far_-_cpa_excel_copy_20190610234509

Question 1

On October 1, 2004, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise.At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, 2004.Fleur’s 2004 financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due on the note were paid February 1, 2005.As a result of Fleur’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly? 12/31/04 retained earnings 12/31/04 interest payable

Answer 1

12/31/04 retained earnings - No12/31/04 interest payable - YesInterest expense on notes should reflect the market interest rate at the date of issuing the note. This firm is recording interest expense at the 16% stated rate rather than the 11% market rate. Thus, interest expense is incorrectly recorded.Also, the merchandise and note should have been recorded at the present value of the note using the market interest rate. Thus, cost of goods sold is incorrectly measured. The result of these two effects is that income and retained earnings are misstated.However, interest payable reflects the stated rate which determines the cash amount to be paid. Interest payable is correctly stated.

Question 2

On September 1, 2003, Brak Co. borrowed on a $1,350,000 note payable from the Federal Bank.The note bears interest at 12% and is payable in three equal annual principal payments of $450,000. On this date, the bank’s prime rate was 11%. The first annual payment for interest and principal was made on September 1, 2004.At December 31, 2004, what amount should Brak report as accrued interest payable?

Answer 2

$36,000Although the question is not completely clear, interest is paid at the time each principal payment is made. Thus, on 9/1/04, after the principal payment of $450,000 (and interest as well) is made, the remaining note balance is $900,000 ($1,350,000 - $450,000). Note that only the principal payment reduces the note balance. Interest for four months to 12/31/04 is recorded in accrued interest payable: $36,000 ($900,000 x .12 x 1/3 year).

Question 3

On October 1, 2005, Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%.Fleur recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, 2005. Fleur’s 2005 financial statements reported interest payable and interest expense on the note for three months at 16%. All amounts due on the note were paid February 1, 2006.Fleur’s 2005 cost of goods sold for the holiday merchandise was A. Overstated by the difference between the note’s face amount and the note’s October 1, 2005 present value. B. This is overstated by the difference between the note’s face amount and the note’s present value at October 1, 2005 plus 11% interest for two months. C. Understated by the difference between the note’s face amount and the note’s October 1, 2005 present value. D. Understated by the difference between the note’s face amount and the note’s October 1, 2005 present value plus 16% interest for two months.

Answer 3

C. The note (and merchandise) should have been recorded at its present value using the market interest rate of 11%. This rate is lower than the stated rate of 16% implying that the present value of the note (face value and interest payments at 16%) using 11% exceeds the face value of the note.Thus, the merchandise was recorded at an amount which understated its market value. All the merchandise was sold before the end of the year causing cost of goods sold to be similarly understated.

Question 4

T/F: Noncurrent Notes Payable are issued for the present value of all future cash flows, including Principal payments only.are not current in the next year. Due in 2-5 years. longer would be bond payable

Answer 4

False. The PV of all future cash flows, including Principal and interest payments.

Question 5

How does the Effective interest method calculate the interest expense for a period?

Answer 5

Interest expense for a period = market rate x beginning note balanceThe difference between cash interest paid and interest expense recognized at each payment date is the amortization of discount or premium

Question 6

T/F: At the date of issuance and subsequent balance sheets, noncurrent notes payable are reported at the PV of remaining payments, using the yield rate at the date of issuance.

Answer 6

True.

Question 7

T/F: The straight line method of amortizing the discount or premium is only allowed if it results in interest expense amounts not materially different from the effective interest method.

Answer 7

True.

Question 8

A company issued a short-term note payable to a bank with a stated 12 percent rate of interest . The bank charged a .5% loan origination fee and remitted the balance to the company.The effective interest rate paid by the company in this transaction would be A. Equal to 12.5%. B. More than 12.5% C. Less than 12.5%. D. Independent of 12.5%

Answer 8

B. The .5% loan origination fee reduces the proceeds to the borrower AND increases the total interest to be paid by the same amount. The effect is to raise the interest rate above 12.5%.Assume the loan amount is $1,000 before the loan origination fee. Therefore, the net amount loaned is $995 [1 - .005($1,000)]. However, the full $1,000 must be paid at maturity. The total interest to be paid is thus increased by the $5 origination fee ($1,000 - $995).For simplicity, assume the loan is for a full year. Then total interest paid is: .12($1,000) + $5 = $125.The effective rate of interest for the year then is: $125/$995 = .1256. This exceeds 12.5%.

Question 9

At December 31, 2005, a $1,200,000 note payable was included in Cobb Corp.’s liability account balances. The note is dated October 1, 2005, bears interest at 15%, and is payable in three equal annual payments of $400,000. The first interest and principal payment was made on October 1, 2006. In its December 31, 2006 balance sheet, what amount should Cobb report as accrued interest payable for this note?

Answer 9

$30,000 equals ($1,200,000 - $400,000)(.15)(3/12).On 10/1/06, the first $400,000 principal payment was made. That left $800,000 of principal balance remaining on 10/1/06. The interest on that amount is computed as shown above.

Question 10

Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of forty cents on the dollar.Hale holds a $30,000 noninterest-bearing note receivable from Seco collateralized by an asset with a book value of $35,000, and a liquidation value of $5,000.The amount to be realized by Hale on this note is A. $5,000 B. $12,000 C. $15,000 D. $17,000

Answer 10

C. Bankruptcy law specifies that secured creditors are to be satisfied before any assets are paid to unsecured creditors. Hale is a secured creditor for the $5,000 liquidation value. A liquidation value is paid at the liquidation of the firm and thus acts as a secured debt. The remaining claim of $25,000 ($30,000 - $5,000) is unsecured and at the 40% rate yields an additional claim of $10,000, for a total amount to be realized of $15,000.

Question 11

On March 1, 2004, Fine Co. borrowed $10,000 and signed a two-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2006.What amount should Fine report as a liability for accrued interest at December 31, 2005?

Answer 11

$2,320he accrued interest covers the period from the borrowing to 12/31/94 because no interest has yet been paid. The interest is also compounded (this is a stumbling point easily missed).The 2005 ending balance in accrued interest payable therefore includes interest on 2004’s accrued interest:2004: $10,000(.12)(10/12) $1,0002005: ($10,000 + $1,000)(.12)(12/12) 1,320Total accrued interest payable, December 31, 2005 $2,320

Question 12

On August 21, 2003, Vann Corp.’s $500,000, one-year, noninterest-bearing note due July 31, 2004 was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing bond discounts.What amount should Vann report for notes payable in its December 31, 2003 balance sheet? A. $500,000 B. $477,500 C. $468,500 D. $446,000

Answer 12

The period from August 21, 2003 to July 31, 2004 is 11 1/3 months. The correct calculation is:Maturity value (note is noninterest bearing) $500,000Less discount to bank $500,000(.108)[(11 1/3 months)/12 months] ( 51,000)Equals book value at date of discounting = proceeds from bank 449,000Plus amortization of discount to December 31, 2003 $51,000[(4 1/3 months)/(11 1/3 months)]19,500Equals book value at December 31, 2003 $468,500The bank’s discount represents the total interest to be paid over the 11 1/3 month term. As the note is amortized, the note’s book value increases and interest expense is recognized. At maturity, the note book value is $500,000 and the total interest of $51,000 is paid as part of the single payment of $500,000. Total interest is $51,000 because that is the difference between the maturity value of $500,000 less the $449,000 proceeds.

Question 13

T/F: Interest revenue is based on the ending book value of the debt.

Answer 13

False.The total interest over the note term equals the difference between the total pmts required under the note and the principal amount.

Question 14

T/F: The market rate relating to a long-term debt issue has changed dramatically since issuance several years ago. Therefore, the rate used for recording the debt and computing interest should be changed.

Answer 14

False.The interest rates at issuance are the rates that are used throughout the term of the note.

Question 15

T/F: The book value of a note is less under the net method compared with the gross method.

Answer 15

False.

Question 16

T/F: Equipment purchased with a discounted note is recorded at a bargain price.

Answer 16

False.Purchase is recorded at the discount, and the discount is amortized over the note term.

Question 17

T/F: All noninterest-bearing notes are recorded at a discount from face value.

Answer 17

TrueThey are recorded at the PV of future cash flows, using the market rate of interest as the discount rate.

Question 18

The purpose of financial accounting is to provide information primarily for…

Answer 18

Investors and creditorsPurpose is provide information relevant to the decision making of investors and creditors. These people make decisions about allocating resources across thousands of firms.

Question 19

What is the primary protection for investors against fraudulent financial reporting by corporations?

Answer 19

The requirement that financial statements be audited.It must be performed by independent third party CPAs. The auditors do not prepare the information, nor do they have employment ties with either the reporting firm or the intended audience of the FS. However, even the audit of FS is not a perfect protection as indicated by the frequency of fraud and audit failure.

Question 20

In reference to proposed accounting standards, the term “negative economic consequences” includes: A. The cost of complying with GAAP. B. The inability to raise capital. C. The cost of government intervention when not in compliance with GAAP. D. The failure of internal control systems.

Answer 20

B. The inability to raise capital.A proposed standard may cause firm earnings to fall, for example when they are adopted. Firms will be concerned that lower earnings may make it more difficult to sell stock or to secure loans. As a result, negative economic consequences become a focal point for arguments against the proposed standard.

Question 21

T/F: The FASB is a governmental unit.

Answer 21

False. The FASB is a Private sector body.The FASB has no official connection with the US Government although the SEC, an agency of the federal government, can modify or rescind an accounting standard adopted by the FASB.

Question 22

The operating procedure for issuing a new FASB statement includes

Answer 22

1. Considers whether to add a project to its agenda, in consultation with the FAF.2. Conducts research on the topic and issues a Discussion Memo detailing the issues surrounding the topic.3. Holds a public hearing on the topic.4. Evaluates the research and comments from interested parties and issues an Exposure Draft.5. Solicits add’l comments, modifies Exposure Draft if needed.6. Finalizes the new statement only after a majority vote by the members of the FASB. At least four of the seven members of the FASB must vote in favor of a proposed Statement of Financial Accounting Standards.7. Issues an Accounting Standards Update (ASU).

Question 23

T/F: The Wheat Committee was involved in the formation of the FASB.

Answer 23

TrueIn 1971, the AICPA appointed the Wheat Committee, which recommended the formation of yet another private sector body - the FASB - to take over the reins from the APB. In 1973, the FASB assumed the role of standard setter for the accounting profession. The FASB is not affiliated with the AICPA.

Question 24

T/F: Recognition in accounting refers to the process of recording a measurable attribute such that it affects one or more of the FS.

Answer 24

TRUE

Question 25

T/F: The Accounting Principles Board was the standard-setting body that immediately preceded the FASB.

Answer 25

TrueIn 1959, the AICPA created the Accounting Principles Board (APB), another committee, to take over the work of CAP. The APB is the second private sector group designated to formulate GAAP. Members were required to be CPAs. The APB issued 31 opinions, many of which remain as GAAP, in whole or in part.

Question 26

T/F: The conceptual framework is not GAAP.

Answer 26

Truethe FASB's conceptual framework plays a role in this process by providing a theoretical structure for guiding the development of a specific standard

Question 27

Savor Co. had $100,000 in cash-basis pretax income for 1999. At December 31, 1999, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, 1998, balances. Compared to the accrual-basis method of accounting, Savor's cash pretax income is:

Answer 27

Lower by $16,000The computation is: 100,000+10,000+6,000 = 116,000, or a $16,000 increase from cash to accrual. The increase in accounts receivable would be added to cash income as it increases sales in accrual income. The decrease in accounts payable, decreases the liabilities, which increases accrual income as there is more money available to pay AP.

Question 28

An increase in prepaid expenses indicates

Answer 28

that more cash was paid than expensed.

Question 29

An increase in accrued liabilities indicates

Answer 29

that more expense was accrued than paid.

Question 30

On February 12, 2005, VIP Publishing, Inc. purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 in 2005. In its 2005 Income Statement, what amount should VIP report as royalty expense?

Answer 30

$80,000A royalty is an amount to be paid based on the sales of a commodity or product, in this case a book. The royalty expense is 10% of $800,000 sales ($80,000) because this amount exceeds the minimum of $60,000 that would be paid if sales were less than $600,000.

Question 31

Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. When should the royalties paid be reported as an expense?

Answer 31

In the period incurred.Under accrual accounting, expenses are recognized when incurred. This is the point in time when obligations come into existence. The period to which specific royalty amounts relate is the period for expense recognition. Often, royalty payments occur at specified intervals that do not correspond to the period in which the royalties were earned.

Question 32

A collection of note receivable from a related party would be placed in what section of the cash flow statement?

Answer 32

Investing activities. The company is lending money to the related party and lending is not a primary business activity - the fact that the loan is in the form of a note implies that it is interest bearing.

Question 33

T/F: The codification is the sole source of US GAAP for nongovernmental entities.

Answer 33

TRUE

Question 34

Class Corp. maintains its accounting records on the cash basis, but it restates its financial statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax income for 2002. The following information pertains to Class operations for the years ended December 31, 2002 and 2001: AR balance was 20,000 in 2001 and 40,000 in 2002AP balance was 30,000 in 2001 and 15,000 in 2002Under the accrual method, what amount of income before taxes should Class report in its December 31, 2002, Income Statement?

Answer 34

95,000 = 60,000+20,000+15,000Plus increase in accounts receivable (this represents sales that were not collected and thus are included in accrual income but not in cash-basis income), Plus decrease in accounts payable (this represents payments in excess of expenses and thus causes accrual income to exceed cash-basis income),

Question 35

What period of time is used to define a current asset?

Answer 35

The definition of a current asset uses the period "operating cycle or one year, whichever is longer."

Question 36

In analyzing a company's financial statements, which financial statement would a potential investor use primarily to assess the company's liquidity and financial flexibility?

Answer 36

The Balance Sheet discloses the assets and liabilities, usually classified by proximity to realization (assets) or payment (liabilities). The balance shows the relative magnitude of assets and liabilities and, therefore, the ability to pay obligations in the near and longer term. It also shows the degree of leverage and ability to adapt to changing financial conditions as well as the ability to manage future cash flows when conditions change. Much of the potential of the firm is disclosed in the Balance Sheet. It is a statement of the wealth position of the firm and allows an assessment of the relative risk of the enterprise.

Question 37

Y/N: Hahn Co. prepared financial statements on the cash basis of accounting. The cash basis was modified so that an accrual of income taxes was reported. Are these financial statements in accordance with the modified cash basis of accounting?

Answer 37

Yes.Under a strict cash basis of accounting, revenues and expenses are recorded only when cash is received or paid. Under a modified cash basis of accounting, certain accruals and/or deferrals are recorded for financial-statement purposes. The most common modifications are the capitalization and amortization of long-lived assets and the accrual for income taxes (recognition of income tax expense and related liability).

Question 38

Pak Co.'s professional fees expense account had a balance of $82,000 on December 31, 2001, before considering year-end adjustments relating to the following: •Consultants were hired for a special project at a total fee not to exceed $65,000. Pak has recorded $55,000 of this fee based on billings for work performed in 2001.•The attorney's letter requested by the auditors dated January 28, 2002, indicated that legal fees of $6,000 were billed on January 15, 2002, for work performed in November 2001, and unbilled fees for December 2001 were $7000.What amount should Pak report for professional fees expense for the year ended December 31, 2001?

Answer 38

$95,000The two amounts listed in the attorney's letter should be added to the preadjusted amount of expense, but the appropriate amount of the consultant expense has been included in the preadjusted amount. The ending expense balance therefore is $95,000 ($82,000 + $6,000 + $7,000).The $10,000 of consulting fees not yet earned should NOT be included.

Question 39

Under East Co.'s accounting system, all paid insurance premiums are debited to prepaid insurance. For interim financial reports, East makes monthly estimated charges to insurance expense with credits to prepaid insurance. Additional information for the year ended December 31, 2005, is as follows:Prepaid insurance at December 31, 2004 $105,000 Charges to insurance expense during 2005 (including a year-end adjustment of 17,500) 437,500 Prepaid insurance at December 31, 2005 122,500 What was the total amount of insurance premiums paid by East during 2005?

Answer 39

Beginning prepaid balance + Premiums paid - Expense charges = Ending prepaid balance $105,000 + Premiums paid - $437,500 = $122,500 Premiums paid = $455,000

Question 40

When changing from cash basis to accrual basis, what is the general rule regarding liabilities and assets?

Answer 40

The general rule to convert from cash to accrual is to add the beginning liability balances and subtract the ending liability balances; also, subtract beginning asset balances and add ending asset balances.

Question 41

Before 2001, Droit Co. used the cash basis of accounting. As of December 31, 2001, 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 2001 accrual basis net income and December 31, 2001, accrual basis owners' equity?

Answer 41

2001 net income = Overstated12/31/01 owner's equity = No effectSupplies expense for 2001 under the accrual method is: supplies expense = beginning supplies + purchases - ending supplies. If beginning supplies cannot be determined, then it is assumed to be zero and supplies expense is understated, causing 2001 income to be overstated. However, total supplies expense for the entire life of the business is unaffected by the inability to determine beginning supplies for 2001. Total supplies expense for the life of the business is total purchases less ending inventory in 2001. These two amounts are determinable, and thus, owners' equity at the end of 2001 can be determined.

Question 42

A company has the following accrual-basis balances at the end of its first year of operation: Unearned consulting fees $2,000 Consulting fees receivable 3,500 Consulting fee revenue 25,000 The company's cash-basis consulting revenue is what amount?

Answer 42

$23,500Cash-basis revenue is the amount of cash collected for the period. $25,000 of accrual-basis revenue was recognized for the period. Start with the $25,000 amount, and add the $2,000 unearned fees. This amount is not included in the $25,000 because it is not earned but was collected during the period. Subtract the $3,500 receivable, which is included in the $25,000 but was not collected. The result is that $23,500 in cash was collected ($25,000 + $2,000 - $3,500).

Question 43

U Co. had cash purchases and payments on account during the current year totaling $455,000. U's beginning and ending accounts payable balances for the year were $64,000 and $50,000, respectively. What amount represents U's accrual-basis purchases for the year?

Answer 43

Using an equation, or a T-account, to analyze accounts payable (AP) yields accrual purchases: Beginning AP ($64,000) + Accrual purchases - Cash payments ($455,000) = Ending AP ($50,000). Solving for accrual purchases yields $441,000.

Question 44

On November 1, 2005, Key Co. paid $3,600 to renew its insurance policy for three years. At December 31, 2005, Key's unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Key's December 31, 2005, financial statements?

Answer 44

Prepaid insurance = $3,400Insurance expense = $1,100Prepaid insurance at year end is $3,400, which is the portion of the prepayment on November 1 that continues to the next three years. Insurance expense includes three items: (1) the $90 of prepaid insurance remaining in the trial balance that has expired, (2) the $200 of insurance expense related to the November 1 purchase above ($3,600-$3,400 remaining prepaid), and (3) the expense portion of the $4,410 insurance expense amount in the unadjusted trial balance ($4,410-$3,600) = $810. This firm must have expensed the entire $3,600 November 1 purchase because it was not reflected in prepaid insurance. The difference of $810 reflects actual expense. Therefore, total insurance expense equals $1,100 = $90 + $200 + $810.

Question 45

If the accrued expenses decrease during the year, would this increase or decrease the net income when comparing the cash basis NI to the accrual basis of NI?

Answer 45

IncreaseIf the accrued expenses account (a current liability, often called accrued expenses payable) decreased during the year, then a greater amount of cash was paid for those expenses than were accrued throughout the year. This would cause cash-basis net income to be less than accrual-basis net income. Cash-basis net income reflects expenses paid; accrual-basis net income reflects expenses recognized (accrued).

Question 46

T/F: A deferred revenue is a liability account.

Answer 46

TRUE

Question 47

T/F: The top level of the GAAP hierarchy is the FASB Accounting Standards Codification.

Answer 47

FalseThere is no implied hierarchy for any sources used for GAAP.

Question 48

T/F: The FASB Accounting Standards Codification presents accounting standards as an individual discrete accounting standard.

Answer 48

FalseMaterial is organized by major area and topic. Basis for conclusions, appendices and other ancillary content are included in the Codification only if the material is considered essential to the understanding and application of GAAP.

Question 49

T/F: The balance sheet is dated differently from the income statement and the statement of cash flows.

Answer 49

TrueThe balance sheet is a snapshot as of a particular date, whereas the IS and CF cover a period of time.

Question 50

What document is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?

Answer 50

A proposed accounting standards update.ASUs

Question 51

Is IFRS included in the Codification?

Answer 51

No. IFRS are not US GAAP and thus are not included in the Codification.

Question 52

What are the three elements of faithful representation?

Answer 52

Neutrality, completeness and free from material error.Neutrality means lack of bias-that financial reporting does not have a preconceived objective or agenda. Completeness means that the info includes all data necessary to be faithfully representative.Free from error is when there are no omissions of errors.

Question 53

What are the primary characteristics of relevance?

Answer 53

Predictive value, confirmatory value, and materiality.Predictive value info assists capital providers in forming expectations about future events.Confirmatory value info confirms or changes past (or present) expectations based on previous evaluations. Materiality is info that determines how it will impact a user's decision. Materiality is somewhat pervasive throughout the objectives of financial reporting in the sense that the FS should present material info because it is decision useful.

Question 54

During the period when an enterprise is under the direction of a particular management, will its FS directly provide information about management performance and/or enterprise performance?

Answer 54

Enterprise performance, but not directly provide information about management performance.The financial statements provide a wealth of information about the performance and financial position of the enterprise, but they do not directly allow an evaluation of management. There are too many factors that affect the firm's performance to be able to single out management's contribution (or lack of it). Many factors interact to determine the performance of the enterprise, one of them being management's performance. Also, for example, current enterprise performance is affected by the past actions of managers that may no longer be with the enterprise.

Question 55

According to the conceptual framework, the objectives of financial reporting for business enterprises are based on: A. The need for conservatismB. Reporting on management's stewardshipC. GAAPD. The needs of the users

Answer 55

D. User needs define the objectives of FS. FS exist solely to satisfy the information needs of users. One of these information needs might be an evaluation of how well management has carried out its stewardship responsibility to owners for the use of enterprise resources entrusted to it. However, that is just one of many information needs. More important are the information needs concerning the assessments of future performance and cash flow generation. The objectives of financial statements are more involved with forward-looking purposes than with evaluation of the past.

Question 56

What is the conceptual framework intended to establish?A. GAAP in financial reporting by business enterprises. B. The meaning of "present fairly in accordance with GAPP." C. The objectives and concepts for use in developing standards of financial accounting and reporting. D. The hierarchy of sources of GAAP

Answer 56

C. The concepts statements, also collectively called The Conceptual Framework, provide the general underpinnings for specific GAAP. In a way, it is a "constitution" for developing specific accounting principles. The concepts statements are not GAAP, however.

Question 57

T/F: When the reported measure of an economic condition or situation aligns with the economic condition or situation, then it is representationally faithful.

Answer 57

TrueInformation faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement. Financial information that faithfully represents an economic phenomenon portrays the economic substance of the phenomenon. Information is representationally faithful when it is complete, neutral, and free from material error.

Question 58

What are the four enhancing qualitative characteristics of the FS?

Answer 58

Comparability, verifiability, timeliness, and understandability.Comparability enables users to identify similarities and differences between sets of info. Verifiability - info is verifiable if different knowledgeable and independent observers could reach similar conclusions based on the info.Timeliness is when info is received in time to make a difference to the decision maker.Understandability - if the user comprehends it within the decision context at hand. Users are assumed to have a reasonable understanding of business and accounting and are willing to study the info with reasonable diligence.

Question 59

Reporting inventory at the lower of cost or market is a departure from the accounting principle of: A. Historical cost. B. Consistency. C. Conservatism. D. Full disclosure

Answer 59

A. LCM departs from historical cost because it provides an ending valuation below cost when market value is below cost. The inventory is actually written down to a value below what was originally paid. This is one of the few such departures.

Question 60

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of: A. Reliability. B. Materiality. C. Legal entity. D. Economic entity

Answer 60

D. Consolidated financial statements are an example of trying to account for the economic entity that comprises more than one legal entity, making this the correct response.

Question 61

T/F: If the going concern assumption were not met, adherence to the historical cost principle would continue to be appropriate.

Answer 61

False.Only when the going concern assumption is met, then the historical cost principle supports many assets.

Question 62

T/F: The accounting assumption of separate entity supports the inclusion of prepaid insurance in total assets.

Answer 62

False.The accounting assumption of separate entity assumes that there is a separate accounting entity for each business organization.

Question 63

T/F: A firm has income of exactly zero for a year during which both specific and general prices (inflation) have increased. The firm maintained its capital under the financial concept of capital maintenance.

Answer 63

True.Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels. When a firm has income, it has recognized revenue sufficient to replace all the resources used in generating that revenue.

Question 64

Y/N: Are most assets subsequently adjusted for changes in market value under the historical cost principle?

Answer 64

No.

Question 65

T/F: Matching is not an accounting assumption.

Answer 65

True.Matching principle: recognize expenses only when expenditures help to produce revenues. Revenues are recognized when earned and realized or realizable; the related expenses are recognized, and the revenues and expenses are "matched" to determine net income or loss.

Question 66

According to the conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of: A. Consistency. B. Cost-benefit. C. Relevance. D. Representational faithfulness.

Answer 66

B. Cost-benefit is the only constraint among the four answer alternatives. When the cost of information exceeds its benefit, it should not be reported, even if it might be useful.

Question 67

What is the underlying concept governing the Generally Accepted Accounting Principles pertaining to recording gain contingencies? A. Conservatism. B. Relevance. C. Consistency. D. Faithful representation.

Answer 67

A. Gain contingencies are not recognized, but loss contingencies that are probable and estimable are recognized. This is a classic example of conservatism, which suppresses positive information under conditions of uncertainty but requires the reporting of negative information when the negative outcome is likely.

Question 68

Which of the following statements concerning the determination of fair value is/are correct?I. The determination of fair value is based on a hypothetical transaction. II. The determination of fair value is based on an exit price. III. The determination of fair value of a nonfinancial asset should be based on the intended use of the asset by the reporting entity.

Answer 68

Both Statements I and II are correct. The determination of fair value is based on a hypothetical transaction and on the use of a (hypothetical) exit price. Statement III is not correct. The determination of fair value of a nonfinancial asset should be based on the highest and best use of the asset by market participants, not based on the intended use by the reporting entity.

Question 69

A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows Market A: Price $1,000; Transaction cost $ 75 Market B: Price $1,050; Transaction cost $150 What is the fair value of the financial asset?

Answer 69

The fair value of the financial asset is $1,000, the quoted price in the most advantageous market, but without adjusting that price for transaction costs. Since there is no principal market for the financial asset, the most advantageous market must be used to determine fair value. The most advantageous market is the market that maximizes the amount that would be received to sell the asset (or minimizes the amount that would be paid to transfer a liability), after taking into account transaction costs and transportation costs. Thus, the most advantageous market is Market A, determined as: Market A Market B Quoted price of asset $1,000 $1,050 Transaction cost ( 75) ( 150) Net Proceeds $ 925 $ 900 Even though transaction costs are considered in determining the most advantageous market, the price in the most advantageous (or principal) market used to measure the fair value of the asset (or liability) is not adjusted for transaction costs [ASC 820-10-35-9B]. Therefore, the quoted price of the asset in the most advantage market, unadjusted for the transaction costs, is fair value.

Question 70

In determining the fair value of an asset in the most advantageous market, the market based exit price should be adjusted for:A. Transaction Cost B. Transportation Cost

Answer 70

B. onlyIn determining the fair value of an asset in the most advantageous market, the market based exit price would not be adjusted for transaction cost associated with executing the (hypothetical) transaction, but would be adjusted for transportation cost to get the asset to the principal or most advantageous market.

Question 71

T/F: In the determination of fair value of a nonfinancial asset, the highest and best use of the asset may be determined as occurring through use and/or through exchange.

Answer 71

True. Both. The highest and best use of a nonfinancial asset (i.e., its maximum value) to market participants may occur either principally through its use with other assets or principally on the price that would be received to sell (exchange) the asset.

Question 72

For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, "Fair Value Measurement," least likely to apply? A. Determination of the fair value to be assigned to land acquired in a business combination. B. Determination of the fair value of a bond liability for applying the fair value option. C. Determination of the fair value of legal services received in exchange for an entity's common stock. D. Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred.

Answer 72

C. The guidance for determining fair value provided in the fair value framework is not appropriate for determining the fair value of legal services received in exchange for an entity's common stock. ASC 820 specifically exempts share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.

Question 73

On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.'s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody's investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment?

Answer 73

Since Peabody has elected to report the investment in Newman using the fair value option, it should recognize its share of cash dividends received during the period (.30 x $20,000 = $6,000) and the increase in the fair value of the investment ($400,000 > $410,000 = $10,000), or $6,000 + $10,000 = $16,000.

Question 74

T/F: The fair value of a liability is based on the amount that would be paid to transfer the liability.

Answer 74

TRUE

Question 75

T/F: The fair value of an asset is based on the price that would be paid to acquire the asset.

Answer 75

FalseFair value of an asset is based on the price that would be received to sell the asset.

Question 76

Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach? A. Market. B. Income. C. Cost. D. Observable inputs.

Answer 76

B. The income approach to fair value measurement of an asset measures fair value by converting future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.

Question 77

Which one of the following financial items may not be measured and reported at fair value at the election of an entity? A. Accounts receivable. B. Investment in debt securities to be held to maturity. C. Investment in a subsidiary that is to be consolidated. D. Accounts payable

Answer 77

D. A firm may not use fair value to measure and report an investment in a subsidiary that is to be consolidated. The financial asset "Investment in subsidiary" will be eliminated in the consolidating process and be replaced by the subsidiary's assets and liabilities (and possibly goodwill) on the consolidated balance sheet.

Question 78

In determining the fair value of an asset or liability, would the fair value of the asset or the fair value of the liability be determined using an entry price or an exit price?

Answer 78

The appropriate basis for determining the fair value of an asset or a liability is an exit price.

Question 79

When the fair value of an asset is determined as the amount that currently would be required to replace the service capacity of the asset, which one of the following valuation techniques has been used? A. Income approach. B. Cost approach. C. Expense approach. D. Market approach.

Answer 79

B. When fair value is determined as the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), the cost approach has been used.

Question 80

Which of the following valuation methods may be used to measure investments classified as held-to-maturity?A. Amortized CostB. Fair Value

Answer 80

Both A and B may be used to measure and report investments classified as held-to-maturity. Amortized cost is the traditional measurement method for investments held-to-maturity and would be used unless an entity elects to use fair value, which is permitted by the fair value option.

Question 81

Papa Company acquired land with an office building on it from its subsidiary, Sonny Company, for $110,000. Prior to the sale, Sonny's carrying value of the land was $60,000 and its net carrying value of the building was $50,000. At the time of the transaction, Papa appropriately determined that the land had a fair value of $75,000 and the building had a fair value of $35,000. At what amount should the land and building be reported on Papa's consolidated statements prepared immediately after the transaction?

Answer 81

Land = $60,000Building = $50,000Even though there was no profit or loss on the intercompany transaction, it resulted in amounts being redistributed between the depreciable asset office building and the non-amortizable asset land, which would result in different amounts of depreciation expense than if the transaction had not occurred. Therefore, the intercompany transaction must be "eliminated" so that the consolidated statements would show land at $60,000 and buildings at $50,000. (Sonny also would need to assess the building for possible impairment.)

Question 82

T/F: If, at acquisition of an asset or liability, the exit price of the item is different than the transaction price, a gain or loss should be recognized.

Answer 82

TRUE

Question 83

T/F: A firm may elect to use the fair value option for an eligible firm commitment when it enters into the contract that establishes the firm commitment.

Answer 83

TrueThe entity cannot apply the fair value option prior to the firm commitment being established.

Question 84

T/F: Discounting a future stream of cash flows to its current value would be an example of the income approach to determining fair value.

Answer 84

TRUE

Question 85

T/F: An employer's prepaid pension asset account can be measured and reported at fair value.

Answer 85

FalseEntities may NOT use fair value measurement for Financial assets and liabilities recognized under lease accounting

Question 86

T/F: Property, plant, and equipment may be measured and reported using fair value.

Answer 86

FalseEntities may NOT use fair value measurement for Financial assets and liabilities recognized under lease accounting

Question 87

T/F: A change in valuation technique(s) used to measure fair value would be treated as a change in accounting principle.

Answer 87

FalseIt's a change in accounting estimates.

Question 88

T/F: A firm may not use the fair value option for investment in common stock which gives the investor significant influence over the investee.

Answer 88

FalseWhen the investor has significant influence over the investee, the fair value option can be used.

Question 89

Which of the following statements concerning the fair value hierarchy used in ascertaining fair value is/are correct?I. Quoted market prices should be adjusted for a "blockage factor" when a firm holds a sizable portion of the asset being valued.II. Quoted market prices in markets that are not active because there are few relevant transactions cannot be used.

Answer 89

Neither Statement I nor Statement II is correct. Quoted market prices should not be adjusted for a "blockage factor" when a firm holds a sizable portion of the asset being valued (Statement I). A "blockage factor" occurs when an entity holds a sizable portion of an asset (or liability) relative to the trading volume of the asset or liability in the market. Using a "blockage factor" would adjust the market value for the impact of such a large block of securities being sold, but is not permitted in determining fair value. Additionally, quoted market prices in markets that are not active because there are few relevant transactions can be used in determining fair value (Statement II). Such prices would be considered level 2 factors, observable inputs but not in active markets.

Question 90

Observable inputs, other than quoted prices in active markets for identical items, would constitute what level in the fair value hierarchy?

Answer 90

Level 2 inputs are observable for assets or liabilities, either directly or indirectly, other than quoted prices in level 1. For example, quoted prices for similar items in an active market would be level 2 inputs.

Question 91

Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability's fair value, except A. Quoted prices for identical assets and liabilities in markets that are not active. B. Quoted prices for similar assets and liabilities in markets that are active. C. Internally generated cash flow projections for a related asset or liability. D. Interest rates that are observable at commonly quoted intervals.

Answer 91

C. This response is a false statement—internally generated cash flow projections are not an observable input.

Question 92

T/F: Observable inputs used in determining fair value are developed based on market data obtained from sources independent of the reporting entity.

Answer 92

TRUE

Question 93

T/F: In the fair value hierarchy, level 2 inputs would include quoted prices for similar assets or liabilities in active markets.

Answer 93

TRUE

Question 94

T/F: In the fair value hierarchy, level 3 inputs should be developed based on what market participants would assume.

Answer 94

TRUE

Question 95

Which of the following statements, if any, concerning disclosures about fair value measurements in periods subsequent to initial recognition is/are correct? I. The fair value hierarchy level within which fair value measurements fall must be disclosed. II. Quantitative fair value measurement disclosures must be in tabular format.

Answer 95

Both I and II are correct. Fair value measurement disclosures require both that fair value amounts be disclosed separately for each level of the fair value hierarchy and that quantitative disclosures be provided in tabular format.

Question 96

When an entity uses the fair value option for eligible financial assets and liabilities, which one of the following is not an expected outcome of the disclosures required of that entity?A. Users being able to understand management's reasons for using the fair value option.B. Users being able to understand how changes in fair value affect net income.C. Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value.D. Users being able to understand the difference between fair value and cash flows.

Answer 96

C. The disclosures required when the fair value option is used are not intended to replace the kind and amount of information that would have been provided if the fair value option had not been used. Rather, the intent is to provide the same kind and amount of information that would have been provided if the fair value option had not been elected.

Question 97

Under U.S. GAAP the disclosure requirements when fair value measurement is used are differentiated by which of the following classifications? A. Between assets measured at fair value and liabilities measured at fair value. B. Between fair value measurements that result in gains and fair value measurements that result in losses. C. Between items measured at fair value on a recurring basis and items measured at fair value on a non-recurring basis. D. Between items for which fair value measurement is required and items for which fair value measurement is elected.

Answer 97

C. Disclosure requirements when fair value measurement is used are differentiated between items measured at fair value on a recurring basis and items measured at fair value on a non-recurring basis. Items measured at fair value on a recurring basis are adjusted to (measured at) fair value period after period; an example would be investments held-for-trading. Items measured at fair value on a non-recurring basis are adjusted to (measured at) fair value only when certain conditions are met; an example would be the impairment of an asset.

Question 98

Which level of the fair value hierarchy, if any, requires the greatest amount of disclosures?

Answer 98

Level 3 is the lowest level in the fair value hierarchy. It consists of unobservable inputs and requires the greatest amount of disclosures.

Question 99

For a firm that elects to measure certain of its financial assets and financial liabilities at fair value, required financial statement disclosures are intended to facilitate which of the following comparisons? I. Comparisons between entities that use different measurement methods for similar assets and liabilities. II. Comparisons between assets and liabilities of a single entity that uses different measurement methods for similar assets and liabilities.

Answer 99

Both Statements I and II are correct. The intended purposes of financial statement disclosures required of a firm that elects to use fair value measurement are to facilitate comparisons both across firms and for differently measured financial assets and liabilities of a single firm.

Question 100

T/F: The methods and significant assumptions used to estimate fair value must be disclosed in both annual and interim reports.

Answer 100

FalseOnly a MUST for annual reports.

Question 101

T/F: Transfers in and transfers out of each level of the fair value hierarchy must be disclosed.

Answer 101

TRUE

Question 102

T/F: The methods and significant assumptions used to estimate fair value must be disclosed only in annual reports.

Answer 102

TRUE

Question 103

T/F: Management's reasons for electing the fair value option must be disclosed for each elected eligible item.

Answer 103

TRUE

Question 104

T/F: Even though the SEC delegates the creation of accounting standards to the private sector, the SEC frequently comments on accounting and auditing issues. The two main pronouncements published by the SEC are: Financial Reporting Regulations (FRR) and the Staff Auditing Bulletins (SAB).

Answer 104

False.The main pronouncements published by the SEC are the Financial Reporting Releases (FRR) and the Staff Accounting Bulletins (SAB).

Question 105

What are the four divisions of the SEC?

Answer 105

Division of Corporate Finance, Division of Enforcement, Division of Trading and Markets, Division of Investment Management.

Question 106

Which Division of the SEC oversees the compliance with the securities acts and examines all filings made by publicly held companies?

Answer 106

The Division of Corporate Finance

Question 107

Which Division of the SEC completes the investigation and takes appropriate actions when there is a violation of a securities law (except the Public Utility Holding Company Act). Then makes recommendations to the Justice Department concerning any punishments or potential criminal prosecution?

Answer 107

The Division of Enforcement

Question 108

Which Division of the SEC oversees the secondary markets, exchanges, brokers, and dealers?

Answer 108

The Division of Trading and Markets

Question 109

Which Division of the SEC oversees the investment advisers and investment companies under the Investment Company Act of 1940 and the Investment Advisers Act of 1940?

Answer 109

The Division of Investment Management

Question 110

The SEC enforces the corporate registration requirements of the Securities Act of 1933 as one of its principal objectives. These requirements are intended to provide info that enables the SEC to:A. Evaluate the financial merits of the corporation offering the securities to the public. B. Ensure that investors are provided with adequate information on which to base investment decisions. C. Guarantee that the facts contained in the registration statement are accurate. D. Assure investors of the accuracy of the financial statements.

Answer 110

B. The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. In order to carry out the mandates in the Securities Act of 1933, the SEC is ensuring that investors are provided with adequate information on which to base investment decisions. www.SEC.gov, What We Do.

Question 111

T/F: The SEC is not a member of the International Organization of Securities Commissions (IOSCO).

Answer 111

FalseThe SEC is a member of the IOSCO, which consists of more than 100 securities regulatory agencies or exchanges across the globe.

Question 112

A company is an accelerated filer that is required to file Form 10-K with the United States Securities and Exchange Commission (SEC). What is the maximum number of days after the company's fiscal year end that the company has to file Form 10-K with the SEC?

Answer 112

75 daysAn accelerated filer has an aggregate worldwide market value of the voting and nonvoting common stock held by nonaffiliates of $75 million or more, but less than $700 million on the last business day of the issuer's most recently completed second fiscal quarter. A large accelerated filer has market capitalization (as described) of $700 million or more. Beginning in 2006 the SEC changed the 10-K filing deadline for large accelerated filers to be 60 days from the fiscal year end. Accelerated filers still have 75 days to file their 10-K.

Question 113

Which of the following is not a required component of the 10-K filing? A. Product market share. B. Description of the business. C. Market price of common stock. D. Executive compensation.

Answer 113

A. The market share of the company's product is not a required disclosure. The company may chose to voluntarily present this information, but it is not a required disclosure.

Question 114

Which regulation governs the form and content of financial statement disclosures? A. Regulation S-X. B. Sarbanes Oxley. C. Regulation S-K. D. Regulation S-Q.

Answer 114

A. Regulation S-X governs the form and content of financial statements and financial statement disclosures.

Question 115

Which regulation enhances corporate governance to mitigate financial accounting abuses? A. Regulation S-X. B. Sarbanes Oxley. C. Regulation S-K. D. Regulation S-Q.

Answer 115

B. The Sarbanes-Oxley Act of 2002 (SOX) contains provisions to enhance corporate governance and to mitigate financial accounting abuses.

Question 116

Which regulation governs the form and content of non-financial statement disclosures? A. Regulation S-X. B. Sarbanes Oxley. C. Regulation S-K. D. Regulation S-Q.

Answer 116

C. Regulation S-K governs the form and content of nonfinancial statement disclosures. These disclosures are the content of the 10-K outside of the financial statements (remember that "S-K" governs the "10-K" nonfinancial statement content).

Question 117

A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period?

Answer 117

40 daysA large accelerated filer is a company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more. A large accelerated filer must file its 10Q within 40 days after quarter end. A non-accelerated filer must file its 10Q within 45 days after quarter end.

Question 118

T/F: Initial registration of securities is typically done via Form S-1.

Answer 118

TRUE

Question 119

T/F: 2 years balance sheets, 3 years income statement, statements of cash flows, and shareholders' equity are the audited financial statements provided upon initial registration of a security.

Answer 119

TRUE

Question 120

T/F: Audited financial information is included in Part II, Item 8 of Form 10-k.

Answer 120

TRUE

Question 121

Which of the following is a member of the Monitoring Board? A. Global Accounting Technical Officer of the World Bank. B. CEO of the Financial Executives International. C. Chair of the CFA Institute. D. Chair of the U.S. Securities and Exchange Commission

Answer 121

D. The Chair of the U.S. Securities and Exchange Commission is a member of the Monitoring Board. The Monitoring Board provides a formal link between the Trustees and public authorities. The U.S. Securities and Exchange Commission is the primary overseer and regulator of the U.S. securities markets. Its mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

Question 122

The IFRS Foundation serves as the administrative umbrella for a group of bodies. Which of the following bodies are NOT included under the IFRS Foundation umbrella? A. International Federation of Accountants (IFAC). B. International Accounting Standards Board. C. IFRS Interpretations Committee. D. IFRS Advisory Council.

Answer 122

A. The International Federation of Accountants (IFAC) is a global organization for the accounting profession. Its members are accounting and auditing organizations throughout the world. It is an independent organization not under the IFRS Foundation umbrella, but it does support the activities of the IFRS Foundation by encouraging high-quality practices by the world's accountants and auditors.

Question 123

Which of the following is an objective of the IFRS Foundation? A. To enforce the use and rigorous application of those standards. B. To take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings. C. To develop, in the public interest, a single set of high-quality, understandable, enforceable, and globally accepted financial-reporting standards (IFRSs) through its member associations. D. To require adoption of international financial reporting standards (IFRSs) globally.

Answer 123

B. Objectives of the IFRS Foundation from its Constitution:1. To develop, in the public interest, a single set of high-quality, understandable, enforceable, and globally accepted financial-reporting standards based upon clearly articulated principles. 2. To promote the use and rigorous application of those standards. 3. To take account of, as appropriate, the needs of a range of sizes and types of entities in diverse economic settings. 4. To promote and facilitate adoption of international financial reporting standards (IFRSs) globally.

Question 124

T/F: The IFRS Foundation is the parent to the IASB.

Answer 124

TRUE

Question 125

T/F: The IASB Board members are elected into their positions.

Answer 125

FalseThe Monitoring Board is composed of public capital market authorities, such as the Chair of the SEC and IOSCO. Responsibilities include participating in the process for appointing Trustees and approving the appointments of Trustees. The Trustees appoint the members of IASB, IFRS Advisory Council, and IFRS Advisory Council.

Question 126

T/F: International Standards Committee (IASC) was the organization that was the predecessor to the IASB

Answer 126

TRUE

Question 127

T/F: A Small and Medium-sized (SME) company can apply the IFRS SME standards and be publicly traded.

Answer 127

FalseSME company's are those that are not publicly traded. These standards cover all reporting areas and is designed to simplify the financial reporting process for SMEs.

Question 128

Which of the following best describes the term "public accountability" according to IFRSs and IFRS for SME? I. Entity files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market.II. Entity holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance entity, securities broker/dealer, pension fund, mutual fund, or investment banking entity.

Answer 128

Both statements are included in the definition of the term "public accountability." The entity files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market, and the entity holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance entity, securities broker/dealer, pension fund, mutual fund, or investment-banking entity. IFRS for SMEs, para. 1.3.

Question 129

According to the IFRS for Small and Medium-sized Entities (IFRS for SMEs), the intended user is an SME. Which of the following, if any, is (are) included in the definition of that user? I. An entity that does not have public accountability. II. An entity that publishes general purpose financial statements for external users.

Answer 129

Both I and II. The IASB uses a broad definition of an SME. Rather than restrict it by revenue or number of employees, as other organizations, such as the World Bank and U.S. government, have done; the Board simply states that the entity does not have public accountability and that the entity publishes general purpose financial statements for external users, such as owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. IFRS for SME, para. 1.2.

Question 130

IAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors includes the IFRS hierarchy. What is the second-level, or the level after the initial level, addressing the requirements and guidance in IFRS? A. The definitions, recognition criteria, and measurement concepts for assets, liabilities, comprehensive income, revenue, expenses, and gains and losses in the Framework. B. The definitions, recognition criteria, and measurement concepts for assets, liabilities, revenue, and expenses in the Framework. C. Pronouncements of other standard-setting bodies, other accounting literature, and accepted industry practices. D. Pronouncements of other standard setting bodies using a similar conceptual framework, other accounting literature, and accepted industry practices.

Answer 130

B.The IFRS hierarchy, as presented in IAS 8, includes first, the requirements in IFRS dealings with similar or related issues; second, the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework; and lastly, the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature, and accepted industry practices, to the extent that these do not conflict with IFRS or the Framework. IAS 8, para. 12.

Question 131

How is an asset defined by the IASB's Framework?

Answer 131

According to the IASB's Framework, an asset is defined as "a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity." IASB Framework, para. 49.

Question 132

T/F: Under the IASB Framework, the following assumptions underlie the preparation and presentation of the FS: Accrual basis and Going concern.

Answer 132

TRUE

Question 133

T/F: The IASB has the right to enforce all regulations, accounting standards and procedures.

Answer 133

False. The IASB has no enforcement authority.

Question 134

What are the two fundamental (primary) qualitative characteristics of useful financial information included in IASB's Framework?

Answer 134

Relevance and faithful representation are the two fundamental qualitative characteristics of financial information (IASB Framework 5-18).

Question 135

T/F: The IASB Framework treats expenses and losses as an expense, where the U.S. Framework treats expenses and losses as separate elements.

Answer 135

TRUE

Question 136

T/F: The IASB Framework and US Framework identifies accrual accounting as a basic assumption.

Answer 136

FalseIASB = trueUS = false, (OCBOA)

Question 137

How is retained earnings calculated?

Answer 137

Revenue - Expenses = NI before taxesSubtract income taxes to arrive at Net incomeAdd retained earning beginning of year balance to arrive at retained earnings end of year balance

Question 138

Which financial statement would an analyst primarily use to assess the entity's liquidity?

Answer 138

An entity's liquidity is usually assessed from the Balance Sheet, by calculating the liquidity ratios, such as Current Ratio [(current assets) / (current liabilities)]; Quick Ratio [(cash + accounts receivable + short-term or marketable securities) / (current liabilities)]; and Cash Ratio [(cash + short-term or marketable securities) / (current liabilities)].

Question 139

Which of the following accounts is a contra account? A. Accumulated depreciation, equipment. B. Depreciation expense, office equipment. C. Dividends. D. Unearned revenue.

Answer 139

A. Accumulated depreciation is a contra account. The asset account Equipment is reported on the Balance Sheet as the net of accumulated depreciation. As such, the accumulated depreciation account has a credit balance, reducing the Equipment account from its historical cost balance to its carrying or book value.

Question 140

Y/N: Could a firm with an operating cycle of three years in duration report as current a liability due two years from the balance sheet date?

Answer 140

Yes. Operating cycle or one year, whichever is longer.

Question 141

T/F: Account Form is the term applied to the balance sheet format that shows assets on the left and liabilities and equity on the right.

Answer 141

TRUE

Question 142

T/F: Intraperiod tax allocation requires that cumulative effects of accounting principle changes be reported net of tax.

Answer 142

TRUE

Question 143

T/F: Intraperiod tax allocation is the process that adjusts deferred tax accounts.

Answer 143

False. Intraperiod tax allocation pertains to the tax effects for only one year. It is the allocation of the total tax consequence for that year among income from continuing operations, Discontinued operations, Other comprehensive income items, Adjustment for retroactive accounting principle changes, and Prior period adjustments.

Question 144

T/F: Gross margin is subject to Intraperiod tax allocation.

Answer 144

FalseIntraperiod tax allocation pertains to the tax effects for only one year. It is the allocation of the total tax consequence for that year among income from continuing operations, Discontinued operations, Other comprehensive income items, Adjustment for retroactive accounting principle changes, and Prior period adjustments.

Question 145

Which of the following activities would Not be included in the company's net income calculation?1 Gross sales 2 Cost of goods sold 3 Selling and administrative expense 4 Adjustment for a prior-year understatement of amortization expense 5 Sales returns 6 Gain on sale of available-for-sale securities 7 Gain on disposal of a discontinued business segment 8 Unrealized gain on available-for-sale securities

Answer 145

4 and 8 would Not be included in the company's net income calculation.

Question 146

In a multi-step Income Statement: A. Total expenses are subtracted from total revenues. B. Gross profit (margin) is shown as a separate item. C. Cost of sales and operating expense are subtracted from total revenues. D. Other income is added to revenue from sales.

Answer 146

B. In a multi-step Income Statement, gross profit (margin), operating profit (margin), and pretax income from continuing operations are determined. The focus is on the determination of operating profit rather than simply income from continuing operations. Gross profit (margin) is shown as a separate item.

Question 147

Comprehensive income for a period is the: A. Sum of other comprehensive income items for the period. B. Change in total owners' equity from all sources, other than from transactions with owners acting as owners. C. Sum of net income and other comprehensive income for the period. D. Change in total owners' equity for the period.

Answer 147

C. Comprehensive income is considered an overall measure of income and includes other comprehensive income. The latter is the net sum across four items: foreign currency adjustments, derivative gains and losses, unrealized gains and losses on securities available for sale, and certain pension adjustments. The latter four items are similar to income items but are not currently included in net income. Thus, comprehensive income is considered a broader and more inclusive measure of income than net income reported in the Income Statement.

Question 148

Under FASB U.S. GAAP, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles? A. Unrealized loss on investments in noncurrent marketable equity securities. B. Unrealized loss on investments in current marketable equity securities. C. Loss on exchange of similar assets. D. Loss on exchange of dissimilar assets.

Answer 148

A. Unrealized gains and losses on securities available for sale are among the few items that appear in comprehensive income but not in earnings. Only SAS can be noncurrent. Assuming the current securities are classified as trading securities, then that unrealized loss is included in earnings. This is a change in owners' equity that is not included in earnings and is not the result of a transaction with owners. It is an "other" comprehensive income item. "Other" refers to other than net income, which is the largest component of comprehensive income. The remaining items are recognized in income.

Question 149

What is the purpose of reporting comprehensive income? A. To summarize all changes in equity from nonowner sources. B. To reconcile the difference between net income and cash flows provided from operating activities. C. To provide a consolidation of the income of the firm's segments. D. To provide information for each segment of the business.

Answer 149

A. The purpose of comprehensive income is to show all changes to equity, including changes that currently are not a required part of net income. Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.

Question 150

T/F: Comprehensive income is a required disclosure.

Answer 150

TRUE

Question 151

The Statement of Changes in Equity: A. Is one of the required financial statements under U.S. GAAP B. Includes accounts such as the retained earnings and common share accounts but not other comprehensive income items. C. Is used only if a corporation frequently issues common shares D. Reconciles all of the beginning and ending balances in the equity accounts.

Answer 151

D. The Statement of Changes in Equity reconciles all of the beginning and ending balances in the equity accounts. The statement shows the opening balance then details all changes in the accounts, ending with the closing balance.

Question 152

The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid-in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year?

Answer 152

$12 If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price is the sum of the par value ($2) and the additional paid-in capital ($10,000/1,000 shares, or $10), which totals $12.

Question 153

Bay Manufacturing Co. purchased a three-month U.S. Treasury bill. In preparing Bay's Statement of Cash Flows, this purchase would: A. Have no effect. B. Be treated as an outflow from financing activities. C. Be treated as an outflow from investing activities. D. Be treated as an outflow from lending activities.

Answer 153

A. The three-month bill meets the definition of a cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.

Question 154

T/F: An investment in bonds which has been held for three years will likely be treated as a cash equivalent during the three months prior to its maturity.

Answer 154

FalseInvestments are usually considered cash equivalents only when their original maturity is three months or less.

Question 155

T/F: Regardless of whether the direct or the indirect method is used to present "Cash Flows from Operating Activities" the remainder of the body of the Statement of Cash Flows will be the same.

Answer 155

TRUE

Question 156

T/F: There is only one way to present "Cash Flows from Operating Activities" in the Statement of Cash Flows.

Answer 156

FalseThe "Cash Flows from Operating Activities" can be presented with either the Direct or the Indirect method.

Question 157

T/F: In the body of the Statement of Cash Flows, only the "Cash Flows from Operating Activities" section can be different based on the method - direct or indirect - used.

Answer 157

TRUE

Question 158

T/F: The amount of "Cash Flows from Operating Activities" will be the same whether the direct of the indirect method is used.

Answer 158

TRUE

Question 159

T/F: Under the indirect method of presenting "Cash Flows from Operating Activities," the presentation begins with net income.

Answer 159

TrueThe indirect method is a reconciliation of net income and net operating cash flow.

Question 160

T/F: When the direct method is used to present "Cash Flows from Operating Activities," a separate reconciliation of net income with cash flow from operating activities must be provided.

Answer 160

TrueThe direct method reports the actual operating cash flows in the operating section. The reconciliation is provided in a separate schedule.

Question 161

T/F: The Statement of Cash Flows discloses only information about cash flows.

Answer 161

False.The CF reports on info of net cash inflow/outflow of Operating Activities, Investing Activities, and Financing Activities; the Effects of Foreign Currency Translation; Reconciliation of net cash inflows/outflows; and Non-cash Investing and Financing Activities.

Question 162

T/F: The direct method of presenting "Cash Flows from Operating Activities" requires different additional disclosures than the indirect method.

Answer 162

TrueThe direct method reports the actual operating cash flows in the operating section. The reconciliation is provided in a separate schedule.

Question 163

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a Statement of Cash Flows, what amount is included in investing activities for the above transaction?

Answer 163

The amounts paid to purchase plant assets and passive investments, such as stocks and bonds from other firms, are investing cash outflows. When part of the purchase price is financed, as in this question, ONLY THE CASH AMOUNT PAID is disclosed in the Statement of Cash Flows. The non-cash activity schedule would disclose the acquisition price and amount financed with the mortgage.

Question 164

Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, year 1?

Answer 164

$3,000Only actual cash inflows and outflows are presented on the statement of cash flows. In this case, Polk paid $3,000 in cash as a down payment for the forklift and financed the remainder of the purchase price. Therefore, the only cash outlay as an investing activity on the statement of cash flows is $3,000. The cash outflows associated with the payment on the note would be classified as a financing activity.

Question 165

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a Statement of Cash Flows for the purchasing company, what amount is included in financing activities for the above transaction?

Answer 165

ZEROThe cash payment is an investing cash outflow, not a financing cash flow. The transaction would show no entry in the financing section of the Statement of Cash Flows. The payment amount (only) would be reported in the investing activity section of the Statement of Cash Flows as an outflow.

Question 166

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method? A. Gain on sale of plant asset. B. Sale of property, plant and equipment. C. Payment of cash dividend to the shareholders. D. Issuance of common stock to the shareholders.

Answer 166

A. The gain on the sale of a plant asset is a noncash item that is used to reconcile net income to cash flows from operations.

Question 167

On December 31, 20x1, Deal, Inc. failed to accrue the December 20x1 sales salaries that were payable on January 6, 20x2. What is the effect of the failure to accrue sales salaries on working capital and cash flows from operating activities in Deal's 20x1 financial statements?

Answer 167

Working Capital = OverstatedCash flows from operating activities = No effectFailure to accrue salaries at the end of 20x1 understates salaries payable, a current liability. Working capital equals current assets minus current liabilities. With current liabilities understated, working capital is overstated. The accrued salaries at the end of 20x1 would not have been paid in 20x1, even if they had been accrued correctly. Therefore, 20x1 operating cash flows are not affected by the failure to accrue the salaries.

Question 168

T/F: Using the Direct Method, Operating Activities includes cash inflows: from customers, interest income or dividend income, and sale of trading investments.

Answer 168

TRUE

Question 169

T/F: Using the Direct Method, Operating Activities includes cash outflows: to suppliers and employees, to government, purchase of trading investments, and for interest or other operational expenses.

Answer 169

TRUE

Question 170

T/F: When using the indirect method of cash flows, you are essentially doing a reconciliation.

Answer 170

TRUE

Question 171

T/F: Investing Activities, cash inflows: sale of PPE. sale of debt or equity securities of other entities, collection of loan principal. Cash outflows: Purchase of PPE, Purchase of debt or equity securities of other entities.

Answer 171

TRUE

Question 172

Financing Activities, cash inflows: from sale of the entity's own equity securities, from issuance of debt (bonds and notes). Cash outflows: to stockholders as dividends, to redeem LT debt, and to reacquire capital stock.

Answer 172

TRUE

Question 173

Y/N: Are the amounts of operating cash flows generally the same as the related amounts of accrual basis revenues and expenses?

Answer 173

No.

Question 174

T/F: Cash payments for income tax is a cash outflow from operating activities.

Answer 174

True.

Question 175

T/F: The sale of marketable securities Held for Trading would be a source of cash flow for operations if the purchaser intends to hold the securities only for a short time.

Answer 175

TRUE

Question 176

In a Statement of Cash Flows, if used equipment is sold at a loss, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment: A. Less the loss and plus the amount of tax attributable to the loss. B. Less both the loss and the amount of tax attributable to the loss. C. Less the loss. D. With no addition or subtraction.

Answer 176

C. A journal entry helps to visualize the transaction: Cash dr. xxx Loss dr. xxx Asset (book value) cr. xxx The investing cash inflow is the book value of the asset less the loss. In actuality, this amount equals the amount of cash received on the sale. Any tax effects are accounted for in income tax payments, an operating cash outflow.

Question 177

Rory Co.'s prepaid insurance was $50,000 at December 31, 2005 and $25,000 at December 31, 2004. Insurance expense was $20,000 for 2005 and $15,000 for 2004. What amount of cash disbursements for insurance should be reported in Rory's 2005 net cash flows from operating activities presented on a direct basis?

Answer 177

The prepaid insurance account is analyzed to determine insurance payments during the year. Beg. prepaid insurance + insurance payments - insurance expense = end. prepaid insurance $25,000 + insurance payments - $20,000 = $50,000 insurance payments = $45,000

Question 178

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows: Accrued interest payable $17,000 decrease Prepaid interest 23,000 decrease What amount of interest expense for the current year will Ness report in its income statement?

Answer 178

A summary journal entry is helpful to sort out what happened with interest during the period: dr. Interest expense 76,000 dr. Accrued interest payable 17,000 cr. Prepaid interest 23,000 cr. Cash 70,000 The interest expense amount for the year is the derived amount in the entry. Also, a more verbal approach works: (1) accrued interest payable decreased implying that $17,000 more cash was paid in interest than was recognized in expense, and (2) prepaid interest decreased implying that $23,000 less cash was paid in interest than was recognized in expense. The net of these two yields $6,000 less cash paid in interest than was recognized in expense. With $70,000 cash paid for interest, $76,000 must have been expensed. Interest expense of $76,000 = cash interest paid of $70,000 - accrued payable decrease of $17,000 + prepaid interest decrease $23,000.

Question 179

Which of the following should not be disclosed in an enterprise's Statement of Cash Flows that is prepared using the indirect method? A. Interest paid, net of amounts capitalized. B. Income taxes paid. C. Cash flow per share. D. Dividends paid on preferred stock.

Answer 179

C. Cash flow per share is not an accepted disclosure. The reason is that there might be confusion with earnings per share, and investors might believe that the amount of cash flow per share would be available for dividends.

Question 180

When calculating the cash paid for goods to be sold, what are the two accounts related to COGS?

Answer 180

Inventory and Accounts PayableCost of goods sold $250,000 Less decrease in inventory (this represents an increase to cost of goods sold for inventory not purchased in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount). (16,000) Less increase in accounts payable (this represents an increase in purchases and, therefore, cost of goods sold that was not paid for in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount). ( 7,500) Equals cash paid for inventory

Question 181

In a Statement of Cash Flows, if used equipment is sold at a gain, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment: A. Plus the gain. B. Plus the gain and less the amount of tax attributable to the gain. C. Plus both the gain and the amount of tax attributable to the gain. D. With no addition or subtraction.

Answer 181

A. The carrying amount plus the gain equals the cash proceeds received. The proper disclosure is something along the lines of the following journal entry: dr. Proceeds from sale of equipment $xxxxxx. cr. Gain xxxxx cr. Equipment (book value) xxxxx

Question 182

During 20x1, Teb, Inc. had the following activities related to its financial operations: Payment for the early retirement of long-term bonds payable (carrying value $740,000) $750,000 Distribution in 20x1 of cash dividends declared in 20x0 to preferred shareholders 62,000 Carrying value of convertible preferred stock in Teb, converted into common shares 120,000 Proceeds from the sale of treasury stock (carrying value at cost, $86,000) 95,000 In Teb's 20x1 Statement of Cash Flows, net cash used in financing activities should be:

Answer 182

$717,000Payment for the early retirement of long-term bonds payable ($750,000) Distribution in 20x1 of cash dividend declared in 20x0 to preferred shareholders (62,000) Proceeds from the sale of treasury stock 95,000 Net cash used in financing activities ($717,000) The conversion of preferred stock is a non-cash activity, not a cash flow.

Question 183

The summary of significant accounting policies should disclose the A. Pro forma effect of retroactive application of an accounting change. B. Basis of profit recognition on long-term construction contracts. C. Adequacy of pension plan assets in relation to vested benefits. D. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.

Answer 183

B. The summary of significant accounting policies conveys information regarding the important accounting methods and policies chosen by the firm, when a choice is available. Knowledge of the methods is critical to an understanding of the amounts disclosed in the financial statements. The method of accounting for long-term contracts may be the percentage of completion or completed contract method. Disclosure of this method assists the user in understanding the meaning of reported revenue and gross profit.The other answer alternatives give data on specific accounts or the result of applying specific accounting principles. They do not indicate what choices the firm has made for accounting and reporting.

Question 184

Which of the following should be disclosed in a summary of significant accounting policies?I. Management's intention to maintain or vary the dividend payout ratio.II. Criteria for determining which investments are treated as cash equivalents.III. Composition of the sales order backlog by segment.

Answer 184

Only II. is an accounting policy. Accounting policies include the choice of accounting methods made by the firm, the principles and methods specific to an industry, and any unusual or innovative applications of GAAP. I. and III. are data regarding specific accounts or statements of management intention. They are not descriptions of methods of measurement or recognition used by the firm disclosed for the purpose of assisting users in understanding the amounts reported in the financial statements.

Question 185

Which of the following should be disclosed in a summary of significant accounting policies? A. Basis of profit recognition on long-term construction contracts. B. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years. C. Depreciation expense. D. Composition of sales by segment.

Answer 185

A. GAAP allows many choices. In the long-term construction contracts area, GAAP allows both the completed contract and percentage of completion methods. The result of applying each method significantly affects both the Income Statement and Balance Sheet.

Question 186

Where in its financial statements should a company disclose information about its concentration of credit risks? A. No disclosure is required. B. The notes to the financial statements. C. Supplementary information to the financial statements. D. Management's report to shareholders.

Answer 186

B. GAAP requires disclosure of all significant concentrations of credit risk from receivables and other financial instruments in the notes. A concentration of credit risk occurs when receivables from different sources reflect common economic risks (for example, a group of receivables from several firms within the same industry).

Question 187

Brad Corp. has unconditional purchase obligations associated with product financing arrangements. These obligations are reported as liabilities on Brad's balance sheet, with the related assets also recognized.In the notes to Brad's financial statements, the aggregate amount of payments for these obligations should be disclosed for each of how many years following the date of the latest balance sheet? A. 0 B. 1 C. 5 D. 10

Answer 187

C. The payments for the five years following the balance sheet date must be disclosed. This question requires memorization of a relatively obscure piece of information. However, there are other cases for which data must be disclosed for the five years following the balance sheet date. Few, if any disclosures are required for a full ten years after the balance sheet date.

Question 188

Which type of material related-party transactions require disclosure? A. Only those not reported in the body of the financial statements. B. Only those that receive accounting recognition. C. Those that contain possible illegal acts. D. All those other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business.

Answer 188

D. Material related party transactions must be disclosed unless they are ordinary business transactions, such as payment of employees and other routine transactions.

Question 189

T/F: Companies must disclose the future maturities on their borrowing for five years following the balance sheet date.

Answer 189

True.

Question 190

T/F: U.S. and International GAAP require disclosure of the amount of dividends proposed or declared before the statements were authorized for issue.

Answer 190

False.Companies are required to provide the following info related to capital structure:1. Rights and privileges of outstanding securities2. Number of shares issued during the annual fiscal period and any subsequent interim period3. Liquidation preference of preferred stock4. If there is a considerable excess of par value or stated value of preferred stock, this info should be disclosed in the equity section of BS5. Other preferred stock disclosures6. Redeemable preferred stock

Question 191

On December 30, 2004, Solomon Co. had a current ratio greater than 1:1 and a quick ratio less than 1:1. On December 31, 2004, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Answer 191

Current Ratio = IncreaseQuick Ratio = DecreaseCash is both a current and a quick asset (an asset immediately available to pay debts). Accounts payable is a current liability. Thus, the numerator and denominator of both ratios have decreased. The current ratio was greater than 1.0 before the transaction. Therefore, the denominator decreased a greater percentage than the numerator causing the ratio to increase. The quick ratio was less than 1.0 before the transaction. Therefore, the numerator decreased a greater percentage than the denominator causing the ratio to decrease.

Question 192

Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy? A. FIFO (first in, first out). B. LIFO (last in, first out). C. Moving average. D. Weighted average.

Answer 192

A. FIFOInventory turnover ratio is Cost of Goods Sold/Average Inventory. Therefore, to produce the lowest inventory turnover ratio, we need the highest value of ending inventory. The method that produces the highest value of ending inventory in an inflationary economy (prices are rising) is FIFO.

Question 193

What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios?Current RatioQuick Ratio

Answer 193

Current Ratio = No effectQuick Ratio = No effectThe current ratio equals current assets divided by current liabilities. The quick ratio equals quick assets divided by current liabilities. Quick assets include cash, cash equivalents, trading securities, accounts receivable and other current assets readily convertible to cash. Quick assets exclude inventories and prepaids. Trading securities are included in both current assets and quick assets because they are, by definition, immediately marketable. The sale of trading securities at book value has no effect on current assets or quick assets because the cash received equals the reduction in the trading securities account. Thus, neither ratio is affected by such a sale.

Question 194

T/F: If the cost of goods sold increases while average inventory remains constant, there has been a more efficient use of inventory.

Answer 194

True.

Question 195

T/F: The accounts receivable turnover ratio shows the relationship between total sales and average accounts receivable on the books.

Answer 195

False.Measures the # of times that AR turns over during a period. Indicates the quality of credit policies and the efficiency of collection procedures.AR turnover = (net) credit sales / avg. (net) AR

Question 196

T/F: If the working capital ratio is more or less than 1.00, equal changes in the current assets and current liabilities will change the working capital ratio.

Answer 196

True.WCR = Current Assets / Current Liabilities

Question 197

T/F: The defensive-interval ratio is a measure of how long available cash and other highly liquid assets could support normal cash requirements.

Answer 197

True.Securities Defensive-interval ratios = (cash + (net) AR + Marketable Securities) / Avg. Daily cash expenditures

Question 198

T/F: In computing the interest earned ratio, interest expense and income tax expense have to be added back to net income.

Answer 198

TrueMeasures the ability of current earnings to cover interest payments for a period.Times Interest Earned Ratio = (NI + Interest Exp. + Income Tax) / Interest Exp.

Question 199

T/F: The price-earnings ratio is computed only for common stock.

Answer 199

True.Measures the price of a share of CS relative to its latest earnings per share (EPS). Indicates a measure of how the market values the stock, especially when compared with other stocks.Price-earnings ratio = market price for a CS / EPS

Question 200

Accounts Receivable Turnover =

Answer 200

(Net) Credit Sales / Average (Net) Accounts Receivable (e.g. (Beginning + Ending)/2) Measures the number of times that accounts receivable turnover (are incurred and collected) during a period. Indicates the quality of credit policies (and the resulting receivables) and the efficiency of collection procedures.

Question 201

Number of Days' Sales in Average Receivables =

Answer 201

(300 or 360 or 365 (or other measure of business days in a year)) / Accounts Receivable Turnover (computed above) Measures the average number of days required to collect receivables; it is a measure of the average age or receivables.

Question 202

Inventory Turnover =

Answer 202

Cost of Goods Sold / Average Inventory (e.g. (Beginning + Ending)/2)Measures the number of times that inventory turns over (is acquired and sold or used) during a period. Indicates over or under stocking of inventory or obsolete inventory.

Question 203

Number of Days' Supply in Inventory =

Answer 203

(300 or 360 or 365 (or other measure of business days in a year)) / Inventory Turnover (computed first) Measures the number of days inventory is held before it is sold or used. Indicates the efficiency of general inventory management.

Question 204

Operating Number of Cycle = Days in Operating =

Answer 204

Number of Days' Sale in A/R + Length Cycle Number of Days' Supply in InventoryMeasures the average length of time to invest cash in inventory, convert the inventory to receivables, and collect the receivables; it measures the time to go from cash back to cash.

Question 205

Acid Test Ratio - aka Quick Ratio =

Answer 205

(Cash + (net) AR + Marketable Securities) / Current LiabilitiesMeasures the quantitative relationship between highly liquid assets and current liabilities in terms of the "# of times" that cash and assets that can be converted quickly to cash cover current liabilities

Question 206

Times Preferred Dividend Earned Ratio =

Answer 206

NI / Annual preferred dividend obligationMeasures the ability of current earnings to cover preferred dividends for a period.

Question 207

Profit Margin (on sales) =

Answer 207

NI / (Net) SalesMeasures the net profitability on sales (revenue)

Question 208

Return on Total Assets =

Answer 208

(NI + (add back) Interest Exp. (net of tax effect)) / Avg. Total AssetsMeasures the rate of return on total assets and indicates the efficiency with which invested resources (assets) are used.

Question 209

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? A. As an adjustment to 2012 rental income. B. As an income tax expense in 2012. C. As a prior period adjustment. D. No reporting in 2012 required.

Answer 209

C. 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.

Question 210

Which of the following items would be recognized in financial statements prepared using an income tax basis of accounting relating to permanent differences? Nontaxable Income Nondeductible Expenses

Answer 210

Yes, YesBoth nontaxable income items (e.g., life insurance proceeds from the death of an officer) and nondeductible expenses (e.g., premium cost of life insurance on an officer) would be recognized in financial statements prepared using an income tax basis of accounting.

Question 211

T/F: When financial statements are prepared using an income tax basis of accounting, nontaxable and nondeductible items related to permanent differences must be recognized separately in revenues and expenses, respectively.

Answer 211

False.Recognition of permanent differences would be made in one of the following ways:1. As separate line items in the revenue and/or expense sections of the IS; most common.2. As separate line items shown as additions to or deductions from the net revenues and expenses3. The nature and amounts disclosed in the notes to the FS.

Question 212

T/F: Amounts reported in income tax-based financial statements are subject to change as a result of IRS examination and determination.

Answer 212

TRUE

Question 213

T/F: The cash basis of accounting will always result in greater revenue than the accrual basis of accounting.

Answer 213

False.Depends on what accounts are involved and how they affect NI on accrual basis compared to cash basis.

Question 214

T/F: When adjustments to income tax-based financial statements result from IRS determinations, all such adjustments are reported as current period income or expense.

Answer 214

False.Adjustments resulting from IRS determinations, are treated differently in the FS depending on the nature of the item adjusted.

Question 215

T/F: In a pure cash basis of accounting, the only asset a balance sheet would report would be cash.

Answer 215

True.

Question 216

T/F: When a firm uses a modified cash basis of accounting, it can modify the cash basis in any way it chooses.

Answer 216

False.

Question 217

T/F: A modification to the cash basis of accounting must be consistent with the accrual basis of accounting.

Answer 217

True.

Question 218

Personal financial statements should report an investment in life insurance at the A. Face amount of the policy less the amount of premiums paid. B. Cash value of the policy less the amount of any loans against it. C. Cash value of the policy less the amount of the premiums paid. D. Face amount of the policy less the amount of any loans against it.

Answer 218

B. Assets should be reported at estimated current value (fair value), which for a life insurance policy is the current cash value, less the settlement amount of any loans against the life insurance policy.

Question 219

In personal financial statements, how should estimated income taxes on the excess of the estimated current values of assets over their tax bases be reported in the statement of financial condition? A. As liabilities. B. As deductions from the related assets. C. Between liabilities and net worth. D. In a footnote disclosure only.

Answer 219

C. Estimated income taxes (i.e., provision for income taxes) on the excess of the estimated current values of assets over their tax bases should be reported as a separate line item between liabilities and net worth sections of the personal financial statement.

Question 220

Personal financial statements should report assets and liabilities at A. Estimated current values at the date of the financial statements and, as additional information, at historical cost. B. Estimated current values at the date of the financial statements. C. Historical cost and, as additional information, estimated current values at the date of the financial statements. D. Historical cost.

Answer 220

B. Personal financial statements should report assets and liabilities at estimated current values (fair values) at the date of the financial statements.

Question 221

T/F: For personal financial statements, assets should be presented in current and non-current categories on the statement of financial condition.

Answer 221

False.

Question 222

T/F: Noncancelable commitments may be presented at their discounted amounts as liabilities on the statement of financial position.

Answer 222

TRUE

Question 223

T/F: Personal financial statements must include a statement of changes in net worth.

Answer 223

FALSE

Question 224

T/F: For personal financial statements, a liability should be recognized for an excess of fair value of net assets over their tax basis.

Answer 224

TRUE

Question 225

T/F: For personal financial statements, liabilities should be presented in the order of their due date, beginning with the most current due.

Answer 225

TRUE

Question 226

T/F: For personal financial statements, a parcel of real estate held for market appreciation should be valued at historical cost on the property.

Answer 226

FALSE

Question 227

T/F: For personal financial statements, assets should be reported net of any costs that would be incurred in disposing of them.

Answer 227

TRUE

Question 228

Which of the following is the purpose of the Private Company Council? A. To certify whether a company meets the definition of a public business entity. B. To set auditing standards for private company audits. C. To assist the FASB in identifying whether and when a private company accounting standard should be developed. D. To provide input to the Emerging Issues Task Force regarding accounting issues faced by private companies.

Answer 228

C. The PCC works with the FASB to set private company accounting standards.

Question 229

Which of the following is the tradeoff for setting GAAP by the Private Company Council? A. Relevance versus cost-benefit. B. Reliability versus cost-benefit. C. Relevance versus materiality. D. Reliability versus materiality.

Answer 229

A. The PCC sets standards for private companies by weighing the relevance of the information versus the cost benefit.

Question 230

The Private Company Council has issued modified accounting for private companies for what aspect of Goodwill? A. Goodwill impairment testing. B. Goodwill amortization. C. Goodwill measurement. D. Goodwill reporting.

Answer 230

B. The PCC allows private companies to amortize goodwill over a period to not exceed 10 years.

Question 231

T/F: A private company can use settlement value versus cash value to as a surrogate for fair market value for all interest rate swaps.

Answer 231

False.

Question 232

Under IFRS for SMEs, which of the following, if any, must be disclosed in financial statements? Earnings per Share (EPS) Information by Segment

Answer 232

Under IFRS for SMEs, neither earnings per share (EPS), nor information by segment is required in financial statements. Since financial statements prepared under IFRS for SMEs are those of entities not traded on exchanges or otherwise required to file with regulatory agencies, earnings per share and segment reporting are not considered important information for users. These are two of the simplifications in IFRS for SMEs that make the standards less burdensome than either U.S. GAAP or full IFRS.

Question 233

Under IFRS for SMEs, which of the following methods, if any, can be used by an investor to account for an investment in another entity (an associate) over which the investor has significant influence? Cost Method Equity Method

Answer 233

Both. Under IFRS for SMEs, either the cost method or equity method may be used by an investor to account for an investment in another entity (called an "associate" in IFRS for SMEs) over which the investor has significant influence. Under U.S. GAAP, only the equity method may be used.

Question 234

Which one of the following is a characteristic of accounting under IFRS for SMEs? A. Interest incurred during construction must be capitalized. B. Earnings per share must be provided in the financial statements. C. Goodwill must be amortized. D. The LIFO cost flow assumption can be used in valuing inventories.

Answer 234

C. Under IFRS for SMEs, goodwill is assumed to have a limited life and is amortized over that life, or a period not to exceed 10 years if the life cannot be reasonably estimated. Under U.S. GAAP, goodwill is assumed to have an unlimited life and is not amortized.

Question 235

T/F: Reversals of impairment charges, if certain criteria are met, is allowed under IFRS for SMEs.

Answer 235

TRUE

Question 236

T/F: IFRS for SMEs constitute generally accepted accounting principles.

Answer 236

TRUE

Question 237

T/F: There are international standards for preparing personal financial statements.

Answer 237

FALSE

Question 238

T/F: Disclosures are simplified in a number of areas including pensions, leases, and financial instruments under IFRS for SMEs.

Answer 238

TRUE

Question 239

On October 31, 2005, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15, 2005, payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.How should these accounts be reported in Dingo's October 31, 2005, classified balance sheet?A. The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability. B. The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability. C. The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft. D. The segregated and regular accounts should be reported as current assets net of the overdraft.

Answer 239

A. The accounts are with different banks. Thus, the accounts cannot be offset against one another.The overdraft is a liability because the bank honored a check or withdrawal causing the account to be negative. The firm owes the bank this amount.The regular corporate account is part of the cash account, a current asset. The segregated account is a long-term investment. The cash in this asset is set aside for a specific purpose. There is no intent to use the cash for ordinary operating purposes.

Question 240

T/F: The effective rate of interest on a 1-year, 5%, $5,000 loan requiring a $300 compensating balance to be maintained is 5.3%.

Answer 240

TRUE

Question 241

T/F: Bank overdrafts must be shown as a liability under IFRS.

Answer 241

FALSE

Question 242

T/F: U.S. currency is included in cash equivalents.

Answer 242

FALSE

Question 243

T/F: Compensating cash balance for a loan is not included in the cash account.

Answer 243

TRUE

Question 244

T/F: Cash equivalents are included in the cash account.

Answer 244

FALSE

Question 245

Hilltop Co.'s monthly bank statement shows a balance of $54,200. Reconciliation of the statement with company books reveals the following information:Bank service charge $ 10Insufficient funds check 650Checks outstanding 1,500Deposits in transit 350Check deposited by Hilltop and cleared by the bank for $125, but improperly recorded by Hilltop as $152 What is the net cash balance after the reconciliation?

Answer 245

$53,050The reconciling items that need to be adjusted to the bank balance are: checks outstanding (-1,500) and deposit in transit (+350). The net cash after the reconciliation is: Bank balance $54,200 - 1,500 + 350 = $53,050. The bank service charge and insufficient funds are already reflected in the bank balance. The error is on Hilltop's books, not on the bank statement and therefore does not need to be included in the reconciliation.

Question 246

On June 30, Almond Co.'s cash balance was $10,012 before adjustments, while its ending bank statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but was erroneously recorded in Almond's general ledger balance as $59. The check was correctly listed in the bank statement at $95.The bank statement also included a credit memo for interest earned in the amount of $35, and a debit memo for monthly service charges in the amount of $50.What was Almond's adjusted cash balance on June 30?

Answer 246

$9,961The adjusted cash balance is computed as $10,012 - corrected #101 amount ($95 - $59) + $35 interest - $50 service charge = $9.96. Check #101 was recorded for $59 but should have been recorded for $95.

Question 247

T/F: A note is collected by the bank as part of its services to the depositor. The note is interest bearing and requires the interest to be paid at maturity. The adjusting entry to be recorded when the reconciliation is prepared includes Cr. Notes receivable only.

Answer 247

FALSE

Question 248

T/F: Sales discounts forfeited is contra to accounts receivable.

Answer 248

FALSE

Question 249

T/F: The gross method of accounting for cash discounts separately records cash discounts not taken by customers.

Answer 249

FALSE

Question 250

T/F: The sales price of an item before trade and cash discounts is $50. A trade discount of 2% is available as well as a 4% cash discount. An allowance of $8 (based on the $50 price) is granted and payment remitted before the cash discount period ended. The amount remitted is $39.51

Answer 250

TRUE

Question 251

T/F: The gross and net methods of recording sales discounts yield the same net sales if customers take all available discounts.

Answer 251

TRUE

Question 252

T/F: Allowance for sales discounts is contra to accounts receivable.

Answer 252

TRUE

Question 253

Under the allowance method of recognizing uncollectible accounts, the entry to write-off an uncollectible account A. Increases the allowance for uncollectible accounts. B. Has no effect on the allowance for uncollectible accounts. C. Has no effect on net income. D. Decreases net income.

Answer 253

C. The entry isDr. Allowance for uncollectible accounts XX Cr. Accounts receivable XXThis entry decreases the allowance because the purpose for which the account was created has now been realized (an uncollectible account). The entry has no effect on income because neither account in the entry is an income account.

Question 254

When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off would A. Increase the allowance for uncollectible accounts. B. Increase net income. C. Decrease the allowance for uncollectible accounts. D. Have no effect on the allowance for uncollectible accounts.

Answer 254

A. The entries are:dr. Accounts receivable cr. Allowance for uncollectiblesdr. Cash cr. Accounts receivableThe first entry reinstates the amount of allowance used up when the account was originally written off. The normal balance in the account is a credit. The first entry increases the account.

Question 255

In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000.What is the total amount of risk of accounting loss related to Butler's trade accounts receivable, and what amount of that risk is off-balance sheet risk?Risk of accounting loss / Off-balance sheet risk $0 $0 $230,000 $0 $230,000 $20,000 $250,000 $20,000

Answer 255

$230,000 $0 This question requires an understanding of two accounting concepts:1. Risk of accounting loss on accounts receivable (credit risk). This is the risk of loss resulting from not collecting amounts due from sales made on credit, and is the total amount of loss that Butler would suffer if those who owe it failed to make any payments and the receivables proved to be of no value. Since Butler's net carrying value of accounts receivable is $230,000 ($250,000 - $20,000), that is the amount of risk of accounting loss.2. Off-balance sheet risk: This is the amount of risk of loss that does not show on the balance sheet. Since all of Butler's net accounts receivable show on the balance sheet, there is no off-balance sheet risk associated with the accounts receivable.

Question 256

Rue Co.'s allowance for uncollectible accounts had a credit balance of $12,000 on December 31, 2002. During 2003, Rue wrote-off uncollectible accounts of $48,000. The aging of accounts receivable indicated that a $50,000 allowance for uncollectible accounts was required on December 31, 2003. What amount of uncollectible accounts expense should Rue report for 2003?

Answer 256

$86,000The preadjusted ending 2003 allowance balance is a $36,000 debit ($12,000 cr. beginning balance - $48,000 dr. from write-offs). When accounts are written off, the allowance is debited and accounts receivable is credited. The aging schedule indicates that a $50,000 ending credit allowance balance is required. Therefore, $86,000 of uncollectible accounts expense must be recognized to change the allowance balance from $36,000 dr. to $50,000 cr. An equation or T account approach also can be used to analyze the allowance account: Beginning balance $12,000 - write-offs $48,000 + uncollectible accounts expense (?) = Ending balance $50,000. Solving for uncollectible accounts expense yields $86,000.

Question 257

T/F: The entry to write off an account under the direct write-off method will have no effect on net income.

Answer 257

FALSE

Question 258

T/F: In most cases, the direct write-off method of accounting for uncollectible accounts is not permissible under US GAAP.

Answer 258

TRUE

Question 259

On January 1, 2006, Jamin Co. had a credit balance of $260,000 in its allowance for uncollectible accounts. Based on past experience, 2% of Jamin's credit sales have been uncollectible. During 2006, Jamin wrote off $325,000 of uncollectible accounts. Credit sales for 2006 were $9,000,000. In its December 31, 2006 balance sheet, what amount should Jamin report as allowance for uncollectible accounts?

Answer 259

$115,000The ending allowance balance equals: Beginning balance - write-offs + 2% of credit sales = $260,000 - $325,000 + .02($9,000,000) = $115,000Write-offs reduce the allowance balance, and the adjusting entry at the end of the year recognizes 2% of credit sales as bad debt expense by increasing the allowance balance.

Question 260

Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward's credit sales for 2004 were $1,000,000. During 2004, Ward wrote off $18,000 of uncollectible accounts. Ward's allowance for uncollectible accounts had a $15,000 balance on January 1, 2004. In its December 31, 2004 income statement, what amount should Ward report as uncollectible accounts expense?

Answer 260

$20,000The credit sales method does not adjust the allowance balance to a required ending amount, but rather simply places the appropriate percent of sales into uncollectible accounts expense and the allowance account. 2% x $1,000,000 = $20,000.

Question 261

T/F: The entry to write off an account under the allowance method has no effect on net accounts receivable.

Answer 261

TRUE

Question 262

T/F: Total sales for a period equals $1,000,000. Of that amount, $400,000 is cash sales. The firm estimates bad debt expense at 8% of credit sales. The preadjusted allowance for doubtful accounts balance is $4,000. Bad debt expense for the period is $48,000.

Answer 262

TRUE

Question 263

On December 1, 2005, Tigg Mortgage Co. gave Pod Corp. a $200,000, 12% loan. Pod received proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,450, beginning January 1, 2006. The repayments yield an effective interest rate of 12% at a present value of $200,000 and 13.4% at a present value of $194,000. What amount of accrued interest receivable should Tigg include in its December 31, 2005 balance sheet?

Answer 263

$2,000The term "accrued interest receivable" refers to the cash amount of interest due. The cash amount of interest due is based on the contractual interest rate and face value. The loan origination fee is a way of increasing the effective interest but it does not affect the cash interest component. The $2,000 accrued interest = (.12)(1/12)($200,000).

Question 264

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest. What is an installment note's receivable balance six months after the sale? A. 75% of the original sales price. B. Less than 75% of the original sales price. C. The present value of the remaining monthly payments discounted at 12%. D. Less than the present value of the remaining monthly payments discounted at 12%.

Answer 264

C. The question does not specify the exact meaning of the term "note receivable balance." When the term "gross" is not applied, it is safe to assume that the balance referred to is the net balance, that is, net of interest yet to be recognized. Notes are reported at present value, which is the amount net of interest yet to be recognized. However, note balances under the installment method include deferred gross margin yet to be realized, because deferred gross margin is subtracted as a separate line item. Thus, the question is referring to the notes receivable balance exclusive of interest yet to be recognized, but inclusive of deferred gross margin yet to be realized. The note's balance is the present value of the remaining payments. This is a two-year note. Therefore, valuation at present value is required. The note's valuation is the present value of the remaining payments at the original discount rate.

Question 265

Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $3 million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices. Which of the following would alter the timing of Red's cash flows for the $3 million in receivables already recorded on its books? A. Change the due date of the invoice. B. Factor the receivables outstanding. C. Discount the receivables outstanding. D. Demand payment from customers before the due date.

Answer 265

B. Factoring is a sale of receivables. This allows Red Co. to sell the receivables and receive cash immediately upon sale.

Question 266

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485.What should be the total interest revenue earned by Leaf over the life of this note? A. $5,045 B. $5,560 C. $8,000 D. $9,000

Answer 266

B. Total interest revenue is the amount received over the term of the note less the present value of the note: 5($5,009) - $19,485 = $5,560.Leaf paid $19,485 for the note, and will receive 5($5,009) over the note term. The difference is interest revenue.

Question 267

Frame Co. has an 8% note receivable, in the original amount of $150,000, dated June 30, 2003. Payments of $50,000 in principal plus accrued interest are due annually on July 1, 2004, 2005, and 2006.In its June 30, 2005, balance sheet, what amount should Frame report as a current asset for interest on the note receivable? A. $0 B. $4,000 C. $8,000 D. $12,000

Answer 267

C. As of June 30, 2005, only one payment has been received (July 1, 2004). Thus, $100,000 of principal balance has been outstanding for an entire year as of the balance sheet date. Interest receivable on June 30, 2005 is thus $8,000 (.08 x $100,000).

Question 268

On December 31, 2005, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity.The note from Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, 2005 was 8%. The compound interest factors to convert future values into present values at 8% follow:Present value of $1 due in nine months: .944Present value of $1 due in five years: .680At what amounts should these two notes receivable be reported in Jet's December 31, 2005, balance sheet? Hart Maxx $9,440 $6,800 $9,652 $7,820 $10,000 $6,800 $10,000 $7,820

Answer 268

$10,000 $7,820 The 9-month note is reported at face value ($10,000) because current notes need not be measured at present value. The 5-year note is reported at $7,820, the present value of the future cash flows. The five years of interest is payable at maturity.$7,820 = [$10,000 + $10,000(.03)(5 years)](.680)], which is the present value of the note plus the present value of the 3% interest.

Question 269

T/F: Interest-bearing notes should be recorded at face value if the stated and market interest rates are the same

Answer 269

TRUE

Question 270

T/F: A 1-year noninterest-bearing note should be recorded at 91% of face value if the market interest rate is 10%.

Answer 270

TRUE

Question 271

T/F: A mortgage note pays equal monthly payments at the end of each month. Interest revenue for a particular month is based on the principal balance at the end of the month.

Answer 271

FALSE

Question 272

T/F: The maker of a note is the original creditor.

Answer 272

FALSE

Question 273

T/F: The key issue in accounting for the transfer of receivables is whether control over the receivables has passed from the transferor to the transferee.

Answer 273

TRUE

Question 274

T/F: ABC, Inc. discounts a 5%, 9-month, $1,000 note with a financial institution after holding the note for 3 months. The note was received on the sale of an asset to another party. The discount percentage is 7%. The proceeds to ABC, Inc. equal $1,001.19.

Answer 274

TRUE

Question 275

T/F: When a receivables transfer is accounted for as a loan, the transferor records a loss on the transfer.

Answer 275

FALSE

Question 276

T/F: If two of the three criteria for the sale of receivables are met, the transfer of receivables is recorded as a sale.

Answer 276

False.All three conditions must be met:1. The transferred assets have been isolated from the transferor, even in bankruptcy.2. The transferee is free to pledge or exchange the assets.3. The transferor does not maintain effective control over the transferred assets either through an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets.

Question 277

T/F: When a transfer of receivables is recorded as a loan, the receivables are removed from the original creditor's books.

Answer 277

FALSE

Question 278

T/F: When a transfer of receivables is recorded as a sale, the receivables are removed from the original creditor's books.

Answer 278

TRUE

Question 279

On November 1, 2004, Davis Co. discounted with recourse at 10%, a one-year, noninterest-bearing, $20,500 note receivable maturing on January 31, 2005.What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31, 2004?

Answer 279

$20,500The firm is contingent for the maturity amount, which for a noninterest-bearing note is the face value. If the maker of the note fails to pay the bank or financial institution with whom Davis discounted the note, Davis would be called on to pay the entire maturity amount.

Question 280

T/F: In a factoring accounted for as a loan, interest expense is recognized in proportion to cash received on the transferred receivables.

Answer 280

TRUE

Question 281

T/F: The term "with recourse" means that the maker must pay if the note is defaulted.

Answer 281

FALSE

Question 282

A creditor's note receivable has a carrying value of $60,000 at the end of Year 1. Based on information about the debtor, the creditor believes the note is impaired and establishes the new carrying value of the note to be $25,000 at the end of Year 1. During Years 2 and 3, the debtor pays $14,000 on the note each year (total payments, $28,000). For Year 3, under which method of the two indicated is interest revenue recognized? Interest Method Cost Recovery Method

Answer 282

Yes, yesThe interest method recognizes interest revenue each year until the note is collected because the note was written down to present value when the impairment was recorded. The estimated future cash flows to be received include interest, which is recognized over the remaining term of the note. The cost recovery method recognizes interest revenue only after cash equal to the new carrying value is collected. During Year 3, total collections surpassed the $25,000 new carrying value. $3,000 of interest revenue is recognized under this method in Year 3 ($28,000 - $25,000).

Question 283

Under IFRS, a cash generating unit (CGU) is: A. The smallest business segment. B. Any grouping of assets that generates cash flows. C. Any group of assets that are reported separately to management. D. The smallest group of assets that generates independent cash flows from continuing use.

Answer 283

D.A CGU is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.

Question 284

When a note receivable is determined to be impaired, A. The note is written-off. B. No recognition of the impairment is required until a formal troubled-debt restructuring takes place. C. The note is written down to the nominal sum of future cash flows expected to be collected, including interest. D. A loss or expense is recognized as equal to the difference between the note carrying value and the present value of the cash flows expected to be received.

Answer 284

D. A note is considered to be impaired if the present value of remaining cash flows is less than book value, using the rate in the note. This is caused by an expected delay in timing of cash flows or reduction in amount of cash flows compared with the original agreement. The creditor makes the determination that the note is impaired and writes the note down to present value. A loss is recorded for the decline in carrying value to present value.

Question 285

T/F: Under IFRS, the impairment loss on the write down of a loan receivable is not recoverable.

Answer 285

FALSE

Question 286

T/F: According to IFRS, value in use is the discounted present value of future cash flows arising from use of the asset and from its disposal.

Answer 286

TRUE

Question 287

T/F: After an impaired note is written down, the interest method must be used to recognize interest revenue.

Answer 287

FalseThe cost-recovery method is also used if they pay back more than accounted for with the loss.

Question 288

What is the appropriate treatment for goods held on consignment? A. The goods should be included in the ending inventory of the consignor. B. The goods should be included in ending inventory of the consignee. C. The goods should be included in cost of goods sold of the consignee only when sold. D. The goods should be included in cost of goods sold of the consignor when transferred to the consignee.

Answer 288

A. Consigned goods belong to the consignor and are included in the consignor's ending inventory.

Question 289

Jel Co., a consignee, paid the freight costs for goods shipped from Dale Co., a consignor. These freight costs are to be deducted from Jel's payment to Dale when the consignment goods are sold. Until Jel sells the goods, the freight costs should be included in Jel's A. Cost of goods sold. B. Freight-out costs. C. Selling expenses. D. Accounts receivable.

Answer 289

D. Jel will recover the freight costs when Jel deducts the costs from the amount it submits to Dale. Until that happens, the amount spent on freight is recorded in a receivable.When Jel submits its payment for the sale of Dale's goods (also less a commission), the receivable is credited; thus reducing the amount of cash that must be paid to Dale. Therefore, the freight costs are borne by Dale. Jel simply paid the costs for Dale and will be reimbursed later. This is not a cost or expense of Jel.

Question 290

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

Answer 290

Yes, NoThe 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.The advance commissions are not inventoriable. They are not incurred to bring the inventory to a salable condition but rather are selling expenses. The costs will be recognized as such when the goods are sold. At that time, the commission is earned by the consignee and is an expense to the consignor. The commissions are never inventoried.

Question 291

On December 28, 2005, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows:Packaging for shipment $1,000Shipping 1,500Special handling charges 2,000These goods were received on December 31, 2005. In Kerr's December 31, 2005 balance sheet, what amount of cost for these goods should be included in inventory?

Answer 291

$50,000Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs.Even the shipping costs are borne by the seller because the terms are FOB destination. This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr's recorded cost is $50,000.

Question 292

Garson Co. recorded goods in transit purchased FOB shipping point at year-end as purchases. The goods were excluded from the ending inventory. What effect does the omission have on Garson's assets and retained earnings at year end? Assets Retained earnings

Answer 292

Understated, UnderstatedBoth responses in this choice are correct. FOB shipping point means that the title passed to the buyer at the selling company's warehouse. Therefore, Garson should have included this inventory in the ending inventory. This leaves inventory (assets) understated. This error also has overstated the cost of goods sold, which understates net income and retained earnings.

Question 293

On October 20, 2005, Grimm Co. consigned 40 freezers to Holden Co. for sale at $1,000 each and paid $800 in transportation costs.On December 30, 2005, Holden reported the sale of 10 freezers and remitted $8,500. The remittance was net of the agreed 15% commission.What amount should Grimm recognize as consignment sales revenue for 2005? A. $7,700 B. $8,500 C. $9,800 D. $10,000

Answer 293

D. Consignment sales revenue is the revenue recognized on consignment sales.In this case, total consignment revenue is 10 x $1,000 = $10,000. The commission and transportation costs are expenses that reduce earnings on consignment revenues, but they do not affect total revenues to be recognized.

Question 294

T/F: An inventory item can be a noncurrent asset (such as a parcel of land) to the buyer, but must be a current asset to the seller.

Answer 294

TRUE

Question 295

T/F: All costs that help to sell inventory are included in the inventory account.

Answer 295

False.Advertising is not...

Question 296

T/F: All goods on the premises of a firm must be included in the firm's ending inventory.

Answer 296

False.Not if they are sold, FOB shipping point...

Question 297

T/F: The specific identification method is feasible primarily for low volume firms.

Answer 297

TRUE

Question 298

T/F: It is possible to assume the sale of goods that were not owned by the firm at the time of sale, under the LIFO method.

Answer 298

TRUE

Question 299

T/F: Under the weighted average method, if the beginning inventory of Year 2 had instead been sold in Year 1, and if prices have been steadily rising, the portion of cost of goods sold for Year 1 relating to these goods would be a smaller number than if the beginning inventory were sold in Year 2.

Answer 299

TRUE

Question 300

T/F: In a periodic system, the purchases account is used during the year to record purchases of inventory, rather than the inventory account.

Answer 300

TRUE

Question 301

T/F: Cost of goods sold in a periodic system can be computed only after all the other inventory costs and components are known.

Answer 301

TRUE

Question 302

T/F: The weighted average method can be used only in a periodic system.

Answer 302

TRUE

Question 303

T/F: The journal entry to recognize cost of goods sold in a periodic system debits purchases returns, allowances and discounts.

Answer 303

TRUE

Question 304

Which of the following statements regarding inventory accounting systems is true? A. A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts. B. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages. C. An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple. D. An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.

Answer 304

B. A periodic system does not record the cost of each item as it is sold; nor does it maintain a continuously current record of the inventory balance. Rather, cost of goods sold is the amount derived from the equation: Beginning inventory + Purchases = Ending inventory + Cost of goods sold. A count of ending inventory establishes the inventory remaining at the end of the period, but there is no recording of cost of goods sold during the period. Cost of goods sold is the amount that completes the equation. Thus, cost of goods sold is really the cost of inventory no longer with the firm at year-end - an amount that includes shrinkage. Inventory shrinkage refers to breakage, waste, and theft. Shrinkage cannot be identified directly with a periodic inventory system.

Question 305

T/F: The cost of goods sold account in a perpetual system has a running balance throughout the year.

Answer 305

TRUE

Question 306

T/F: In a period of steadily rising prices, LIFO will generally result in lower cost of goods sold in a perpetual system as compared to a periodic system.

Answer 306

TRUE

Question 307

T/F: The purchases account is not used in a perpetual system.

Answer 307

TRUE

Question 308

A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change? Ending inventory Net income Increase, Decrease or No change?

Answer 308

Decrease, DecreaseEnding inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO.The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.

Question 309

Generally, which inventory costing method approximates most closely the current cost for each of the following? Cost of goods sold Ending inventory LIFO FIFO LIFO LIFO FIFO FIFO FIFO LIFO

Answer 309

LIFO FIFO LIFO assumes the sale of the most recent purchases first and thus results in cost of goods sold that is the most current value. FIFO assumes the sale of the earliest purchases first (and beginning inventory before any purchases) and thus results in ending inventory that is the most current value. FIFO is sometimes called LISH: last in still here.

Question 310

Drew Co. uses the average cost inventory method for internal reporting purposes and LIFO for financial statement and income tax reporting.On December 31, 2005, the inventory was $375,000 using average cost and $320,000 using LIFO. The unadjusted credit balance in the LIFO Reserve account on December 31, 2005 was $35,000.What adjusting entry should Drew record to adjust from average cost to LIFO on December 31, 2005? Debit Credit Cost of goods sold $55,000 Inventory $55,000 Cost of goods sold $55,000 LIFO reserve $55,000 Cost of goods sold $20,000 Inventory $20,000 Cost of goods sold $20,000 LIFO reserve $20,000

Answer 310

Cost of goods sold $20,000 LIFO reserve $20,000 The ending difference between average cost and LIFO is $55,000 ($375,000 - $320,000). This is the required LIFO reserve account.The balance before adjustment is $35,000. Thus, $20,000 must be added to the account. The conversion to LIFO, for reporting purposes, increases cost of goods sold because, under LIFO, ending inventory is lower. The entry in this answer alternative increases the cost of goods sold. The inventory account itself is not credited. Rather, the LIFO reserve account acts as a valuation account to reduce inventory to LIFO for balance sheet purposes.

Question 311

T/F: Cost of goods sold under LIFO reflects more current values for inventory when prices have been in decline.

Answer 311

TRUE

Question 312

T/F: Liquidation is a reporting problem only for LIFO.

Answer 312

TRUE

Question 313

T/F: Cost of goods sold under LIFO generally will be less than under FIFO when prices have been in decline.

Answer 313

TRUE

Question 314

T/F: A LIFO liquidation occurs when the number of units in ending inventory exceeds the number in beginning inventory.

Answer 314

False.A. What happens when the number of units purchased or produced is less than thenumber of units sold? Under LIFO, the computation of cost of goods sold for thecurrent period first uses all the purchases for the period. Then it works backward intime and liquidates layers that were added in previous periods (latest layer addedfirst), until the total number of units sold for the period is costed. A LIFOliquidation is that part of current period cost of goods sold represented by the costof goods acquired in prior years.B. LIFO liquidations occur either from (1) poor planning, or (2) lack of supply.

Question 315

Estimates of price-level changes for specific inventories are required for which of the following inventory methods? A. Conventional retail. B. Dollar-value LIFO. C. Weighted average cost. D. Average cost retail.

Answer 315

B. DV LIFO is based on price level indices. The ending inventory is determined at current cost, and then reduced to the price level existing at the base-year (the year LIFO was adopted). The ending inventory measured in base-year dollars is compared to beginning inventory measured in base-year dollars. The difference is the increase in inventory measured in base-year dollars. This difference is then raised to the current-year price level and added to beginning inventory DV LIFO, yielding ending inventory DV LIFO. Thus, price-level changes are used throughout this method.Price-level changes are used as a means of estimating the ending inventory. Individual item costs are not maintained or used in the valuation of inventory.

Question 316

Walt Co. adopted the dollar-value LIFO inventory method as of January 1, 2005, when its inventory was valued at $500,000.Walt's entire inventory constitutes a single pool. Using a relevant price index of 1.10, Walt determined that its December 31, 2005, inventory was $577,500 at current-year cost, and $525,000 at base-year cost.What was Walt's dollar-value LIFO inventory on December 31, 2005?

Answer 316

Ending inventory at current cost $577,500Ending inventory in base-year dollars $577,500/1.10 $525,000Less beginning inventory in base-year dollars 500,000Equals increase in inventory in base-year dollars 25,000Times current price level index x 1.10Equals increase in inventory at current prices 27,500Plus beginning inventory, DV LIFO 500,000Equals ending inventory, DV LIFO $527,500In the year of adoption only, the beginning inventory under DV LIFO is the same as beginning inventory in base-year dollars. DV LIFO ending inventory is the sum of the base-year inventory plus layers measured in the prices of the year added.

Question 317

T/F: When a liquidation occurs in DV LIFO, the earliest layer is assumed sold first.

Answer 317

FALSE

Question 318

T/F: When converting the change in inventory for the period in base-year dollars to the change in inventory in current-year dollars, the ratio of base index to current year index is used.

Answer 318

FALSE

Question 319

T/F: A firm using DV LIFO may use either an internal or external price index.

Answer 319

TRUE

Question 320

Under LCM, the replacement cost, net realizable value and the net realizable value less profit margin are three figures used to determine what?

Answer 320

The market value of inventory is determined by the middle of the 3 figures. If the middle figure is less than cost, then the inventory is reported at market.

Question 321

T/F: Using the basis of Item for applying LCM yields the smallest holding loss to be recognized.

Answer 321

FALSE

Question 322

When marking up a specific line of household items for resale, a retailer computes its markup as 40% of cost. For purposes of estimating ending inventory using the gross margin method, what percentage is applied to sales when estimating cost of goods sold?

Answer 322

Let S be selling price and C be cost. The markup is computed on cost; therefore, C + .4C = S or 1.4C = S. Therefore, C/S = 1/1.4 = .71. The gross margin method applies the cost to sales ratio to sales in order to derive an estimate of cost of goods sold. Subtracting the resulting estimate of cost of goods sold from the cost of goods available for sale yields an estimate of ending inventory without counting the items. This firm determines the selling price to be 140% of cost because the markup is 40% of cost. Cost plus markup yields selling price. Therefore, the cost to sales ratio is 1.00/1.40 or .71.

Question 323

T/F: Beginning inventory is $40,000, net purchases are $400,000, and sales are $450,000. If the margin on cost is 30%, the ending inventory is $ 93,846.

Answer 323

TRUE

Question 324

T/F: A gross margin percentage of 55% is equivalent to a margin on cost of 122%.

Answer 324

TRUE

Question 325

T/F: A gross margin percentage of 55% implies a cost to sales ratio of 45%.

Answer 325

TRUE

Question 326

T/F: A margin on cost of 1/9 is equivalent to a gross margin percentage of 1/10.

Answer 326

TRUE

Question 327

How does the retail inventory method establish the lower-of-cost-or-market valuation for ending inventory? A. The procedure is applied on a cost basis at the unit level. B. By excluding net markups from the cost-to-retail ratio. C. By excluding beginning inventory from the cost-to-retail ratio. D. By excluding net markdowns from the cost-to-retail ratio.

Answer 327

D. Although the result is approximate, by excluding net markdowns from the denominator of the cost-to-retail ratio, the ratio is a smaller amount, resulting in a lower ending inventory valuation.

Question 328

The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale? A. Purchase returns. B. Sales returns. C. Net markups. D. Freight in.

Answer 328

A. The retail method measures beginning inventory and net purchases at both cost and retail. It then applies the average relationship between cost and retail (based on beginning inventory and purchases) to ending inventory at retail to determine ending inventory at cost.Purchase returns reduce net purchases at both cost and retail because returns represent amounts included in gross purchases that are not available for sale.

Question 329

T/F: The cost to retail ratio for the average retail method is the cost of beginning inventory and purchases divided by the retail value of these two amounts plus net additional markups less net markdowns.

Answer 329

TRUE

Question 330

T/F: Freight-in increases only the numerator of the cost to retail ratio.

Answer 330

TRUE

Question 331

T/F: The FIFO retail method applies all markups and markdowns to current period purchases in computing the cost to retail ratio.

Answer 331

TRUE

Question 332

Choose the correct inclusions to the cost-to-retail ratio computation under the dollar-value LIFO retail method. Beginning Inventory Net Markdowns

Answer 332

No, YesDV LIFO retail uses the FIFO (not LCM) cost-to-retail ratio. Under LIFO, a layer added during a period should reflect only the cost and retail amounts pertaining to that period. Thus, beginning inventory amounts are not used in calculating the ratio. Also, because LIFO may contain inventory layers for several preceding periods, excluding net markdowns is not an effective way to accomplish the LCM valuation objective. Thus, net markdowns are included in the cost to retail computation.

Question 333

T/F: DV LIFO retail applies DV LIFO to retail dollars, and then applies the FIFO cost to retail ratio to the increase in retail inventory as measured in current period prices.

Answer 333

TRUE

Question 334

When an inventory overstatement in year one counterbalances in year two, this means: A. There are no reporting errors, even if the overstatement is never discovered. B. A prior period adjustment is recorded if the error is discovered in year three. C. The year one Balance Sheet does not need to be restated if the error is discovered in year three. D. A prior period adjustment is recorded if the error is discovered in year two.

Answer 334

D. Counterbalancing simply means that the effect of the inventory error in the second year is opposite that of the first year. Discovery in year two provides an opportunity for the firm to correct year two beginning retained earnings, which is overstated by the error in year one. The overstatement of inventory in year one caused cost of goods sold to be understated and income overstated in year one. The prior period adjustment, dated as of the beginning of year two, is a debit to retained earnings for the after-tax effect of the income overstatement in year one. Inventory is credited for the amount of the overstatement. This allows year two to begin with corrected balances.

Question 335

A retailer failed to record a purchase of inventory on credit near the end of the current year. The goods did arrive and were included in the inventory count. The purchase will be recorded next year, when the goods are paid for. As a result, A. Cost of goods sold is understated for the current year. B. Net income for next year is overstated. C. Income tax expense for the next year is overstated. D. By the end of next year, all of the effects of the error will be automatically eliminated.

Answer 335

A. The error affects purchases but not ending inventory. Therefore, cost of goods sold for the current period is understated because goods available is understated. When ending inventory (which is not in error) is subtracted from goods available, cost of goods sold is understated by the amount of the understatement in purchases.

Question 336

T/F: A firm overstated its ending inventory in Year 1. This mean that retained earnings at the end of year 1 is overstated.

Answer 336

TRUE

Question 337

In October of year one, a firm committed to a purchase of inventory at a total cost of $26,000. The contract is irrevocable and specifies a delivery date in March of year two. At the end of year one, the market value of the inventory under contract is worth $23,000 at current cost. Choose the correct reporting for the year one financial statements: A. A liability of $3,000 is reported in the Balance Sheet. B. An extraordinary loss of $3,000 is reported in the Income Statement. C. The potential loss on contract is reported in the footnotes, but there is no recognition in the financial statements. D. No reporting is required.

Answer 337

A. The firm has committed to a purchase for a total cost of $26,000, but at year-end, the value of the item to be received is $3,000 less. The firm cannot postpone the loss and liability recognition because the reduction in the firm's earnings and net assets has already occurred. The economic events causing the loss have occurred as of the Balance Sheet date.

Question 338

T/F: If a contract for a purchase commitment cannot be revised based on changing market conditions, a footnoted contingent liability is appropriate, but an accrued contingent liability is not.

Answer 338

FALSE

Question 339

T/F: If a contract for a purchase commitment can be revised based on changing market conditions, a footnoted contingent liability is appropriate, but an accrued contingent liability is not.

Answer 339

TRUE

Question 340

T/F: A contract for a purchase commitment specifies a price of $10 per unit for a commodity. The price is fixed by contract. As of the balance sheet date, the contract had not been executed, and the market price of the commodity had decreased to $7. The firm should report a loss of $3 per unit in the income statement.

Answer 340

TRUE

Question 341

How is inventory under IFRS reported?

Answer 341

Inventory under IFRS is reported at the lower of cost or net realizable value (NRV) where NRV is the selling price less the cost to complete or dispose.Net realizable value is defined by IAS 2 as "the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimate costs necessary to make the sale."

Question 342

T/F: Under IFRS accounting for inventory, it is permitted to reverse the previous write down of inventory to net realizable value.

Answer 342

TRUE

Question 343

T/F: IFRS presumes that the cost flow assumption follows the physical flow of goods to the extent possible.

Answer 343

TRUE

Question 344

T/F: Land is not a depreciable plant asset.

Answer 344

TRUE

Question 345

T/F: A firm owns a tract of land that it is holding for speculative purposes. This land should be classified as land for balance sheet purposes.

Answer 345

FALSE

Question 346

T/F: A firm owns a tract of land purchased for the purpose of mining its natural resources. This land should be classified as land for balance sheet purposes.

Answer 346

FALSE

Question 347

What are the two criteria for capitalizing post-acquisition costs of PPE?

Answer 347

1. increase in useful life2. increase in productivity or efficiency including cost reduction.If either criteria is met, the costs can be capitalized rather than immediately expensed.

Question 348

T/F: When purchasing land, the net cost to demolish the old building is added to the new building cost.

Answer 348

True. This net cost is properly allocated to the land because it is a cost necessary to place the land into its intended condition.

Question 349

T/F: When purchasing land, any legal fees and title guarantee costs are not included in the capitalized cost of the land.

Answer 349

False.The legal fees and title guarantee cost must be incurred to avoid future legal problems, and thus contribute to the value of the land - and are therefore capitalized.

Question 350

Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an): A. Reduction of the cost of the new warehouse. B. Gain from discontinued operations, net of income taxes. C. Part of continuing operations. D. Extraordinary gain, net of taxes.

Answer 350

C. The gain or loss on the sale of an asset is part of continuing operations as it is expected that a company will sell existing assets from time to time as the assets are replaced.

Question 351

Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin.The proceeds from the sale of the building should be: A. Classified as other income. B. Deducted from the cost of the land. C. Netted against the costs to clear the land and expensed as incurred. D. Netted against the costs to clear the land and amortized over the life of the plant.

Answer 351

B. The proceeds from the building removed and sold reduce the cost of the land to the buyer. Had the building been razed, the net razing cost would be added to the land. Compared to the latter situation, the case in the problem results in a cost savings.

Question 352

T/F: The cost to excavate for the foundation of a building is debited to land.

Answer 352

False.It would be capitalized

Question 353

T/F: The cost of the foundation of a building is debited to building.

Answer 353

TRUE

Question 354

T/F:The cost of a building includes the amount financed by a mortgage loan.

Answer 354

TRUE

Question 355

Plant assets are occasionally acquired by means other than by paying cash. Choose the correct statement about such acquisitions. A. If equipment is acquired with 100% debt financing, the equipment is capitalized at the sum of all interest and principal payments on the debt. B. If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, the fair value of the building should be used to initially debit the building account. C. If land is received by a firm as a donation, no amount should be recorded for the land because there is no cost to the firm. D. If land is acquired as one component of a group of plant assets for a discounted aggregate price, the amount capitalized for the land is its market value.

Answer 355

B. The more objective or readily determinable value is used for recording the building. If the number of shares is significant in relation to the total shares outstanding, the stock price will be affected by the increase in the shares outstanding resulting from the purchase. The more objective value is the appraised value of the building.

Question 356

Young Corp. purchased equipment by making a down payment of $4,000 and issuing a note payable for $18,000. A payment of $6,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of an ordinary annuity factor for three years at 8% is 2.58, and the present value for the future amount of a single sum of one dollar for three years at 8% is .735. Shipping charges for the equipment were $2,000, and installation charges were $3,500. What is the capitalized cost of the equipment? A. $19,480 B. $21,480 C. $24,980 D. $27,500

Answer 356

The capitalized cost is the sum of the down payment, present value of the note payments, and the shipping and installation charges. $4,000 + $6,000(2.58) $2,000 $3,500 = $24,980. The present value of the three payments required on the note is capitalized, which excludes the interest included in those payments. The two charges are capitalized because they were incurred to place the asset into its intended condition and location.

Question 357

T/F: If the fair value of a self-constructed asset is less than the total cost of construction, then interest cannot be capitalized on the asset.

Answer 357

FALSE

Question 358

T/F: The recorded cost of a plant asset that is 100% debt financed is the present value of all future payments to be made on the debt.

Answer 358

TRUE

Question 359

T/F: A firm issues a small number of its shares to purchase a unique piece of used equipment. The shares of the firm trade actively on a national stock exchange. Most likely, the value of the shares issued will be used as the recorded value of the equipment.

Answer 359

TRUE

Question 360

T/F: The total cost to self-construct an asset is $30,000. The fair value of the asset upon completion is $22,000. Therefore, a loss of $8,000 is recorded.

Answer 360

TRUE

Question 361

T/F: When the stated and market rates of interest on debt used to finance the purchase equipment are different, the stated rate is used to compute the present value of the debt payments for the purpose of recording the equipment.

Answer 361

FALSE

Question 362

How is interest computed to be capitalized when using the weighted average method?

Answer 362

This method uses the average interest rate on all interest bearing debt, weighted by principal. That rate is the quotient of the interest on all the debt divided by the principal on all the debt.

Question 363

A company obtained a $300,000 loan with a 10% interest rate on January 1, year 1, to finance the construction of an office building for its own use. Building construction began on January 1, year 1, and the project was not completed as of December 31, year 1. The following payments were made in year 1 related to the construction project:January 1 Purchased land for $120,000September 1 Progress payment to contractor for $150,000What amount of interest should be capitalized for the year ended December 31, year 1? A. $13,500 B. $15,000 C. $17,000 D. $30,000

Answer 363

C. Interest can be capitalized on the accumulated average expenditures during the year. During year 1 the weighted average expenditures were ($120,000 x 12/12) + ($150,000 x 4/12) = $170,000. Interest is capitalized based on the weighted average expenditures times the interest rate of 10% ($170,000 x .10 = $17,000).

Question 364

Debt is frequently incurred when plant assets are acquired. For example, debt may be incurred on the purchase of plant assets. Debt may also be incurred during the construction of plant assets. How is the interest in these two cases treated for financial reporting? Debt for purchase Debt during construction expense capitalize expense expense capitalize capitalize capitalize expense

Answer 364

Expense, CapitalizeInterest on debt incurred when purchasing a plant asset, is incurred after the asset has reached its intended condition and location. Therefore, it is expensed as incurred. Debt incurred during the construction of plant assets is considered avoidable and also incurred before the asset has reached its intended condition and location. Therefore, it is capitalized to the asset in the same way material, labor, and overhead are capitalized. The interest is expensed as part of depreciation during the service life of the asset.

Question 365

Two approaches are available for applying interest rates to average accumulated expenditures for the purpose of capitalizing interest. These approaches are called the specific method and the weighted average method. In some cases, these approaches yield the same results. Two situations may be encountered in practice for a specific period:(1) average accumulated expenditures exceed total interest bearing debt (principal) and(2) the interest rates on all interest bearing debt instruments are the same.Which situation yields the same results for the two approaches? A. only (1). B. only (2). C. both (1) and (2). D. neither (1) nor (2).

Answer 365

C. When average accumulated expenditures exceeds interest bearing debt, all interest for the period is capitalized because all debt could have been avoided if the construction had not taken place. Also, if the interest rates on all debt are the same, then the two approaches yield the same results because, ultimately, only one interest rate is applied to average accumulated expenditures for computing capitalized interest.

Question 366

At the beginning of the year, Cann Co. started construction on a new $2 million addition to its plant. Total construction expenditures made during the year were $200,000 on January 2, $600,000 on May 1, and $300,000 on December 1. On January 2, the company borrowed $500,000 for the construction at 12%. The only other outstanding debt the company had was a 10% interest rate, long-term mortgage of $800,000, which had been outstanding the entire year. What amount of interest should Cann capitalize as part of the cost of the plant addition? A. $140,000 B. $132,000 C. $72,500 D. $60,000

Answer 366

C. First calculate the Average Accumulated Expenditures (AAE). This gives you the amount of borrowing from which to calculate avoidable interest ($625,000). Next calculate avoidable interest ($72,500) and actual interest (($500,000 x 12%) + ($800,000 x 10%) = $140,000). The amount that can be capitalized is the lesser of the avoidable interest or actual interest. The amount that can be capitalized is $72,500.AAE 200,000 12/12 200,000600,000 8/12 400,000300,000 1/12 25,000 625,000Avoidable interest 500,000 12% 60,000125,000 10% 12,500 72,500

Question 367

T/F: Interest is capitalized on inventory only if a substantial period of time is required for its manufacture.

Answer 367

FALSE

Question 368

T/F: When interest is capitalized in a period, future depreciation expense is increased.

Answer 368

TRUE

Question 369

T/F: Capitalized interest is the interest that could have been avoided if construction activities had not taken place during the period.

Answer 369

TRUE

Question 370

A firm has spent the last two years constructing a building to be used as the firm's headquarters. At the end of the first year of construction, the balance of building under construction was $400,000, which includes capitalized interest. During year two, the firm paid $240,000 to the contractor on March 1, and $600,000 on October 1. The building was not finished by the end of the second year. The firm had one loan outstanding all year, an 8%, $3,000,000 construction loan. Compute capitalized interest for year two.

Answer 370

$60,000Average accumulated expenditures for the second year = $400,000(12/12) + $240,000(10/12) + $600,000(3/12) = $750,000. Interest capitalized = .08($750,000) = $60,000. Note that the interest capitalized in year one is compounded in year two because year one capitalized interest is included in average accumulated expenditures for the second year.

Question 371

Average accumulated expenditures for year five on a construction project amounted to $70,000. The total cash invested in the project by the end of year five, was $160,000. During year six, the firm spent another $240,000 (total) on the project, uniformly throughout the year. Compute average accumulated expenditures for year six.

Answer 371

$180,000Average accumulated expenditures is the amount of debt for the annual period that could have been avoided. In this case, the firm has $160,000 already invested in the project at the beginning of year six. That amount represents $160,000 in debt, that could have been avoided for year six if the firm had not been involved in the construction project. The expenditures during year six were incurred evenly. Average accumulated expenditures therefore = $160,000(12/12) + $240,000/2 = $280,000. Also, [$160,000 + ($160,000 + $240,000)]/2 = $280,000.

Question 372

Cole Co. began constructing a building for its own use in January 2004. During 2004, Cole incurred interest of $50,000 on specific construction debt and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 2004 was $40,000.What amount of interest cost should Cole capitalize?

Answer 372

$40,000This question requires no calculation. The answer is given in the question.Capitalized interest is limited to the interest that would have been avoided had the construction not occurred. This is the amount of interest based on average accumulated expenditures.

Question 373

T/F: Average accumulated expenditures is $30,000. A 4%, $20,000 construction loan was outstanding the entire period, and $60,000 of other debt with an average interest rate of 5% was also outstanding. Using the weighted average method, the firm will capitalize $1,425 interest.

Answer 373

TRUE

Question 374

T/F: Average accumulated expenditures is $30,000. A 4%, $20,000 construction loan was outstanding the entire period, and $60,000 of other debt with an average interest rate of 5% was also outstanding. Using the specific method, the firm will capitalize $1,300 interest.

Answer 374

TRUE

Question 375

A building suffered uninsured water and related damage. The damaged portion of the building was refurbished with upgraded materials. The cost and related accumulated depreciation of the damaged portion are identifiable.To account for these events, the owner should: A. Capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building. B. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building. C. Record a loss in the current period equal to the cost of refurbishing, and continue to depreciate the original cost of the building. D. Record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building.

Answer 375

A. When the portion of an asset that is removed from a larger asset has identifiable costs and accumulated depreciation amounts, those amounts are removed from the books. The difference between these two amounts is the carrying value of the damaged portion of the larger asset. There is no insurance. Therefore, the carrying value of the damaged portion is written off as a loss. The replacement assets are capitalized at cost. The entries are:Portion removed New materialsLoss AssetAccumulated depreciation CashAsset

Question 376

A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable. To account for these events, the owner should: A. Reduce accumulated depreciation equal to the cost of refurbishing. B. Record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building. C. Capitalize the cost of refurbishing, and record a loss in the current period equal to the carrying amount of the damaged portion of the building. D. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building.

Answer 376

C. When the cost and accumulated depreciation of a component or portion of a larger asset is identifiable, and that component or portion is replaced, the replacement is treated as two separate transactions:(1) disposal of the old component (for zero proceeds in this case, due to the fire damage) and(2) purchase of the new component.Thus, a loss equal to the book value of the old component is recognized for (1) and the amount paid to purchase the new component is capitalized as a separate purchase for (2).

Question 377

On January 1, 2005, Dix Co. replaced its old boiler. The following information was available on that date:Carrying amount of old boiler $ 8,000Fair value of old boiler 2,000Purchase and installation price of new boiler 100,000The old boiler was sold for $2,000. What amount should Dix capitalize as the cost of the new boiler?

Answer 377

$100,000The disposal of the old boiler and purchase of the new boiler are separate transactions. The loss on disposal has no effect on the capitalized cost of the new boiler, which is recorded at its $100,000 purchase cost.

Question 378

In which of the following situations is the units of production method of depreciation most appropriate? A. An asset's service potential declines with use. B. An asset's service potential declines with the passage of time. C. An asset is subject to rapid obsolescence. D. An asset incurs increasing repairs and maintenance with use.

Answer 378

A. This method is most appropriate when the service potential of an asset can be estimated reliably in terms of a physical variable, such as miles to be driven, or number of units of output that can be produced by the asset.Over time, as more units are produced, the service potential of the asset declines because the total number of units that can be produced is finite. Over time, the number of units that can be produced by the asset in the future declines. The primary causative agent for depreciation under the units of production method is, thus, the actual use of the asset in production.

Question 379

How is annual depreciation calculated under the units of production (activity) method depreciation?

Answer 379

Annual depreciation under this method is:[(Cost-salvage value)/(Total estimated production)](units produced year).The quantity in square brackets is the rate of depreciation per unit.

Question 380

A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners?

Answer 380

$120,000The purchase price of the asset acquired less its salvage value is the asset's depreciable cost. In this case, total depreciation on the asset is limited to $120,000 ($135,000 purchase price-$15,000 salvage value). The cost to the seller and the previous salvage value are not relevant to the new owner.

Question 381

Zahn Corp.'s comprehensive Balance Sheet at December 31, 2005 and 2004 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 2005.Depreciation charged to operations in 2005 was: A. $190,000 B. $200,000 C. $210,000 D. $220,000

Answer 381

C. The accumulated depreciation on the property sold was $10,000 ($50,000 cost less $40,000 carrying value). The sale of property requires that the accumulated depreciation on the property be removed from the accounts.Thus, the $10,000 amount is a decrease in accumulated depreciation. With an overall increase of $200,000 in accumulated depreciation during the period ($800,000-$600,000), depreciation must have been $210,000 ($200,000 + $10,000).

Question 382

Ichor Co. reported equipment with an original cost of $379,000 and $344,000 and accumulated depreciation of $153,000 and $128,000, respectively, in its comparative financial statements for the years ended December 31, 2005 and 2004.During 2005, Ichor purchased equipment costing $50,000 and sold equipment with a carrying value of $9,000.What amount should Ichor report as depreciation expense for 2005? A. $19,000 B. $25,000 C. $31,000 D. $34,000

Answer 382

C. Net equipment at end of 2004: $344,000-$128,000 = $216,000Equipment purchase 50,000Book value of equipment sold (9,000)Depreciation in 2005 ?Equals net equipment at end of 2005: $379,000-$153,000 = $226,000Solving for depreciation yields $31,000 depreciation for 2005.

Question 383

On January 2, 2005, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus 24 monthly payments of $5,000 each, for total cash payments of $130,000.The cash-equivalent price of the machinery was $110,000. The machinery has an estimated useful life of 10 years and estimated salvage value of $5,000. Lem uses straight-line depreciation.In its 2005 Income Statement, what amount should Lem report as depreciation for this machinery?

Answer 383

$10,500The capitalized cost of the equipment is $110,000, not the total of the cash payments to be made. The latter amount includes interest.Thus, annual depreciation is $10,500:($110,000-$5,000)/10.

Question 384

T/F: The service hours and units of production methods yield the same amount of depreciation for a period.

Answer 384

FALSE

Question 385

T/F: The service hours and units of production methods use constant rates of depreciation.

Answer 385

TRUE

Question 386

T/F: The minimum book value for an asset with a positive salvage value is zero.

Answer 386

FALSE

Question 387

T/F: Depreciation expense represents the decline in the utility of an asset for a period.

Answer 387

FALSE

Question 388

T/F: Land does not have depreciable cost.

Answer 388

TRUE

Question 389

T/F: Book value always includes salvage value for an asset with a positive salvage value.

Answer 389

TRUE

Question 390

How is the depreciation calculated under the double declining balance method?

Answer 390

Depreciation in year 1 = Cost(2/N)Depreciation in year 2 = (Cost − depreciation in year 1)(2/N)Depreciation in year 3 = (Cost − depreciation in years 1 and 2)(2/N)The rate (2/N) is twice the straight-line rate. N=useful life in years.

Question 391

When calculating depreciation under the 150% of declining-balance method, what is different from the double declining balance method?

Answer 391

The calculations are the same as for double-declining balance except that (1.5/N) is the rate used.Depreciation in year 1 = Cost(1.5/N)Depreciation in year 2 = (Cost − depreciation in year 1)(1.5/N)Depreciation in year 3 = (Cost − depreciation in years 1 and 2)(1.5/N)The rate (1.5/N) is twice the straight-line rate. N=useful life in years.

Question 392

How is depreciation calculated using the sum-of-the-years' digits method?

Answer 392

1. First the sum of years' digits must be calculated by using the formula: SYD = (N(N+1)/2N= useful life in yearsSYD is the denominator of the fraction used each year to compute depreciation. The numerator is the number of years remaining at the beginning of the year.2. Year 1 Depreciation: (N/SYD)(Cost − Salvage Value)Year 2 Depreciation: ((N-1)/SYD)(Cost − Salvage Value))Year X Depreciation: (N-X/(SYD))(Cost − Salvage Value))X = number of years

Question 393

T/F: An asset is purchased by a calendar or fiscal year firm for $60,000 on October 1, 1997. The asset has a useful life of four years and salvage value of $10,000. Depreciation for 1998 under the double declining balance method is $26,250.

Answer 393

TRUE

Question 394

T/F: The declining balance methods depreciate assets to zero because they do not subtract salvage value when computing depreciation.

Answer 394

FALSE

Question 395

T/F: One of the advantages of the composite method of depreciation is that accumulated depreciation records are not maintained on an individual asset basis.

Answer 395

TRUE

Question 396

T/F: An asset is purchased by a calendar or fiscal year firm for $60,000 on October 1, 1997. The asset has a useful life of four years and salvage value of $10,000. Depreciation for 1998 under the sum-of-the-years' digits method is $18,750.

Answer 396

TRUE

Question 397

Cantor Co. purchased a coal mine for $2,000,000. It cost $500,000 to prepare the coal mine for the extraction of the coal. It was estimated that 750,000 tons of coal would be extracted from the mine during its useful life. Cantor planned to sell the property for $100,000 at the end of its useful life. During the current year, 15,000 tons of coal were extracted and sold.What would Cantor's depletion amount be per ton for the current year? A. $2.50 B. $2.60 C. $3.20 D. $3.30

Answer 397

C. The depletion rate is the sum of the cost incurred to acquire the mineral rights, find the minerals, and develop the site less the salvage value, all divided by the estimated number of units of resource expected to be removed from the site.The depletion rate per ton is ($2,000,000 + $500,000-$100,000)/750,000 = $3.20. This rate is applied to the units removed each period to determine depletion for that period.As such, it allocates the total cost of the obtaining and developing the resource to each unit of resource removed.

Question 398

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. What amount of depletion is recognized during the current year under the full costing method? A. $20 million B. $12.5 million C. $10 million D. $21 million

Answer 398

A. The depletion rate = ($40 + $100 + $60)/20 = $10/ton. Depletion = 2,000,000($10/ton) = $20,000,000. Depletion for a period is the cost of the deposit allocated to the inventory removed for the period. In this case, the entire amount is included in cost of goods sold because there is no ending inventory. However, if there had been ore left at the end of the period, the $10/ton rate would have been applied to the units remaining. That would not change the answer to the question, however.

Question 399

A firm began a mineral exploitation venture during the current year by spending (1) $40 million for the mineral rights; (2) $100 million exploring for the minerals, one-fourth of which were successful; and (3) $60 million to develop the site. Management estimated that 20 million tons of ore would ultimately be removed from the property. Wages and other extraction costs for the current year amounted to $10 million. In total, 2 million tons of ore were removed from the deposit in the current year. The entire production for the period was sold. Compute cost of goods sold under the successful efforts method. A. $30 million B. $12.5 million C. $10 million D. $22.5 million

Answer 399

D. The depletion rate = [$40 + (.25)($100) + $60]/20 = $6.25/ton. Depletion = 2,000,000($6.25/ton) = $12,500,000. Because all the ore removed was sold, cost of goods sold includes the entire amount of depletion and the extraction costs. Cost of goods sold = $12,500,000 $10,000,000 = $22,500,000. Note, that extraction costs is included in inventory (and therefore, cost of goods sold), but not in the deposit (and therefore, not in depletion).

Question 400

Choose the best association of terms in the natural resources accounting area with the conceptual framework. A. Successful efforts method-matching. B. Full costing method-definition of asset. C. Depletion-fair value accounting. D. Successful efforts method-definition of asset.

Answer 400

D. The successful efforts method capitalizes only the cost of exploration efforts that locate the resource. As such, only those efforts that yield a probable future benefit are capitalized. This is a direct application of the asset definition, which requires that an asset have a probable future benefit.

Question 401

T/F: The natural resources account includes the cost of extraction.

Answer 401

FALSE

Question 402

T/F: Depletion is the cost of the natural resources account allocated to the resources sold in the period.

Answer 402

FALSE

Question 403

On January 1, year one, an entity acquires a new piece of machinery for $100,000 with an estimated useful life of 10 years. The machine has a drum that must be replaced every five years and costs $20,000 to replace. Also included in the cost of the machine is an inspection fee of $8,000. Continued operations of the machine requires an inspection every four years after purchase. The company uses the straight-line method of depreciation. Under IFRS what is the depreciation expense for year one? A. $10,000 B. $10,800 C. $12,000 D. $13,200

Answer 403

D. Under IFRS the components of the asset must be depreciated over their estimated useful life. Therefore, the $100,000 cost is broken down into the following components:Depreciable value Life Depreciation$72,000 10 yr. $7,20020,000 5 yr. 4,0008,000 4 yr. 2,000 $13,200

Question 404

A company has a parcel of land to be used for a future production facility. The company applies the revaluation model under IFRS to this class of assets. In year 1, the company acquired the land for $100,000. At the end of year 1, the carrying amount was reduced to $90,000, which represented the fair value at that date. At the end of year 2, the land was revalued, and the fair value increased to $105,000. How should the company account for the year 2 change in fair value? A. By recognizing $10,000 in other comprehensive income. B. By recognizing $15,000 in other comprehensive income. C. By recognizing $15,000 in profit or loss. D. By recognizing $10,000 in profit or loss and $5,000 in other comprehensive income.

Answer 404

D. Under IFRS an increase in an assets fair value above original cost are recorded in a revaluation surplus account and any decreases in an assets fair value below the original cost are recorded as losses to the income statement. Therefore, the 10,000 decrease in year 1 would have been recorded as a loss to the income statement and the 15,000 increase in year 2 would be recorded as a 10,000 gain to the income statement and 5,000 gain in revaluation surplus (OCI).

Question 405

T/F: Under IFRS plant and equipment can be remeasured to fair value if fair value can be reliably measured.

Answer 405

TRUE

Question 406

T/F: Both IFRS and U.S. GAAP permit revaluation of plant and equipment to fair market value.

Answer 406

FALSE

Question 407

T/F: For those assets under construction, IFRS requires interest capitalization.

Answer 407

FALSE

Question 408

T/F: Under IFRS, if an asset revaluation subsequently decreases, a loss is recognized in earnings.

Answer 408

FALSE

Question 409

T/F: IFRS requires that an asset's estimated useful life and depreciation method be reviewed on an annual basis.

Answer 409

TRUE

Question 410

T/F: U.S. GAAP requires that an asset's estimated useful life and depreciation method be reviewed on an annual basis.

Answer 410

FALSE

Question 411

T/F: When the component parts of an asset have differing useful life, IFRS requires component depreciation.

Answer 411

TRUE

Question 412

On April 1, North Company issued bonds in the market. Upon issue, South Company acquired 10% of North Company's issue. On November 30, South sold the North Company bonds in the market; the bonds were acquired by East Company. On December 31, which, if any, of the following companies is an investee? North South East

Answer 412

North = Yes, investeeSouth = No, neitherEast = No, investorNorth is the investee because it issued the bonds, but neither South nor East are investees. Since East owns the bonds on December 31, it is the investor. Since South did not issue the bonds and does not own the bonds on December 31, it is neither an investor nor an investee.

Question 413

In which one of the following cases would an investor be presumed to have significant influence over the investee? A. Investor acquires more than 50% of the investee's non-voting preferred stock. B. Investor acquires 10% of investee voting common stock. C. Investor acquires 40% of investee voting common stock, which it intends to hold for 60 days. D. Investor acquires 18% of investee voting common stock and is the primary buyer of the investee's output.

Answer 413

D. Although the acquisition of 18% of an entity's voting common stock is less than the 20% normally required to presume significant influence over the investee, the fact that the investor has material transactions with the investee (together with the 18% ownership) is presumed to give the investor sufficient means for exercising significant influence.

Question 414

At what percentage is an investor considered to have control of an investee?

Answer 414

When an investor owns more than 50% of the voting common stock of an investee, in the absence of constraining conditions (e.g., investee in bankruptcy), the investor has controlling interest in the investee.

Question 415

In the absence of other relevant factors, what minimum level of voting ownership is considered to give an investor significant influence over an investee?

Answer 415

20%. In the absence of other relevant factors, an investor is considered to have significant influence over an investee if it owns 20%-50% of the voting securities of the investee.

Question 416

T/F: An investor is given ownership rights if it invests in either bonds or common stock of another entity.

Answer 416

False.An investment in the bonds of another entity does not give the investor an ownership interest, but an investment in the common stock of another entity does give the investor an ownership interest. An investment in the bonds of another entity establishes a debtor-creditor relationship, not an ownership relationship.

Question 417

Which one of the following is least likely to be a factor in determining how an investment in debt or equity securities is accounted for and reported in financial statements? A. The nature of the investment. B. The method of payment used to acquire the investment. C. The extent or proportion of the investment securities acquired. D. The purpose for which the investment was made.

Answer 417

B. The method of payment used to acquire an investment does not help determine the correct accounting treatment of the investment. While the method of payment determines what will be "credited" upon acquisition of the securities, it will not enter into the subsequent accounting treatment of the investment.

Question 418

T/F: An investment in equity securities gives the investor the right to receive dividends.

Answer 418

False.Equity ownership provides voting rights.

Question 419

T/F: Stock options held are equity securities for investment accounting purposes.

Answer 419

TRUE

Question 420

T/F: An investment in debt securities does not give the investor any influence over the investee.

Answer 420

TRUE

Question 421

T/F: If an investor has significant representation on the Board of Directors of the investee and participates in the investee's policy making, the investor is likely to have significant influence over the investee.

Answer 421

TRUE

Question 422

T/F: For accounting purposes, convertible bonds are debt securities.

Answer 422

TRUE

Question 423

T/F: An investment in between 20% and 50% of the voting common stock of an entity assures the investor of having significant influence over the investee.

Answer 423

FalseThis could only be true in the absence of other relevant factors.

Question 424

On January 2, 2004, Adam Co. purchased, as a long-term investment, 10,000 shares of Mill Corp.'s common stock for $40 a share.On December 31, 2004, the market price of Mill's stock was $35 a share, reflecting a temporary decline in market price. On December 28, 2005, Adam sold 8,000 shares of Mill stock for $30 a share.For the year ended December 31, 2005, Adam should report a loss on disposal of long-term investment of:

Answer 424

$80,000The realized loss on the sale of available-for-sale securities is the decline in market value since the acquisition of the securities sold. The $80,000 loss equals 8,000($40-$30). The loss to the beginning of 2005 is unrealized and recorded in owners' equity.

Question 425

On July 1, 2004, York Co. purchased, as a held-to-maturity investment, $1,000,000 of Park, Inc.'s 8% bonds for $946,000, including accrued interest of $40,000.The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2011 and pay interest annually on January 1. York uses the effective interest method of amortization.In its December 31, 2004 Balance Sheet, what amount should York report as investment in bonds? A. $911,300 B. $916,600 C. $953,300 D. $960,600

Answer 425

A. Initial investment cost: $946,000-$40,000 = $906,000Interest revenue for 2004: $906,000(.10)(1/2 year) = $45,300Less cash interest for 6 months: $1,000,000(.08)(1/2) = (40,000)Equals amortization of discount (increases investment) 5,300Investment in bonds balance at the end of 2004 $911,300The initial investment cost or balance excludes accrued interest. The bonds were purchased at the halfway point in the interest period. York must pay for 1/2 a year's interest, and will receive a full year's interest on January 1, 2005. The interest revenue for the year is based on the effective yield of 10%. The difference between interest revenue and the cash interest earned for the second half of 2004 is the growth in the value of the bond over time.The book value of the bond investment at maturity will be $1,000,000. Thus, the discount amortization increases the investment carrying value each year until it reaches $1,000,000.

Question 426

A security that has unrealized gains and losses recognized in owners' equity is a (an):

Answer 426

AFS - available-for-saleSecurities available for sale are held for purposes other than short-term price appreciation. Only realized gains would be recognized in NI.

Question 427

In year 1, a company reported in other comprehensive income an unrealized holding loss on an investment in available-for-sale securities. During year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following? A. The unrealized loss should be credited to the investment account. B. The unrealized loss should be credited to the other comprehensive income account. C. The unrealized loss should be debited to the other comprehensive income account. D. The unrealized loss should be credited to beginning retained earnings.

Answer 427

B. The unrealized loss would be credited to the other comprehensive income account to reclassify the holding loss as a realized loss in the income statement for year 2. For purposes of illustration, assume the available for sale (AFS) securities were originally purchased for $5 and that the loss during year 1 was $1. The related entries would be:Purchase: DR. AFS Securities $5 CR. Cash $5 Year 1 End: DR. OCI (holding loss) $1 CR. AFS Securities $1 Year 2: DR. Cash $4 CR. AFS Securities $4 DR. Loss on AFS Securities $1 (Income Statement) CR. OCI (holding loss) $1 (B/S, Accumulated OCI)The last entry (above) reclassifies the holding loss to recognize a realized loss on sale

Question 428

In 2003, Lee Co. acquired, at a premium, Enfield, Inc. 10-year bonds as a held-to-maturity investment. At December 31, 2004, Enfield's bonds were quoted at a small discount.Which of the following situations is the most likely cause of the decline in the bonds' market value? A. Enfield issued a stock dividend. B. Enfield is expected to call the bonds at a premium, which is less than Lee's carrying amount. C. Interest rates have declined since Lee purchased the bonds. D. Interest rates have increased since Lee purchased the bonds.

Answer 428

D. Bond prices and interest rate changes are inversely related. When bond prices increase, the market value of fixed income investments, such as bonds decreases, because now there are better opportunities on the market.

Question 429

What is a security that is held for short-term price appreciation; when it's value increases or decreases, that gain or loss should be recognized in earnings?

Answer 429

Held-for-trading securitiesconsistent with the purpose for holding the investments

Question 430

In open-market transactions, Oak Corp. simultaneously sold its investment in Maple Corp. bonds (held as securities available-for-sale) and purchased its own outstanding bonds.The broker remitted the net cash from the two transactions. Oak's gain on the purchase of its own bonds exceeded its loss on the sale of Maple's bonds.Oak should report the: A. Net effect of the two transactions as an ordinary gain. B. Gain and loss separately in income from continuing operations. C. Gain and loss as separate extraordinary items. D. Net effect of the two transactions as an extraordinary gain.

Answer 430

B. The gain and loss arise from completely different transactions and should be reported separately. Neither is extraordinary.

Question 431

Jent Corp. purchased bonds at a discount of $10,000. Jent classified the bonds as available-for-sale and subsequently sold them at a premium of $14,000. At the time of the sale, $2,000 of the discount had been amortized.What amount should Jent report as gain on the sale of bonds? A. $12,000 B. $22,000 C. $24,000 D. $26,000

Answer 431

B. The book value at the date of sale was $8,000 below face value ($10,000 original discount-$2,000 amortization). The market value of the bonds at date of sale was $14,000 above face value ($14,000 premium). Thus, the difference between the price of the bonds at sale and the book value was $22,000 ($8,000 + $14,000). That difference is the gain on sale.

Question 432

When the fair value of an investment in debt securities exceeds its carrying amount, how should each of the following assets be reported at the end of the year? Held-to-maturity securities Available-for-sale securities Fair value Carrying amount Carrying amount Fair value Carrying amount Carrying amount Fair Value Fair Value

Answer 432

HTM: Carrying amount AFS: Fair value Securities classified as held-to-maturity are reported at amortized cost, which is the carrying amount of the securities. Further, securities classified as available-for-sale are reported at fair value.

Question 433

On both December 31, 2003 and December 31, 2004, Kopp Co.'s only marketable equity security had the same market value, which was below cost.Kopp considered the decline in value to be temporary in 2003 but other than temporary in 2004. At the end of both years, the security was classified as a noncurrent available-for-sale investment.What should be the effects of the determination that the decline was other than temporary on Kopp's 2004 net noncurrent assets and net income? A. No effect on both net noncurrent assets and net income. B. No effect on net noncurrent assets and decrease in net income. C. Decrease in net noncurrent assets and no effect on net income. D. Decrease in both net noncurrent assets and net income.

Answer 433

B. A permanent decline in the value of an available-for-sale security is recognized as a loss in the Income Statement (whereas nonpermanent declines are treated as reductions in owners' equity).The security did not change in value during 2004 because the market value had not changed, thus there is no further reduction in assets. The owners' equity account would be reclassified as a loss account; thus, only income is decreased.

Question 434

T/F: Equity securities have a maturity date.

Answer 434

FALSE

Question 435

T/F: The assets "Investments Available-for-Sale" may appear in either the Current Assets or the Non-Current Assets section of the balance sheet.

Answer 435

TRUE

Question 436

T/F: The proceeds from the sale of investments classified as available-for-sale should be classified in the Cash Flows from Investing Activities section of the Statement of Cash Flows.

Answer 436

TRUE

Question 437

T/F: The classification of investments as available-for-sale applies only to investments in equity securities.

Answer 437

False.AFS can be either Debt or Equity securities

Question 438

T/F: Investment classified as held-to-maturity should be reported at amortized cost.

Answer 438

TRUE

Question 439

T/F: If at the balance sheet date the fair value of investments held-for-trading is greater than the book (carrying) value, the resulting holding gain has been realized.

Answer 439

FalseHeld-for-trading investments must be adjusted to fair value at the BS date. Any unrealized G/L are included in earnings in the period they occur. Recognize (realized) G/L at date of sale, if any, as difference between sales price and carrying value of investments sold.

Question 440

T/F: The asset "Investments Held-to-Maturity" may appear only in the noncurrent asset section of the balance sheet.

Answer 440

False.On the BS, it will appear as current - if maturity is within one year; or noncurrent - if maturity is not within one year.

Question 441

T/F: The recorded cost of an investment includes brokerage fees incurred to acquire the securities.

Answer 441

TRUE

Question 442

T/F: In order for an investment to be classified as held-to-maturity, the investor must have both the positive intent and the financial ability to hold the security until it matures.

Answer 442

TRUE

Question 443

T/F: The cost of purchasing investments held-for-trading should be shown as a use of cash in the Cash Flows from Investing Activities section of the Statement of Cash Flows.

Answer 443

FalseOn the Statement of Cash Flows, held-for-trading securities will be shown in the Operating Activities.

Question 444

When investments are transferred between classifications, which one of the following valuation basis is most likely to be used when recording the investment in the new classification? A. Historic cost. B. Amortized cost. C. Prior carrying value. D. Fair market value.

Answer 444

D. Fair market value is the valuation basis used when investments are transferred between classifications. Conceptually, the existing carrying value is written off and the current fair value is written on in the new classification, with any difference being an unrealized gain or loss.

Question 445

Sun Corp. had investments in marketable equity securities costing $650,000. On June 30, 20x2, Sun decided to hold the investments indefinitely and, accordingly, reclassified them from held-for-trading to available-for-sale on that date. The investments' market value was $575,000 at December 31, 20x1, $530,000 at June 30, 20x2, and $490,000 at December 31, 20x2.What amount should Sun report as net unrealized loss on noncurrent marketable equity securities in its 20x2 statement of stockholders' equity?

Answer 445

$40,000The securities were classified as available-for-sale at June 30, 20x2. The decline in market value from that date to December 31, 20x2 is $40,000 ($530,000-$490,000).That amount is reported in owners' equity because holding gains and losses on securities available-for-sale are not recognized in earnings.

Question 446

In which of the following cases would an unrealized gain or loss on the transfer of an investment (which does not give the investor significant influence) from one classification to another classification not be recognized in current net income? A. Transfer from held-to-maturity to trading. B. Transfer from held-to-maturity to available-for-sale. C. Transfer from trading to held-to-maturity. D. Transfer from trading to available-for-sale.

Answer 446

B. A transfer of an investment from held-to-maturity to available-for-sale would result in writing off the unamortized cost in the held-to-maturity classification and writing on the investment at fair value in the available-for-sale classification, with any difference being an unrealized gain or loss recognized in comprehensive income, not in current net income.

Question 447

T/F: If an investment classified as held-to-maturity is reclassified to available-for-sale, a holding gain or loss may be recognized.

Answer 447

TrueAn unrealized G/L is recorded in AOCI.

Question 448

T/F: Equity securities classified as available-for-sale can be reclassified to held-to-maturity.

Answer 448

False.Only Debt securities classified as AFS can be reclassified to HTM.

Question 449

T/F: If a parent uses the cost method on its books to carry a subsidiary, under normal circumstances the carrying amount of the investment in the subsidiary will change each operating period.

Answer 449

False.The cost method is permitted if the investor cannot exert significant influence over the investee and there is no readily determinable fair value of the investment. After initial recording, no further adjustments or changes are required, unless: the fair market value of investment has a permanent decline, or there is a liquidating dividend.

Question 450

T/F: If a parent uses the equity method on its books to carry a subsidiary, under normal circumstances the carrying amount of the investment in the subsidiary will change each operating period.

Answer 450

True.

Question 451

T/F: An investment in equity securities which do not have a readily determinable fair value and for which there is no evidence of loss in value should be reported at cost.

Answer 451

True.

Question 452

Under IFRS, which of the following statements is correct (if any)?I. Only investments in debt securities may be transferred between categories.II. When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must not be restated.

Answer 452

I only.Only investments in debt securities may be transferred between categories; equity securities may not be transferred between categories (Statement I). When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must be restated (Statement II).

Question 453

Under IFRS, how is an investment that meets the conditions of debt instrument measured?

Answer 453

At amortized cost. All other investments, including debt instruments not measured at amortized cost and all equity instruments and derivative instruments are measured at fair value.

Question 454

Which of the following are possible ways that gains or losses on changes in the fair value of investments in equity securities may be reported under IFRS requirements?In profit/loss (Income Statement) In other comprehensive income

Answer 454

Both. Under IFRS, changes in fair value may be reported in profit/loss or in other comprehensive income, depending on whether or not the investment is held for trading purposes or not. If an investment in equity securities is held-for-trading purposes (i.e., to make a profit on price appreciation), changes in fair value will be reported through profit/loss. If an investment in equity securities is not held-for-trading purposes, the investor may elect to report changes in fair value through other comprehensive income.

Question 455

Which, if any, of the following characteristics concerning the categories of investments under IFRS No. 9 is/are correct?I. There is a single category for debt investments and a single category for equity investments.II. The business model test used in evaluating debt instruments for classification purposes is concerned with the investor's intent.

Answer 455

II only.The business model test used in evaluating debt instruments for classification purposes is concerned with the investor's intent. Specifically, did the investor make the investment to collect cash flows from interest and return of principal, rather than to make a profit on sale of the investment (Statement II)? While there is a single category for equity investments (at fair value), there are two categories for debt investments (at amortized cost and at fair value) (Statement I).

Question 456

Which, if any, of the following transfers between categories is possible under IFRS No. 9 for investments in debt securities?Amortized cost to fair value Fair value to amortized cost

Answer 456

Both.Under IFRS No. 9, investments in debt securities may be (1) transferred from amortized cost (when the investment originally meets both the business model test and the cash flow characteristic test) to fair value when the investment fails to continue to meet both the business model test and the cash flow characteristic test and (2) transferred from fair value to amortized cost when an investment that originally fails to meet both the business model test and the cash flow characteristic test subsequently meets both tests.

Question 457

T/F: Under IFRS No. 9, all changes in the fair value of investments in equity securities must be reported through profit or loss.

Answer 457

False.If the investor does not hold an equity investment for trading purposes, it may elect to report changes in fair value through OCI.

Question 458

T/F: Under IFRS No. 9, investments in equity securities that have no ready market should be accounted for at cost.

Answer 458

False.All investments in equity are measured and reported at fair value. Even investments in equity securities with no ready market must be reported at fair value. Cost, however, can be the best estimate of fair value.

Question 459

T/F: When a debt investment is an element of an accounting mismatch, under IFRS No. 9, the investor may elect to measure the investment at fair value if that would significantly reduce the mismatch.

Answer 459

TRUE

Question 460

T/F: In order to classify an investment as debt at amortized cost under IFRS No. 9, an entity must hold the investment solely to collect cash flows.

Answer 460

TRUE

Question 461

T/F: Gains and losses on the sale of investments, measured at amortize cost, must be separately reported on the face of financial statements.

Answer 461

TRUE

Question 462

T/F: Under IFRS No. 9, investments in debt securities can be transferred from the amortized cost category to the fair value category.

Answer 462

TRUE

Question 463

What are the three categories of investments?

Answer 463

1. Held-to-maturity2. Available-for-sale3. Trading

Question 464

When an investor acquires sufficient voting common stock of an investee so that it has significant influence, which, if any, of the following kinds of investee data must the investor "capture" at the time the investment is made? Book values of assets & liabilities Fair values of assets & liabilities

Answer 464

Both. At the time an investor acquires sufficient voting stock of an investee to give it significant influence over the investee, it must "capture" both the book values and fair values of the investee's assets and liabilities in order to apply the equity method of accounting to the investment.

Question 465

In which one of the following cases is an investor most likely to use the equity method to carry and report an investment in an investee? A. Investor owns 15% of the voting stock of the investee and has no other affiliation with the investee. B. Investor owns 40% of the voting stock of the investee, and the investee is in bankruptcy. C. Investor is a manufacturing firm that owns 25% of the voting stock of a consulting firm. D. Investor owns 30% of the voting stock of the investee but is unable to obtain representation on the investee's Board of Directors or obtain significant information from the investee.

Answer 465

C. An investor that owns 25% of the voting stock of an investee, in the absence of evidence to the contrary, is presumed to be able to exercise significant influence over the investee. The fact that the investor and the investee are in different lines of business generally does not mitigate the influence the investor is able to exercise.

Question 466

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?

Answer 466

$60,000Only the dividends received on the preferred stock are recognized as revenue: $60,000 = 100% x ($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.

Question 467

Lee, Inc. acquired 30% of Polk Corp.'s voting stock on January 1, 2004 for $100,000. During 2004, Polk earned $40,000 and paid dividends of $25,000. Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During 2005, Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, 2005, Lee sold half of its stock in Polk for $66,000 cash. What should the gain on sale of this investment in Lee's 2005 Income Statement be?

Answer 467

$12,250, the correct gain amount, and the amount equals the proceeds of $66,000 less the carrying value of the 1/2 of the investment sold. Lee uses the equity method because it has significant influence over the investee. The equity method requires that the investor recognize its share of undistributed earnings of the investee in its own income. The carrying value of the portion of the investment sold reflects 1/2 of the entire income of the investee for 2005, but only the first dividend. The second dividend was declared after the sale and thus could not have affected the investment carrying value on the date of sale. The carrying value of the entire investment at the date of sale equals: $100,000 + .30[$40,000-$25,000 + .5($50,000)-$15,000] = $107,500. The gain, therefore, equals: $66,000-.5($107,500) = $12,250

Question 468

Pal Corp.'s 2004 dividend income included only part of the dividend received from its Ima Corp. investment. The balance of the dividend reduced Pal's carrying amount for its Ima investment. This reflects that Pal accounts for its Ima investment by the: A. Fair Value method, and only a portion of Ima's 2004 dividends represent earnings after Pal's acquisition. B. Fair Value method, and its carrying amount, exceeded the proportionate share of Ima's market value. C. Equity method, and Ima incurred a loss in 2004. D. Equity method, and its carrying amount exceeded the proportionate share of Ima's market value.

Answer 468

A. The portion of the dividend reducing the investment carrying value is a liquidating dividend. A liquidating dividend occurs when the investee pays more income than was earned during the period the investor owned the shares of the investee. For example, assume that Pal held 1% of Ima's outstanding stock from January 1-December 31 of 2004 only. Ima earned $40,000 during 2004 but paid $50,000 in dividends ($10,000 coming from earnings before 2004). Pal would receive $500 dividends in total (1%), but only $400 are attributable to earnings during the period Pal was a shareholder. Thus, $100 of the dividend is attributable to income earned by Ima before Pal became an investor. From Pal's viewpoint, this is a return of a portion of Pal's investment, a liquidating dividend. Under the cost method, liquidating dividends are treated as a reduction in the investment account whereas normal dividends are treated as income. The wording of the question implies that dividends are otherwise treated as income. Thus, the equity method could not be the method used by the firm. Under the equity method, all dividends are treated as a reduction in the investment account. No dividends received are treated as income under the equity method.

Question 469

Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years, and has the ability to exercise significant influence over Devon. The following information relates to Larkin's investment in Devon during the most recent year: Carrying amount of Larkin's investment in Devon at the beginning of the year $200,000 Net income of Devon for the year 600,000 Total dividends paid to Devon's stockholders during the year 400,000 What is the carrying amount of Larkin's investment in Devon at year end? A. $100,000 B. $200,000 C. $250,000 D. $350,000

Answer 469

C. Larkin's investment in Devon at year end would be computed as the carrying amount of the investment at the beginning of the year ($200,000) + Larkin's share of Devon's reported net income for the year ($600,000 x .25 = $150,000)-Larkin's share of Devon's dividends paid during the year ($400,000 x .25 = $100,000), or $200,000 + $150,000 = $350,000-$100,000 = $250,000, the correct answer.

Question 470

When the equity method is used to account for investments in common stock, which of the following affects the investor's reported investment income? Goodwill amortization related to purchase Cash dividends from investee

Answer 470

Neither. Under the equity method of accounting for an investment, neither amortization of goodwill nor dividends from the investee affect the investor's investment income. Goodwill resulting from an investment in another entity (i.e., the excess of the cost of the investment over the investor's share of the fair value of the investee's identifiable assets) is not amortized. Dividends from the investee are not recognized as income; rather, they reduce the investment account.

Question 471

Lee, Inc. acquired 30% of Polk Corp.'s voting stock on January 1, 2004 for $100,000. During 2004, Polk earned $40,000 and paid dividends of $25,000. Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During 2005, Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, 2005, Lee sold half of its stock in Polk for $66,000 cash. The carrying amount of this investment in Lee's December 31, 2004 Balance Sheet should be: A. $100,000 B. $104,500 C. $112,000 D. $115,000

Answer 471

B. $104,500 = $100,000 + .30[$40,000-$25,000] because the equity method is used by Lee, who has significant influence over Polk. Under the equity method, the investor recognizes its share of undistributed earnings in the investee, since acquiring the investment, in its income.

Question 472

When the equity method is used to account for investments in common stock, which one of the following affect(s) the investor's reported investment income? A change in market value of investee's common stock Cash dividends from investee

Answer 472

Neither. Under the equity method of accounting, changes in the market value of the investee's common stock are ignored. Further, cash dividends received by the investor from the investee are not recognized as investment income; rather they are recognized as a debit to cash and a reduction in (credit to) the investor's investment in investee account.

Question 473

Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, 2004. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 2004, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 2005, and $200,000 for the year ended December 31, 2005. On July 1, 2005, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 2005. In Grant's December 31, 2004 Balance Sheet, what should the carrying amount of this investment be?

Answer 473

$209,000Grant uses the equity method because it has significant influence over South. Under the equity method, the investor recognizes its share of the undistributed earnings of the investee as an increase in the investment carrying value. Thus, at the end of 2004, the carrying value of the investment is $200,000 + .30($80,000-$50,000) = $209,000.

Question 474

Pare, Inc. purchased 10% of Tot Co.'s 100,000 outstanding shares of common stock on January 2, 2004, for $50,000. On December 31, 2004, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during 2004. Tot reported earnings of $300,000 for 2004. What amount should Pare report in its December 31, 2004, Balance Sheet as investment in Tot?

Answer 474

$230,000 This question is difficult because it is easy to forget that once the investor has acquired a sufficient percentage of the stock to use the equity method, which is retroactively applied to earlier periods for which the holdings were not sufficient to use the equity method. In these earlier periods, only the actual ownership percentage is applied. In this question, the equity method becomes the required method only at the very end of the year. So, only the 10% is used in applying the equity method for the purpose of recognizing income, which in turn increases the investment account.The ending balance of the investment account is then: $50,000 (original investment) + $150,000 (second investment) + $30,000 (.10 x $300,000, which is the equity in earnings of the investee) = $230,000.

Question 475

Lee, Inc. acquired 30% of Polk Corp.'s voting stock on January 1, 2004 for $100,000. During 2004, Polk earned $40,000 and paid dividends of $25,000. Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During 2005, Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, 2005, Lee sold half of its stock in Polk for $66,000 cash. Before income taxes, what amount should Lee include in its 2004 Income Statement as a result of the investment? A. $40,000 B. $25,000 C. $12,000 D. $7,500

Answer 475

C. $12,000 = .30($40,000). Under the equity method, the investor recognizes its share of investee earnings in its own income. The equity method is used because Lee has significant influence over Polk.

Question 476

Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it accounts for the investment as held-for-trading or uses the equity method of accounting? Held-for-trading Equity method

Answer 476

Neither. A dividend never increases the investment account under any accounting method. Under the cost method, the dividend is recorded as revenue. Under the equity method, the dividend is recorded as a decrease in the investment account.

Question 477

T/F: A gain or loss on the sale of an investment accounted for using the equity method would be determined as the difference between the selling price and the original cost of the investment.

Answer 477

False.would be the difference between the selling price and the book value of the investment at the time of sale.If SP > BV = realize gainIf SP

Question 478

T/F: An investor's write-off of a portion of an excess payment (cost > book value) will reduce the amount of Investment (Equity) Revenue that would otherwise be recognized by the investor.

Answer 478

TRUE

Question 479

T/F: If the cost of an investment for a portion of the stock of a company is greater than the fair market value of the net assets acquired, the excess payment is for goodwill.

Answer 479

TRUE

Question 480

T/F: An investment that will have to be accounted for using the equity method should be initially recorded at cost.

Answer 480

TRUE

Question 481

T/F: Under the equity method of accounting for investments, the investor does not recognize prior period adjustments recognized by the investee.

Answer 481

False. They do recognize prior period adjustments recognized by the investee.

Question 482

T/F: An investor's write-off of a portion of a bargain purchase (cost

Answer 482

False.An investor's write-off of a portion of an excess payment (cost > book value) will reduce the amount of Investment (Equity) Revenue that would otherwise be recognized by the investor.

Question 483

T/F: If an investor properly switches from the fair value method to the equity method of accounting for an investment, the net income of prior periods must be adjusted.

Answer 483

TRUE

Question 484

Which of the following is not required under IFRS with respect to equity method accounting? A. The accounting policies of the "associate" must conform with the accounting policies of the investor. B. Any investor can elect to apply the fair value option to the accounting for the "associate." C. The reporting dates for the investor and "associate" cannot be more than 3 months apart. D. Any impairment loss on an equity investment is measured as the carrying value less the recoverable amount.

Answer 484

B. Under IFRS, the fair value option can only be applied by certain investors such as venture capitalist, mutual funds or unit trusts.

Question 485

According to IFRS guidance on equity method accounting, under what circumstances would the investor be required to recognize the associate's (investee's) losses that exceed the investor's investment?I. The associate's return to profitability is imminent and assured.II. The investor has guaranteed the obligations and commitments of the associate.

Answer 485

II only.If the investor has obligations or commitments to make payments on behalf of the associate, it may continue to recognize its share of losses to the extent of those obligations.

Question 486

Which of the following methods may a mutual fund investor use to measure and report an equity method investment under IFRS? Fair Value method Equity method

Answer 486

Both. Under IFRS, only certain investors can elect to measure the equity investee using the fair value option. Mutual fund investors are allowed to utilize the fair value option.

Question 487

T/F: Under IFRS, significant transactions and events of an investee that occur between the end of an equity method investee's accounting period and the later end of the investor's accounting period must be adjusted in the equity amounts reported by the investor.

Answer 487

TRUE

Question 488

T/F: Under IFRS, investees accounted for using the equity method are identified as "associates."

Answer 488

TRUE

Question 489

T/F: IFRS requires that an investor apply uniform accounting policies in its use of the equity method.

Answer 489

TRUE

Question 490

T/F: U.S. GAAP requires that an investor and its investees accounted for using the equity method must use the same accounting policies.

Answer 490

False.The investor and investee can use different accounting policies in accounting for using the equity method.

Question 491

T/F: Under both U.S. GAAP and IFRS, any investor may elect to account for an investment in an entity over which it has significant influence using fair value, instead of the equity method.

Answer 491

FALSE

Question 492

Which one of the following is least likely to be used to report an investment in a corporate joint venture? A. Equity method. B. Fair Value method. C. Consolidation basis. D. Partnership basis.

Answer 492

B. Even though an investment in a joint venture is a financial asset, and financial assets generally are eligible to be reported at fair value at the election of the holder (investor), such an option is not likely to be available for joint ventures because (1) if the joint venture is to be consolidated, it is not eligible for fair value measurement and (2) even if it is not to be consolidated, the nature of joint ventures (e.g., not traded in a public market) makes it unlikely that a readily determinable fair value will be available.

Question 493

Which one of the following is the most likely characteristic of a business joint venture? A. Profits and losses are shared equally. B. Control is shared jointly by parties to the venture. C. Must be established for a limited time. D. Must be formed as a corporation.

Answer 493

B. Shared control is a central characteristic of a joint venture. None of the participating parties is likely to have unilateral control of the joint venture.

Question 494

Jacko, Co., a 50% owner of Venture Co., a jointly controlled entity, contributed to Venture a nonmonetary asset with an original cost of $200,000, accumulated depreciation of $50,000, and a fair value of $180,000. Under IFRS, which one of the following is the amount of gain, if any, Jacko should recognize on its contribution to Venture Co.? A. $ 0 (no gain) B. $15,000 C. $20,000 D. $30,000

Answer 494

B. A gain should be recognized by Jacko for the share of ownership held by others (50%) attributable to the excess of the fair value of the asset over its carrying value. The excess of fair value ($180,000) over carrying value ($200,000-$50,000 = $150,000) is $30,000 ($180,000- $150,000). Therefore, Jacko should recognize .50 x $30,000 = $15,000 as a gain.

Question 495

T/F: Under IFRS, an entity must carry and report its investment in a jointly controlled entity using the equity method of accounting.

Answer 495

False.IFRS accounting for joint arrangements allows either the equity method or the Proportionate consolidation method.

Question 496

T/F: A corporate joint venture could be a variable interest entity.

Answer 496

TRUE

Question 497

T/F: The only way to form a joint venture is through the participation of two entities.

Answer 497

False.Joint control by two or more investors is central to a joint venture association. Investors can be individuals or entities.

Question 498

T/F: In a joint venture, usually none of the participating parties has unilateral legal control.

Answer 498

TRUE

Question 499

T/F: Under IFRS, when a nonmonetary asset is contributed in the formation of a jointly controlled entity, only a portion of the difference between the carrying value of the asset and its fair value is recognize as a gain or loss.

Answer 499

True50%

Question 500

T/F: If a corporation participates as an owner of a corporate joint venture, it will consolidate the joint venture in its consolidated financial statements.

Answer 500

False.Generally, the investor accounts for and reports its investment in the corporate joint venture using the equity method of accounting.Only when a VIE is determined, or the investor is able to unilaterally control a corporate joint venture, would the FS be consolidated.