Flashcards in FAR: All: 4/14/2018 Deck (13):
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?
1) As an adjustment to 2012 rental income.
2) As an income tax expense in 2012.
3) As a prior period adjustment.
4) No reporting in 2012 required.
As a prior period adjustment
The amount of the 2011 rental expense error would not be ignored (not reported) in the 2012 financial statements. 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.
Before year 2, Droit Co. used the cash basis of accounting. As of December 31, year 2, 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 year 2 accrual basis net income and December 31, year 2 accrual-basis owners’ equity?
Year 2 Net income 12/31/Y2 Owners' equity
1) Understated No effect
2) Understated Understated
3) Overstated No effect
4) Overstated Overstated
Overstated, No Effect
Inability to determine beginning supplies inventory would cause supplies expense to be understated and year 2 net income to be overstated. Cumulative supplies expense would be properly stated so there would be no effect on December 31, year 2 retained earnings.
Albert University, a private, not-for-profit university, has donor-restricted regular endowment funds that include investments in equity securities. These equity securities all have readily determinable fair values because they are all traded on national security exchanges. Most of the equity investments represent between 1% and 3% of the common stock of the investee companies; however, a few of Albert’s investments permit the university significant influence over the operating and financing policies of the investee companies. How should Albert report these equity securities on its statement of financial position?
Equity securities: Equity Securities:
1% to 3% ownership Significant influence
1) Fair value Fair value
2) Fair value Use equity method
3) Lower of cost or market Fair value
4) Fair value Lower of cost or market
Fair Value, Use Equity Method
Where the university can exercise significant influence the equity method should be used.
Grove Township issued $50,000 of bond anticipation notes at face amount in Year 1 and placed the proceeds into its Capital Projects Fund.
All legal steps were taken to refinance the notes, but Grove was unable to consummate refinancing.
In the Capital Projects Fund, what account should be credited to record the $50,000 proceeds?
1) Other Financing Sources Control.
2) Revenues Control
3) Deferred Inflow of Resources
4) Bond Anticipation Notes Payable
Bond Anticipation Notes Payable
The proceeds from bond anticipation notes payable are never recorded as Deferred Inflow of Resources in the Capital Projects Fund, because there is no event that would allow the proceeds to be recognizes as Revenues. If the refinancing had occurred, then Grove would have credited Other Financing Sources control for $50,000.
If all legal steps have been taken to refinance the bond anticipation notes and the ability to consummate refinancing criteria (FASB Statement No. 6) have not been met, then the bond anticipation notes should be reported as a Fund Liability in the fund receiving the proceeds. The Capital Projects Fund should credit Bond Anticipation Notes Payable for $50,000.
Jackson Company classifies investment in equity securities as an operating activity based on their nature and purpose. In a statement of cash flows in which the operating activities section is prepared under the indirect method, the realized gain on an investment in equity securities should be presented as a(n)
1) Deduction from net income in the amount of the gain.
2) Addition to net income in the amount of the securities’ fair value at the beginning of the period.
3) Cash inflow from investing activities.
4) Both a deduction from net income in the amount of the gain and cash inflow from investing activities.
Addition to net income in the amount of the securities’ fair value at the beginning of the period.
Cash inflows and outflows from equity securities may be included in either operating or investing activities, based on the nature and purpose of the securities. Unrealized gains and losses on equity securities should be included in current income. Equity securities are carried at fair value and the amount of realized gain on the sale is the difference between the securities’ fair value at the beginning of the period and the amount of appreciation to the date of sale. Net income is the starting point when preparing the operating activities section of a statement of cash flows using the indirect method. Since the realized gain on sale is already included as a component of net income, only the fair value (carrying amount) of the securities at the beginning of the period must be added to net income. The total cash inflow from the sale (carrying amount plus realized gain) will then be included in operating activities.
The functional currency of Nash, Inc.’s subsidiary is the Swiss franc. Nash borrowed Swiss francs as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash’s translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash’s consolidated financial statements?
1) The translation loss less the exchange gain is reported as "other comprehensive income" under one of three alternatives and "accumulated other comprehensive income" in the stockholders’ equity section of the balance sheet.
2) The translation loss less the exchange gain is reported in the income statement.
3) The translation loss is reported separately as "other comprehensive income" and in the stockholders’ equity section of the balance sheet and the exchange gain is reported in the income statement.
4) The translation loss is reported in the income statement and the exchange gain is reported as "other comprehensive income" and in the stockholders’ equity section of the balance sheet.
The translation loss less the exchange gain is reported as "other comprehensive income" under one of three alternatives and "accumulated other comprehensive income" in the stockholders’ equity section of the balance sheet.
According to ASC Topic 830, translation adjustments resulting from the translation of foreign currency statements should be reported separately as a component of "other comprehensive income" under one of three alternatives and in "accumulated other comprehensive income" in stockholders’ equity. Additionally, gains and losses on certain foreign currency transactions should be reported in the same manner. Those gains and losses which should be excluded from net income and instead reported in "other comprehensive income" and as a component of stockholders’ equity include foreign currency transactions designated as economic hedges of a net investment in a foreign entity. Thus, both the translation loss and the exchange gain are to be reported as "other comprehensive income" and in the stockholders’ equity section of the balance sheet.
Rock County has acquired equipment through a noncancelable lease-purchase agreement dated December 31, Year 1. This agreement requires no down payment and the following minimum lease payments:
December 31 Principal Interest Total
Year 2 $50,000 $15,000 $65,000
Year 3 50,000 10,000 60,000
Year 4 50,000 5,000 55,000
What account should be debited for $150,000 in the General Fund at inception of the lease if the equipment is a general fixed asset and Rock does not use a Capital Projects Fund?
1) Other Financing Uses control
3) Expenditures Control
4) Memorandum entry only
The following entry must be made in the General Fund at the inception of the lease.
DR Expenditures - Capital Lease 150,000
CR Other Financing Sources - Capital Lease 150,000
On January 1, Year 1, an entity has a projected benefit obligation of $3 million and plan assets of $2 million. On that date, the entity amends its pension contract to make the benefits larger, and this change creates a prior service cost of $400,000. The discount or interest rate in connection with the projected benefit obligation is 6%, and the expected earnings rate on plan assets is 4%. The average remaining service life of those employees impacted by the amendment is estimated to be 10 years. The service cost for the year is $290,000. No funding occurred during the year. What is the net pension cost (the pension expense figure) to be recognized for Year 1?
A defined benefit pension plan can have up to five components that must be used to determine net pension cost each year:
1) ADD: service cost for the period
2) ADD: plus interest cost on the projected benefit obligation
3)LESS: minus expected return on plan assets
4) ADD: plus prior service cost amortization
5) ADD or LESS: plus (or minus) amortization of actuarial unrealized losses (or gains)
Here, there are four of these components.
(1) The service cost for the year is $290,000.
(2) The projected benefit obligation is increased from $3 million to $3.4 million by the prior service cost, so the interest on the projected benefit obligation is $3.4 million multiplied by 6%, or $204,000.
(3) The income on the plan assets is $2 million multiplied by 4%, or $80,000.
(4) The prior service cost is amortized to the net pension cost over the average remaining service life of the employees. That amortization increases the cost by $40,000 ($400,000 / 10 years).
Hence, the net pension cost is $290,000 plus $204,000 less $80,000 plus $40,000, or $454,000.
If losses in the amount of $2,750 (net of tax) on available-for-sale debt securities have been previously included in other comprehensive income, what amount would be the reclassification adjustment added (or deducted) when the securities are sold? Assume a 30% tax rate.
Dee’s inventory and accounts payable balances at December 31, Year 2, increased over their December 31, Year 1, balances. Should these increases be added to or deducted from cash payments to suppliers to arrive at Year 2 cost of goods sold?
Increase in inventory Increase in accounts payable
1) Added to Deducted from
2) Added to Added to
3) Deducted from Deducted from
4) Deducted from Added to
Deducted From, Added To
Cash payments to suppliers are converted to CGS as follows:
Cash payments to suppliers
+ Increase in AP
– Increase in inventory
Cost of Goods Sold
An increase in ending inventory represents the cost of items purchased during the period that remain unsold. Thus, the increase should be deducted from cash payments to suppliers. An increase in AP indicates that certain items purchased during the period have not yet been paid for and are not included in cash payments. Since these represent unrecorded purchases, the increase must be added to cash payments to suppliers to arrive at CGS.
On January 1, 2005, Jambon purchased equipment for use in developing a new product. Jambon uses the straight-line depreciation method. The equipment could provide benefits over a 10-year period.
However, the new product development is expected to take 5 years, and the equipment can be used only for this project.
Jambon's 2005 expense equals
1) The total cost of the equipment.
2) One-fifth of the cost of the equipment.
3) One-tenth of the cost of the equipment.
The total cost of the equipment
The equipment is being used solely in research and development. Even though the equipment has a 5-year useful life, the only use of the machine is in this particular research project.
Therefore, it qualifies as research and development and is expensed immediately. If it had usefulness apart from this project, then it would be depreciated over its useful life.
The France Company owns a foreign subsidiary with 2,400,000 local currency units (LCU) of property, plant, and equipment before accumulated depreciation at December 31, year 3. Of this amount, 1,500,000 LCU were acquired in year 1 when the rate of exchange was 1.5 LCU to $1, and 900,000 LCU were acquired in year 2 when the rate of exchange was 1.6 LCU to $1. The rate of exchange in effect at December 31, year 3, was 1.9 LCU to $1. The weighted average of exchange rates which were in effect during year 3 was 1.8 LCU to $1. Assuming that the property, plant, and equipment are depreciated using the straight-line method over a 10-year period with no salvage value, how much depreciation expense relating to the foreign subsidiary’s property, plant, and equipment should be charged in France’s income statement for year 3? Assume the US dollar is the functional currency.
This answer is incorrect. ASC Topic 830 requires remeasurement when the US dollar is the functional currency. Remeasurement means that all assets and liabilities on the balance sheet and revenues and expenses on the income statement are translated at the rates in effect when the transactions originally occurred (e.g., depreciation is translated at the exchange rate in effect at the original transaction date) (i.e., the historical rate). Since the useful life of the fixed assets is 10 years with no salvage value, depreciation will be 150,000 LCU for the equipment acquired in year 1 and 90,000 LCU for the equipment acquired in year 2. These are converted to dollars at their respective historical rates of 1.5 and 1.6 LCU.
$1,500,000 × 10% ÷ 1.5 = $100,000
$ 900,000 × 10% ÷ 1.6 = 56,250