
A. 225,000
B. 525,000
C. 750,000
D. Some other amount.
D
Retained earnings are calculated as follows:
Revenue [4,500,000] - Expenses [3,750,000] 750,000
Income taxes = 0.30 * 750,000 (225,000)
Net income 525,000
Retained earnings, 1/1/Yr. 5 350,000
Retained earnings, 12/31/Yr. 5 875,000
80
The following trial balance of JB Company at December 31, year five, has been adjusted except for income taxes. The income tax rate is 30%.
DR CR
Accounts receivable, net $725,000
Accounts payable 250,000
Accumulated depreciation 125,000
Cash 185,000
Contributed capital 650,000
Expenses 3,750,000
Goodwill 140,000
Prepaid taxes 225,000
Property, plant, and equipment 850,000
Retained earnings, 1/1/Year five 350,000
Revenues __________ 4,500,000
5,875,000 5,875,000
During Year five, estimated tax payments of $225,000 were paid and debited to prepaid taxes. There were no differences between financial statement and taxable income for year five.
Included in accounts receivable is $400,000 due from a loyal customer. Special terms were granted to this customer to make payments of $100,000 semi-annually every March 1 and September 1.
In JB Company's December 31, Year five Balance Sheet, what amount should be reported as total assets?
A. 1,575,000
B. 1,775,000
C. 2,000,000
D. 5,875,000
B
Total assets are calculated as follows:
Cash 185,000
Accounts receivable, net 725,000
Property, plant, and equipment 850,000
Accumulated depreciation (125,000)
Goodwill 140,000
Total assets 1,775,000
81
If a firm changes the valuation approach used to determine fair value, how would the amount of change in fair value resulting from the change in the valuation approach be reported?
A. As a change in accounting principle.
B. As an adjustment to beginning retained earnings of the period of change in approach.
C. As a change in accounting estimate.
D. As gain on the income statement for the period of change in approach.
C
The amount of change in fair value resulting from a change in the valuation approach used to determine fair value is reported as a change in accounting estimate. That means that the amount of the change, like the change in fair value resulting from market forces, will be reported in current income (as income from continuing operations).
Note:
The amount of a change in fair value resulting from a change in the valuation approach used to determine fair value would be reported as a change in accounting estimate
82
In determining the fair value of an asset or liability, would the fair value of the asset or the fair value of the liability be determined using an entry price or an exit price?
Asset Fair Value Liability Fair Value
Entry price Entry price
Entry price Exit price
Exit price Entry price
Exit price Exit price
Asset / Liability Fair Value is at = Exit Price
83
Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability's fair value, except
A. Quoted prices for identical assets and liabilities in markets that are not active.
B. Quoted prices for similar assets and liabilities in markets that are active.
C. Internally generated cash flow projections for a related asset or liability.
D. Interest rates that are observable at commonly quoted intervals.
C
| This response is a false statement—internally generated cash flow projections are not an observable input.
84
Which of the following statements concerning inputs used in ascertaining fair value is/are correct?
I. Only observable inputs can be used.
II. Inputs that incorporate the entity's assumptions may be used.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
B
An entity's assumptions may be used as inputs in determining fair value. Those assumptions would be level 3, unobservable inputs, but would be used when adequate observable inputs were not available to make fair value determinations.
NOTE I.- the word ONLY is incorrect
85
Which of the following statements concerning the fair value hierarchy used in ascertaining fair value is/are correct?
I. Quoted market prices should be adjusted for a "blockage factor" when a firm holds a sizable portion of the asset being valued.
II. Quoted market prices in markets that are not active because there are few relevant transactions cannot be used.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
D.
Neither Statement I nor Statement II is correct. Quoted market prices should not be adjusted for a "blockage factor" when a firm holds a sizable portion of the asset being valued (Statement I). A "blockage factor" occurs when an entity holds a sizable portion of an asset (or liability) relative to the trading volume of the asset or liability in the market. Using a "blockage factor" would adjust the market value for the impact of such a large block of securities being sold, but is not permitted in determining fair value. Additionally, quoted market prices in markets that are not active because there are few relevant transactions can be used in determining fair value (Statement II). Such prices would be considered level 2 factors, observable inputs but not in active markets.
86
Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?
A. Discounted cash flow of Favre's operations.
B. Quoted market prices available from a business broker for a similar asset.
C. Quoted market prices on a stock exchange for an identical asset.
D. Historical performance and return on Driver's investment in Favre.
C
Quoted market prices on a stock exchange for identical assets would be level 1 inputs, the highest level in the hierarchy of inputs for valuation purposes, and the most reliable evidence of fair value.
87
Which of the following should be included in general and administrative expenses?
```
Interest Advertising
Yes Yes
Yes No
No Yes
No No
```
NO/NO
Neither expense is normally included in general and administrative expenses because interest and advertising are expenses that result from very specific activities and are frequently material in amount. They should be separately identified. Interest is identified with specific financing activities, and advertising with specific promotional activities (selling expenses).
88
A company's activities for year two included the following:
Gross sales $3,600,000
Cost of goods sold 1,200,000
Selling and administrative expense 500,000
Adjustment for a prior-year understatement of amortization expense 59,000
Sales returns 34,000
Gain on sale of available-for-sale securities 8,000
Gain on disposal of a discontinued business segment 4,000
Unrealized gain on available-for-sale securities 2,000
The company has a 30% effective income tax rate. What is the company's net income for year two?
A. $1,267,700
B. $1,273,300
C. $1,314,600
D. $1,316,000
C
All items are included in net income except the prior year adjustment to amortization expense and the unrealized gain on the AFS securities. The pre-tax income is $1,878,000 and after 30% taxes the net income is $1,314,600.
89
The following items were among those reported on Lee Co.'s Income Statement for the year ended December 31, 2005:
Legal and audit fees $170,000
Rent for office space 240,000
Interest on inventory floor plan 210,000
Loss on abandoned data processing equipment used in operations 35,000
The office space is used equally by Lee's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Lee's multiple-step Income Statement?
A. $290,000
B. $325,000
C. $410,000
D. $500,000
A. $290,000
General and administrative expenses include expenses that are not related to significant specifically identifiable activities. G & A costs benefit the entire firm rather than one specific function.
The $170,000 of legal and audit fees are included in G & A expenses and are 1/2 of the rent for the office space ($120,000 = .5 x $240,000). The portion of rent related to accounting is G & A. The other half of the rent is a selling expense, a significant separate activity.
Total G & A expense is $290,000 ($170,000 + $120,000).
NOTE-The interest and loss are also separately reported.
It is not a general and administrative expense but rather a financing cost.
90
Lew Co. sold 200,000 corrugated boxes for $2 each. Lew's cost was $1 per unit.
The sales agreement gave the customer the right to return up to 60% of the boxes within the first six months, provided an appropriate reason was given.
It was immediately determined, with appropriate reason, that 5% of the boxes would be returned. Lew absorbed an additional $10,000 to process the returns and expects to resell the boxes.
What amount should Lew report as operating profit from this transaction?
A. $170,000
B. $179,500
C. $180,000
D. $200,000
A is not correct.
operating profit is computed and explained as follows:
Sales 200,000 units x $2 selling price =
$400,000
Less: Provision for returns 200,000 x .05 x $2 = 20,000[1]
Net Sales = $380,000
COGS 200,000 units x $1 cost = $200,000
Less: Provision for returns 10,000 x $1 = 10,000
Net COGS 190,000 units x $1 = 190,000
Gross Profit $190,000
Less: Return processing cost 10,000[2]
Operating profit $180,000
[1] The facts state that 5% of the (all) boxes sold would be returned. The fact that 60% could be returned only established the maximum returnable rate, whereas 5% is the expected return rate.
[2] Since Lew has "absorbed" $10,000 to process returns, it has charged that amount to sales. The fact that Lew expects to resell the boxes is not recognized until the boxes are actually resold.
91
In LM's single-step income statement, the section titled Revenues consisted of the following:
Net sales revenue $187,000
Results from discontinued operations:
Loss from operations of segment, net of $1,200 tax effect $ 2,400
Gain on disposal of segment, net of $7,200 tax effect 14,400 12,000
Interest revenue 10,200
Gain on sale of equipment 4,700
Cumulative change in previous year's income due to change
In depreciation method, net of $750 tax effect 1,500
Total revenues $215,400
In the revenues section of the income statement, LM should have reported total revenues of
A. $217,800
B. $215,400
C. $203,400
D. $201,900
D
In a single step income statement, total revenue is the sum of all revenues, including Net Sales Revenue ($187,000) plus Interest Revenue ($10,200) plus Gain on sale of equipment ($4,700), or $201,900.
***Results from discontinued operations are reported at the end of the income statement. The cumulative change item is not reported in current year's income statement, as it was a one-time adjustment for the prior reporting period.
92
Which of the following information should be disclosed as supplemental information in the Statement of Cash Flows?
Cash flow per share Conversion of debt to equity
Yes Yes
Yes No
No Yes
No No
NO/YES
Cash flow per share is specifically prohibited from being disclosed unless it is based on contractual amounts.
The conversion of debt to equity is an example of a transaction that would appear in the supplemental noncash disclosure schedule.
93
Which of the following sets of financial statements generally cannot be prepared directly from the adjusted trial balance?
A. Income Statement, Balance Sheet, Statement of Cash Flows.
B. Income Statement, Statement of Cash Flows.
C. Statement of Cash Flows.
D. Balance Sheet and Statement of Cash Flows.
C
This statement generally requires a significant amount of analysis to uncover the cash flows reported within. The adjusted trial balance presents ending account balances. The Statement of Cash Flows reports changes in cash by category. Cash flows are changes in cash and are categorized by type and reported in three categories: operating, investing, and financing.
94
New England's cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000, and proceeds of $40,000 were received from the sale.
What was New England's cash balance at the end of the year?
A. $ 27,000
B. $ 40,000
C. $208,000
D. $248,000
C
The cash balance at the end of the year equals the cash balance at the beginning of the year, $27,000, plus the net sum of the three categories of cash flows: $351,000 operating - $420,000 investing + $250,000 financing. The ending balance is $208,000.
95
Paper Co. had net income of $70,000 during the year. The dividend payment was $10,000. The following information is available:
Mortgage repayment $20,000
Available-for-sale securities purchased 10,000 increase
Bonds payable-issued 50,000 increase
Inventory 40,000 increase
Accounts payable 30,000 decrease
```
What amount should Paper report as net cash provided by operating activities in its Statement of Cash Flows for the year?
A. $0
B. $10,000
C. $20,000
D. $30,000
```
A
Operating Activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. Net income - increase in inventory - decrease in accounts payable $70.000 - $40 000 - $30 000 = $0
96
Mend Co. purchased a three-month U.S. Treasury bill. Mend's policy is to treat all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents . How should this purchase be reported in Mend's Statement of Cash Flows?
A. As an outflow from operating activities.
B. As an outflow from investing activities.
C. As an outflow from financing activities.
D. Not reported.
D
The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. This Treasury bill meets the definition of a cash equivalent. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this Treasury bill is not reported in the Statement of Cash Flows.
97
Which of the following information should be disclosed as supplemental information in the Statement of Cash Flows?
Cash flow per share Conversion of debt to equity
Yes Yes
Yes No
No Yes
No No
No Yes
Cash flow per share is specifically prohibited from being disclosed unless it is based on contractual amounts.
The conversion of debt to equity is an example of a transaction that would appear in the supplemental noncash disclosure schedule.
------------------------------------------
The conversion of debt to equity is an example of a transaction that would appear in the supplemental noncash disclosure schedule, assuming a material amount is involved.
98
On December 31, 20x1, Deal, Inc. failed to accrue the December 20x1 sales salaries that were payable on January 6, 20x2.
What is the effect of the failure to accrue sales salaries on working capital and cash flows from operating activities in Deal's 20x1 financial statements?
Working capital Cash flows from operating activities
Overstated No effect
Overstated Overstated
No effect Overstated
No effect No effect
Working capital Cash flows from operating activities
Overstated No effect
* Failure to accrue salaries at the end of 20x1 understates salaries payable, a current liability. Working capital equals current assets minus current liabilities. With current liabilities understated, working capital is overstated.
* The accrued salaries at the end of 20x1 would not have been paid in 20x1, even if they had been accrued correctly. Therefore, 20x1 operating cash flows are not affected by the failure to accrue the salaries.
99
In a Statement of Cash Flows, which of the following items is reported as a cash outflow from financing activities?
I. Payments to retire mortgage notes;
II. Interest payments on mortgage notes;
or
III. Dividend payments.
A. I, II, and III.
B. II and III.
C. I only.
D. I and III.
D
Both I and III are financing cash outflows. Principal payments on loans from financial institutions are financing because they are a return of a source of long-term financing.
The dividends are a return to shareholders who have provided a considerable portion of total firm financing.
100
Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, year 1?
A. $3,000
B. $9,000
C. $12,000
D. $30,000
A
Only actual cash inflows and outflows are presented on the statement of cash flows. In this case, Polk paid $3,000 in cash as a down payment for the forklift and financed the remainder of the purchase price. Therefore, the only cash outlay as an investing activity on the statement of cash flows is $3,000. The cash outflows associated with the payment on the note would be classified as a financing activity.
101
Abbott Co. is preparing its Statement of Cash Flows for the year. Abbott's cash disbursements during the year included the following:
Payment of interest on bonds payable $500,000
Payment of dividends to stockholders 300,000
Payment to acquire 1,000 shares of Marks Co. common stock 100,000
What should Abbott report as total cash outflows for financing activities in its Statement of Cash Flows?
A. $0
B. $300,000
C. $800,000
D. $900,000
B
Dividends paid to shareholders are a financing activity.
-The payment of interest on bonds is an operating activity, -The payments to acquire shares of Marks Co. stock are investing activities.
102
Which of the following transactions should be classified as Investing Activities on an entity's Statement of Cash Flows?
A. Increase in accounts receivable.
B. Sale of property, plant and equipment.
C. Payment of cash dividend to the shareholders.
D. Issuance of common stock to the shareholders
B
The cash flows from the sale of property, plant, and equipment would be shown as a cash inflow under the investing section in the Statement of Cash Flows.
C-Operating section
D-Financing Section
103
Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?
A. Gain on sale of plant asset.
B. Sale of property, plant and equipment.
C. Payment of cash dividend to the shareholders.
D. Issuance of common stock to the shareholders.
A
The gain on the sale of a plant asset is a noncash item that is used to reconcile net income to cash flows from operations.
Sale of PPE = Investing activities
-Payment of Cash Dividends & Issuance of common stock = Financing activities
104
Which of the following items is included in the Financing Activities section of the Statement of Cash Flows?
A. Cash effects of transactions involving making and collecting loans.
B. Cash effects of acquiring and disposing of investments and property, plant, and equipment.
C. Cash effects of transactions obtaining resources from owners and providing them with a return on their investment.
D. Cash effects of transactions that enter into the determination of net income.
C
Correct!
Financing cash flows are those between the firm and the parties providing it with debt and equity financing. Financing cash flows are the major sources of nonoperating cash inflows and repayments of those amounts to the providers. For example, borrowings and proceeds from stock issuance, retirements of debt, treasury stock purchases, and dividends paid are all financing cash flows. Interest paid, however, is an operating cash flow.
105
A company calculated the following data for the period:
Cash received from customers $25,000
Cash received from sale of equipment 1,000
Interest paid to bank on note 3,000
Cash paid to employees 8,000
What amount should the company report as net cash provided by operating activities in its Statement of Cash Flows?
A
Cash received from the customers and paid to employees are operating activities. Interest paid on a bank note is also an operating activity. Therefore, the cash for from operating activities is $25,000 - 3,000 - 8,000 = $14,000.
-Cash received from sale of equipment is -Investing
106
A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance.
In a Statement of Cash Flows for the purchasing company, what amount is included in financing activities for the above transaction?
A. Cash payment.
B. Acquisition price.
C. Zero.
D. Mortgage amount.
C
The cash payment is an investing cash outflow, not a financing cash flow. The transaction would show no entry in the financing section of the Statement of Cash Flows.
The payment amount (only) would be reported in the investing activity section of the Statement of Cash Flows as an outflow
107
In a Statement of Cash Flows, which of the following items is reported as a cash outflow from financing activities?
I. Payments to retire mortgage notes;
II. Interest payments on mortgage notes;
III. Dividend payments.
A. I, II, and III.
B. II and III.
C. I only.
D. I and III.
D
Both I and III are financing cash outflows. Principal payments on loans from financial institutions are financing because they are a return of a source of long-term financing.
The dividends are a return to shareholders who have provided a considerable portion of total firm financing.
NOTE-All interest payments are defined as operating cash flows, in part, because they affect income.
108
A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred:
Dividends paid $300
Proceeds from the issuance of common stock $250
Borrowings under a line of credit $200
Proceeds from the issuance of convertible bonds $100
Proceeds from the sale of a building $150
What is the company's increase in cash flows provided by financing activities for the year?
A. $50
B. $150
C. $250
D. $550
C
Cash flows from financing activities are those associated with how the company is financed such as with borrowing or equity. Therefore, the proceeds from the sale of the building would not be included in financing activities. The proceeds from the issuance of common stock (250), convertible bonds (100) and borrowing on the line of credit (200) are all cash inflows from financing activities. The payment of dividends (300) is a cash outflow from financing activities. 250 + 100 + 200 - 300 = 250.
109
On July 1, 2005, Ran County issued realty tax assessments for its fiscal year ended June 30, 2006.
On September 1, 2005, Day Co. purchased a warehouse in Ran County. The purchase price was reduced by a credit for accrued realty taxes. Day did not record the entire year's real estate tax obligation, but instead records tax expenses at the end of each month by adjusting pre-paid real estate taxes or real estate taxes payable, as appropriate. On November 1, 2005, Day paid the first of two equal installments of $12,000 for realty taxes.
What amount of this payment should Day record as a debit to real estate taxes payable?
A. $4,000
B. $8,000
C. $10,000
D. $12,000
B
The total annual real estate tax is 2($12,000) or $24,000. Therefore, the tax per month is $2,000. Day assumed the taxes, already assessed on the property, for the full year.
The payment on November 1 covers the four months July, August, September, and October, for a total cost of $8,000. This portion of the $12,000 payment is debited to real estate taxes payable, because the full annual property tax amount is already accrued on Day's books from the purchase of the property. Pre-paid real estate taxes are debited for the remaining $4,000 of the payment.
The $4,000 pre-pays the tax for the next two months (November and December). At the end of each of those two months, the payable is debited for $2,000 and the pre-paid is credited for $2,000. The cycle begins again when the second payment is made. In this jurisdiction, the tax is assessed for a year at the beginning of the year.
Therefore, payments are debited to pre-paid real estate taxes unless previously accrued, as was the case here.
110
Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes for National's mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee's account and used to reduce future escrow payments.
Additional information follows:
Escrow accounts liability, 1 Jan, 2004 $700,000
Escrow payments received during 2004 $1.58mn
Real estate taxes paid during $1.72mn
Interest on escrow funds during 2004 50,000
What amount should Kent report as escrow accounts liability in its December 31, 2004 balance sheet?
A. $510,000
B. $515,000
C. $605,000
D. $610,000
C
The following equation is used to explain the changes in the escrow liability and the ending balance (31 December, 2004):
Beginning + Payments - Real estate + Interest - 10% (interest) = Ending
Balance Received Tax Payments Balance
$700,000 + $1.58mn - $1.72mn + $50,000 - $5,000 = $605,000
The interest increases the liability, because it is an amount owed to the mortgagee. This debt is extinguished by crediting the receivable from the mortgagee. The 10% fee reduces the portion of the liability owing to interest.
111
On May 1, 2004, Marno County issued property tax assessments for the fiscal year ended June 30, 2005.
The first of two equal installments was due on November 1, 2004. On September 1, 2004, Dyur Co. purchased a 4-year old factory in Marno subject to an allowance for accrued taxes.
Dyur did not record the entire year's property tax obligation, but instead records tax expenses at the end of each month by adjusting prepaid property taxes or property taxes payable, as appropriate.
The recording of the November 1, 2004 payment by Dyur should have been allocated between an increase in prepaid property taxes and a decrease in property taxes payable in which of the following percentages?
% allocated to
+ in prepaid prop tax (-) in property taxes payable
66 2/3% 33 1/3 %
0% 100%
50% 50%
33 1/3% 66 2/3 %
33 1/3% 66 2/3 %
When the property was purchased on September 1 the firm received an allowance for property taxes for the period July 1 - September 1, a period of two months. This is the portion of the fiscal year the firm did not own the factory. However, the firm will be responsible for the taxes for these two months.
The allowance at purchase reduced the total amount paid for the property by the tax for these two months. The firm recorded property taxes payable for two months (equal to the allowance amount). Then at the end of September and October, the firm accrued another month of property taxes payable. Now the firm has recorded a total of 4 months of property taxes payable. When it pays the first installment on November 1 (for 6 months), the property taxes payable is decreased to zero and prepaid property taxes is debited for 2 months worth of property tax.
Thus, the payment increases prepaid property taxes 2 months, and decreases property taxes payable 4 months, or 1/3 and 2/3 of the payment amount, respectively.
112
North Corp. has an employee benefit plan for compensated absences that gives employees ten paid vacation days and ten paid sick days per year.
Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken.
At December 31, 2004, North's unadjusted balance of liability for compensated absences was $21,000. North estimated that there were 150 vacation days and 75 sick days available at December 31, 2004. North's employees earn an average of $100 per day.
In its December 31, 2004 balance sheet, what amount of liability for compensated absences is North required to report?
A. $36,000
B. $22,500
C. $21,000
D. $15,000
D
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 x $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.
113
The following information pertains to Rik Co.'s two employees:
Name Wkly sal # of wks worked Vac. vest /accum
Ryan $800 52 Yes
Todd $600 52 No
Neither Ryan nor Todd took the usual two-week vacation in 2005. In Rik's Dec 31,05, FS,what $ f vacation expense and liability should be reported?
A. $2,800
B. $1,600
C. $1,400
D. $0
B
Only Ryan's vacation rights vest or accumulate and cause a liability to be reported. This amount is $1,600 (two weeks vacation x $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.
114
Gavin Co. grants all employees two weeks of paid vacation for each full year of employment. Unused vacation time can be accumulated and carried forward to succeeding years and will be paid at the salaries in effect when vacations are taken or when employment is terminated.
There was no employee turnover in 2005.
Additional information relating to the year ended December 31, 2005 is as follows:
Liability for accum vac @ Dec 31, 04 $35,000
Pre-05 accr vacs taken from Jan 1, 05 to 30 Sept 05 (the authorized period for vac) 20,000 Vac earned for work in 05 (adj to current rates) 30,000
Gavin granted a 10% salary increase to all employees on Oct 1, 05, its annual sal increase date. For the year ended Dec 31, 05, Gavin should report vac pay exp of
A. $45,000
B. $33,500
C. $31,500
D. $30,000
C
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.
115
Aneen's Video Mart sells 1- and 2-year mail order subscriptions for its video-of-the-month business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following:
2004 2005
Sales $420,000 $500,000
Less cancellations 20,000 30,000
Net sales $400,000 $470,000
======== ========
Subscriptions expirations:
2004 $120,000
2005 $155,000 $130,000
2006 $125,000 $200,000
2007 $140,000
________ ________
$400,000 $470,000
========= =========
In Aneen's December 31, 2005 balance sheet, the balance for unearned subscription revenue should be
A. $495,000
B. $470,000
C. $465,000
D. $340,000
C
The unearned revenue amount at the end of 2005 is the subscription value of unexpired subscriptions at that date. Subscriptions will expire as follows:
Year of subscription: 2004 2005
Total Expiration in:
2006 $ 125,000 $ 200,000 $325,000
2007 140,000 140,000
Total expiring after 2005: $465,000
116
Fell, Inc. operates a retail grocery store that is required by law to collect refundable deposits of $.05 on soda cans.
Information for 2004 follows:
Liability for returnable deposits - 12/31/03 $ 150,000
Cans of soda sold in 2004 10,000,000
Soda cans returned in 2004 11,000,000
On February 1, 2004, Fell subleased space and received a $25,000 deposit to be applied toward rent at the expiration of the lease in 2008. In Fell's December 31, 2004 balance sheet, the current and noncurrent liabilities for deposits were
```
Current Noncurrent
$125,000 $0
$100,000 $25,000
$100,000 $0
$25,000 $100,000
```
CURRENT NONCURRENT
100,000 25,000
The $25,000 rent deposit is a noncurrent liability because it will be applied toward the rental of a tenant more than one year after the 2004 balance sheet.
The ending liability for cans = $150,000 - (11,000,000 - 10,000,000).05 = $100,000.
When customers return cans, they are paid $.05 for each. Can returns reduce the liability. At sale, the deposit is collected and the liability increases. More cans were returned than were sold. Therefore, the deposit liability for cans decreased during the year. This is a current liability. Most customers do not keep cans for more than one year before returning them.
117
Ryan Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $720,000 at December 31, 2005 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, 2005. Outstanding service contracts at December 31, 2005 expire as follows:
During 2006 $150,000
During 2007 $225,000
During 2008 $100,000
What amount should be reported as unearned service contract revenues in Ryan's December 31, 2005 balance sheet?
A. $540,000
B. $475,000
C. $295,000
D. $245,000
B
The ending 2005 unearned service contract revenue (liability) balance is the sum of the unexpired contracts at the end of that year. The $180,000 of service expense does not affect the balance of the liability, which is reduced (revenue is recognized) as contracts expire. The liability is not limited to the cost of service rendered.
```
The total unearned revenue is the sum of contract expirations:
Expirations:
During 2006 $150,000
During 2007 225,000
During 2008 100,000
Total liability $475,000
```
118
Marr Co. sells its products in reusable containers. The customer is charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery.
Marr accounts for the containers not returned within the time limit as being retired by sale at the deposit amount. Information for 2005 is as follows:
Container deposits at December 31, 2004 from deliveries in:
2003 $150,000
2004 430,000 $580,000
Deposits for containers delivered in 2005 780,000
Deposits for containers returned in 2005 from deliveries in:
2003 $ 90,000
2004 $250,000
2005 $286,000 $626,000
In Marr's December 31, 2005 balance sheet, the liability for deposits on returnable containers should be
A. $494,000
B. $584,000
C. $674,000
D. $734,000
C
At the end of 2005, any remaining 2003 deposits not claimed by returning containers are recognized as revenue and therefore no longer included in the ending 2005 container deposit liability. Customers are given only two years to return containers. The ending 2005 liability is:
Deposits - Returns = Container deposit liability
From 2004 $430,000 - $250,000 = $180,000
From 2005 780,000 - 286,000 = 494,000
Total 2005 container deposit liab. $674,000
119
Alco, Inc., a small manufacturing company, prepares its financial statements using its income tax basis of accounting. In December, 2012, it determined that an error had been made in the amount of rent expense reported in its 2011 tax return. How should Alco account for the amount of the rental expense error in its 2012 financial statements?
A. As an adjustment to 2012 rental income.
B. As an income tax expense in 2012.
C. As a prior period adjustment.
D. No reporting in 2012 required.
C
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.
120
Which of the following items would be recognized in financial statements prepared using an income tax basis of accounting relating to permanent differences?
Nontaxable Income Nondeductible Expenses
Yes Yes
Yes No
No Yes
No No
YES 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.
121
Which of the following statements, if any, concerning the modified cash basis of accounting is/are correct?
I. The modified cash basis of accounting employs some elements of accrual accounting.
II. To be acceptable, modifications to the cash basis of accounting must have substantial support in practice.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
C. 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.
122
The Private Company Council has issued modified accounting for private companies for what aspect of Goodwill?
A. Goodwill impairment testing.
B. Goodwill amortization.
C. Goodwill measurement.
D. Goodwill reporting.
B
| The PCC allows private companies to amortize goodwill over a period to not exceed 10 years.
123
Which of the following is the tradeoff for setting GAAP by the Private Company Council?
A. Relevance versus cost-benefit.
B. Reliability versus cost-benefit.
C. Relevance versus materiality.
D. Reliability versus materiality.
A. Relevance versus cost-benefit.
| The PCC sets standards for private companies by weighing the relevance of the information versus the cost benefit.
124
Which of the following is the purpose of the Private Company Council?
A. To certify whether a company meets the definition of a public business entity.
B. To set auditing standards for private company audits.
C. To assist the FASB in identifying whether and when a private company accounting standard should be developed.
D. To provide input to the Emerging Issues Task Force regarding accounting issues faced by private companies.
C. To assist the FASB in identifying whether and when a private company accounting standard should be developed.
The PCC works with the FASB to set private company accounting standards.
125
Which of the following does not have an alternative accounting for private companies?
A. Interest rate swaps—variable rates to fixed rates.
B. VIE criteria to common controlled leasing arrangements.
C. Accounting for certain intangibles in business combination.
D. Recognition of contingent consideration in a business combination.
D. Recognition of contingent consideration in a business combination.
* There is no simplified accounting for the contingent consideration in a business combination.
NOTE:
There is simplified accounting for interest rate swaps (ASU 2014-03) that convert variable rate debt to fixed rates.
