FAR: ALL: Practice Questions: 3/10/2018 Flashcards Preview

CPA: FAR > FAR: ALL: Practice Questions: 3/10/2018 > Flashcards

Flashcards in FAR: ALL: Practice Questions: 3/10/2018 Deck (11):
1

On January 1 of the current year, a firm's defined benefit pension plan is amended to increase the benefits for service already provided by employees through that date. The resulting immediate increase in projected benefit obligation (PBO) is $500 at January 1. The average remaining service period of employees covered by the amendment is ten years. Service cost for the year is $1,500. Actual and expected return on plan assets is $178. The discount rate is 10%. PBO at January 1, including the effect of the prior service grant, is $2,800. The funding contribution for the current year is $1,800.
Compute pension expense for the current year.

1) $1,372
2) $1,652
3) $1,602
4) $2,102

$1,652

Pension expense = $1,500 service cost + $280 interest cost (= $2,800 × .10) − $178 expected return. $50 amortization of PSC (= $500/10) = $1,652.

When PSC is initially recorded, another comprehensive income account is debited for $500. The amortization of $50 credits that account and debits pension expense for $50.

2

Smith Company reports under IFRS. A note payable is classified as current in Smith’s statement of financial position. Under what conditions can the note payable be classified as noncurrent instead of current?

1) If Smith has the intent and ability to reclassify the note before the issuance of the financial statements.
2) If Smith has the intent and ability to reclassify the note before the statement of financial position date.
3) If Smith has executed an agreement to refinance the note as long-term, before the statement of financial position date.
4) If Smith has executed an agreement to refinance the note as long-term, before issuance of the financial statements.

If Smith has executed an agreement to refinance the note as long-term, before the statement of financial position date.

In order to reclassify a liability from current to noncurrent, an agreement to refinance the liability as long-term must be executed before the statement of financial position date.

3

What are the four possible items of other comprehensive income?

Currently, there are four possible items of other comprehensive income:

1) Minimum additional pension liability adjustment
2) Unrealized gains and losses on debt investments classified as available-for-sale
3) Gains and losses resulting from translating financial statements expressed in a foreign currency (foreign currency translation) and losses/gains on related hedges
4) Gains and losses on the effective portion of cash flow hedges

4

Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. Green's 30% ownership of common stock gives it significant influence over Axel.

In 2004, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations.

What amount of dividend revenue should Green report in its Income Statement for the year ended December 31, 2004?

1) $0
2) $30,000
3) $60,000
4) $90,000

$60,000

Only the dividends received on the preferred stock are recognized as revenue: $60,000 = 100% × ($60,000). The common stock investment is accounted for under the equity method, which treats all dividends received as a return of capital. Dividends reduce the investment account under this method.

5

When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid

1) Minus discount.
2) Minus discount minus par value.
3) Plus discount.
4) Plus discount plus par value.

Plus discount

Discount on bonds payable represents additional interest paid over the life of the bond. The interest paid each year is equal to the principal times the coupon rate. The discount is amortized over the life of the bond, which increases the amount of interest expense recognized each period. Therefore, the total interest expense over the term of the bond is equal to the cash interest paid plus the discount.

6

An entity authorized 500,000 shares of common stock. At January 1, year 2, the entity had 110,000 shares of common stock issued and 100,000 shares of common stock outstanding. The entity had the following transactions in year 2:

March 1 Issued 15,000 shares of common stock
June 1 Resold 2,500 shares of treasury stock
September 1 Completed a 2-for-1 common stock split

What is the total number of shares of common stock that the entity has outstanding at the end of year 2?

1) 117,500
2) 230,000
3) 235,000
4) 250,000

235,000 Shares

The number of shares outstanding at the end of year 2 = (100,000 + 15,000 + 2,500)2 = 235,000. The beginning outstanding shares of 100,000 is augmented by the issuance of previously unissued stock, and by the reissuance of treasury stock. Stock splits are applied retroactively to all changes in outstanding shares occurring before the split. The split is a nonsubstantive change in shares. Each share after the split is worth half of one share before the split.

7

An employee covered by a post-retirement healthcare plan just completed her 18th year of service for a firm. Each year of employment to full eligibility provides credit for post-retirement healthcare benefits for this firm. She must work an additional seven years from today to be eligible for 75% healthcare coverage during retirement. She is expected to work ten more years from today. If this employee worked 15 more years from today, the firm would pay all her healthcare costs during retirement. Choose the correct statement.

1) The employee's full eligibility date is reached when she has worked 33 years in total.
2) Accumulated post-retirement benefit obligation equals expected post-retirement benefit obligation for the employee, as of today.
3) Service cost will not be computed for the employee during her last three years of service to the firm.
4) Expected post-retirement benefit obligation reflects only 18 years of service, as of today, for the employee.

Service cost will not be computed for the employee during her last three years of service to the firm.

The employee's full eligibility date occurs seven years from today. At that time, she is fully eligible for 75% coverage. The last three years of her service do not increase the level of her benefit. There is no additional service cost beyond that date, although interest cost will continue. If she were expected to work 15 years after today, her full eligibility would not occur until 15 years from now, at which time she would be fully eligible for 100% coverage and service cost would continue through that date.

8

On December 31, Year 1, the board of trustees of a private, not-for-profit college designated $1,000,000 of net assets without a donor restriction for the construction of an addition to the gymnasium. What effect does this designation have on the college's net assets shown on the statement of financial position on December 31, Year 1?

Net Assets without a Donor Restriction Net Assets with a Donor Restriction
No effect No effect
Decrease Increase
Decrease No effect
No effect Increase

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

Row A

Because the restriction is an internal, not an external, restriction, the classification of net assets without a donor restriction does not change.

9

Which of the following is not associated with the general principles of accounting for foreign currency operating transactions?

1) Transactions will be recorded in terms of the functional currency.
2) Gains and losses result from changes in currency exchange rates.
3) Gains and losses are deferred until transactions are settled.
4) Foreign currencies are converted using the current or spot exchange rate.

Gains and losses are deferred until transactions are settled.

Gains and losses on foreign currency operating transactions that result from changes in currency exchange rates are not deferred. Such gains and losses must be recognized in current income of the period in which the currency exchange rate changes.

10

In year 1, Beech City issued $400,000 of bonds, the proceeds of which were restricted to the financing of a capital project. The bonds will be paid wholly from special assessments against benefited property owners. However, Beech is obligated to provide a secondary source of funds for repayment of the bonds in the event of default by the assessed property owners. In Beech’s basic financial statements, this $400,000 special assessment debt should

1) Not be reported.
2) Be reported in the General Fund.
3) Be reported in the government-wide statements only.
4) Be reported in an agency fund.

Be reported in the government-wide statements only.

According to GASB Codification Section S40, if a government is obligated in some manner to assume the payment of related debt service in the event of default by property owners, all transactions related to capital improvements financed by special assessments should be reported. These transactions should be reported in the same manner, and on the same basis of accounting as any other capital improvement and financing transaction. Therefore, the debt related to Beech’s capital project is treated as general obligation debt and should be reported as any other general obligation debt (i.e., in the government-wide statements only).

11

On December 27, year 1, Holden Company sold a building, receiving as consideration a $400,000 noninterest bearing note due in 3 years. The building cost $380,000 and the accumulated depreciation was $160,000 at the date of sale. The prevailing rate of interest for a note of this type was 12%. The present value of $1 for three periods at 12% is 0.71. In its year 1 income statement, how much gain or loss should Holden report on the sale?

1) $ 20,000 gain.
2) $ 64,000 gain.
3) $ 96,000 loss.
4) $180,000 gain.

$ 64,000 gain


The gain (loss) is the difference between the value of the consideration received and the book value of the building sold. The consideration received is a 3-year, noninterest-bearing, $400,000 note. Per ASC Topic 835, such receivable is to be recorded at its present value.



PV of note $400,000 × .71 = $ 284,000
Book value $380,000 – $160,000 = $ 220,000
Gain $284,000 – $220,000 = $ 64,000


The entry to record this transaction is as follows:



DR Note receivable 400,000
DR Accum. depr. 160,000
CR Discount on N/R 116,000
CR Building 380,000
CR Gain 64,000