FAR: ALL: 4/25/2018 Flashcards Preview

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Flashcards in FAR: ALL: 4/25/2018 Deck (13):

Legal fees incurred in successfully defending a patent suit should be capitalized when the patent has been

Internally developed Purchased from an inventor
Yes No
Yes Yes
No Yes
No No

Yes, Yes

Legal fees from a successful defense of a patent suit may be capitalized in the patent account because such a suit establishes the legal rights of the holder. It is irrelevant how the patent was acquired as long as there is ownership.


The stockholders' equity section of Brown Co.'s December 31, 20X5 balance sheet consisted of the following:

Common stock, $30 par, 10,000 shares authorized and outstanding $300,000
Additional paid-in capital 150,000
Retained earnings (deficit) (210,000)
On January 2, 20X6, Brown put into effect a stockholder-approved quasi-reorganization by reducing the par value of the stock to $5 and eliminating the deficit against additional paid-in capital. Immediately after the quasi-reorganization, what amount should Brown report as additional paid-in capital?

1) $(60,000)
2) $150,000
3) $190,000
4) $400,000


The problem data indicate that $250,000 of the common stock account was converted to additional paid-in capital: ($30 − $5)10,000 shares = $250,000.

Therefore, the additional paid-in capital account is actually increased by $40,000 ($250,000 − $210,000) as a result of the reorganization.


As of December 15, Year 1, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for Year 1 of $100,000 have not yet been declared. The Board of Directors plans to declare cash dividends on its preferred and common stock on January 16, Year 2. Aviator paid an annual bonus to its CEO based on the company's annual profits. The bonus for Year 1 was $50,000, which will be paid on February 10, Year 2. What amount should Aviator report as current liabilities on its balance sheet at December 31, Year 1?

1) $ 50,000
2) $150,000
3) $200,000
4) $350,000


Dividends do not constitute a liability until declared. The dividends for Year 1 have not been declared. Furthermore, dividends in arrears are not a liability until declared. Thus, the bonus is the only liability at 12/31/Year 1.


When a company goes through a quasi-reorganization, its balance sheet carrying amounts are stated at:

1) Original cost.
2) Original book value.
3) Replacement value.
4) Fair value.

Fair Value

The replacement value of the assets is not relevant here. There is no intent to replace the assets. Rather, the assets should be revalued to fair value.


Roth, Inc. received from a customer a one-year, $500,000 note bearing annual interest of 8%. After holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash did Roth receive from the bank?

1) $540,000
2) $523,810
3) $513,000
4) $495,238


The correct approach is:

Maturity value of the note: $500,000(1.08) $540,000
Less discount to the bank: $540,000(.10)(6/12) (27,000)
Equals proceeds to Roth


Nickels Hospital, a nonprofit hospital affiliated with a religious group, reported the following information for the year ended December 31, Year 1:

• Gross patient service revenue at the hospital’s full established rates $860,000
• Bad debts expense 10,000
• Contractual adjustments with third-party payors 100,000
• Allowance for discounts to hospital employees 35,000

On the hospital’s statement of operations for the year ended December 31, Year 1, what amount should be reported as net patient service revenue?

1) $725,000
2) $760,000
3) $715,000
4) $815,000


The provision for contractual adjustments and discounts and bad debt expense is recognized on the accrual basis and deducted from gross patient service revenue to determine net patient revenue.


Flax Company’s working capital at December 31, year 1, was $1,700,000. Data pertaining to year 2 are as follows:

Working capital provided by operations $900,000
Purchases of plant assets for cash 600,000
Short-term borrowings 950,000
Payments on short-term borrowings 500,000
Cash dividends paid on common stock 250,000

Flax’s working capital at December 31, year 2, was

1) $2,450,000
2) $2,200,000
3) $2,000,000
4) $1,750,000


Working capital equals current assets less current liabilities. Any transactions which affect either current assets or current liabilities, but not both, will affect working capital. If a transaction affects both current assets and current liabilities, the effects will offset and there will be no change in working capital.

$1,700,000 BOY Working Capital
+$900,000 Working capital from operations
($600,000) Purchases for PP&E
($250,000) Cash dividends paid for CS
Working Capital Total $1,750,000


The budget for the City of Goodville for the year ending December 31 was adopted and recorded on January 2 of the same year. After recording the budget, the accounting records showed a debit balance of $50,000 in the Budgetary Fund Balance account. What does this indicate?

1) Appropriations are $50,000 greater than estimated revenues.
2) Estimated revenues are $50,000 greater than appropriations.
3) Appropriations are $50,000 greater than revenues.
4) Revenues are $50,000 greater than appropriations.

Appropriations are $50,000 greater than estimated revenues.

When Goodville adopted its budget, estimated revenues are debited and appropriations are credited. A debit or credit to the budgetary fund balance occurs when the budget does not balance. The budgetary fund balance is debited when appropriations are greater than estimated revenues. This answer is incorrect because it includes “revenues” rather than “estimated revenues.” “Revenues” is used to record actual operating transactions, and “estimated revenues” is used to record the budget. Beware of answers such as this that commingle actual and budgetary accounts.


At December 31, Hull Corp. had the following debt securities that were purchased during the year, its first year of operations:

Cost Fair value Unrealized gain (loss)
Security A $ 90,000 $ 60,000 $(30,000)
Security B 15,000 20,000 5,000
Totals $105,000 $ 80,000 $(25,000)
======== ======== ========
Security Y $ 70,000 $ 80,000 $ 10,000
Security Z 90,000 45,000 (45,000)
Totals $160,000 $ 125,000 $(35,000)
======== ======== ========
At December 31, adjustments to fair value should be established with a corresponding charge against

Income Stockholders' equity
A. $60,000 $0
B. $30,000 $45,000
C. $25,000 $35,000
D. $25,000 $0

1) Row A
2) Row B
3) Row C
4) Row D

$25,000; $35,000

The $35,000 decline in value (unrealized loss) on securities available-for-sale is recognized in owners' equity, bypassing earnings. Securities available-for-sale are held for purposes other than short-term price appreciation. Thus, the increases and decreases in portfolio market value may not be indicative of the intent of holding the securities. Recognition in earnings each year may cause unwarranted volatility in earnings.


When a bond is purchased, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond?

1) Price.
2) Par.
3) Yield.
4) Interest.


The yield rate of a bond is the market rate of interest. The terms are synonymous. The yield rate is used to discount the face value and interest payments to present value. The result is the bond priced.


Erdman Corp. signs a lease to rent equipment for ten years. The lease payments of $20,000 per year are due on January 2 each year. At the end of the lease term, Erdman may purchase the equipment for $500. The equipment is estimated to have a useful life of 10 years. Erdman prepares its financial statements in accordance with IFRS. Erdman should classify this lease as a(n):

1) Operating lease.
2) Capital lease.
3) Sales-type lease.
4) Finance lease.

Finance Lease

US GAAP uses the term “capital lease,” whereas IFRS uses the term “finance lease.”


Ace Corp. entered into a troubled debt restructuring agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in exchange for a note with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain on restructuring the debt?

1) $0
2) $25,000
3) $50,000
4) $75,000


The gain on restructuring the debt would be the difference between the carrying amount of the note received and the FMV of the land given. The amount that Ace should report as gain in its income statement is

$150,000 CV of note
100,000 FMV of land
$ 50,000 Gain on restructuring the debt


Ariel Village issued the following bonds during the year ended June 30, year 1:

For installation of street lights, to be assessed against properties benefited $300,000
For construction of public swimming pool; bonds to be paid from pledged fees collected from pool users 400,000

If Ariel Village is not potentially liable for the bonds for the assessments, how much should be accounted for through Debt Service Funds for payments of principal over the life of the bonds?

1) $0
2) $300,000
3) $400,000
4) $700,000


Neither set of transactions would be reported in the Debt Service Fund.