FAR: ALL: 4/28/2018 Flashcards Preview

CPA: Tiffany's Notes > FAR: ALL: 4/28/2018 > Flashcards

Flashcards in FAR: ALL: 4/28/2018 Deck (11):
1

Southgate Co. paid the in-transit insurance premium for consignment goods shipped to Hendon Co., the consignee. In addition, Southgate advanced part of the commissions that will be due when Hendon sells the goods.

Should Southgate include the in-transit insurance premium and the advanced commissions in inventory costs?

Insurance premium Advanced commissions

1) Yes Yes

2) No No

3) Yes No

4) No Yes

Yes, No

The insurance in transit is included in inventory because it is a cost necessary to bring the inventory into a salable condition. This is the criterion for capitalizing inventory costs.

2

On January 1, year 1, Kent Corporation purchased a machine for $50,000. Kent paid shipping expenses of $500 as well as installation costs of $1,200. The machine was estimated to have a useful life of 10 years and an estimated salvage value of $3,000. In January year 2, additions costing $3,600 were made to the machine in order to comply with pollution control ordinances. These additions neither prolonged the life of the machine nor did they have any salvage value. If Kent records depreciation under the straight-line method, depreciation expense for year 2 is

1) $4,870

2) $5,170

3) $5,270

4) $5,570

$5,270

The machine cost is $51,700 ($50,000 cost plus shipping cost of $500 and installation cost of $1,200). The depreciation base is $48,700 (cost of $51,700 less salvage value of $3,000) resulting in an annual depreciation cost of $4,870 ($48,700 ÷ 10 yr.). Additions increase the service potential of an asset and thus should be charged to the asset. The pollution control additions of $3,600 made at the beginning of year 2 are to be amortized over the remaining 9 years with no salvage value, resulting in a $400 per year cost. Thus the depreciation for year 2 is $5,270 ($4,870 + $400).

3

In which of the following legal forms of business combination does at least one preexisting entity cease to exist?

Merger Consolidation Acquisition

1) Yes Yes Yes

2) Yes Yes No

3) Yes No No

4) No No Yes

Yes, Yes, No

Not only in a merger does at least one preexisting entity cease to exist, but also in a legal consolidation at least one preexisting entity ceases to exist. In an acquisition, one preexisting entity acquires controlling interest in another preexisting entity, and both continue to exist as separate legal entities. In a legal merger, one preexisting entity is combined into another preexisting entity; one entity ceases to exist. In a legal consolidation, two or more existing entities are combined into one new entity; two or more entities cease to exist

4

On January 2, 20X5, Dix Machine Shops, Inc. signed a 10-year noncancelable lease for a heavy-duty drill press.

The lease stipulated annual payments of $30,000 starting at the end of the first year, with title passing to Dix at the expiration of the lease. Dix treated this transaction as a capital lease.

The drill press has an estimated useful life of 15 years, with no salvage value. Dix uses straight-line depreciation for all of its fixed assets. Aggregate lease payments were determined to have a present value of $180,000, based on implicit interest of 10%.

In its 20X5 income statement, what amount of depreciation expense should Dix report from this lease transaction?


1) $30,000

2) $20,000

3) $18,000

4) $12,000

$12,000

Depreciation on a capital lease for which the title to the asset transfers to the lessee is the initial capitalized cost less residual value at the end of the asset's life, all divided by the useful life of the asset.

In this case, annual depreciation is: ($180,000 − $0)/15 = $12,000. The lessee will have the asset on its books for 15 years, not merely the 10-year lease term. Therefore, the useful life is the appropriate measure of the period for which the asset will provide benefits.

5

Comprehensive income can be displayed in the financial statements in

I. A separate statement that begins with other comprehensive income.
II. A separate statement that begins with net income.
III. A continuation of net income presented at the bottom of the income statement.
IV. Part of the statement of changes in stockholders’ equity





1) I and II

2) I and III

3) II and III

4) III and IV

II and III

Comprehensive income can be displayed in the financial statements either as a separate statement that begins with net income or as a continuation of net income presented at the bottom of the income statement. Comprehensive income can no longer be displayed as part of the statement of changes in stockholders’ equity.

6

Which of the following types of healthcare organizations recognize depreciation expense?
Investor-owned healthcare enterprises Not-for-profit organizations Governmental health organizations

Yes Yes No
Yes No Yes
No No Yes
Yes Yes Yes

1) Row A

2) Row B

3) Row C

4) Row D

Row D

All healthcare organizations are required to recognize depreciation expense

7

On August 1, 20X2, a company incurs a cost to fulfill a contract. The company will benefit from the cost over the next 11 months. How should the company account for the cost?

1) Amortize the cost over 11 months.

2) Expense the cost in the current period.

3) Split the cost between the current year and the following year.

4) Expense the cost in the following period in which the contract is completed.

Expense the cost in the current period

Costs to fulfill a contract that benefit a period of less than one year are expensed in the period in which they are incurred.

8

Which of the following meets the definition of a derivative instrument and must be accounted for using ASC Topic 815, Derivatives and Hedging?

1) Adjustable rate loans

2) Mortgage-backed securities

3) Credit indexed contracts

4) Variable annuity contracts

Credit indexed contracts

Credit indexed contracts meet the definition of a derivative instrument and must be accounted for using ASC Topic 815. Adjustable rate loans, mortgage-backed securities, and variable annuity contracts are not required to be accounted for under ASC Topic 815.

A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps. Top. 2

9

Changes in the fair value of contingent consideration transferred in a business combination resulting from occurrences after the acquisition date should be recognized as a gain or loss in the current income when the contingent consideration is classified as

An Asset or a Liability An Equity Item

1) Yes Yes

2) Yes No

3) No Yes

4) No No

Yes, No

Changes in the fair value of contingent consideration resulting from occurrences that occur after the acquisition date are recognized as gains or losses when the contingent consideration is classified as an asset or a liability. Contingent considerations classified as equity are not remeasured, and no gain or loss is recognized. The change in fair value of equity items is recognized as an adjustment within equity.

10

On June 30, 2004, Lang Co. sold equipment with an estimated useful life of 11 years and immediately leased it back for 10 years. The equipment's carrying amount was $450,000; the sales price was $430,000; and the present value of the lease payments, which is equal to the fair value of the equipment, was $465,000. In its June 30, 2004 balance sheet, what amount should Lang report as deferred loss?

1) $35,000

2) $20,000

3) $15,000

4) $0

$20,000

The loss on the sale is $20,000 ($450,000 carrying value − $430,000 sales price). But the fair value of the asset exceeds carrying value.

Thus, the firm has only an "artificial" loss. This loss will most likely be made up by lowering the lease payments on the leaseback. The entire loss is deferred. Whenever the market value exceeds carrying value, a "true" loss has not occurred on the sale and the loss is deferred.

11

In March year 2, an explosion occurred at Nilo Co.'s plant, causing damage to area properties. By May year 2, no claims had yet been asserted against Nilo. However, Nilo's management and legal counsel concluded that it was reasonably possible that Nilo would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages. Nilo's $5,000,000 comprehensive public liability policy contains a $300,000 deductible clause. In Nilo's December 31, year 2 financial statements, for which the auditor's fieldwork was completed in April year 3, how should this casualty be reported?

1) As a footnote disclosing a possible liability of $3,000,000.

2) As an accrued liability of $300,000.

3) As a footnote disclosing a possible liability of $300,000.

4) No footnote disclosure or accrual is required for year 3 because the event occurred in year 2.

As a footnote disclosing a possible liability of $300,000


Per ASC Topic 450, a loss contingency should be accrued if it is probable that a liability has been incurred at the balance sheet date and the amount of the loss is reasonably estimable. Although this contingency is reasonably estimable, it is not probable. Therefore, no loss is accrued. However, since the contingency is reasonably possible, it will be disclosed in the footnotes to the 12/31/Y2 financial statements. The possible loss will be disclosed as $300,000. The additional potential liability above the deductible would be covered by the insurance policy, and would not be a loss for Nilo.