FAR

Question 1

A combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). Which of the following would be considered part of the acquisition cost of an acquired entity in a business combination?
I.Costs incurred by the acquiring entity that are directly related to the acquisition
II.Costs incurred by the acquired entity that are directly related to the acquisition
III.Indirect acquisition costs incurred by the acquiring entity

A.
I only

B.
I and II only

C.
I and III only

Answer 1

D. None of the above
Cost incurred from business combinations include:

finders fees, advisory, legal, accounting, valuation and other pro and consulting fees, gen and admin , and costs of maintaining internal acquisitions department and cost of registering and issuing debt and equity securities

These costs are expensed in the period incurred. Except for costs of issuing debt and equity securities under GAAP

Question 2

During 20X1, Gum Co. introduced a new product carrying a 2-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ending December 31, 20X1 and 20X2, are as follows:

             Sales          Actual Warranty Expenditures
            --------        ---------------------------- 20X1            $150,000                  $2,250 20X2             250,000                   7,500
            --------                  ------
            $400,000                  $9,750
            ========                  ====== What amount should Gum report as estimated warranty liability in its December 31, 20X2, balance sheet?

Answer 2

Add together the estimated percentages and multiply by Sales. Total the sales and subtract the actual expenditures for Total warranty expenditure

(6% x 150 + 6% x 250)- 9750
——-
Estimated warranty liability on December 31, 20X2 $14,250

Question 3

A company recently acquired a copyright that now has a remaining legal life of 30 years. The copyright initially had a 38-year useful life assigned to it. An analysis of market trends and consumer habits indicated that the copyrighted material will generate positive cash flows for approximately 25 years. What is the remaining useful life, if any, over which the company can amortize the copyright for accounting purposes

Answer 3

25 years

uselife life of intangible=period in which asset is expected to provide the future cash flow

Question 4

Brite Corp. had the following liabilities on December 31, 20X1:

Accounts payable $ 55,000
Unsecured notes, 8% (due 7-1-X2) 400,000
Accrued expenses 35,000
Contingent liability 450,000
Deferred income tax liability 25,000
Senior bonds, 7% (due 3-31-X2) 1,000,000
The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against Brite. Brite’s legal counsel expects the suit to be settled in 20X3, and has estimated that Brite will be liable for damages in the range of $450,000 to $750,000. The deferred income tax liability is not related to an asset for financial reporting and is expected to reverse in 20X3. What amount should Brite report in its December 31, 20X1, balance sheet for current liabilities?

Answer 4

Short term liabilities include.
AP, unsecured notes due within 3 months. Accrued expenses, and senior bonds due within 12 months.

The contingent liability and deferred income tax liability will not come due or reverse until 20X3; therefore these liabilities are noncurrent.

Question 5

On January 1, 20X1, Card Corp. signed a 3-year, noncancelable purchase contract, which allows Card to purchase up to 500,000 units of a computer part annually from Hart Supply Co. at $.10 per unit and guarantees a minimum annual purchase of 100,000 units. During 20X1, the part unexpectedly became obsolete. Card had 250,000 units of this inventory at December 31, 20X1, and believes these parts can be sold as scrap for $.02 per unit. What amount of probable loss from the purchase commitment should Card report in its 20X1 income statement?

Answer 5

The question asks for the probable loss from purchase commitment (i.e., the loss for the remaining two years on the contract). The loss on the 250,000 units already in inventory is not considered part of this loss; it would be reported as an operating loss due to the write-down of inventory due to obsolescence.

min purchase cost- min purchase scrap value.

Minimum purchase commitment for 20X2 and 20X3
(100,000 units x $.10/u x 2 years) $20,000
Less scrap recovery (100,000 units x $.02 x 2 years) 4,000
——-
Probable loss from purchase commitment $16,000

Question 6

Tack, Inc., reported a retained earnings balance of $150,000 on December 31, 20X1. In June 20X2, Tack discovered that merchandise costing $40,000 had not been included in inventory in its 20X1 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 20X2?

Answer 6

beginning RE balance
+) 40000 x (1-.3) merchandise cost multiplied by 1- tax rate
= adjusted beginning RE

Question 7

Which of the following expenditures qualifies for asset capitalization?

Incorrect A.
Cost of materials used in prototype testing

B.
Costs of testing a prototype and modifying its design

C.
Salaries of engineering staff developing a new product

D.
Legal costs associated with obtaining a patent on a new product

Answer 7

Assets are probable future economic benefits obtained or controlled by a particular enterprise as a result of past transactions or events. (SFAC 6.25)

The incorrect answer choices are research and development costs. Since there is a great deal of uncertainty about the future benefit of these costs, they must be expensed. (FASB ASC 730-10-05-3)

Question 8

Four years ago on January 2, Randall Co. purchased a long-lived asset. The purchase price of the asset was $250,000, with no salvage value. The estimated useful life of the asset was 10 years. Randall used the straight-line method to calculate depreciation expense. An impairment loss on the asset of $30,000 was recognized on December 31 of the current year. The estimated useful life of the asset at December 31 of the current year did not change. What amount should Randall report as depreciation expense in its income statement for the next year?

Answer 8

1) depreciate for first four years.

Cost $250,000
Accumulated depreciation (4 years at $25,000) 100,000
——–
Book value before impairment $150,000
2) subtract impairment
Impairment 30,000
——–
Book value after impairment $120,000
3) depreciate for remaining life
Remaining useful life 6 years
Annual depreciation ($120,000 / 6 years) $ 20,000

Question 9

Where does the noncontrolling interest appear on the balance sheet?

Answer 9

owners equity section

Question 10

During 20X1, Beam Co. paid $1,000 cash and traded inventory, which had a carrying amount of $20,000 and a fair value of $21,000, for other inventory in the same line of business with a fair value of $22,000. The exchange of the inventory is to facilitate sales to Beam’s customers. What amount of gain (loss) should Beam record related to the inventory exchange?

Answer 10

0

Nonmonetary exchange should be at FV. Except
three exception cases in which a nonmonetary exchange should be recorded based on the recorded amount (book value) of the assets surrendered:
1.Fair value is not determinable.
2.Exchange transaction is to facilitate sales for customers.
3.Exchange transaction lacks commercial substance.

In Beam’s case, exception 2 is met. The exchange of the inventory is to facilitate sales to Beam’s customers. The exchange should be recorded based on carrying amounts with no gain recognized. If the inventory’s carrying amount had been in excess of the fair value of the inventory given up, the inventory given up should have been written down and the loss recognized before the exchange was recorded.

Question 11

During 20X1, Pard Corp. sold goods to its 80%-owned subsidiary, Seed Corp. At December 31, 20X1, one-half of these goods were included in Seed’s ending inventory. Reported 20X1 selling expenses were $1,100,000 and $400,000 for Pard and Seed, respectively. Pard’s selling expenses included $50,000 in freight-out costs for goods sold to Seed. What amount of selling expenses should be reported in Pard’s 20X1 consolidated income statement?

Answer 11

Since freight-out costs are paid by the seller (Pard), they are not included in the value of inventory by the buyer (Seed). Also, since they were paid on an intercompany sale, these costs should be eliminated from Pard’s consolidated income statement. Thus, consolidated selling expenses for 20X1 are:

         Pard total - intercompany + Seed's total
            ($1,100,000 - $50,000) + $400,000
                        $1,050,000 + $400,000 = $1,450,000

Question 12

What expenses and/or losses result from the development and production of software to be sold or leased?

A.
Research and development expense

B.
Amortization expense

C.
Impairment loss

D.
All of the answer choices are possible expenses or losses.

Answer 12

D. All of the above

Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model.

After technological feasibility has been established, all software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized computer software costs are amortized on the basis of current and future revenue for each product with the minimum annual amortization equal to the straight-line amortization over the remaining estimated economic life of the product.

An impairment loss would be recognized if the net realizable value was determined to be less than the amortized cost.

Question 13

During January 20X1, Vail Co. made long-term improvements to a recently leased building. The lease agreement provides for neither a transfer of title to Vail nor a bargain purchase option. The present value of the minimum lease payments equals 85% of the building’s market value, and the lease term equals 70% of the building’s economic life. Assets should be recognized for:

A.
the building.

B.
the leasehold improvements.

C.
both the building and the leasehold improvements.

D.
neither the building nor the leasehold improvements.

Answer 13

capital lease application:TT BPO 75 or 90

1. Transfer of ownership
2. Bargain purchase option
3. Lease term is 75% or more of asset life.
4. Present value of lease payments equals or exceeds 90% of fair value of asset.

Since none of these criteria is met by Vail’s lease agreement, the building would not be capitalized.

The leasehold improvements should be capitalized and amortized over the term of the lease.

Question 14

The following information is relevant to the computation of Chan Co.’s earnings per share to be disclosed on Chan’s income statement for the year ending December 31:
•Net income for the year is $600,000.
•$5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued four years ago at a discount that is being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9%, and the bonds were issued to yield 10%. Each $1,000 bond is convertible into 20 shares of Chan’s common stock.
•Chan’s corporate income tax rate is 25%.

Chan has no preferred stock outstanding and no other convertible securities. What amount should be used as the numerator in the fraction used to compute Chan’s diluted earnings per share assuming that the bonds are dilutive securities?

A.
$130,000

B.
$247,500

C.
$952,500

Incorrect D.
$1,070,000

Answer 14

The numerator will be Net income + Interest (net of tax).

Net income $600,000
Interest:
Cash ($5,000,000 x .09) $450,000
Discount amortization 20,000
Tax ($470,000 x .25) (117,500) 352,500
——–
Numerator $952,500

Question 15

Capital Lease

Answer 15

The lessee must classify a lease as a capital lease instead of an operating lease if any one of the following four criteria is met:

1. The lease transfers ownership to the lessee by the end of the lease term (not met in this lease).
2. The lease contains a bargain purchase option (not indicated for this lease).

For leases consummated in the first 75% of the economic useful life of the leased asset:

3. The noncancelable lease term is at least 75% of the remaining economic useful life of the leased asset (true for this lease).
4. The present value of the minimum lease payments is at least 90% of the fair value of the leased asset (less any investment tax credit retained by and expected to be realized by the lessor) at the inception of the lease (true for this lease).

Question 16

Campbell Corp. exchanged delivery trucks with Highway, Inc. Campbell’s truck originally cost $23,000, its accumulated depreciation was $20,000, and its fair value was $5,000. Highway’s truck originally cost $23,500, its accumulated depreciation was $19,900, and its fair value was $5,700. Campbell also paid Highway $700 in cash as part of the transaction. The transaction lacks commercial substance. What amount is the new book value for the truck Campbell received?

A.
$5,700

Incorrect B.
$5,000

C.
$3,700

D.
$3,000

Answer 16

Generally, a nonmonetary exchange should be based on the fair values of the assets exchanged—resulting in the immediate recognition of a gain or loss.

Exceptions to this treatment include the following:
•Fair value is not determinable
•Exchange transaction to facilitate sales to customers
•Exchange transaction that lacks commercial substance

Under these exceptions, no gains or losses are recognized.

Since this transaction lacks commercial substance, no gain or loss is recognized and the new book value is equal to the book value prior to the exchange:

Original cost               $23,000
 Accumulated depreciation     20,000
                             -------
Book value                  $ 3,000
 Additional cash paid            700
                             -------
New book value              $ 3,700

Terms

Fair Value

Question 17

Sun Co. was constructing fixed assets that qualified for interest capitalization. Sun had the following outstanding debt issuances during the entire year of construction:
•$6,000,000 face value, 8% interest
•$8,000,000 face value, 9% interest

None of the borrowings were specified for the construction of the qualified fixed asset. Average expenditures for the year were $1,000,000. What interest rate should Sun use to calculate capitalized interest on the construction?

Incorrect A.
8.00%

B.
8.50%

C.
8.57%

D.
9.00%

Answer 17

Since Sun Co. did not specify the borrowings were for the fixed assets, the capitalized rate should be the weighted average of the applicable rates. Interest on the two debts is $480,000 and $720,000 for a total of $1,200,000.
•$1,200,000 ÷ $14,000,000 = 8.57%

Add interest for both debts and divide by total FV

Question 18

XL Software Company is developing a new software product. During 20X1, monthly costs of the project were $100,000 per month. A detailed program design was completed on August 31. How much of the development costs would be expensed as research and development expenses?

A.
$0

B.
$400,000

Correct C.
$800,000

Answer 18

Computer software costs to be sold, leased, or otherwise marketed are charged to expense as research and development until technological feasibility has been established for the product. Technological feasibility is established on completion of a detailed program design or completion of a working model.

Since a technological feasibility was established on August 31, all of the costs up to that date (8 × $100,000) would be expensed as research and development expenses.

Question 19

Wand, Inc., has adopted FASB ASC 205-20 (Presentation of Financial Statements—Discontinued Operations). On October 1, 20X1, Wand, Inc., committed itself to a formal plan to sell its Kam division’s assets. On that date, Wand estimated that the loss from the disposal of assets in February 20X2 would be $25,000. Wand also estimated that Kam would incur operating losses of $100,000 for the period of October 1, 20X1, through December 31, 20X1, and $50,000 for the period January 1, 20X2, through February 28, 20X2. These estimates were materially correct. Assuming that the Kam division qualifies as a component, disregarding income taxes, what should Wand report as loss from discontinued operations in its comparative 20X1 and 20X2 income statements?

Incorrect A.
20X1: $175,000; 20X2: $0

B.
20X1: $125,000; 20X2: $50,000

C.
20X1: $100,000; 20X2: $75,000

D.
20X1: $0; 20X2: $175,000

Answer 19

Estimated loss for 2012 and operating loss is included in 2011. Just the operating loss is included in 2012

FASB ASC 360-10-35-40 provides that when an entity is classified as held for sale, the unit must be written down to the fair value, so “a loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell.”

Wand’s 20X1 loss from operations is $100,000 and the write-down to FMV is $25,000 and is reported in 20X1. The operating loss in 20X2 is $50,000, so Wand would report a $50,000 loss from discontinued operations before income taxes in 20X2.

2011: loss from operations plus FMV write down (100+25)
2012: loss from discontinued operations before taxes (50)

Question 20

Visor Co. maintains a defined benefit pension plan for its employees. The service cost component of Visor’s net periodic pension cost is measured using the:

A.
unfunded accumulated benefit obligation.

B.
unfunded vested benefit obligation.

C.
projected benefit obligation.

D.
expected return on plan assets.

Answer 20

The service cost component is the portion of pension expense that represents an estimate of the increase in pension benefits payable (specifically, the increase in the projected benefit obligation) as a result of employee services rendered in the current period.

This goes to comprehensive income

Question 21

On December 31, 20X1, Key Co. received two $10,000 non-interest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in nine months, was made under customary trade terms, but the note from Omega Co., which is due in two years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in nine months at 8% is 0.944. The present value of $1 due in two years at 8% is 0.857. At what amounts should these two notes receivable be reported in Key’s December 31, 20X1, balance sheet?

A.
Alpha $9,440, Omega $8,570

B.
Alpha $10,000, Omega $8,570

Incorrect C.
Alpha $9,440, Omega $10,000

D.
Alpha $10,000, Omega $10,000

Answer 21

Current receivables acquired as a result of customary trade terms are normally reported at their face value.

Long-term receivables are reported at their present value: $10,000 × 0.857 = 8,570.

Question 22

In September 20X1, Koff Co.’s operating plant was destroyed by an earthquake. Earthquakes are rare in the area in which the plant was located. The portion of the resultant loss not covered by insurance was $700,000. Koff’s income tax rate for 20X1 is 40%. In its 20X1 income statement, what amount should Koff report as extraordinary loss?

A.
$0

B.
$280,000

Correct C.
$420,000

D.
$700,000

Answer 22

According to FASB ASC 225-20-45-2, extraordinary items are both unusual in nature and infrequent in occurrence. The fact that earthquakes are rare in the area means that damages from earthquakes would be both unusual and infrequent. Therefore, the loss from the earthquake would be an extraordinary item on the income statement. Additionally, intraperiod tax allocation is applied to such irregular items on the income statement.

Pretax extraordinary loss $700,000
Tax effect (280,000)
———
Extraordinary loss, net-of-tax $420,000
=========

Question 23

Kell Corp.’s $95,000 net income for the quarter ended September 30, 20X1, included the following after-tax items:
•A $60,000 extraordinary gain, realized on April 30, 20X1, was allocated equally to the second, third, and fourth quarters of 20X1.
•A $16,000 cumulative-effect loss resulting from a change in inventory method was recognized on August 2, 20X1.

In addition, Kell paid $48,000 on February 1, 20X1, for 20X1 calendar-year property taxes. Of this amount, $12,000 was allocated to the third quarter of 20X1.

For the quarter ended September 30, 20X1, Kell should report net income of:

A.
$91,000.

B.
$103,000.

C.
$111,000.

Incorrect D.
$115,000.

Answer 23

Net income
-) extraordinary gain portion
+)cumulative effect loss from change in inv
= Net income for the quarter

: “each interim period should be viewed primarily as an integral part of the annual period” and specifies the following:
•Costs not directly associated with interim revenues (such as property taxes) are allocated equally—so the $12,000 allocation of the property tax expense is properly included in third-quarter net income.
•Extraordinary items should be recognized totally in the period in which they occur—so the extraordinary gain of $60,000 should have been recognized totally in the second quarter without being allocated to the balance of the year; the $20,000 should not be included in Quarter 3.
•Cumulative-effect losses resulting from a change in accounting principles are reported by restating the pre-change interim periods; the $16,000 cumulative loss from the change in inventory method should not be included in the third quarter net income.

Thus, Kell Corp.’s third quarter net income should be:
•$95,000 - $20,000 + $16,000 = $91,000

Question 24

Red and White formed a partnership in 20X1. The partnership agreement provides for annual salary allowances of $55,000 for Red and $45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of $80,000 for 20X1 before any allowance to partners. What amount of these earnings should be credited to each partner’s capital account?

A.
Red: $40,000; White: $40,000

B.
Red: $43,000; White: $37,000

C.
Red: $44,000; White: $36,000

Incorrect D.
Red: $45,000; White: $35,000

Answer 24

Salaries are paid (as an expense) to the partners before partnership earnings are allocated:

                                   Allocation
                        --------------------------------    Earnings
                         To Red     To White     Total      Balance
                        ---------   ---------   --------   ---------
                                                            $80,000 Salary allowance             $55,000     $45,000    $100,000    (20,000) Loss allocation   To Red (.6 x $20,000)      (12,000)                (12,000)   ( 8,000)   To White (.4 x $20,000)                 (8,000)     (8,000)         0
                         --------    --------   ---------   ======== Totals                       $43,000     $37,000    $ 80,000
                         ========    ========   =========

Question 25

Subsequent events take place: I.after the formal balance sheet date. II.after the balance sheet is issued. A. I only B. II only C. Both I and II

Answer 25

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.

Question 26

For the purpose of determining that no additional segments should be reported, the total of external revenues of all reportable segments must make up at least what percentage of total consolidated revenues? A. 50%

Answer 26

Additional operating segments shall be identified unless: •the total of external revenues of all reportable segments must make up at least 75% of the total consolidated revenues or •an operating segment that previously met the criteria as a reportable segment, but does not meet those criteria in the current period, may still be treated as a reportable segment if management judges it to be of continuing significance.

Question 27

Eagle Co. has cosigned the mortgage note on the home of its president, guaranteeing the indebtedness in the event that the president should default. Eagle considers the likelihood of default to be remote. How should the guarantee be treated in Eagle's financial statements? A. Disclosed only B. Accrued only C. Accrued and disclosed Incorrect D. Neither accrued nor disclosed

Answer 27

A loss contingency should be accrued if it is probable that a loss will occur and if the amount of such loss can be reasonably estimated. FASB ASC 850-10-50-1 states, “Financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosure shall include:” •“The nature of the relationship(s) involved.” •“A description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements.” •“The dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period.” •“Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.” Eagle should disclose the guarantee, but not make an accrual.

Question 28

Which of the following qualifies as a reportable operating segment? A. Corporate headquarters, which oversees $1 billion in sales for the entire company Correct B. North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer C. South American segment, whose results of operations are reported directly to the board of directors, and has 5% of the company's assets, 9% of revenues, and 8% of the profits D. Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company's assets, 12% of revenues, and 11% of profits

Answer 28

A reportable operating segment is a component of an enterprise: a. That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise), b. Whose operating results are regularly reviewed by the enterprise's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and c. For which discrete financial information is available. Further, FASB ASC 280-10-50-7 requires, “Generally, an operating segment has a segment manager who is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment.”

Question 29

On January 1, a company enters into an operating lease for office space and receives control of the property to make leasehold improvements. The company begins alterations to the property on March 1 and the company's staff moves into the property on May 1. The monthly rental payments begin on July 1. The recognition of rental expense for the new offices should begin in which of the following months? A. January B. March Incorrect C. May D. July

Answer 29

The day they enter into the operating lease. January

Question 30

During 20X1, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows: FIFO Weighted-Average ------- ---------------- January 1, 20X1 $71,000 $77,000 December 31, 20X1 79,000 83,000 Orca's income tax rate is 30%. Orca should report the cumulative effect of this accounting change as: A. a component of income after extraordinary items. B. a component of income from continuing operations. C. an extraordinary item. Correct D. retrospectively as an adjustment of the beginning-of-period balance of retained earnings of the earliest year presented.

Answer 30

Change of inventory valuation is a change in principle and must be recognized retrospectively. mandates that voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented. The only exception is when the FASB issues a new pronouncement and mandates in that pronouncement that a change in accounting principle made to comply with that pronouncement should be made by including the cumulative effect in net income of the year of change.

Question 31

Topic 275 of the FASB's Accounting Standards Codification is entitled “Risks and Uncertainties.” In discussing the disclosure required by this section, what element is identified as important in determining the matters that are significant to a specific entity? A. Selectivity B. Risk Incorrect C. Uncertainty D. Significance

Answer 31

An important element of this topic is selectivity. Selectivity involves the specified criteria that serve to screen the risks and uncertainties encountered by every entity. The objective is to restrict required disclosures to matters that are significant to that specific entity.

Question 32

Options to purchase common stock are excluded from the computation of diluted EPS if: A. they are issued as part of employee compensation arrangements. B. their exercise price is greater than the average market price. C. they are employee compensation and the employee may not be able to sell the stock until some future date. Incorrect D. their exercise price is less than the average market price.

Answer 32

Options have a diluting effect when the average market price of the common stock exceeds the exercise price of the options. (Note that options would not be exercised by holders if the option price exceeds the market price.) FASB ASC 260-10-45-28A states that stock-based awards are included in diluted EPS even if the employee may not be able to sell them until some future date.

Question 33

A. A loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price. B. A loss is deferred so that the asset received in the exchange is properly valued. C. A loss, if any, which is unrelated to the determination of the amount of the asset received should be recorded. Incorrect D. A loss can occur only when assets are sold or disposed of in a monetary transaction.

Answer 33

In general, the accounting for nonmonetary exchanges should be based on fair value, which is the same basis as that used in monetary transactions. The asset received should be recorded at the fair value of the asset surrendered or the fair value of the asset received, whichever is more clearly evident. The difference between this fair value and the book value of the asset surrendered should be recognized as a gain or loss at the time of the exchange. recognize immediately

Question 34

Koby Co. entered into a capital lease with a vendor for equipment on January 2 for seven years. The equipment has no guaranteed residual value. The lease required Koby to pay $500,000 annually on January 2, beginning with the current year. The present value of an annuity due for seven years was 5.35 at the inception of the lease. What amount should Koby capitalize as leased equipment? A. $500,000 B. $825,000 Correct C. $2,675,000 D. $3,500,000

Answer 34

The lessee should capitalize the present value of the minimum lease payments. The minimum lease payments in this lease were the seven annual beginning-of-the-year payments of $500,000 each. There was not a bargain purchase option, and the lessee did not guarantee any portion of residual value. The amount that should be capitalized is the $500,000 annuity payment times the present value of an annuity due for seven years (5.35), or $2,675,000. annuity payment x pv of annuity due

Question 35

If a computer software arrangement does not require significant production, modification, or customization of software, when will revenue be recognized? A. When persuasive evidence of an arrangement exists B. When delivery has occurred Incorrect C. When the vendor's fee is fixed or determinable, and collectibility is probable D. All of the answer choices are necessary.

Answer 35

If a computer software arrangement does not require significant production, modification, or customization of software, revenue shall be recognized when all of these criteria are met.

Question 36

Which of the following transactions qualifies as a discontinued operation? Incorrect A. Disposal of part of a line of business B. Planned and approved sale of a segment C. Phasing out of a production line D. Changes related to technological improvements

Answer 36

Planned and approved sale of segment Discontinued operations must be related to a component of a business. A component of an entity is comprised of the operations and cash flows that can be clearly distinguished. An operating segment or reportable segment of an entity qualifies as an operation. Disposition, phasing out, or changing a portion of the assets of a component would not meet the definition of a discontinued operation.

Question 37

Which of the following is generally termed “deferred compensation”? Incorrect A. Individual retirement plans (IRAs) B. Defined benefit plan C. Rabbi trusts D. All of these plans are deferred compensation plans.

Answer 37

Deferred compensation is the portion of an employee's compensation that is payable in the future, either while employed or as retirement benefits, and may result in taxable income for the employee in the future rather than the present. Pension plan benefits, profit-sharing plans, stock bonus plans, bond purchase plans, individual retirement plans (IRAs), and Keogh plan earnings of the current year may be deferred and taxed in the year the payment is received by the employee. The timing of the taxability depends on whether or not the deferred compensation meets the technical requirements of Subchapter D of the Internal Revenue Code.

Question 38

What type of bonds mature in installments? A. Debenture B. Term C. Variable rate Correct D. Serial

Answer 38

Debenture bonds do not have a security interest in specific property. Variable rate debt has no fixed stated rate. Term bonds all mature together after a fixed term, but serial bonds mature in installments.

Question 39

Derby Co. incurred costs to modify its building and to rearrange its production line. As a result, an overall reduction in production costs is expected. However, the modifications did not increase the building's market value, and the rearrangement did not extend the production line's life. Should the building modification costs and the production line rearrangement costs be capitalized? A. The building modification costs should be capitalized. B. The production line rearrangement costs should be capitalized. C. The building modification costs and the production line rearrangement costs should both be capitalized. Incorrect D. Neither the building modification costs nor the production line rearrangement costs should be capitalized.

Answer 39

The general rule here is that if an expenditure benefits periods other than the current period, the expenditure should be capitalized and charged (depreciated) to the present and all future periods benefited. It would appear that this treatment should be applied to both the building modification costs and the production line rearrangement costs since the expenditures involved more than simple routine maintenance. Both expenditures are extraordinary repairs or betterments—large dollar amounts, non-recurring in nature, that increase the utility (efficiency) of the asset by decreasing production costs.

Question 40

Martin Pharmaceutical Co. is currently involved in two lawsuits. One is a class-action suit in which consumers claim that one of Martin's best selling drugs caused severe health problems. It is reasonably possible that Martin will lose the suit and have to pay $20 million in damages. Martin is suing another company for false advertising and false claims against Martin. It is probable that Martin will win the suit and be awarded $5 million in damages. What amount should Martin report on its financial statements as a result of these two lawsuits? Correct A. $0 B. $5 million income C. $15 million income D. $20 million expense

Answer 40

If the possibility that a company will be required to pay a contingent liability is reasonably possible, the liability is not required to accrue the liability. However, the nature of the liability and an estimate of the loss (or range of loss) must be disclosed. If it is probable that the company will acquire assets in the future due to the contingency, the gain cannot be recognized. In this problem, the “reasonably possible” loss will not be accrued, only disclosed. The contingent gain cannot be accrued.

Question 41

The fair value of an impaired asset may be determined by all of the following except: A. quoted market prices in active markets for the impaired asset. B. market prices for similar assets. C. the carrying amount of similar assets of competitors. Incorrect D. appropriate valuation techniques (e.g., present value of expected future cash flows).

Answer 41

not the carrying amounts Quoted market prices in active markets and market prices for similar assets are methods of determining fair value. The carrying amount of similar assets would usually not be known and would not necessarily indicate an impairment loss, even if it were known. Appropriate valuation techniques can be used in determining the fair value of an impaired asset. Examples of such techniques include present value of expected future cash flows, option-pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis.

Question 42

Album Co. issued 10-year, $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the effective interest rate for the debenture bonds? A. 6% B. 7% Incorrect C. 12% D. 14%

Answer 42

Effective interest = Carrying value of the bonds × Effective interest rate × Time period In this case: •$13,016 = $185,953 × Unknown effective interest rate × 1/2 year •Effective interest rate = ($13,016 ÷ $185,953) × 2 = 14%

Question 43

On January 2, 20X1, Yardley Co. sold a plant to Ivory, Inc., for $1,500,000. On that date, the plant's carrying cost was $1,000,000. Ivory gave Yardley $300,000 cash and a $1,200,000 note, payable in four annual installments of $300,000 plus 12% interest. Ivory made the first principal and interest payment of $444,000 on December 31, 20X1. Yardley uses the installment method of revenue recognition. In its 20X1 income statement, what amount of realized gross profit should Yardley report? Incorrect A. $344,000 B. $200,000 C. $148,000 D. $100,000

Answer 43

Gross profit on sale = $1,500,000 - $1,000,000 = $500,000 Gross profit rate = $500,000 / $1,500,000 = 33-1/3% Cash collected in 20X1 ($300,000 + $444,000) $744,000 Less interest collected ($444,000 - $300,000) 144,000 -------- Cash collected from sales 600,000 Times gross profit rate x 33-1/3% -------- Gross profit reported in 20X1 $200,000 ========

Question 44

Notes or accounts receivable from officers, employees, or affiliated entities must be: Incorrect A. included with notes or accounts receivable from the entity's business. B. shown separately and not included under a general heading such as notes receivable or accounts receivable. C. included only in disclosure to the financial statements. ``` D. shown as a separate class of equity. ```

Answer 44

According to FASB ASC 850-10-50-2, notes or accounts receivable from officers, employees, or affiliated entities must be shown separately and not included under a general heading such as notes receivable or accounts receivable.

Question 45

Estimates are a necessary part of the preparation of financial statements. It is necessary to explicitly communicate to the users of the financial statements that estimates have been used and that many of the amounts reported are approximations rather than exact amounts. Which of the following is not an example of certain significant estimates as listed in Topic 275 of the FASB's Accounting Standards Codification? Correct A. Expensed computer software costs B. Inventory subject to rapid technological obsolescence C. Contingent liabilities for obligations of other entities D. Estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets

Answer 45

You are correct, the answer is A. Estimates are a necessary part of the preparation of financial statements. It is necessary to explicitly communicate to the users of the financial statements that estimates have been used and that many of the amounts reported are approximations rather than exact amounts. This understanding should help users to make better decisions. (FASB ASC 275-10-05-6) Certain significant estimates are those estimates involving a situation where it is reasonably possible that the estimate will change in the term and the effect of the change will be material. Disclosure must include the nature of the uncertainty and an indication that it is at least reasonably possible that this change in the estimate will occur in the near term. (FASB ASC 275-10-50-8) Examples of items that might require disclosure under this topic include the following (FASB ASC 275-10-50-15): •Inventory subject to rapid technological obsolescence •Specialized equipment subject to technological obsolescence •Environmental remediation-related obligations •Contingent liabilities for obligations of other entities •Amounts reported for long-term obligations, such as amounts reported for pension and postemployment benefits •Estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets

Question 46

Moss Corp. owns 20% of Dubro Corp.'s preferred stock and 80% of its common stock. Dubro's stock outstanding on December 31, 20X1, is as follows: 10% cumulative preferred stock $100,000 Common stock 700,000 Dubro reported net income of $60,000 for the year ending December 31, 20X1. What amount should Moss record as equity in earnings of Dubro for the year ending December 31, 20X1? A. $42,000 Incorrect B. $48,000 C. $48,400

Answer 46

Moss' share of preferred dividends = 20% x 10% x $100,000 = $2,000 Earnings attributable to common shareholders = $60,000 - 10% x $100,000 = $50,000 Moss' share of common earnings = 80% x $50,000 = $40,000 Moss' total equity in Dubro earnings = $2,000 + $40,000 = $42,000 FASB ASC 323-10-35-16 states: “If an investee has outstanding cumulative preferred stock, an investor shall compute its share of earnings (losses) after deducting the investee's preferred dividends, whether or not such dividends are declared.” These amounts may be adjusted later into consolidated statements.

Question 47

In general, an enterprise preparing interim financial statements should: Incorrect A. defer recognition of seasonal revenue. B. disregard permanent decreases in the market value of its inventory. C. allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred. D. use the same accounting principles followed in preparing its latest annual financial statements.

Answer 47

Because the standards generally treat interim periods as “integral parts” of the annual reporting periods, not as discrete periods or separate reporting periods, companies are required to use the same accounting principles for interim periods that they follow in preparing their annual financial statements

Question 48

Which of the following subsequent events must not be recognized in the financial statements? A. Loss on an uncollectible trade account receivable as a result of a customer's deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued Correct B. Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued C. The events that gave rise to litigation took place before the balance sheet date and that litigation is settled, after the balance sheet date but before the financial statements are issued or are available to be issued, for an amount different from the liability recorded in the accounts. D. Shortly before financial statements are issued, the actual loss of plant or inventories as a result of fire or natural disaster that occurred before the balance sheet date is determined to be greater than the loss that was originally estimated

Answer 48

The correct answer is “loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued.” An entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued. The other answer choices are incorrect because an entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet.

Question 49

Douglas Co. leased machinery with an economic useful life of six years. For tax purposes, the depreciable life is seven years. The lease is for five years, and Douglas can purchase the machinery at fair market value at the end of the lease. What is the depreciable life of the leased machinery for financial reporting? A. Zero B. Five years Incorrect C. Six years

Answer 49

Douglas Co. should capitalize the lease because the lease term (five years) is equal to 83% (equal to or more than 75%) of the economic life (six years). Under a capital lease, the lease is depreciated using the life of the lease if the 75% or 90% of fair market value criteria are met. If the lease transfers ownership or has a bargain purchase, the life of the asset is used to determine depreciation. (FASB ASC 840-30-35-1)

Question 50

In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold's gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Gold has routinely retired its own bonds early. Gold should report: Incorrect A. the effect of the two transactions as an extraordinary gain. B. the effect of the two transactions in income before extraordinary items. C. the effect of its own bond transaction gain in income before extraordinary items and report the Iron bond transaction as an extraordinary loss. D. the effect of its own bond transaction as an extraordinary gain and report the Iron bond transaction loss in income before extraordinary items. You answered A. The correct answer is B. Grant, Inc., acquired 30% of South Co.'s voting stock for $200,000 on January 2, 20X1. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X2, and $200,000 for the year ended December 31, 20X2. On July 1, 20X2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X2.

Answer 50

The loss on the sale of long-term investment in Iron Corp. bonds would be reported as income before extraordinary items. The gain from purchase of Gold's own bonds is subject to the provisions of FASB ASC 470-50-45, which states that FASB ASC 225-20-45-2 criteria apply to early extinguishment of debt. Note FASB ASC 225-20-45-2 requires that extraordinary items be both unusual in nature and infrequent in occurrence and applies to the determination of whether or not the early extinguishment of debt is an extraordinary item. Therefore, Gold Corp. should not report the gain on the purchase of its own bonds as an extraordinary item. Since the net of the two transactions is a gain, they would be included in income before extraordinary items. Neither item would be considered an extraordinary item.

Question 51

Grant, Inc., acquired 30% of South Co.'s voting stock for $200,000 on January 2, 20X1. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X2, and $200,000 for the year ended December 31, 20X2. On July 1, 20X2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X2. In Grant's December 31, 20X1, balance sheet, what should be the carrying amount of this investment? A. $200,000 Correct B. $209,000 C. $224,000 D. $230,000

Answer 51

Acquisition cost $200,000 30% of South's income (30% x $80,000) 24,000 30% of South's dividends (30% x $50,000) (15,000) --------- Carrying amount on December 31, 20X1 $209,000 =========

Question 52

In testing for impairment of long-lived assets, Nale Co. determined the following: ``` Cost of asset $100,000 Accumulated depreciation 60,000 Future cash flows 20,000 Fair value 30,000 The impairment loss is: ``` A. $20,000. Incorrect B. $30,000. C. $10,000. D. $70,000.

Answer 52

If the carrying amount exceeds the future cash flows, an impairment loss should be recognized. The loss is the excess of the asset's carrying amount over its fair value. 40>20 40-30

Question 53

A business interest that constitutes a large part of an individual's total assets should be presented in a personal statement of financial condition as: Incorrect A. a separate listing of the individual assets and liabilities at cost. B. separate line items of both total assets and total liabilities at cost. C. a single amount equal to the proprietorship equity. D. a single amount equal to the estimated current value of the business interest.

Answer 53

The estimated current value of an investment…should be shown in one amount as an investment....

Question 54

How should financial reporting assist users in evaluating operating results of the governmental entity? A. Provide information necessary to determine whether its financial position improved or deteriorated B. Provide information about sources and uses of resources C. Provide information about how it financed its activities Correct D. All of the answer choices are correct.

Answer 54

(1) Providing information about sources and uses of financial resources (2) Providing information about how it financed its activities and met its cash requirements (3) Providing information necessary to determine whether its financial position improved or deteriorated as a result of the year's operations

Question 55

Nomar Co. shipped inventory on consignment to Seabright Co. that cost $20,000. Seabright paid $500 for advertising that was reimbursable from Nomar. At the end of the year, 70% of the inventory was sold for $30,000. The agreement states that a commission of 20% will be provided to Seabright for all sales. What amount of net inventory on consignment remains on the balance sheet for the first year for Nomar? A. $0 Correct B. $6,000 C. $6,500 D. $20,000

Answer 55

Inventory on consignment is inventory of the consignor, not of the consignee. The 30% of the inventory that was not sold is Nomar's inventory, not Seabright's inventory. Therefore, Nomar's inventory cost is 30% of $20,000, or $6,000.

Question 56

Which of the following funds would be reported as a fiduciary fund in Pine City's financial statements? Incorrect A. Special revenue B. Permanent C. Private-purpose trust D. Internal service

Answer 56

The only listed fund that would be reported as a fiduciary fund in Pine City's financial statements is the private-purpose trust fund. The special revenue and permanent funds are both governmental funds, and the internal service fund is one of two types of proprietary funds.

Question 57

On January 2, 20X1, Paye Co. purchased Shef Co. at a cost that resulted in recognition of goodwill of $200,000 having an expected benefit period of 10 years. During the first quarter of 20X1, Paye spent an additional $80,000 on expenditures designed to maintain goodwill. Due to these expenditures, on December 31, 20X1, Paye estimated that the benefit period of goodwill was 40 years. For 20X1, Paye assessed impairment to be $7,000. In its December 31, 20X1, balance sheet what amount should Paye report as goodwill? A. $180,000 Incorrect B. $195,000 C. $193,000 D. $273,000

Answer 57

any costs of developing, maintaining, or restoring goodwill should be deducted from income when incurred. Obviously, the $80,000 expenditure falls into this category. The $200,000 of purchased goodwill should be assessed for impairment each year. Initial cost of goodwill $200,000 Less: 20X1 impairment 7,000 -------- Unamortized amount on December 31, 20X1 $193,000

Question 58

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. Incorrect B. lower by $4,000. C. higher by $36,000. D. lower by $36,000.

Answer 58

Relative to accrual basis, a decrease in accounts receivable is an increase in cash because cash must be received to decrease accounts receivable. Relative to accrual basis, an increase in accounts payable is an increase in cash because accounts payable was increased instead of making cash purchases. Decrease in accounts receivable $20,000 Increase in accounts payable 16,000 ------- Total increase in cash-basis income $36,000

Question 59

A company is completing its annual impairment analysis of the goodwill included in one of its cash generating units (CGUs). The recoverable amount of the CGU is $32,000. The company noted the following related to the CGU: Other Goodwill Patents Assets Total -------- ------- ------- ------- Historical cost $15,000 $10,000 $35,000 $60,000 Depreciation and amortization 0 3,333 11,667 15,000 ------- ------- ------- ------- Carrying amount, December 31 $15,000 $ 6,667 $23,333 $45,000 Under IFRS, which of the following adjustments should be recognized in the company's consolidated financial statements? A. Decrease goodwill by $13,000 B. Decrease goodwill by $15,000 Incorrect C. Decrease goodwill by $3,250, patents by $2,167, and other assets by $7,583 D. Decrease goodwill by $4,333, patents by $1,926, and other assets by $6,741

Answer 59

Under IFRS, impairment is measured at the level of the cash generating unit. Total carrying amount $45,000 Recoverable amount 32,000 ------- Impairment $13,000

Question 60

Expenses, subject to reporting per functional classification, recorded in the general ledger of ABC, a nongovernmental not-for-profit organization, are as follows: Soliciting prospective members $45,000 Printing membership benefits brochures 30,000 Soliciting membership dues 25,000 Maintaining donor list 10,000 What amount should ABC report as fundraising expenses? Correct A. $10,000 B. $35,000

Answer 60

Fundraising activities include publicizing and conducting fundraising campaigns, maintaining donor lists, conducting special fundraising events, preparing and distributing fundraising manuals and other materials, and other activities involved with soliciting contributions. Membership development activities are separate from fundraising activities when members receive significant benefits. The presence of member benefits is indicated by the brochure.

Question 61

Oz, a nongovernmental not-for-profit entity, received $50,000 from Ame Company to sponsor a play given by Oz at the local theater. Oz gave Ame 25 tickets, which generally cost $100 each. Ame received no other benefits. What amount of ticket sales revenue should Oz record? A. $0 Correct B. $2,500 C. $47,500 D. $50,000

Answer 61

This payment is partially an exchange transaction and partially a contribution and the two parts should be accounted for separately. Oz would recognize ticket sales revenue for the 25 tickets ($2,500) and recognize the balance as contribution revenue.

Question 62

Enterprises often carry life insurance policies on the lives of key officers and employees. If the enterprise is the beneficiary, the cash surrender value of the policy is an asset of the enterprise. The amount to be charged to expense is: Incorrect A. the amount of premiums paid. B. the amount of such premiums paid less the increase in cash surrender value during the period. C. the increase in cash surrender value. D. the decrease in cash surrender value.

Answer 62

Enterprises often carry life insurance policies on the lives of key officers and employees. If the enterprise is the beneficiary, the cash surrender value of the policy is an asset of the enterprise. The amount to be charged to expense is the amount of such premiums paid less the increase in cash surrender value during the period.

Question 63

On March 15, 20X1, Ashe Corp. adopted a plan to accumulate $1,000,000 by September 1, 20X5. Ashe plans to make four equal deposits to a fund that will earn interest at 10% compounded annually. Ashe made the first deposit on September 1, 20X1. Future value and future amount factors are as follows: Future value of 1 at 10% for 4 periods 1.4641 Future amount of ordinary annuity of 1 at 10% for 4 periods 4.6410 Future amount of annuity in advance of 1 at 10% for 4 periods 5.1100 Ashe should make four annual deposits (rounded) of: A. $250,000. Incorrect B. $215,500. C. $195,700. D. $146,000.

Answer 63

Payment made at the beginning of a period is an annuity in advance. Thus, Ashe Corp. should use the following computation: 5.1100z = $1,000,000 z = $1,000,000 / 5.1100 z = $195,695 (rounded to $195,700) ``` where: z is the amount of deposit Future value is $1,000,000 Periods of future value is 4 Future value of annuity in advance of 1 at 10% for 4 periods is 5.1100 ```

Question 64

Tech Co. bought a trademark on January 2, two years ago. Tech accounted for the trademark as instructed under the provisions of FASB 142 during the current year. The carrying value at the beginning of the year was $38,000. It was determined that the cash flow will be generated indefinitely at the current level for the trademark. What amount should Tech report as amortization expense for the current year? Correct A. $0 B. $922 C. $1,000 D. $38,000

Answer 64

Indefinite life intangibles are not amortized. They must be tested for impairment each year to determine if their value has been impaired. If fair value of an indefinite life intangible is less than book value, the asset is impaired. When this occurs, an impairment loss is recognized and the asset is written down to its fair value. Amortization expense is never reported on indefinite life intangibles, however.

Question 65

On December 31, 20X1, Kale Co. had the following balances in the accounts it maintains at First State Bank: Checking account 101 $175,000 Checking account 201 (10,000) Money market account 25,000 90-day certificate of deposit due February 28, 20X2 50,000 180-day certificate of deposit due March 15, 20X2 80,000 Kale classifies investments with original maturities of three months or less as cash equivalents. On the December 31, 20X1, balance sheet, what amount should Kale report as cash and cash equivalents? A. $190,000 B. $200,000 C. $240,000 Incorrect D. $320,000

Answer 65

Cash and cash equivalents on December 31, 20X1: Checking account 101 $175,000 Checking account 201 (10,000) Money market account 25,000 90-day certificate of deposit 50,000 --------- Total $240,000 ========= The 180-day (6-month) certificate of deposit would not be included in cash and cash equivalents because its original maturity is more than three months. Accounts with the same bank can be netted.

Question 66

Lano Corp.'s forest land was condemned for use as a national park. Compensation for the condemnation exceeded the forest land's carrying amount. Lano purchased similar, but larger, replacement forest land for an amount greater than the condemnation award. As a result of the condemnation and replacement, what is the net effect on the carrying amount of forest land reported in Lano's balance sheet?

Answer 66

Lano Corp.'s forest land was condemned for use as a national park. Compensation for the condemnation exceeded the forest land's carrying amount. Lano purchased similar, but larger, replacement forest land for an amount greater than the condemnation award. As a result of the condemnation and replacement, what is the net effect on the carrying amount of forest land reported in Lano's balance sheet? Correct A. The amount is increased by the excess of the replacement forest land's cost over the condemned forest land's carrying amount. B. The amount is increased by the excess of the replacement forest land's cost over the condemnation award. C. The amount is increased by the excess of the condemnation award over the condemned forest land's carrying amount. D. No effect, because the condemned forest land's carrying amount is used as the replacement forest land's carrying amount.

Question 67

On June 1 of the current year, a company entered into a real estate lease agreement for a new building. The lease is an operating lease and is fully executed on that day. According to the terms of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current year and to continue each month thereafter for 56 months. The lease term spans five years. The company has a calendar year-end. What amount is the company's lease expense for the current calendar year? A. $86,700 B. $161,838 Correct C. $188,813 D. $202,300

Answer 67

The inception of a lease is the date of the lease agreement. Rental expense should be as of that date. When the lease payments begin later than the inception date, the lease payments must be spread evenly over the longer period of time, which includes the months between the inception date and the beginning of the lease payments. •$28,900 × 56 months = $1,618,400 •$1,618,400 ÷ 60 months = $26,973.33 •$26,973.33 × 7 months (June through December) = $188,813

Question 68

n 20X1, a personal injury lawsuit was brought against Halsey Co. Based on counsel's estimate, Halsey reported a $50,000 liability in its December 31, 20X1, balance sheet. In November 20X2, Halsey received a favorable judgment, requiring the plaintiff to reimburse Halsey for expenses of $30,000. The plaintiff has appealed the decision, and Halsey's counsel is unable to predict the outcome of the appeal. In its December 31, 20X2, balance sheet, Halsey should report what amounts of asset and liability related to these legal actions? A. Asset: $30,000; Liability: $50,000 B. Asset: $30,000; Liability: $0 Incorrect C. Asset: $0; Liability: $20,000 D. Asset: $0; Liability: $0

Answer 68

FASB ASC 450-20-25-2 provides for: •accrual of a loss if such loss is probable and can be reasonably estimated, and •no accrual of gains. FASB ASC 450-20-55-12 indicates: Quote If the underlying cause of the litigation, claim, or assessment is an event occurring before the date of an enterprise's financial statements, the probability of an outcome unfavorable to the enterprise must be assessed to determine whether the condition in paragraph 8(a) is met. Among the factors that should be considered are the nature of the litigation, claim, or assessment, the progress of the case (including progress after the date of the financial statements but before those statements are issued or are available to be issued, with the appropriate date determined in accordance with Statement 165), the opinions or views of legal counsel and other advisers, the experience of the enterprise in similar cases, the experience of other enterprises, and any decision of the enterprise's management as to how the enterprise intends to respond to the lawsuit, claim, or assessment (for example, a decision to contest the case vigorously or a decision to seek an out-of-court settlement). Since the outcome of the appeal cannot be predicted, no asset (gain) should be reported. Since Halsey received a favorable judgment, the liability accrued in 20X1 is no longer appropriate. (And the legal costs have probably already been expensed.) However, the lawsuit and appeal should be disclosed in a footnote.