FAR: ALL: 4/14/2018 Flashcards Preview

CPA: Tiffany's Notes > FAR: ALL: 4/14/2018 > Flashcards

Flashcards in FAR: ALL: 4/14/2018 Deck (11):
1

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?

1) $430,000
2) $454,000
3) $790,000
4) $814,000

$454,000

A defined benefit pension plan can have up to five components that must be used to determine net pension cost each year [service cost for the period, plus interest cost on the projected benefit obligation, minus expected return on plan assets, plus prior service cost amortization, and 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.

2

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.

1) $2,750
2) $(2,750)
3) $3,575
4) $(3,575)

+ $2,750

3

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
Added to
Deducted from
Added to
Added to
Deducted from
Deducted from
Deducted from
Added to



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

Change in Cash + Other assets = change in Liab + Change in OE

1) Solve for Change in cash

Change in Cash = + Change in Liab + Change in OE - Change in Other Assets

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.

4

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.

1) $126,316
2) $133,333
3) $150,000
4) $156,250

$156,250

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
$156,250

5

In the calculation of pension expense recognized for a period by an employer sponsoring a defined benefit pension plan, which components will not be included?

1) Interest cost on the projected benefit obligation.
2) Actuarial present value of benefits attributed by the pension benefit formula to employee service during that period.
3) Amortization of the unrecognized net obligation (and loss or cost) or unrecognized net asset (and gain) existing at the date of transition.
4) Excess of accumulated benefit obligation over the fair value of the plan assets.

Excess of accumulated benefit obligation over the fair value of the plan assets.

6

Assume a private firm elects to early adopt ASU 2014-08: Business Combinations: Accounting for Intangible Assets in a Business Combination. Noncompetition agreements:

1) Must be separately measured as an intangible asset apart from goodwill.
2) May be excluded from both intangible asset and goodwill accounting.
3) Must be measured and included within goodwill.
4) May be measured and included within goodwill.

May be measured and included in goodwill

ASU 2014-18 allows (not requires) private firms, in a business combination, to measure noncompetition agreements as part of goodwill.

7

When a company elects not to bifurcate a hybrid instrument and accounts for the hybrid instrument at fair value, which method(s) of disclosure are permissIble?



I. As a separate line item for fair value and non-fair value instruments on the balance sheet.
II. As an aggregate amount of all hybrid instruments on the balance sheet.
III. As an aggregate amount of all hybrid instruments with the amount of the hybrid instruments at fair value shown in parentheses on the balance sheet.
IV. As a footnote disclosure with elected amounts.

1) I only.
2) III only.
3) I and III.
4) I and IV.

I and III

If a company elects to use fair value measurement on selected hybrid instruments, the balance sheet disclosure may be presented in one of two ways: as either a separate line item for the fair value and non--fair value instruments on the balance sheet, or as an aggregate amount of all hybrid instruments with the amount of hybrid instruments at fair value shown in parentheses

8

Inco, Inc., a U.S. entity, has elected to prepare financial statements in accordance with IFRS to provide to its foreign suppliers. Inco has the following information concerning an investment in the bonds of Tryco, Inc., as of December 31

Par value $100,000
Original cost 108,000
Current premium 3,500
Fair value 105,000
Inco normally does not invest in debt but made this investment with the expectation that it could profit from short-term decreases in the market interest rate. Which one of the following is the amount at which Inco should report its investment in Tryco in its December 31 IFRS-based Statement of Financial Position?

1) $100,000
2) $103,500
3) $105,000
4) $108,000

$105,000

This answer ($103,500) results from reporting the investment in bonds at amortized cost. Under IFRS No. 9, investments in debt securities that are not made under an entity's business model plan to make and hold such investments solely to receive cash flow from interest and principal repayment should be reported at fair value, not at amortized cost.

9

Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values.

The exchange lacks commercial substance.

As a result of the exchange, Slate should recognize

1) A gain equal to the difference between the fair value and the carrying amount of the land given up.
2) A gain in an amount determined by the ratio of cash received to total consideration.
3) A loss in an amount determined by the ratio of cash received to total consideration.
4) Neither a gain nor a loss.

A gain in an amount determined by the ratio of cash received to total consideration.

"A gain equal to the difference between the fair value and the carrying amount of the land given up" would be correct if there were commercial substance to the exchange. However, without commercial substance, Slate's recognized gain is limited to the percentage of its asset "sold" for cash.

10

On September 30, year 1, Grey Company issued 3,000 shares of its $10 par common stock in connection with a stock dividend. No entry was made on the stock dividend declaration date. The market value per share immediately after issuance was $15. Grey’s stockholders’ equity accounts immediately before issuance of the stock dividend shares were as follows:



Common stock $10 par; 20,000 shares authorized outstanding $200,000
Additional paid-in capital 300,000
Retained earnings 350,000


What should be the retained earnings balance immediately after the stock dividend?
1) $305,000
2) $320,000
3) $327,500
4) $350,000

$305,000

The stock dividend is a 15% dividend (3,000/20,000). A stock dividend of less than 20-25% is recorded (on the date of declaration) at the FV of the shares to be issued. This amount is charged to Retained earnings and credited to the Stock dividend distributable and Paid-in capital accounts. The FV of the stock on the date of declaration is not indicated in the problem; however, the FV immediately after issuance of the stock dividend is $15. This is the best choice based on the information available. Therefore, Retained earnings would be charged for $45,000 (3,000 × $15). The retained earnings balance would then be $305,000 ($350,000 − $45,000).

11

What is the present value of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date only?

1) Service cost.
2) Interest cost.
3) Projected benefit obligation.
4) Accumulated benefit obligation.

Accumulated benefit obligation.


Service cost (which is NOT the correct answer), measured each period, is the increase in projected benefit obligation attributed to service rendered by employees for the period. Service cost is the primary component of annual pension expense.